BOSTON—Contract development and manufacturing organizations (CDMOs) and contract research organizations comprise a significant—and growing—part of the drug development market as companies seek to outsource part or all of their development work in an effort to streamline the process and costs. Capstone Headwaters released its Q3 Pharmaceutical Outsourcing Mergers & Acquisitions (M&A) Update near the end of 2019, providing a snapshot of the market and its rapid growth. Eric Williams and Mark Surowiak, managing director and director of Capstone Headwaters, respectively, contributed to the report.
“The industry continues to benefit from a record number of drugs under development, ample venture capital allocated to biotech ventures, rising number of drugs securing FDA approval, and a rise in research and development initiatives targeting rare diseases,” the report stated. “Not surprisingly, the second most common reason to outsource, as reported in Contract Pharma's 2018 Outsourcing Survey, was the fact that the drug sponsor was a virtual company. Additionally, as development, testing, manufacturing, quality control and regulatory issues become more complex, even the largest pharmaceutical companies are seeking outsourced partners who can augment internal capabilities and offer solutions that can shorten time to market, streamline and optimize the regulatory process, lower manufacturing costs, and boost R&D productivity.”
A key driver is the increased interest in rare/orphan diseases. Categorized by the FDA as diseases affecting fewer than 200,000 individuals, the opportunity for market dominance is significant for whichever company can get a drug or therapeutic to market first in a given indication. However, the rarity of the disease, and relative paucity of patients compared to broader indications such as diabetes or neurodegenerative disease, also means there is a need to streamline and minimize costs as much as possible to manage risk and ensure a return on investment. Another consideration is the infrastructure needed to develop a product for a single indication, which can be a prohibitively costly endeavor. As such, many companies seek to outsource rare disease drug development, which allows them to make use of contract research organizations or CDMOs with existing capabilities, rather than investing heavily in production equipment and infrastructure for a drug that may not make it to market for a smaller than usual market size.
Given the forecasted potential for the orphan disease market, however, it's no wonder that many companies consider it worth the risk. In 2018, 59 new drugs were approved, and of those, more than half were for rare diseases. The report states that according to EvaluatePharma, global orphan drug sales are expected to reach $242 billion by 2024, comprising 20.3 percent of all prescription sales. In 2020, that number is expected to rise from last year's $136 billion to $150 billion.
Additionally, the types of drugs being approved are also impacting the CDMO industry. Biologics are on the rise, and where once they accounted for only two, three or four of all drugs approved in a given year, in 2014, 2015, 2017 and 2018, 10 or more of the drugs approved annually were biologics.
The rising number of biologics-based drugs and therapeutics has also contributed, as the nature of these molecules requires developers to meet additional or more stringent regulatory standards. And given that moving a drug from discovery to commercialization takes an average of 10 years and $1 billion, it's no surprise that many companies are “realizing tangible benefits from outsourcing specialized regulatory affairs and compliance services to expert partners who can help ensure programs minimize risk, adhere to quality and manufacturing standards, and reduce unnecessary delays,” as per the report.
“The evolving regulatory framework in the pharmaceutical industry, continued focus among sponsors to streamline the pathway from idea to regulatory approval, and increasingly complex drug candidates have driven demand for outsourced compliance providers,” the report states.
The authors add that, “Transaction activity in the Pharmaceutical Outsourcing industry has remained robust, with 44 transactions announced or completed year-to-date (YTD), outpacing 33 deals through YTD 2018. CROs have continued to account for the largest percentage of transaction activity (34.1 percent), followed by consulting and CDMOs, at 29.6 percent and 22.7 percent, respectively.”
Of those deals, some of the biggest acquisitions of the first three quarters of the year included Permira Advisers' acquisition of Cambrex, a CDMO in the small-molecule industry, for an enterprise value of $2.5 billion; Paragon's acquisition of Catalent for $1.2 billion; and J.R. Automation's acquisition of Hitachi for $1.425 billion.