Guest Column | July 16, 2019

Private Equity Accelerating Consolidation In The CDMO Market

By Bill Bolding and Ajeya Shekar, Provident Healthcare Partners


The CDMO industry has benefitted from big pharma’s divestment of in-house development and manufacturing capabilities in this current economic cycle. The sector has grown at a consistent 7 percent compound annual growth rate (CAGR) for the better part of a decade, outpacing that of the greater pharmaceutical industry itself. The rise of competition from new CDMO players and consolidation within the pharmaceutical sponsor space, however, has led to a crowded market and, in many cases, a commoditized service base.

To compete in this environment, CDMOs have utilized various strategies to achieve economies of scale, diversify their service offerings, and vertically integrate to create a more marketable offering to the sponsor community. While some CDMOs have successfully positioned their businesses by aligning with a larger strategic player, the private equity (PE) community has emerged as a partner to many CDMO shareholders, particularly those of owner-operated businesses.

While private equity has been active and successful in this space dating back to the early 2000s, we have observed eight private equity platform investments into the CDMO sector in the last 18 months, signifying a heightened interest in the space. In order to analyze the effects of this investment activity, it is important to understand how private equity works and its motivations for investing in the CDMO sector.

Private Equity In The CDMO Industry — A Brief Primer

Private equity refers to investors who seek to make direct investments in mostly privately-owned businesses. Depending on the investment thesis and growth strategy, they seek to exit these businesses within three to seven years, generally seeking a return of three to five times invested capital.

Upon investment, or a recapitalization, the PE firm will acquire a stake in the business — providing the existing shareholders with significant liquidity in the form of cash proceeds — as well as the opportunity to retain equity in the newly recapitalized company. Post-transaction, private equity firms provide access to capital and expertise as they seek to improve the business both financially and operationally.

Within the CDMO space, the type of growth initiatives can vary from model to model. In the lower middle market of healthcare, private equity firms will typically infuse their portfolio companies with capital to expedite organic and inorganic growth initiatives that the organization would not have been able to undertake without a partner.

Organic initiatives that have been deployed successfully in CDMO platforms include investment in new technologies, onboarding of key personnel, and building out de novo capabilities like GMP manufacturing. Inorganic initiatives include acquisitions of competitors to consolidate market share, enter into new geographies, and obtain new facilities.

As mentioned previously, the motivations of these private equity investments can be to drive scale (vertical or horizontal), focus on core competencies, or increase technological advantages before the eventual exit of the business. Since the existing shareholders maintain a significant equity portion in the company, they benefit alongside their private equity partners when the timing is appropriate to exit the business.

In analyzing the past and current private equity investments in the CDMO space, the eventual “exit” of the investment will usually be to a larger strategic acquirer in the space, another private equity firm with expertise in operating larger businesses, or in some cases a public listing.

Case Study: Halo Pharma

An example of the growth-oriented private equity investment highlighted above would be the story of Halo Pharma. Founded in 2008, Halo was a relatively young company with a tech-focused approach to solid, semi-solid, and liquid dosage formulation, before their first majority recapitalization with SK Capital in 2013. Over the course of five years, SK Capital deployed capital and operators to assist in not only driving scale via facility and capacity expansion, but also in integrating the technology infrastructure needed to ensure quality across a larger platform.

While growth capital is without a doubt the primary value-add of a private equity firm in the lower-middle market of healthcare, this example highlights how operations and integration expertise is necessary to create value for investors, management, and a company’s customers. SK Capital and the shareholders of Halo Pharma sold the company to Cambrex in 2018, at a $400-million+ valuation. As a final dose formulation and manufacturing specialist that had achieved critical scale during its partnership with SK Capital, Halo was positioned to be a complementary service offering to Cambrex’s robust API production capabilities.

The marriage of API and final dose formulation in the CDMO space, such as the Halo Pharma and Cambrex deal, has been an area of debate for industry stakeholders. While the vertically integrated CDMO model has the potential to award one-stop-shop CDMOs and their customer bases, success is not guaranteed. We have observed that culture and geographic fit, operational compatibility, and an actionable integration plan can be key determinants of the success of a future partnership.

Looking Ahead

We expect that an increased emphasis on infrastructure integration will drive future vertical acquisitions, ultimately leading to a CDMO industry that is not only more concentrated, but more efficient as well.

Parallels can be drawn to the CRO sector, where consolidation has been driven predominantly by the private equity community. IQVIA, one of the largest CROs in the world, was taken private through a private equity buyout in 2010 by multiple private equity firms for roughly $5 billion and taken public again in 2013, when it received a valuation of $6.6 billion. Today, the three largest CROs control 50% of global market share.

In conclusion, the result of private equity investment in the CDMO space will result in an expedited consolidation timeline for the sector, similar to what we have observed in the CRO industry. Moving forward, organizations that can successfully identify and execute on PE partnerships will be positioned to compete in a hyper-competitive space that benefits from scale and technologic advantages, while also creating value for an evolving and dynamic customer base.

About The Authors:

Bill Bolding is an analyst at Provident Healthcare Partners, an investment bank that provides transaction advisory services to healthcare organizations. Bolding works closely with healthcare professionals and industry executives across various subsectors to educate them on consolidation trends and M&A activity within their respective verticals. He is active through all phases of the transaction process with responsibilities that include deal origination, deal execution, and relationship management.


Ajeya Shekar is a VP with the investment banking team at Provident Healthcare Partners. Shekar focuses on identifying consolidation trends in markets characterized by the efficient and cost-effective delivery of healthcare services. In addition to forming relationships with key healthcare industry executives in these markets, he is primarily responsible for deal origination, client relations, and transaction support services.