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Andrew Badrot, CEO of C2 PHARMA, weighing in on the future trends of mergers and acquisitions in the life sciences industry, a Pharma's Almanac Q1 issue

Andrew Badrot,
Chief Executive Officer, C2 PHARMA

A: Due to its nature, the pharmaceutical industry will always see M&A activity. That is not likely to change anytime soon. However, the drivers behind it do change over time, based on the trends in the market.

Right now, as the regulatory landscape continues to become more stringent and standardized, and cost controls are being enhanced, the recent trends include:

  • Tighter review and controls of drug pricing — particularly in the U.S. marketplace — driving consolidation of generic players. There is a continuing collapse of outdated business models based on price hikes of old/existing generic drugs, meaning that generics companies must continue to find ways to seek scale and find cost efficiencies to pass along to customers.
  • In today’s market, pharmaceutical R&D is no longer as insular as it once was. There is a great deal of reliance on external innovation driven by venture capital companies that are looking to invest in innovation to close product gaps. This model has proven to be more efficient than pharma companies relying solely on internal R&D.

In the CMO space, we have also seen an increasing trend of M&A activity, which has been reflected in many big ticket purchases, particularly from 2017 to today.

The greatest drivers in this space are:

  • Increased activity from private equity (and to a lesser extent venture capital) investors seeking to consolidate a fragmented marketplace (as drug makers show growing interest in streamlining their supply chain with fewer vendors/points of contact).
  • Within larger CMOs, cheap money and abundance of liquidity that needs to be used, coupled with the convenience of purchasing ready-to-use capacity and capabilities, rather than investing in building these from the ground up.

As much as I feel that valuations in pharma are still manageable, valuations in the CMO space are heading into unhealthy territories. The backlash is yet to come, but as valuations soar to around 12–15 times EBITA for CMOs, the bubble will have to burst at some point.

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