Investors continue to see the manufacture of chemical APIs as lucrative, despite the growing revenues and interest generated by biologics, according to PharmSource’s analysis of private equity activity. Chemical APIs are small molecules, polymers and oligonucleotides.

Chemical API manufacturing 2019

Despite the current emphasis on biologic medicines, the manufacture of chemical APIs is still far more common. APIs are also more likely to have their manufacture outsourced than their biologic counterparts.

Private equity deals have risen year-on-year from 2016 to 2018 in both deal number and combined value for chemical APIs, according to the GlobalData Pharma Intelligence Center Deals Database.

Private equity activity is both a reliable metric and a key driver of the state of the CMO industry. About one-third of all pharma CMO acquisitions were by private equity companies or by companies that are private equity-backed, showing that private equity firms have a high level of influence on the outsourcing industry, according to the PharmSource Trend Report M&A in the Contract Manufacturing Industry: Implications and Outlook – 2018 Edition (December 2018).

Between 2016 and 2017, the number of private equity deals involving chemical API CMOs rose from one to five, creating an accumulated disclosed value of $1.1 billion, and demonstrating the appeal of chemical API CMOs to private equity firms.

These deals include the acquisition of high-profile CMOs such as Albany Molecular Research Inc (Albany, NY, US), which was acquired by the private equity firm The Carlyle Group for $922 million in 2017. Private equity appetites continued unabated in 2018, with eight deals taking place for a total of $3.4 billion, including the acquisition of Zentiva Group as (Prague, Czech Republic) by Advent International for $2.4 billion.

Overall, both the number of private equity deals and their total value have been rising since 2016, which is a very positive sign for chemical API CMOs. Half the 2016–2018 deal values were not disclosed, which pushes the true combined values higher but also means that an absolutely definitive trend in deal values cannot be drawn. It is clear, though, that the rise in the number of private equity deals in the chemical API field bucks overall investment trends. A recent McKinsey report, entitled ‘The Rise and Rise of Private Equity’, found that private equity deals across every sector declined in number by 8% between 2016 and 2017, although deal values rose 14%.

Private equity deal activity for chemical API CMOs, 2016–2018

Note: Excludes undisclosed deal values. Source: GlobalData Pharma Intelligence Center Deals Database (accessed April 5, 2019)

Private equity average deal value for chemical API CMOs, 2016–2018

Note: Excludes undisclosed deal values. Source: GlobalData Pharma Intelligence Center Deals Database (accessed April 5, 2019)

Excess capacity contract service providers, which produce their own products and offer contract services using their excess production capacity, are also included in this analysis of private equity deals.

Therefore, contract services for some of these deals may not be the acquirer’s primary target. The figure below shows that while the majority of deals were for dedicated contract CMOs, the largest combined deal value is attributable to excess capacity CMOs at $3.4 billion. Dedicated contract CMOs, which exclusively offer contract services, had deal value totalling $929 million.

There was only one recorded acquisition of a private label company, which was SK Capital Partners’ acquisition of Perrigo Company Plc (Dublin, Ireland) for $110 million. Private label companies produce drug products for sale under another company’s brand. They tend to have only a few clients and are much rarer than dedicated contract companies.

Private equity deals by contract business model, 2016—2018

Source: GlobalData, Deals Database (accessed April 5, 2019)