CPhI Worldwide 2015

Rush to acquire ex-pharma sites means survival of the biggest for CMOs

By Fiona BARRY contact

- Last updated on GMT

CROs are expected to grow in size as they acquire smaller rivals and manufacturing capacity
CROs are expected to grow in size as they acquire smaller rivals and manufacturing capacity

Related tags: Contract

As pharma sells off manufacturing capacity and outsources to large and specialist CMOs, smart contract houses will have an opportunity to grab market share in a currently fragmented sector, say experts.

A panel of big pharma leaders and M&A experts at last week’s CPhI Worldwide in Madrid said CMOs are increasingly bundling in supply agreements when they buy facilities from drug companies.  

This year, Recipharm bought an eye drug plant from Alcon, with a deal​ to take over manufacturing of Alcon’s drugs, while AMRI took over Aptuit’s nascent manufacturing agreement with Glide​ after acquiring Aptuit’s production facilities.

Tim Tyson, former CEO of Valeant and ex-GSK president, told an audience at CPhI that pharma’s confidence in outsourcing manufacturing has grown enormously. “Most high-quality CMOs were built by pharma – they’re ex-Merck etc. facilities and staff […] There’s more confidence in outsourcing because they know the people.​”

Consolidation

CMOs can take advantage of drugmakers’ vertical disintegration – as pharma seeks to reduce manufacturing redundancy and focus on core competencies – by snapping up these production sites, tied in with agreements to take over the sellers’ production lines, said M&A advisor Christoph Bieri of Kurmann Partners.

Contract manufacturing organisations can gain economies of scale by focusing on specific technologies and by upping their volume with the purchase of these ex-pharma sites, he said. But as the contract manufacturing sector consolidates in a flurry of acquisitions and regulatory changes increase CMO costs and minimum size, only the large – or at least, specialist – CMOs will make it, Bieri warned.

Stakeholder problems

Bieri noted that the sale of plants combined with a manufacturing and supply agreement brings complexities to site acquisitions. As well as the transaction price, parties must decide future manufacturing and supply terms, including a capital investment spit between seller and buyer, and taking into account how the financial and regulatory track record of the buyer could affect supply certainty.

Jaime Gil Gregorio, head of global solids projects at Sandoz, and formerly a director of operations at Merck & Co., added that while CMO buyers want quick transactions with a minimum cost and risk, big pharma sellers typically want no liability. The deal must also balance the desires of workers at the site, including management and unions, who want “a good severance package ​and a job in the future.​”

Local communities don’t like a big employer selling a plant to a CMO,​” added Bieri.

Stakeholder management on the vendor’s side is of paramount importance​” to successfully balance the transaction itself, a future supply agreement, and public relations with the press, unions, and local government, he said.

Tyson added a warning to pharma companies planning to manage their supply chains in this way: “At GSK we decided not to pit core products against non-core capacity [after a bad experience]. We sold a product to Warner Lambert but continued making it for them [and ran out of capacity for in-house manufacturing]. We had to delay launch of our own product because of a contractual commitment.​”

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