Getting to grips with the growing CDMO opportunity – Adragos Pharma


Contract development and manufacturing organizations (CDMOs), suppliers to the pharma industry that develop and manufacture medicines, have become essential for today’s healthcare systems. About 25% of worldwide drug manufacturing is currently in the hands of these players, keeping medicines affordable and available. AltAssets spoke to investment specialist Adragos Pharma‘s founders to shed some light on this little-known but much sought-after industry segment.

The CDMO market is a hundred-billion-dollar industry with growth rates far higher than the actual pharma end-market. That is testament to incessantly high demand for outsourcing, and probably best exemplified by the recent Covid-19 vaccine production, with BioNtech, Moderna, and AstraZeneca all relying on CDMOs for supply.

Many investors try to enter this increasingly attractive segment, yet access is difficult and success hinges on a deep understanding of the pharma industry’s inherent complexity.

A successful player in this field is the Munich-based Adragos pharma. Backed by a leading German family office the Prange Group, Adragos is driving consolidation in this segment and aims to build a global Top 10 CDMO through acquisitions in Europe and North America.

What makes CDMOs such a unique investment opportunity?

Managing partner Philipp Ziehr, (PZ), pictured: “Growth, stability, and margins. Medications are the last thing people will go without, any other industry might face recessions, not pharma. Individual pharma companies might have issues, but CDMOs have a large customer base, this shields them from volatility and their business is pretty steady. You get more of the benefits and less of the risks of investing in the pharma space.”

Managing partner Dr Andreas Raabe (AR): “Pharma is one of the industries where suppliers have strong negotiation power. In pharma you cannot just switch suppliers as you wish, exit barriers are high, which is good for CDMOs. Also, one should add that the sheer volumes CDMOs supply to markets makes them quite indispensable for patients and healthcare systems, they help keep prices low. This spans across all therapeutic areas, from cold syrup to oncology drugs.”

So what plan do you have within this space?

AR: “The space is hyper-fragmented, estimates on the number of CDMOs go up to 1000. Yet, the largest players only command 3-4% of the total market. That is a great opportunity for buy & build, we are simply rolling up the field. Most smaller players will ultimately perish, you need global reach and economies of scale to stay in the game. We have deep experience and an excellent network in this field, build over many years. This is why we can be faster than others, especially those who are unfamiliar with the segment. Trust me, navigating the pharma industry is tricky, everything is highly regulated and improvement measures take time to bear fruit. Many learned that the hard way.

PZ: “I would like to emphasize that we are not typical financial investors: while we are committed to the returns of our investors, we have a very entrepreneurial investment approach that is in line with that of our partner Otto Prange, founder and chairman of a family-lead Prange Group and Family Office. We aim at developing our portfolio companies holistically and sustainably, focusing on operational excellence and long-term success to ensure the reliable medication supply of our customers and patients. Short-sighted cost-cutting measures like drastic personnel reductions are not part of our strategy.”

How are you funded, and what is the size of the endeavor?

PZ: “We have a good existing base with 3 production sites in Europe and Japan. We will expand those through further add-ons, likely about 8-10. Our goal is to be among the global Top 10 in the next 5 years and so far everything points in the right direction. We are part of a large family office, the Prange Group. The founder, Otto Prange, has made some industry-shaping deals in the pharma space and is actively involved in our activities. Naturally, this assures other parties, not only family offices but also institutional investors as we are more of a Mittelstand investor than a large global PE, also from a cultural standpoint. By the way, we are still open for further investors to come on board. Industry consolidation will continue for at least 10 years, so there is plenty of space to grow.

How does the market look now – did Covid have a big impact?

AR: “CDMOs did extremely well – not unnoticed by investors – some publicly traded players doubled their stock prices in the last 12 months. Don’t forget, all this while being very low-risk relative to other segments. Austerity and cost pressure on pharmaceutical companies will continue, driving outsourcing to suppliers. So, life is good for CDMOs.

PZ: “For us too, many pharma players are rightsizing their production network, shedding underutilized production plants that we carve out and integrate. This is our specialty, but we also look for smaller competitors we can take over. Generally, our pipeline holds more than we can take up.”

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