Pharmaceutical industry investors are betting on contract development and manufacturing organizations (CDMOs) this year, as they shift their focus from contract research organizations (CRO).
Pharmaceutical industry investors are betting on contract development and manufacturing organizations (CDMOs) this year, as they shift their focus from contract research organizations (CRO).
The main reason is COVID-19. Investors see CDMOs as recession-proof, at least while the industry is faced with manufacturing enough vaccine to inoculate the world. CROs, which in the outsourcing segment of the pharmaceutical industry historically garnered the most interest, were deeply affected by states’ stay-at-home mandates and shuttered clinical trials.
“As many clinical trials have been delayed, private equity and strategic buyers have focused their efforts on consummating transactions in the outsourced manufacturing and testing subsectors in the first half of 2020,” according to a just-released report by Capstone Headwaters. Investors today are looking for recession-proof industries with strong fundamentals. With an impending, dire need for vaccine manufacturing and limited global capacity, CDMOs look promising.
Earnings is another big reason for investors’ interest. Earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples from Capstone’s Pharmaceutical Outsourcing Index appreciated 29% between March 11, when the World Health Organization declared a pandemic, and August 6.
Another is that industries are rethinking their off-shoring strategies and are turning to CDMOs. For example, an article in the South China Morning Post noted that 40% of American Chamber of Commerce (AmCham) members in Hong Kong are seriously considering leaving that city in response to China’s new national security law and escalating trade tensions from Western nations. COVID-19 concerns figured into their calculations, too. Overall, 75% of those surveyed by AmCham said they were pessimistic about Hong Kong’s business climate. This comes at a time when the U.S. is encouraging pharmaceutical manufacturers to make more of the nation’s critical medical supplies in the U.S.
The decline in CRO activity during the first half of the year is another result of the COVID-19 pandemic, which caused people to fear going to hospitals and clinics. At the height of the pandemic, the number of new participants entering clinical trials fell 70%. During that timeframe, approximately half of all U.S. pharmaceutical companies paused recruitment for clinical trials and some 75% paused site activation, according to Capstone Headwaters.
A McKinsey & Company survey cited in the report found that 100% of the vaccine, respiratory, infectious disease, inflammation and gastrointestinal executives surveyed reported major disruptions to their clinical trials. In oncology, moderate disruption was reported by 80% of respondents, while cardiovascular trials were evenly divided between moderate disruption and no or low disruption.
By June, when states began opening up, the number of new trial participants was only 30% lower than the same period in 2019. Whether that improvement will continue depends in part upon whether viral outbreaks are increasing and how states respond. California, for example, issued another statewide lockdown August 14.
For the remainder of 2020 (and probably beyond), digital technologies will be vital for clinical trials. For example, the Capstone Headwaters report noted that 57% of all CROs plan either to adopt virtual technology or increase its use to better reach patients.
That interest manifests in collaborations and M&A deals. Covance Laboratories, for instance, is partnering with Medable, a digital clinical trial software provider, to enable remote data collection and enhance remote engagement among patients, clinicians, and trial sites.
Meanwhile, CDMOs are enhancing their production levels to meet anticipated manufacturing needs. For example, Altimmune signed an agreement recently with Vigene Biosciences to manufacture single doses of an intranasal COVID-19 vaccine candidate, the Capstone Headwaters report said, and Emergent BioSolutions inked a 5-year, $480 million agreement with Janssen Pharmaceuticals to produce its COVID-19 vaccine in 2021.
The efforts go beyond vaccine production to include packaging. Catalent recently acquired Teva-Takeda Pharmaceuticals’ packaging facility in Japan, for instance. This acquisition enhances Catalent’s controlled temperature capabilities, clinical returns, and destruction, capabilities as well as packaging.
Financing for these transactions has shifted, too. In terms of year-to-date financing, private funding saw an uptick, accounting for just over 43% of all financings, compared to 31% last year. Follow-on funding, at just over 34%, held steady. Public funding was down slightly, at 22%, from last year’s year-to-date figure of 27%. Private equity activity was minimal, at nearly 3%, compared to 9% at this point last year. Year-to-date venture capital funding is elevated compared to 2019, at approximately $16 billion.
Halfway through the year, CDMOs accounted for most of the year’s acquisitions in the outsourcing segment of the industry, at just over 35%. Lab and testing services comprised the next largest category, at nearly 30%, the Capstone Headwaters report noted.
Overall, year-to-date transactions – at 36 – are only one behind the year-to-date transactions from 2019. If this pace continues, 2020 will be the most active M&A year since 2015, which had 85 transactions.
Outsourcing is a growing market and, for pharmaceutical and biotech developers, CROs and CDMOs make good partners. As Reportlinker noted in a summer report, the complex and capital-intensive nature of manufacturing biologics and vaccines is a driving force. Because CDMOs work with many innovators, that knowledge accrues internally, enabling best, cutting-edge practices to bear on each project. Reportlinker predicted a compounded annual growth rate of 7% between 2020 and 2025.
