“The marketplace is highly fragmented right now,” said Tim Tyson, chairman and CEO, Avara Pharmaceutical Services. “The people that are buying contact services are looking for larger opportunities to work with fewer suppliers.”
Mark Quick, EVP of corporate development at Recipharm AB, during a panel session at CPhI Worldwide earlier this month in Madrid, Spain, echoed this sentiment, commenting that there were too many companies exhibiting at the massive tradeshow, which spanned more than ten halls and 2,560 exhibitors.
“The number of companies … this is not sustainable going forward… I think they [small companies] will fall by the wayside or be acquired. There will be natural consolidation,” said Quick.
Speaking of working with fewer partners, Tim Kent, Pfizer VP of business development, global supply, also said the NY-headquartered pharma company would like to see “some sort of” consolidation.
“For us, we have 300, 400 contract manufacturing partners,” said Kent, adding that the company would rather work with 10.
Gerard Bellettre, director, strategic planning, investments, and business development, industrial affairs, Sanofi, said the company is on the same page wanting to pare down its list of more than 400 partners.
The Top 5 CDMOs
Today, the top five contract development and manufacturing organizations (CDMOs) collectively account for approximately 15% of the market – valued at $92.3bn (€80.4bn) in 2017 – compared to the contract research organization (CRO) space, where the top five holds 70%, according to a recent report.
Kevin Bottomley, Results International, named the (likely) top five CDMOs as:
- Lonza: $5.9bn
- Catalent: $2.5bn
- Patheon: >$2bn (based on 2017)
- Recipharm: $1.0bn
- Siegfried: $0.8bn
Market growth for these firms is forecasted at 5% to 6.5% per year over the next five years, and the largest CDMOs are growing faster than their big pharma counterparts.
Growth is being driven by smaller companies lacking in-house manufacturing capabilities as well as an expected increase in outsourcing on the part of big pharma. According to the report, the outsourcing penetration of 30% today is expected to increase to 40% by 2020.
As Bottomley explained, M&A is driven by a need to diversify service offerings, add high-value capabilities, and achieve critical mass. The desire for geographical expansion as well as early-stage product capture also drive such deals.
“The message is that M&A is incredibly important,” Bottomley said during the panel discussion.
According to the report, big pharma’s bias for large CDMOs also drives consolidation: “Big Pharma firms want few, long-term, reliable relationships, and favor large CDMOs over smaller ones.”
This sentiment was echoed during the panel discussion and a similar “size affinity” exists between pharma companies and CROs. Also similar to the CRO industry, big pharma companies may increasingly enter into strategic alliances with CDMOs, establishing preferred partnerships with a select group.
As such, the CDMO industry is undergoing significant consolidation at a pace comparable to the CRO industry three to five years ago.
Per the Kurmann Partners report, between 2013 and 2017 there were 30 to 60 transactions annually involving CDMOs and manufacturing units, with the number of deals peaking in 2015.
However, while transactions decreased in the last two years, deal volume increased, owing mainly to Lonza’s $5.5bn acquisition of Capsugel and Thermo Fisher’s purchase of Patheon for $7.2bn – two of the largest M&A transactions in the CDMO industry to date.
Private equity (PE) also has played a role in the CDMO industry buildout with several transactions over the last year, most notably, PE’s billion-dollar acquisition of AMRI in June 2017.
Buying and selling
“Someone’s always buying and someone’s always selling,” said Kent– and M&A poses new opportunities.
Mainly, two types of mergers and acquisition (M&A) activity are occurring, including big pharma’s divestment of facilities, and consolidation, in which one competitor buys another.
In the case of the former, if a CDMO purchases a facility from big pharma, the customer base needs to be diversified, which poses the risk of: Can this be done? According to Quick, those not able to invest, perhaps relying on a legacy contract, may “fall by the wayside” or be acquired.
Tyson said assets will be repurposed and reused, with underinvested sites discontinuing operations.
“Some well-built sites can continue to support the industry and be used by multiple companies instead of one,” Tyson explained. This could launch “a whole new wave of contract service provision,” he added. Though significant investment is required to retain and sustain the business.
“Some of the CDMOs will actually have to take the tough decision that big pharma has not been doing in terms of consolidating and site rationalization,” Quick added.
Bellettre cited the product lifecycle as a contributor to capacity challenges. “Suddenly, in the US in one year, you lose 70% of your volumes, then you’re left with empty sites,” he explained.
“We have a changing profile,” added Kent. “We move from making lots and lots of tablets to making very niche products. As we do that our portfolio of sites needs to change.”
In Europe, Bellettre said many of Sanofi’s pharma facilities are no longer needed as the company’s strategy has changed. In line with this, Sanofi earlier this year transferred its Holmes Chapel facility and all existing contract manufacturing agreements to Recipharm.
Many companies have been reevaluating strategy, especially as the UK’s future remains unclear following the decision to leave the European Union (EU). On Brexit, Quick said, “It certainly does not make it more efficient to do business.”
As per the amount of work that is outsourced, Kent said Pfizer’s aim is approximately 70% internal, 30% external. In a unique position, the company also offers contract manufacturing services under its Pfizer CentreOne business, which it launched in April 2016.
“It’s a very strange dynamic where we are both a buyer and a seller of contract manufacturing capabilities,” he added, though there are curtains between the two sides of the business.
Avara’s Tyson expects the outsourced services industry to mature and fragmented companies to be integrated, with capabilities increasing. “It’s going to take some time,” Tyson said, “but I think we are going to be required to get at capacity … and sweat the excess.”
This focus on capacity utilization and efficiency also results from significant cost pressures. “We can learn from other industries, and were going to have to,” said Tyson.
However, pricing pressure could potentially shift manufacturing outside of the US, he said.
“Somebodies got to pay and somebodies got to have a reasonable profit,” Tyson added. “It costs a certain amount to do things and innovation costs a certain amout of money.”
“We’re in a failure business,” he said – and it costs a lot to fail.
Tyson said the restrictive activities going on now in the US and in the UK probably are counter to good economic practice. While the dynamics have shifted, he said Avara will continue to take the long term view and not make short term decisions.
“If we decided that the UK was going to be a difficult place to make product ... surely by the time we complete that activity the decision will change,” he said. “We have to take a long view of the marketplace to be able to do the things that are right and necessary.”