M&A activity of pharma CMOs will continue despite challenging borrowing environment: GlobalData

The mergers and acquisitions (M&A) activity of well-capitalised pharma contract manufacturing organisations (CMOs) is set to continue over the coming years despite a challenging borrowing environment due to rising inflation and interest rates, according to GlobalData.

GlobalData’s latest report, ‘M&A in the Contract Manufacturing Industry: Implications and Outlook – 2023 Edition,’ reveals that the M&A activity of CMOs decreased slightly in 2022 compared to 2021. CMOs showed an increasing reluctance to take on debt in 2022. Even still, large CMOs made acquisitions of companies and facilities to enhance their capabilities or scale of production. Private equity investment in CMOs over the previous five years peaked in 2022.

Major CMOs Catalent and Recipharm made the most acquisitions of any pharma contract service provider during 2021–2022. As well as whole company acquisitions, Catalent made two facility acquisitions. The company made sustained investments in cell and gene therapies: it acquired both RheinCell Therapeutics and Delphi Genetics. Recipharm also targeted companies with biologic production, with 75 per cent of its acquisitions involving companies with API biologic manufacturing sites.

Adam Bradbury, Pharma Analyst at GlobalData, comments, “The largest targeted group for M&A during 2021–2022 had specialised manufacturing capabilities – in contained and controlled drug manufacturing). Contained drugs are substances where operators require protection against exposure to these products and controlled drugs refer to a drug substance whose manufacture, importation, possession, use, or distribution is regulated by law, because of the possibility of illicit use.”

Standard offering acquisitions have continued to decline since 2018. CMOs are increasingly targeting companies with sophisticated (biologic and specialised) capabilities to manufacture modern drugs and sign high-value outsourcing contracts.

Bradbury continues, “Far fewer private equity companies divested CMOs during 2021–2022 than bought CMOs, indicating that their interest in the CMO industry is growing and investor appetite is strong. Pharma manufacturing persistently prospers regardless of changing economic environments, as demand for pharma products continues to grow.”

Key opinion leaders (KOLs) quoted in the report highlighted the complexity and limitations of cell and gene therapy production and why they are so in demand as acquisition targets.

Most private equity company acquisitions related to commercial dose CMOs were for targets with injectable capabilities. During the pandemic, the production capacity for vaccines and generally all injectables was stretched, driven by unexpected sharp increases in demand, and it would have been a wise investment to acquire these capabilities.

Bradbury concludes, “Many drug manufacturers are facing a COVID cliff in 2023 as vaccine and treatment sales are set to fall greatly. The rising approval and use of biologics and oncology drugs will mean injectable manufacturing will still be needed in the future. Manufacturers will have to switch lines or adapt their production to use capacity previously used for producing vaccines.”