CMO sector still set for consolidation says industry expert

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Mergers and acquisitions remain a key growth strategy for contract manufacturing organizations (CMOs) as uncertainly persists across the industry. 

The public policy environment is creating uncertainly for the entire industry,” said Jim Miller, President at PharmSource, A GlobalData Company at DCAT Week in March. “What CMOs need to understand is the complexity of the supply chain decisions that large pharma companies have to make.”

As such, Miller explained the challenge for CMOs will be penetrating big pharma in a more effective way than it has historically. For example, Miller said adaptive manufacturing will create a “mix and match” value proposition to meet pharma’s requirements. “One-stop-shop” will also serve as a supply chain solution, he said – though process complexity and scale are big limitations to the model.

Capabilities and capacity

Expanding capabilities and customer reach are some of the main drivers of M&A activity in the industry, as well asgaining economies of scale, and “growth for its own sake,” said Miller, who will also be speaking next week at CPhI North America in Philadelphia.

Others, such as private equity firms, are simply looking to buy into the CDMO market.

Private equity firms continue to be very interested in buying their way into the industry, but not as much as they used to be,” explained Miller.

However, the majority of deals were smaller ($0-24m), though these deals still add capacity, technology, and geographic presence.

As for consolidation, Miller said there has been little from M&A, with just 4.5% of dose CMO industry revenues consolidated. “Only the merger of two large CMOs is likely to have significant effect on industry fragmentation,” he added.

Additionally, facility deals have become more common – and will continue to be.

When you buy a facility you buy capacity,” Miller explained, adding that for larger CMOs constrained by capacity, pre-owned companies are “prime targets.”

Other targets include well-run family owned companies, especially in Europe “where older generations are looking to sell because younger generations aren’t necessarily interested in taking over company,” said Miller.

However, he added that large EU-based CMOs have challenges – “big problems on the bottom line” – and as they stand, aren’t attractive opportunities. “Buyers will be more selective,” he said, and small- and mid-sized companies will depend on continued support of the financial markets.

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