Consolidation In The CRO, CDMO Segment

Brian Scanlan, operating partner (life sciences), Edgewater Capital Partners, expects consolidation to continue in the CRDMO space, given the highly fragmented landscape still, particularly in earlier phases of development.(Also see "India Q2 2023 Deal Trends, What May Be In Store" - Scrip, 25 July, 2023.)

Scanlan observed that in North America alone, there are an estimated 1000-plus pharma service companies with less than 200 employees. While many of these are very small, there are some that have grown into “solid” small/mid-sized CRO/CDMOs.

“These tend to be more specialist organizations and the larger, integrated CDMOs have looked to these specialists historically to help fill gaps and provide pipeline opportunities into the mother ship,” he explained.

Nevertheless, Scanlan, underscored that there is “a very strong place” for smaller CDMOs as they tend to be more flexible and provide a “high customer-touch business model” that the emerging pharma companies really value; emerging biopharma loves the “lack of bureaucracy and fast response” at the smaller specialist CDMOs.

On where things may be headed hereon and whether some of the consolidation could lead to more companies like WuXi, which is “super integrated”, Scanlan believes that industry might start to see more of the kind of the “stay in your swim lane business model”. For instance, it could mean small molecule shops that are expanding a little bit maybe out into some adjacencies but in order to have the most value they could perhaps stay more focused there rather than go fully across.

Markedly, the next phase, he believes, could see a sort of balancing act between more consolidation and then divestiture and then re-consolidation around more focused capabilities. There’s been mega consolidation over the past five years, "with money flying everywhere", the executive pointed out.

“I think now, it's like a settling out period - what do we have? What's core/ non-core and what should we cull from the system? We may start seeing a period of accelerating divestitures,” Scanlan declared.

For instance, an integrated CDMO may decide that it no longer wants to be in the solid dose segment.

“So, they’ll divest and some other firm may find a way to make an integration strategy around more solid dose and take that and maybe some other things,” he said but reiterated that it doesn't mean M&A or consolidation stops.

Earlier, an analysis by EY-Parthenon indicated that 244 publicly announced M&A transactions involved CDMOs between 2017 and 2021. “The absolute total deal volume has been highly variable due to a few major multibillion deals in 2017 and 2021 with a mean of $7bn,” EY-Parthenon said last year. (Also see "India M&A Hourglass: Control Deals, ‘FOMO’, Monetization Calls At Family-Owned Firms" - Scrip, 12 September, 2023.)

What’s In Store For CROs, CDMOs – “Stay In Your Swim Lane”, Consolidation, Divestitures

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