M&A rife in manufacturing space, driven by big CDMOs and PE

The CDMO space is perceived as fragmented and particularly lucrative says GlobalData, with private equity (PE) firms and large established players investing heavily in the sector.

A report from data and analytics company GlobalData entitled ‘M&A in the Contract Manufacturing Industry: Implications and Outlook – 2021 Edition’ has found that dealmaking in the sector has been particularly rife over the past few years, predominantly led by PE firms and big contract manufacturing organizations (CMOs).

“Investors perceive the CMO industry as particularly lucrative,” Adam Bradbury, PharmSource Analyst at GlobalData, told BioProcess Insider.

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He attributed the rapid rise of investment to the Tax Cuts and Jobs Act of 2017, which reduced corporation tax rates and made it more profitable to be a private equity firm. “During 2018-2020 the most common type of acquirer was private equity/venture capital (VC)/investment firms, which increasingly view the CMO industry as a prudent choice to provide a good return on investment.”

As such, money has flown into CMOs. Some examples include Recipharm, which was delisted from the stock exchange and became a private company owned by private equity firm EQT IX earlier this year; PCI Pharma Services, which saw Kohlberg & Company take a majority stake in 2020; and Cambrex Corp, which was acquired by global investment firm Permira Funds in 2019.

While the bulk of PE investment in the contract development and manufacturing organization (CDMO) sector focused on the small molecule side, Bradbury highlighted that biologic and multi-service offering CMOs represent some of the highest potential returns for investors. However, “there is a limit on the number of CMOs with biologics capabilities (compared to other service offerings) to acquire but the industry and investors do view these capabilities as high value, in particular for gene and cell therapy manufacture.

“Private equity will continue to seek out biologics capabilities in future.”

Big CDMOs

According to Jim Miller, content advisor/consultant for DCAT, 32 CDMO acquisitions took place in the first six months of 2021. This comprised of 19 full company acquisitions, four acquisitions of business units divested by their parent companies, and nine facility acquisitions. Of these, two were done by private companies, five by PE firms, and eight by PE-backed companies. The bulk (17) were undertaken by public companies

Some by the bigger players in the CDMO and wider life sciences space drove these acquisitions.

Catalent acquired plasmid DNA maker Delphi in February, Promethera’s cell therapy manufacturing subsidiary Hepatic Cell Therapy Support (HCTS) in May, and stem cell maker RheinCell Therapeutics in June.

New, but heavily-funded, player Resilience bought assets from Therapure Biopharma, a facility from Sanofi-Genzyme, and CDMO Ology Bioservices in the first half of the year, and continues on its M&A rampage paying $110 million for Bluebird bio’s North Carolina lentiviral vector manufacturing facility last month.

Such deals are expected to continue, said Bradbury, with both big CDMOs and others picking up the smaller players.

“There are many small private CMOs operating in the CMO space. However, the industry is dominated by large CMOs already, with this group gaining a large proportion of commercial stage contract manufacturing service agreements,” he told us.

“Small CMOs can often lack capabilities to produce innovative products and this often restricts them to manufacturing relatively low value products. We expect large CMOs to continue to acquire other CMOs either to enhance their capabilities or their scale, to essentially aim to provide high value advanced technologies or full service offering for clients.”

Bioprocess giants

Another sector flexing its buying prowess are traditional bioprocessing companies.

Thermo Fisher led the charge when it jumped from a life sciences tool and equipment vendor into the CDMO space in 2017, through the $7.2 billion acquisition of Patheon. Since then, the multinational has bought several other CDMOs and manufacturing assets, including paying $1.7 billion for gene therapy CDMO Brammer Bio in 2019. Since the beginning of the year, the firm has acquired divested assets from Novasep and expanded into the contract research organization (CRO) space through the $17.4 billion acquisition of PPD.

Meanwhile, fellow bioprocess giant Danaher – which owns both Cytiva and Pall – is seemingly shifting focus to the pureplay CDMO space, buying Aldevron for $9.6 billion in June.

According to Bradbury, the synergies between different parts of these business could place these bigger and more diverse players in enviable positions, especially as the marketed landscape for drugs continues to shift towards advanced therapies.

“Many small pharma companies will struggle to manufacture these products, so opportunities for CMOs operating in that space will continue to rise,” he said. “CMOs which can afford to acquire or develop cell and gene manufacturing capabilities will be looking to do so as even the largest pharma companies find it difficult to develop this relatively novel class of product.”