CDMOs investing for returning growth
All the talk is about biologics , but there is plenty of business for small molecule CDMOs . Andrew Warmington reports from DCAT Week 2024
The mood in the pharmaceutical CDMO market is “ significantly improved ” from a year ago , according to Daniel Cohen of Morgan Stanley in a general session during DCAT Week 2024 in New York on 19 March . Cohen has been involved in various transactions in the field over the last five years .
Rising stock prices and debt issuance since early 2023 , plus stabilising interest rates , lower borrowing costs and improved general confidence , have helped to funnel more money to the biopharmas , who had suffered a real decline in funding post-COVID . This will ultimately find its way through to service providers .
Markets improving
In the previous two years , M & A activity in the CDMO sector had been muted but Cohen believes it will be back soon as all the indicators are right . The decline in M & A since 2021 also led to a build-up of capital among private equity firms that they will have to spend at some point .
“ We had a significant rebound in debt issuance in Q4 , which led to actually a record level of repricing activity in January 2024 . So things are starting to come unstuck in the debt markets , which is great for dealmaking in terms of public equity in biopharma ,” he observed .
Q1 2024 saw a rising number of IPOs and about $ 9 billion of public equity issuance in biopharma . Meanwhile , Big Pharma – notably Bristol-Myers Squibb and Abbvie – have been buying up biopharmas again since late 2023 and general M & A activity in pharma has seen an uptick .
The net result of all of this for CROs and CDMOs is that “ we ’ re in a better place ,” Cohen said . He expects yearon-year revenue growth to rise from 7.0 % in 2023 to 10.9 % this year for the former and from 6.0 % to 11.9 % for the latter . EBITDA margins are expected to rise slightly to 20.2 % to 22.3 % respectively .
Cohen also expects a return to deal making in the sector . This had peaked at an aggregate value of $ 35.4 billion in 2021 , but fell to $ 11.2 billion in 2022 and $ 11.3 billion in 2023 . Novo Holdings ’ acquisition of Catalent ( see box story ) virtually guarantees that it will be higher in 2024 and four other deals have already been made ; he projected $ 16.9 billion for the year as a whole .
In terms of what CDMOs should do to create value , the operating drivers have not changed , Cohen said . “ Operational excellence is the foundation of any CDMO and that needs to be a metric-driven performance culture across the entire organisation .” CDMOs should seek to be a solution provider rather than just a supplier of spare capacity . They should help companies develop products early in clinical development to get customers to stay with them .
“ Areas of technical expertise are highly valued . We see this right now in steriles - we get probably a call a week
Figure 1 – Projected growth of pharma industry & by type , 2023-8
22 SPECIALITY CHEMICALS MAGAZINE ESTABLISHED 1981