Last year, I started off by setting up a broad perspective on the size of the global CMO/CDMO sector, carefully curating figures from PharmSource, ICON, and others to illustrate the growth rate of the business. That was a lot of work, and the scene hasn’t changed appreciably, so this time around, we’re going to dive right into trends, drivers and some predictions, if my crystal ball doesn’t fail me.
Consolidation
The number one trend from last year’s edition demands a repeat (see - (http://pharma-bio.org/pdfs/CPhI%20annual%20report%202015.pdf - page 46). The CMO/CDMO sector remains fragmented, and business logic dictates that the sector needs to consolidate (or rationalize, if that’s your term of choice). It’s been this way for years, so if we keep calling for it, it’s bound to happen, right?
Consolidation doesn’t just mean big CDMOs will be devouring smaller ones to shrink the food chain. In fact, the big rumor to crop up last year was Lonza Group’s interest in acquiring Catalent, one of the largest CDMOs in the world. According to a Reuters report, the two sides failed to agree on a price, but “Lonza, which is keen on an acquisition, may decide to pursue other targets.” You might recall that in 2009, Lonza launched a bid for Patheon, long before the latter merged with DSM.
So will we see CDMO mega-mergers, combining API-heavy firms with formulation-oriented ones, or mid-tier mergers of equals, or the aforementioned big fish eating the little ones in bolt-on, accretive deals? I think there’ll be plenty of the latter, but I also think we’ll see a significant attempt at building a soup-to-nuts drug substance through drug product company in the next year or so. Mind you I don’t think such a structure -- going from APIs to dosage forms -- will necessarily work, but I think some companies will try.
Of course, that’s only the intra-CDMO sector we’re talking about. It doesn’t cover pharmas buying pharmas that own CDMO units, like Pfizer’s acquisition of Hospira (and the One 2 One CDMO business), or one of the more interesting acquisitions in the past year: Mylan’s purchase of (most of) DPT/Confab. The press release announcing that move focused on DPT/Confab’s ANDAs, not their manufacturing facilities and CDMO operations, and it remains to be seen how Mylan integrates the CDMO business, but the acquisition is a sign that CDMOs can be valued for more than their service businesses.
A few years ago, Metrics Contract Services was another example of this, when the firm was acquired by Mayne Pharma as part of Mayne’s entry into the US generic space. The good news is that the parent company has remained committed to Metrics as a CDMO business. I think we’ll see other CDMOs get snapped up because of non-CDMO assets.
Buy In
On the flipside, some CDMO opportunities may arise from large pharma companies trying to rationalize their own manufacturing networks. A CDMO buying a pharma site in exchange for a trailing supply agreement is still a risky proposition -- if you don’t build up enough new business by the time the supply agreement ends, you could be stuck with a lot of overhead costs -- but there can be good fits.
In the last few years, Teva has been working on a $2 billion/year restructuring plan that has put many of its facilities in play; a few of them have already been sold off to CDMOs and other generic firms. Teva also recently closed a $40 billion deal for Actavis’ generic portfolio, in which it had to divest significant generic holdings to receive government approval for the deal; presumably, more facilities in its network will lead to more spinout possibilities. Look for more of those facility-deals to happen across the spectrum.
But I’m guessing we’ll see plenty of intra-CDMO mergers or sell-offs of specific sites. Recipharm got into the US by acquiring a site from Indian CDMO Kemwell, after a series of non-US deals. CMOs with no US footprint will keep looking for avenues to enter the world’s biggest pharmaceutical market, especially with the uncertainty facing the EU in the wake of the Brexit.
Mergers and acquisitions will be the primary mode for that, although Vetter did finally answer its “make or buy” question when the company announced plans to build a commercial facility in Illinois, near its Development Services site. Vetter’s a unique company in a high-value segment, so I wouldn’t extrapolate from its example; most CDMOs looking at the US are likely to buy their way in.
Cash Out
One of the biggest players in the industry, Patheon, recently went public. Like the other top-rank CDMO, Catalent, proceeds from the IPO were used to pay down debt. There are upsides and downsides to having these companies on the stock market. As Jim Miller put it in the July, 2016 issue of PharmSource’s Bio/Pharmaceutical Outsourcing Report:
“Adding another public company to the CMO industry is good . . . because it makes it more transparent and helps customers and investors appreciate the industry’s development. For instance, the equity analysts who follow the CMO industry still try to shoehorn it into models developed from 15 years of following the CRO industry. Perhaps with another significant public CMO they will refine their understanding of the industry.”
That said, I was around the last time Patheon was public (and Catalent was the Pharmaceutical Technologies and Services division of Cardinal Health), and the quarter-to-quarter earnings pressure was fierce. Still, the company has completely different management that it had in those days. Also, I like to think we’re in a slightly more enlightened age when it comes to expectations about the CDMO sector’s revenues -- that is, that they’re not a smooth curve -- but as Jim Miller pointed out, the market’s not exactly well-informed about the CDMO space, and that could lead to some incorrect assessments of its health.
Patheon’s in a unique position, and I doubt any other pure-play CDMO could manage a public offering, so I predict a one-off here, not a trend. (I know Therapure announced plans for an IPO early this year, but that company’s a hybrid bio-CDMO with a pipeline of its own biologics.) I’ll also note that it’s a good sign that Patheon’s IPO did well, because it signals a positive trend for funding “biopharma” companies. And if more small companies get investors, that’ll keep drug development programs going and feed CDMOs’ business pipelines.
Quick Hits
Continuous Manufacturing: CDMOs will advance this and other new manufacturing technologies faster than in-house pharma will (provided pharma clients are on board with it).
Biosimilars: Some CDMOs will benefit now that the US regulatory system is growing clearer (and some US payers are signaling that they’ll favor biosimilars over innovator biologics).
Rare Diseases: CDMOs will become a missing link in facilitating R&D into less profitable areas of the rare disease space, as well as in tropical diseases.
Complex Generics: As more complex drugs arc toward the end of patent protection, CDMOs with novel formulation technologies will benefit from helping clients develop generic competitors.
Harmonization/Harmonisation: FDA, EMA, Health Canada and other regulatory bodies will advance mutual recognition of inspections, but it’ll take a while; first, they have to settle on a spelling of harmonization.
My last prediction for the CDMO sector is, I admit, self-aggrandizing. For the past year, our trade association has been working closely with FDA on reauthorizing the Generic Drug User Fee Amendment (GDUFA), and as a result, we’ve built relationships with many levels of the agency, including a high-level presentation with CDER about the CDMO sector. We’ve demonstrated that CDMOs are an important part of the healthcare ecosystem, and have given a professional face to our industry.
So I’m predicting that CDMOs are on the cusp of a transformation, in terms of the FDA, CDER, and other stakeholders seeing us as partners, not just service providers. In the years to come, the CDMO sector will be recognized for its role in bringing safe and effective medicines to patients.
All predictions null-and-void if Trump wins the US Presidential election.
Gil Y. Roth is the President of the Pharma & Biopharma Outsourcing Association (www.pharma-bio.org), a US-based trade association representing the regulatory, legislative and general business interests of CMO/CDMOs. From 1999 to 2014, he was the Founding Editor of Contract Pharma magazine. He can be reached at [email protected]