Unlocking Growth in the CDMO Market: Executive Summary and Key Growth Factors

Vertical: Contract Manufacturing Organizations
Author: JC Lupis
Date: April 2019

Executive Summary

  • Contract manufacturing organizations serving the pharmaceutical market typically differentiate either through specialization or by offering an end-to-end solution.
  • Forecasts expect the global CMO/CDMO market to grow by up to 7%+ annually in the medium-term. Growth drivers include underlying pharmaceutical market growth and greater strategic utilization of outsourcing.
  • Biopharmaceuticals, oncology, and cell/gene therapy are areas of promise for contract manufacturing and have contributed to considerable M&A activity of late.
  • The most important drivers of recent transaction activity have been technology and capabilities, though geography and scale remain oft-cited.
  • Buyers are looking for growth rates, regulatory track records, quality and expertise in targets. The one-stop-shop model is frequently discussed within the industry, but its usefulness in practice has been debated.
  • Recent transactions suggest an uptick in multiples paid, often in the 15-25x range.

Growth Factors

The growth of the contract manufacturing market owes to several factors.

– Pharmaceutical Market Growth

One key underlying factor is, of course, growth in the pharmaceuticals market itself, which the CMO market serves. The global API market, for example, has been forecast to grow at a compound annual rate of 6.3% from 2016 ($157.95 billion) through 2021 ($213.97), according to one projection. Rising demand for pharmaceuticals, driven in part by higher prevalence of certain diseases, growth in emerging markets, and an aging global population, all factor into this equation.

The growth of the pharmaceutical market would not have such an impact on C(D)MOs were their utilization to be decreasing. By contrast, though, recent years have seen much greater levels of C(D)MO utilization, leading to a proclaimed “changing of the manufacturing guard.”

– Healthy clinical pipeline

Pharmaceutical market growth seems unlikely to change in the near future given what appears to be a healthy clinical pipeline. Reporting from the PhRMA indicates that there is an active pipeline of pharmaceuticals in development for various disorders, including cancer (1,120), neurological disorders (537), and skin diseases (328)18. And while total R&D pipeline growth appears to have slowed slightly in 2018, it is still rising to new heights.

A key point here relating to biopharmaceutical CDMOs is made by Thermo Fisher CEO Marc Casper, who notes that more than three-quarters of molecules coming through the pipeline are from smaller biotechs who lack later-stage manufacturing capabilities, opening up opportunities for the CDMO industry. This leads to “much more of a pipeline of commercial drugs in the CDMO market.” Now is the “golden age for the CDMO space,” according to Casper.

– Strategic considerations drive greater utilization of CMOs

Many pharmaceutical companies are re-aligning their strategic priorities, focusing on R&D, breakthrough therapies, and seeking to avoid using capital to build plants (in many cases instead selling them off to CMOs). These moves are in part due to the so- called “patent cliff,” but also in response to a desire to move into more lucrative fields. Sanofi’s re-prioritization of its programs – in which it has invested heavily in oncology at the expense of others including treatment for diabetes and heart disease20 – is an example of such strategic re-alignment.

This has led to opportunities for contract manufacturers, who are increasingly providing value not only for their cost-effectiveness, but also for their technical sophistication and flexibility. Indeed, pharmaceutical companies are using contract partners not only as a way to fill capacity, but also to fill gaps in manufacturing expertise and operational sophistication. A good CMO can help bring a drug to market at a reduced timeline while also mitigating financial risk, managing quality issues, and providing regulatory compliance. This more strategic approach to contracting with C(D)MOs explains why quality and experience are so highly prized in contracted partners.

– Regulatory developments

Regulatory developments also play a critical role. The FDA under Commissioner Scott Gottlieb has taken steps to increase market competitiveness – though it remains to be seen what impact his departure will have. While some moves intended to lower the cost of pharmaceuticals may rankle drug companies, it’s also true that the FDA is focused on faster evaluations and is approving more applications. Last year saw, for example, a new high for FDA drug approvals at 59 new molecular entities, up from 46 the year prior and besting the previous record of 5321 set in 1996. This of course has a downstream impact on CMOs: as more drugs are approved for development and manufacturing, and as drug companies increasingly turn to C(D)MOs for those services, demand for skilled contract manufacturers rises in tune.

– Reverse migration

GHA sources suggest that some of the work outsourced to China in recent years is coming back to North America and Europe, as drugmakers hold concerns over the protection of intellectual property. As such, while Asian markets are expanding in terms of producing drugs for their own citizens, the contract manufacturing pie available to companies in North America and Europe may be growing.

– Generics

Drugmakers’ strategic considerations dovetail with regulatory developments in the case of generics. With the US FDA pushing for lower-cost drugs, generics appear to be a market poised for growth, despite some pressures. At the same time, pharmaceutical manufacturers don’t necessarily see the profit margins in manufacturing generics at their lower price points, so are more likely to outsource this activity, portending a keen source of business for CDMOs with the right expertise. It remains to be seen if a long-term push to drive down drug prices will have a negative downstream impact on C(D)MOs, but increased reimbursements for generics could also loosen margins and have a positive effect.

CDMO Market: Key Chart

C(D)MO Acquisitions by Service Offering (2015-2017)

GHA-CDMO-Acquisitions-by-Service-Type

GHA’s CDMO report includes the following sections:

    • 1. Market Overview
      • CMO and CDMO Services
      • CMO and CDMO Segmentation
      • Market Size and Top Players
    • 2. Growth Rates & Factors
      • Growth Rates
      • Growth Factors
    • 3. Noteworthy Market Trends
      • Biopharmaceuticals
      • Oncology
      • Cell and Gene Therapy
    • 4. Drivers of M&A Transactions
      • New Capabilities
      • Geographic Footprint
      • Capacity Expansion
    • 5. What Buyers Want: Business Considerations
      • Quality and Experience
      • Which Capabilities Are in Demand?
      • One-Stop Shops and Development Services
      • Other Notes and Considerations
    • 6. Key M&A Deals
      • Notable Recent C(D)MO Transactions (2018 and 2019 to-date)
      • Earlier Notable Transactions (2015-2017)
      • EBITDA Multiples
    • 7. References

    To inquire about a copy, please contact research@ghadvisors.net.