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How investors can tap into the €100bn CDMO market

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CDMOs – contract development and manufacturing organizations – are suppliers to the big pharma industry. An estimated 25% of global drug production is in the hands of these little-known players, making them indispensable for industry, global healthcare systems and patients – not least during Covid, as some of these players help manufacture the mRNA vaccines.

With outsourcing in high demand, the CDMO segment outperformed the actual pharma end market and is poised for further high growth. Naturally, this attracts keen interest by private equity investors. Yet navigating this terrain is tricky due to the sectors’ innate complexity and high regulatory burden. Smaller and specialized PE firms promise better access, they have a targeted focus, high expertise and know the ins and outs of the sector, thus enabling investors to tap into a market that holds substantial value while competition and acquisition multiples are low.

Munich-based Adragos aims to do just that, building a new CDMO player, as the fund’s founders explain here.

The CDMO market is a peculiar one: little known but indispensable and valued >€ 100bn where ongoing demand outweighs the offer, especially in the generic drug sector with billions going off patent in future years. A sector that is uniquely resilient to crises and where strong negotiation power lies on supplier side. It is also a market that is hyper-fragmented in need for consolidation with long product cycles and chronically slow adoption of digital tools and tech.

So, much potential for PE firms to drive value, especially since relatively few players have entered this segment so far. With high capital inflow to the PE market in recent years, acquisition prices rose as well, ever higher multiples are being called and PEs lament tighter deal flow and lack of good opportunities. However, complex sectors such as CDMO still hold many opportunities for substantial value creation as they are more difficult to access due to their innate complexity and intricate regulation.

Specialist PE firm Adragos focuses especially on this segment and expects unprecedented opportunities as many large pharma companies seek leaner production footprints and are selling off factories – if the buyer can guarantee ongoing operations.

“Our value is the experience and special know-how in this sector. It is something you cannot just buy in the market. Pharma demands savviness both for big picture and for the details, else you are paying dearly,” explains founder Andreas Raabe. He should know, after a summa cum laude PhD in biomedicine, he learned the tools of the trade leading large M&A for McKinsey and later in top management positions in the pharma industry.

“We have an excellent network to the top pharma companies, quite essential for deal opportunities and commercial development but most importantly, we know how to drive operational improvements, this is very industry specific,” he said.

A sentiment that Otto Prange, pictured, confirms. The self-made entrepreneur is a well-known figure in the pharma space, and joined Adragos last year. He can look back on a long track record of industry-shaping deals such as Haupt Pharma, a leading CDMO at the time and he still holds many majority investments in several companies via his family office holding. He describes himself as prudent investor. Accordingly, Adragos does not follow the trend to invest into biotech assets or R&D heavy businesses. Instead, the firm targets established companies and products and aims to unlock value through higher efficiency, digitization and agility.

“Frankly, there is great potential in ‘non-sexy’ business and at much lower risk, so that’s our focus.” Prange says. As the pharmaceutical market valued almost at $1.5tn, PE firms like Adragos should have plenty opportunities. Accordingly, the firm plans to close their fund at €300m and still holds opportunities to get on board. Responsible for the investor relations is Philipp Ziehr, third partner in the team and finance expert. After many years as CFO for automotive suppliers he moved to the pharma industry where he transformed a leading CDMO. “I am still astounded how much operational improvement potential there is in pharma. Especially on a level of process improvement and digitization,” he said.

The three partners aim to expand their current portfolio of three companies with acquisitions in North America and Europe. The conditions for this are ideal: the market is growing and, in the wake of Covid19, there is high intereste to move pharmaceutical production back ‘onshore’. The sector will remain exciting.

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