Some CPhI folks believe 'bigger is better,' but don't expect CDMO megamergers

CPhI logo

This coverage is sponsored by: Catalent Pharma Solutions

The M&A topic just does not quiet down around CPhI, evidenced by the fact that Michel Le Bars, managing partner of Switzerland-based M&A consultants Kurmann Partners, spoke to a standing-room-only crowd on the topic.

Le Bars had plenty of insights for those looking to buy themselves into new markets and here are a few of the takeaways: The robust M&A market will continue to driven by the fact that money continues to remain cheap so private equity investors remain active. He said those investors, however, are being more careful in evaluating their targets. They have come to realize that you have to understand not only efficient manufacturing but the science and market of drugs.

“They have learned that their Excel modeling may not be enough,” Le Bars explained.

Another factor is that Chinese and Indian companies remain very interested in getting an EU or U.S. footprint. They believe that being able to say they manufacture products in the countries where they sell them can counter market concerns that their meds may not measure up in quality.

Le Bars said that sterile injectables still present a real M&A opportunity. The market is expected to produce 10% annualized growth in the short term. It should grow to about $70 billion in 2020 from $43 billion today. Currently, he said, less than 20 companies represent 75% of capacity.

“More companies are looking to get into sterile injectables, but they need to get in quick because there are few targets left,” Le Bars explained after his presentation.

Still, he cautioned, sterile injectables are not for everyone. While growth and margins in that market are really good, products are tricky to produce, particularly biosimilars, requiring a lot of know-how and a well-trained workforce.

Le Bars didn’t talk about specific companies that have stumbled in this arena, but Mylan ($MYL) and Teva ($TEVA) both come to mind.

While sterile injectables may be a hot growth market, do not suggest to Matthew Moorcroft, VP of global marketing for New Jersey-based Cambrex ($CBM), that there is only limited upside to producing small molecule products. Cambrex has dedicated itself to that sector exclusively.

“Biologics may represent 1% of the drug market,” Moorcroft proffers. “There is so much more playing field in chemistry. You have to go to the doctor’s office 5 times before they will prescribe a biologic.”

Cambrex is committed enough to the category to have invested $200 million across three manufacturing sites in recent years, while also going the M&A route for expansion. Last week, it struck a deal to buy High Point, NC-based PharmaCore for $25 million. It gets a 35,000-square-foot facility that can handle batch sizes from milligrams to 100 kilos, and also is DEA licensed to handle Schedule II through Schedule V controlled substances.

He thinks that Big Pharma will increasingly look for partners to produce many of their small molecule drugs rather than invest in more sites themselves and says Cambrex has no qualms about dedicating itself to that market.

Mark Quick has heard the talk about the possibility of some of big CDMOs pulling off a “megamerger,” but remains skeptical. “I don’t see that happening,” he said at CPhI Wednesday. Quick has a good vantage point from which to assess the situation. He is EVP of corporate development for Sweden-based Recipharm, a sizable player that has gotten progressively bigger with half a dozen deals since going public in 2014.

While megamergers may not make sense, Quick thinks being bigger is better. Why? Because Big Pharma likes to deal with companies that have breadth and depth. “If you are a bigger company, you get bigger contracts,” he said.

Bigger also means having the resources to invest in market changes. Serialization comes to mind. “It is a heavy investment,” Quick says. “I am not sure the industry as a whole is ready. I think a lot of folks are still hoping the regs will be put off.”