Outsourcing in Pharma & Biotech: Shifting to Contract Manufacturing and Development

As the world’s population ages and healthcare standards continue to rise, the demand for pharmaceutical products has been steadily increasing across the globe. In a direct response to these market trends of increased demand, the landscape for contract development and manufacturing organizations (CDMOs) is changing to meet all of the new expectations from customers. The pharma industry has been exploding since the turn of the century, with mergers and acquisitions (M&A), layoffs, and outsourcing activities becoming common-place occurrences among its vast network of companies. Whether or not this will translate into a more sustainable industry, however, has yet to be determined. The perpetual absence of new products has always been one of the biggest problems in the pharma industry, and mergers and acquisitions seem to be one of the best methods for increasing efficiency in the discovery and development of new drugs. Outsourcing activities have become a huge piece of the pharma pipeline, and contract research and contract manufacturing organizations (CROs/CMOs) are currently an integral part of the pharmaceutical industry today. CROs and CMOs, however, do not only benefit from growth opportunities, they also face some new challenges. Let’s take a look at the history of CDMO M&A, the industry’s current activities, and how this new type of consolidation is going to affect the future of the industry.    

The past and how it used to be 

Years ago, CDMOs were much less commonplace, and whenever outsourcing services were needed by pharmaceutical companies the market was fragmented into only CROs and CMOs. Nowadays the CDMOs are on the upswing, and over the past few decades the sector has blown up and is now considered an integral piece of the drug development pipeline for most pharmaceutical companies. All Big Pharma players are currently adopting outsourcing strategies as one of the most important ways to accelerate their pipelines and timelines for new products. For biotechnology companies, CDMOs are also increasingly being used to further extend their development and manufacturing capabilities, providing solutions that are fully integrated with their own pre-existing services.  

The present and how it is now

To be successful in today’s landscape, modern CDMO’s must provide flexibility, collaboration and innovation, which requires continuously evolving their capabilities to ensure a solid delivery of drug development and manufacturing services. Clients are looking for everything from fully integrated services to individual offerings, and it’s essential that current CDMOs are ready to take on new challenges with a substantial amount of expertise and value-added benefits. The CDMO sector is also having to quickly respond to these new challenges, particularly as drug development campaigns become increasingly complex. With complexity comes a greater need for CDMOs to provide effective process solutions and rapid innovation for delivering all of these new and sophisticated drug products. In order to attain these higher standards, modern CDMOs must be technologically progressive and flexible, combining professionals from multiple disciplines to actively find solutions that increase the overall efficiency of their projects.

In such a competitive space, most pharmaceutical companies require advanced supply chain opportunities in order to optimize the development of their molecule, which has led to a lot of firms seeking partnerships with CDMOs as opposed to just investing internally on infrastructure.

Because of this increased demand for CDMOs across the pharma and biotech industries, there has been an enormous amount of M&A that has taken place in the last decade.

CDMO trends and industry consolidation

The CDMO industry is currently a very fragmented space; the top five companies own less than a 15 percent share of the market. In comparison to the CRO market, in which the top five largest companies own 70 percent. This is beginning to change however, as more mergers and acquisitions take place across the CDMO sector, with significant consolidation expected in the next few years. This is in line with the preferences of many pharmaceutical companies; more and more customers are choosing to outsource to one full-service CDMO rather than several niche providers, as this simplifies the supply chain and can reduce time to market. In addition, to help bolster and expand their capabilities, many larger CDMOs are acquiring smaller, niche facilities in multiple locations, a trend we will see continue. [1] 

Next let’s take a look at some of the strategic reasons why companies target certain CMOs and CROs for acquisition and evaluate their value-added benefits to the buyer.

‍CDMO M&A: Diversification of revenue 

Consolidation within the industry has been majorly driven by the desire to diversify capabilities, and hence revenue streams. Diversification enables CDMOs to effectively provide customers with comprehensive end-to-end drug development and manufacturing services, while additionally reducing overhead expenses. Pharmaceutical companies are heavily invested in progressing their drug products to market in the quickest way possible and with minimal supply chain complexity. They also know that having to change service providers multiple times throughout the course of the drug development pipeline can wreak havoc on their funding, so full-service CDMOs are often seen as a great way to decrease overall costs associated with drug development. Because of this emerging demand for CDMOs, major players are merging to consolidate their capabilities and looking to niche acquisitions to diversify their offerings. CDMOs have been shown to reap immediate rewards from consolidated capabilities and diversifying revenue streams, including everything from immediate increases in production scale to a more diversified customer base.   

“Consolidation is sometimes focused on increasing customer diversification. Some of them are very concentrated on their customers – diversifying in a way so that they’re not too dependent on just one or two of them,” Standard & Poor’s research assistant Sarah Kahn said in a recent article. [2]

Diversification of revenues is one of the best reasons for M&A of CROs and CMOs, because having inorganic growth that layers on top of the base organic growth is great for the market, and there is in fact financial value to be created from the multiple layers of capabilities provided by CDMOs. After a CDMO has an established platform, it can continue to fill their gaps with new layers of businesses and capabilities, and will be able to run more profitably than those smaller businesses could ever do on their own.  

CDMO M&A: Addition of high value capabilities 

As the CDMO landscape continues to evolve, pharmaceutical companies will have many more opportunities to further their pipelines in the upcoming years. We’ve seen that both consolidation and diversification of revenues are important factors regarding M&A activities, because they help drive the emergence of new technologies and enable companies to innovate new drugs, while also reducing timelines and overall costs for everyone. But another great reason that we are seeing a huge increase in M&A of CMOs and CROs is the ability of CDMOs to add high value capabilities into their research and drug development arsenal.   

A good recent example of when a decision to consolidate was primarily based off of the ability to add high value capabilities was when Catalent acquired Cook Pharmica in 2017 for close to $1B for their highly sought after capability of sterile fill for biologics. Now that there is a greater reliance on outsourcing partners, the industry is in dire need of finding experts at all stages of the drug development process. CDMOs are the answer to this by adapting to the new demands of the industry and specializing in a number of services to provide a greater expansion of services. The most important driver is expanding high value capabilities, particularly across the development cycle into late-stage clinical and commercial manufacturing. The addition of high value capabilities lets CDMOs quickly progress companies from preclinical phase through to full-scale commercial launch in a very quick time frame by delivering effective solutions for every step in the development process. 

CDMO M&A: Gaining early products acquisitions

When looking at the M&A deals of CDMOs, the goal is to create a wider funnel through which services can be efficiently completed and transferred from early development to manufacturing. The earlier in the cycle a CDMO can deliver services, the greater the chance of securing the project’s commercial manufacturing business, and private equity firms also target consolidation of companies for this reason.   

Dan Cohen, a seasoned investment banker working in the pharmaceutical outsourcing sector at RBC Capital Markets recently said, “There’s an awareness at CDMOs that it’s important to capture molecules early, and from smaller companies who tend to be great customers over the long term. You've seen a lot of the large CMOs do ‘funnel-based acquisitions’ of companies focused around emerging-growth, startup drug-developers, and that's perceived as valuable. Private equity has certainly caught on to that, too. The good news is we will continue to see investment in that type of a smaller CDMO, in order to cater better to the needs of the emerging or virtual company.” [3]

One real life example of where this scenario played out was when Juniper Pharmaceuticals made a significant capital investment to expand its early development capabilities by using Capsugel’s Xcelodose powder micro-dosing system to feed demand for Phase I study materials. This acquisition furthered specific capabilities in early formulation development, analytical service and clinical trial manufacturing services. Let’s take a look at some of the CDMO M&A activities over the past few years to get an idea on the impact of these activities on the pharma and biotech industries.

Significant M&A activities in the past

There were over 130 acquisitions among service providers during the three-year period from 2015 - 2017. The majority of these acquisitions targeted CMOs that heavily focused on small molecule API, dosage technology, and analytical services. Nearly 70% of acquirers of services companies were strategic partners, that is, they were operating companies rather than investment firms. A few services companies changed hands as a consequence of the purchase of their parent company, while several CMOs were acquired by pharma and biotech companies seeking to secure product supply. [4]

Some of the biggest M&A activities in 2017 were Thermo Fisher's $7.2B acquisition of Patheon, Lonza’s $5.5B acquisition of Capsugel, Fresenius Kabi’s $4.75B buy of Akorn, and Catalent’s $950M Acquisition of Cook Pharmica. Overall, 2017 was an important year for M&A activities in the Pharma and Biotech industries, showing that the market was beginning to make huge moves towards consolidation. In 2018, we saw even more M&A activities with the value of M&A in the sector topping $149 billion, nearly doubling the value in 2017. [5] Some of the largest activities in 2018 were Takeda Pharmaceutical’s breathtaking $59B acquisition of Shire, GlaxoSmithKline’s $13B buy of Novartis’s stake in an over-the-counter (OTC) drug joint venture and Sanofi’s $11.6B  acquisition of BioVerativ, just to name a few. 

For 2017-2018 the theme of “bigger is better” is an important one, because Big Pharma thinks it’s the future of the industry, and CDMO executives agree because valuations are where they should be, and because private and public investors are happy to further along the proper M&A to make that happen. As a new “rule-of-thumb” for the industry, an API supplier becoming a finish-dosage manufacturer provides an avenue for service providers to grow with the same customer base. Another factor impacting the proliferation of past and even recent M&A strategies is the current fragmented state of the sector. As manufacturing activity continues to become increasingly outsourced, companies are consolidating in a move to meet customer demand and maintain a successful position within the sector.

A look at recent M&A activity in the CMO sector 

In recent years, the pharmaceutical market has experienced a lot of change, which has significantly impacted the CDMO sector and demand for its services. With the pharma industry worth $1.2 trillion in 2018, IQVIA predicts that it will be worth over $1.5 trillion by 2023. [6] Last year was another doozy for M&A, with Bristol-Myers Squibb rocking the industry with an astonishing $74B acquisition of Celgene, Ipsen’s $1.3B acquisition of the rare disease drug developer Clementia Pharmaceuticals, Catalent’s $1.2B acquisition of Paragon Bioservices to expand their gene therapy capabilities, and Vertex’s $245M acquisition of Exonics Therapeutics to capture their gene editing platform.  

Over the past few years, mergers and acquisitions have played a pivotal role in the evolution of the CDMO industry. Over the next few years, Big pharma will continue to invest significant amounts into building in-house primary manufacturing capacity particularly for biologics, driven by the need to protect IP surrounding these high value products and retain oversight over the manufacturing process to ensure regulatory compliance and quality of the product. Another interesting gap that CDMOs are starting to fill is within the crucial development and manufacturing roles for gene therapy, as these specialty companies on their own do not usually have any captive manufacturing capacity. There is so much demand for contract manufacturing that making a manufacturing change causes gene therapy companies, in particular, to have go to the back of the queue and lose a significant amount of time because of the high demand for gene therapy CDMOs. We believe this is going to change in the near future. 

Future of CDMO M&A: Vertical integration is key   

The future of the CDMO landscape is achieving full onsite vertical integration, from early development through commercial manufacturing and everything in between. By vertically integrating all services at one site, modern CDMOs can help build relationships between all  multidisciplinary experts, creating an efficient and highly effective approach to pharmaceutical development that most businesses have never seen in the past. Vertical integration is key to providing the best services to a growing industry. Talented drug substance process chemists will be routinely supported by experienced analytical chemists, while guidance on formulation and solid-state parameters will be completed by the site’s solid state teams, leading to rapid drug substance and drug product delivery for the manufacturing teams to upscale. These close working relationships between all departments can be more easily fostered at one location, as opposed to some of the current service providers with geographically diverse assets and service units. This vertical approach has the advantage of being able to quickly resolve issues as needed, and the depth of knowledge available from multiple experts ensures effective solutions will be found for even the most complex small and large molecule projects.  

The one-stop-shop concept has been around for some time, and clearly a number of leading CDMOs have adopted this model. Customers can theoretically benefit from reduced sourcing costs due to simplification of the value chain and accelerated development timelines due to simplified movement through the development cycle with elimination of the need for technology transfers from one partner to another. On the flip side, CDMOs benefit from the need to manage fewer customers with whom stronger relationships are established. [7]  

As the industry continues its consolidation activities, CDMOs will keep pursuing this one-stop-shop model of being a fully integrated provider in order to offer its clients services across the entire drug life-cycle and supply chain from API to commercial packaging and beyond. It is this approach of offering the full range of services that is driving large CMOs and CROs to shell out big bucks for assets that fill capability gaps, with a particular focus on specialty services and high value capabilities that will keep them one step ahead from their competitors.  

Future of CDMO M&A: Technological innovation   

Modern CDMOs have the advantage of greater flexibility in the technological assets they invest in for the future. If clients require the implementation of a new technology or asset as part of their project, future CDMOs that have not invested in all of the older technology will be able to respond more quickly. For example, in early development services a continuous flow platform or disposable technology can enable a more flexible, timely and controlled approach to drug substance development, but many of the older companies approach drug synthesis through legacy batch reactors and will most likely be unable to invest in new technology all of the time. Modern CDMOs that have invested in the continuous flow platform or disposable systems from the beginning have a huge advantage from this innovative technology and will be much better to work with in the long run. These new CDMOs will have the ability to deliver pharmaceutical and biotech products way more efficiently and at a lower cost to their clients when compared to older companies who are locked in to existing assets. 

In the future CDMOs will be developing innovative digital platforms for short pilot runs of drug products at an affordable cost. For example, an innovative type of CDMO technological advancement will be the development of novel production equipment that uses robotic capsule filling systems for greater speed and especially dosage accuracy. Big Pharma and biotechnology companies can be reassured that the industry is ready to take on these challenges and modern CDMOs have the innovative production platforms in place to provide a secure source of delivery for technically complex early manufacturing and pilot studies. As pharma companies have evolved, so have the challenges facing outsourcing partners. CDMOs are positioning to technologically extract more value along the supply chain, which is unlocking new opportunities and benefits for pharmaceutical researchers. While the current market continues to grow for the foreseeable future, it’s more important than ever to optimize and innovate CDMOs with modern technology for profitable growth. 

CDMOs will also make the way for significant advancements in the application of automation for improving other drug development and manufacturing, such as in data analytics. A key group of CDMOs are investing in real-time and controlled system analysis to enable the automatic adjustment of reaction parameters to optimize processes. This includes the use of FT-IR (Fourier-transform infrared) spectroscopy probes to provide real-time analytical data, which is then used to identify optimal temperature, pressure and solvent flow rate. The integration of analytical and process chemistries within a closed loop manufacturing process creates a scalable solution quickly, without requiring multiple screening reactions. [8] 

A modern sales mix for a modern landscape

With the state of the industry currently in consolidation mode, CDMOs are trying to understand the best methods to continue being competitive in a rapidly evolving landscape. Before all of this large amount of consolidation took place contract pharma had focused on the large-scale manufacturing of drug products for commercialization, but over time these organizations began to capture value further upstream in pipeline to early development and preformulation activities. As the industry started taking ahold of the CDMO landscape, customers were increasingly interested in finding strategic outsourcing partners, such as companies that could offer multiple services from early optimization and candidate selection to commercial manufacturing. Even in the industry’s current state there are still some room for growth with the emergence of biologics and biosimilars, as they each require their own set of capabilities to capture sales opportunities.   

Overall the number of services offered to customers has increased as the industry has grown over the past few decades. Current day sales teams must be flexible to their customer’s requests, as pharma companies are now faced with an astonishing number of services provided by outsourcing partners. The modern industry makes it clear it currently prefers accessing more services and capacity via fewer service-provider relationships. But not everyone is on board with the trend. For smaller pharma and biotech companies, these market mechanizations can result in less access to fewer service providers, and diminishing opportunities to work with the “A” teams if they do get access. [9]  

Some of the best ways businesses development teams can get ahead the ever-evolving CDMO industry is to become inline with the trends of current CDMOs, by providing services that drive down project variability, decrease the amount of time required for project intake, and improve pricing to match market realities. At the same time, sellers must have realistic expectations regarding the timeline and the level of effort required to prepare for a transaction, as well as the projected value of marketing their services all under one roof. But for sales and marketing teams the increasing trend towards CMO consolidation may create some problems, as there will be much less outsourcing partners and less overall competition, which in turn may decrease the options for some companies. This may also lead to constricted capacity, and potentially higher prices for services, as those seeking CMO services tend to bid up the increasingly scarce capacity and project slots. 

With all of these new CDMOs creating an industry with less outsourcing partners, less overall capacity, potentially longer wait times on projects, and higher service premiums, it’s important to make sure marketing and sales teams are current on the best strategies for gaining new clients, and that is where a platform like Zymewire truly shines. 

Sales and Marketing 2.0: Less hunting and more selling

Zymewire is a powerful software solution used by sales and marketing teams at CRO’s, CMO’s, and other providers for effectively monitoring drug sponsor activity and acting on new business opportunities as they arise. Instead of having to manually dig through mountains of industry news to uncover valuable insights, Zymewire presents with you the precise information that’s most important to your business in a digestible and actionable format.

In addition to scouring thousands of data sources to bring you relevant up-to-the hour biotech and pharma news, Zymewire integrates seamlessly with your CRM to help you identify where you could be increasing your coverage. Gone are the days of cross-referencing the results of your web searches with your LinkedIn network and Salesforce records - Zymewire does it for you, so you can direct your energy towards selling instead of hunting.

From discovering new opportunities within a given territory, tracking and prioritizing a list of existing clients, revealing contact details for key decision makers from prospective companies, or even identifying the right people to talk to at an upcoming conference, Zymewire is there as your digital research assistant, delivering critical sponsor information to your inbox or mobile phone. Stop missing out on new opportunities, and reach out for a demo today!