As Billions Of Dollars Pour In, Do CDMO Valuations Matter?

By Louis Garguilo, Chief Editor, Outsourced Pharma

What’s top of mind when selecting a CDMO? Technical capabilities and regulatory track record. Capacity and timelines. Geography and cultural fit.

What about a CDMO’s valuation? Or its ownership? How about the people behind those increasing private-equity investments?

These questions arise (again) with another recent splash of investment news.

PCI Pharma Services is fueling a “a new growth phase” with a large private-equity investment.

The investor is renowned private equity (PE) firm Bain Capital, which joins existing stakeholders (and also well-known) Kohlberg (adding to its initial investments.)

As a (front-page) headline in the The Wall Street Journal put it, “Bain and Kohlberg Bet Big on Biopharma Industry.”

Big to the tune of an estimated $10 billion.

If you are a client of a CDMO who receives anything near this investment, I’d expect you’d be encouraged.

The PCI press release includes declarations about growth, leadership, innovation, scale, and helping biopharma clients bring therapies to patients.

Bigger. Presumably better. Join the crowd.

• From Lonza’s acquisition of Capsugel (via PE-firm Kohlberg Kravis Roberts & Co. (KKR) for ~$5.5 billion, and Thermo Fisher’s purchase of Patheon for $7.2 billion, both in 2017;
• to Cambrex being aquired by PE-firm Permira for ~$2.4 billion in 2019, and Recipharm taken private by EQT for ~$2.1 billion in 2020;
• to the recent buyout of Catalent by Novo Holdings for ~$16.5 billion announced last year;
• and considering other M&A and related deals, we’ve now demonstrated how the CDMOs you work with have grown in size and valuations, and how PE and other deep-pocket organizations can command your outsourcing landscape.

So along with initial enthusiasms, chances are at this moment you may also feel increasingly dwarfed by the size and importance of the service providers you work with.

And every dollop of dollars into the ownership pool can bring with it the ripple effects of transition.

For some CDMO clients, this translates to increased offerings (on a global scale). For others, it introduces complexity, and a shift in relationship dynamics.

So to answer our questions above, yes, valuations matter. They can shape a CDMO’s ambitions and priorities, and affect processes, procedures, projects, and partnerships.

The Weight of Ownership

Private Equity firms, especially when making multi-billion-dollar investments, expect a certain level of returns over a defined horizon.

They typically operate on about a 5-year window before deciding next strategies, such as another sale of the CDMO.

Financial returns can be achieved through price increases at the CDMO, gaining operational “efficiencies” and thus profitability, adding services, making further acquisitions, or on the other hand, selling off parts of or the entire CDMO.

These moves should align with what clients want — expanded (or right-sized) sterile fill-finish capacity, for instance.

Other times, they can add complexity, force worker turnover, negatively influence a service provider’s culture, and become a general distraction at the CDMO.

And distractions at CDMOs are never a good thing.

It's Already A Difficult Business

The CDMO business model can be difficult to execute. Margins are often not where a growing industry would want them.

Recruiting and maintaining skilled workers is a challenge. Upgrading facilities (which themselves are expensive to build and upkeep) with the latest instrumentation and equipment is costly ... and so on. 

Not withstanding all that, the elevated financial valuations we are experiencing for CDMOs must signal we have healthy and profitable external partners.

Today your CDMO is likely to be perceived as a "growth platform" by investors.

So while valuation is not a direct proxy for customer service, CDMOs receiving infusions of financial support indicates there are lists of satisfied and returning customers, and plenty of prospects.

CDMOs must be meeting or beating customer expectations the majority of the time.

So why not? Three cheers for CDMOs commanding valuations based on years of service and management. Our service providers now compares well with those of other high-technology organizations in other industries.

Not A Perfect Investment

However, as many readers know all too well, no CDMO is perfect. Some far from it.

A CDMO worth billions can stumble on your project due to overextension, shifting priorities, or growing pains.

Conversely, a smaller, specialized CDMO — with no flashy investors — might be your most responsive and technically aligned partner.

It might be instructive, then, without ascribing any of the comments below to a specific company or deal, to paraphrase some of the difficulties customers of CDMOs have made public (or groused in private) over the years about CDMO gyrations.

• This deal significantly expanded oral dose and drug delivery offerings, but while some praised the enhanced one-stop-shop potential, others reported cultural friction within the organization and difficulties fully integrating.
• Integration brought new capabilities but a palpable sense of being absorbed into a larger corporate structure, with less direct access to decision-makers.

• This was a defining deal for the sector; customers gained access to broader R&D services. However, smaller and mid-size clients feel de-prioritized post-acquisition because the “new” CDMO focuses on large-pharma accounts.
• Onboarding became rigid and timelines longer as corporate systems replaced more local practices.

• There’s deep concern (born of experience) over the investment firm’s stated focus on cost efficiency and “network optimization.” Some fear facility closures or deprioritization of services.
• We began to face operational issues such as FDA warnings and facility slowdowns.
• This is seen as a stabilizing move; customers are cautiously optimistic, but wary of ongoing changes in leadership and strategic direction.
• There are questions around how rapid scaling impacts focus on customer-service quality, particularly for smaller clients.

Bottom line is ask questions when dollars flow to your CDMO.

What are the investors' goals, and the CDMOs mission now? Are investors actively shaping operations?

And stay vigilant.

Are key executives or project managers leaving?

The continued rise of private equity and valuations in the biopharma-services sector is significant.

Let’s hope this reflects what we’ve known all along. CDMOs are vital to our industry and the future of medicine. Let’s see if it means more money flowing into innovation, manufacturing capacity, more optionality and better customer service.

And by all means, keep an eye on your new valuation in the eyes of your CDMO.