Public Market Valuations and Industry Outlook

November 2021

Public market valuations

CDMO stocks have performed exceptionally well since the start of the Covid-19 pandemic and EBITDA multiples are consequently at record levels

Public company valuations in the sector remain near the all-time high, despite a slight pull-back in valuations since the peak in September

Relatively few publicly traded Western CDMOs remain. Companies such as Consort, Recipharm, AMRI (nka. Curia) and Cambrex have been removed from public markets through mergers and take-privates

Sources: Public data, Capital IQ. Data calendarised to December YE. Enterprise value is in USD millions. Data accurate as at 30/09/2021

Share price performance

CDMO stocks recovered very quickly following the initial market reaction to the pandemic in March 2020

CDMO stocks rebounded both more quickly and more strongly than the broader market and have since experienced a period of continued growth that has resulted in significant outperformance of the market. The average EV/EBITDA multiple of public CDMOs has increased by c. 5x since January 2020

This growth has in particular been driven by two factors:
- Execution of lucrative vaccine manufacturing agreements by all major CDMOs
- Increased investor interest in the pharmaceutical sector as a critical and so more recession proof industry

Sources: Public data, CapitalIQ. Data accurate from 01/01/2020 to 30/09/2021. Index starts at 100. Healthcare index is the MSCI European healthcare index. CDMO group contains the following companies: Lonza, Catalent, Siegfried and Thermo Fisher

COVID-19 Impact

CDMOs have seen unprecedented demand due to the Covid-19 pandemic. This has been both for the production of vaccines and increased demand of critical products from healthcare systems globally
Recent reports have shown that clinical trials contract manufacturing has increased both in volume and value as a result of the pandemic – R&D spend by pharma companies remained at a record level through 2020
In response to this elevated demand, many CDMOs have been investing in additional manufacturing capacity – in particular for viral vaccine production – as demand is likely to remain at an elevated level for the near and medium term
Western CDMOs are set to disproportionally benefit as Western healthcare systems are looking to shift supply chains to reduce future reliance on Asian suppliers
Overall, the CDMO sector is likely to see a 2-3% CAGR increase over the next few years, compared to pre-pandemic estimates

Source: GlobalData. RBC capital markets, ResearchDive, IQVIA

Reshoring of API manufacturing

US and European pharma are considering ways to diversifying their supply chains, including reshoring of drug and ingredients manufacturing, in the light of drug shortages that have arisen from the pandemic.

Covid has been ultimately disruptive for many countries, such that they will need to recalibrate the delicate balance between onshoring and offshoring to maintain the autonomy and survive future crises
There have been a number of examples of companies in other industries that are making similar moves to bring their operations back to their home turf
These have tended to be mainly industries which are considered critical infrastructure and key resource sectors, which includes those that are healthcare and commodities related
In these sectors there has historically been a high degree of foreign sourcing and dependency on critical components and finished products
The US and Europe remain highly dependent for their sourcing of APIs with 41% and 77% respectively imported from India and China
We expect this shift to be reflected in the M&A market through greater demands and increases in valuation with respect to European and US site divestments and corporate sales, particularly for API sites and others where the technology is critical and in finite use

Reshoring of API manufacturing (continued)

Source: PharmaTech.com, CHEManager

Industry outlook

CDMOs have been uniquely positioned to address the challenges that drug developers have faced during the pandemic. The industry has proved itself as being defensive given the robust demand and performance that has been observed across the last 18 months
Market reports indicate that contract manufacturing has increased both in volume, as well as value, during the pandemic. The industry is facing greater shortages of staff and resources as the pandemic has exacerbated the short supply of single use products and devices
We estimated the total size of the global CDMO market at approximately $100bn in 2020 with an annual growth rate of 7.0% until 2023. Increased demand for vaccines and pharmaceuticals in general as a result of the pandemic is likely going to boost sector growth by 2-3% annually in the near-term and continue to drive the inflow of investment
Areas of particularly strong growth will include cell and gene therapies (viral vectors), injectable drug products, viral vaccines and highly potent API manufacturing

M&A outlook

Given the increased buyer and investor appetite in the sector as a result of continually favourable fundamentals that have been further boosted by the pandemic, we see M&A activity remaining at the current high levels with valuations likely to stay near all-time highs
There is still ample scope for consolidation in the sector as the market remains highly fragmented with approximately 70% of CDMOs generating less than $50m revenue
Private equity will continue to be a major driver of M&A activity, both through new investments and the increasing number of growth platforms they back
We expect that global pharma will continue to evaluate their global supply chains and in-house manufacturing networks, leading to future opportunities for high-quality pharma manufacturing asset acquisitions