Key Value Creation Levers for CDMOs: an Investor’s Guide

Since we started our series of articles on contract development and manufacturing organisations (CDMOs) last year, contract research and manufacturing has only become more central to key healthcare and life science debates. Only weeks into 2021, we have already seen Sanofi agree to effectively become a mega-CDMO in helping Pfizer produce its COVID-19 vaccine, while Bayer and CureVac have entered into a multifaceted partnership in order to roll out 160 million vaccine doses by 2022.

It is clear that the CDMO space presents exciting opportunities for PE investors. In our previous article we compared investment strategies, looking at targeted ‘string of pearls’ acquisitions alongside more complex but transformative ‘step change’ transactions. These different strategies respond to broader trends within the pharmaceutical space. As pharma companies divest assets and transition into new asset-light business models, CDMOs are taking the opportunity to build capabilities and market share. More generally, fast-paced consolidation, fierce competition, increasing cost pressures and rapid technological innovation pose profound questions as to how companies can secure their market positions and effectively differentiate from competitors.

But when every investment is very different, and with the CDMO space developing and changing at such speed, value creation plans can pose particular challenges. We see acquisitive growth and organic growth as two compelling paths for investors and management teams. These strategies are certainly not mutually exclusive, but different companies may feel that internal capabilities and financial bandwidth make one a better fit with their overarching value creation plans.

Pillars of acquisitive value creation plans

Acquisitions are potentially transformative value drivers for investors and management teams. They offer organisations rapid entry into new geographies or markets that could otherwise take years of organic development.

Transactions in the CDMO space can involve acquisition of entire entities but also more targeted bolt-on deals for specific sites and production facilities. In January, for example, Siegfried announced its purchase of two sites in Spain from Novartis, deepening the partnership between the two companies as well as broadening Siegfried’s reach in Europe. As we discussed in our previous article, this is set to remain an important value lever for CDMOs.

Mergers and acquisitions (M&A) can also function as a catalyst for productive operational change, from efficiencies in shared services to optimising capacity – both driving better utilisation and expanding capacity in existing competencies. Acquisitions can also deliver entry into new areas and specialisms. High-potency drug development is one example of an opportunity that CDMOs in adjacent spaces could explore through acquisitions.

In addition, research and development synergies can enable better scaling of products and deeper relationships with partners through the value chain. Depending on the partners on either side of the deal, integrating horizontally or vertically can help establish unique offers.

Exploring organic value creation agendas

Of course, creating value does not solely depend on acquisitions. Stakeholders aiming to deliver organic growth can also pinpoint particular areas of focus.

In a competitive market, carving out niches and specialist positions can pay dividends. For example, companies may opt to build capability in specific dosage forms that may be less costly or lower-risk, or to invest in high-demand technologies like sterile manufacturing where shortages are felt keenly through supply chains. For organisations involved in drug development, the decision to concentrate on small molecules or biologics presents another important strategic choice. (Again, our previous article weighs up this debate in some more detail.)

Organic growth also depends on effectively articulating a market position and defining a service proposition to partners. CDMO management teams should decide whether the business should be a one-stop shop for development and manufacturing, or whether the interests of stakeholders is best served by acting as a strategic partner for specific stages in the development process.

Optimising sales and pricing effectiveness is another essential step for organisations planning organic growth. Scoping whether cost-plus pricing or value-based pricing makes sense can enhance each deal’s revenue potential while preserving strong relationships with customers.

It is also crucial to focus on central systems and functions where the consequences of underperformance are serious. This includes areas like quality control, which may not hit the headlines when everything is working well but which can lead to significant financial and reputational damage if failures become apparent. (For more on A&M’s approach to quality in pharmaceuticals and life sciences, see our recent paper.)

Summary: every growth plan will be different

Whether value creation plans are M&A-driven or predominantly organic, the characteristics of CDMOs and the industry in general should play a role in deciding on the right value creation plan. As CDMOs become more important to global pharma supply chains, trust and operational excellence may determine whether companies can turn short-term relationships into deep strategic partnerships. In addition, the rapid pace of growth in the space means that market leaders cannot rest easy. New technological innovations and resourceful competitors will make life difficult for companies who do not look forward and focus on generating long-term value.

A&M: Leadership. Action. Results.

A&M has worked with some of the largest European and global organisations to transform operations and accelerate results. A&M’s Health and Life Sciences team brings decades of experience creating value and driving results for healthcare businesses. To learn more, reach out to our key contacts Markus Peterseim, David McCartney and Raymond Berglund.