Life Sciences

CPHI Annual Report predicts VC capital (re)entry and contract services growth in 2024

New research from the CPHI Annual Report 2023 – launched during CPHI Barcelona, the world’s largest pharma event, held at Fira Barcelona(October 24-26th, 2023) – points to an uplift ahead for biotech funding and a consequential follow through of growth for pharma contract services.

The news will be a boon to the attendees of CPHI Barcelona, which sees the largest gathering of CDMOs and comes after a year of weakening confidence. Sherma Ellis Daal, brand director, Pharma at Informa Markets, added: “We are expecting a near record event and this news comes at the perfect moment, as the partnerships agreed this week will be integral to the growth the sector sees ahead in 2024. All across the show floor we are seeing rising levels of confidence and longer term the sector looks incredibly strong.”

Analysis was provided by CPHI Report expert, Brian Scanlan of Edgewater Capital, who states that liquidity in the biotech and mid-sized pharma market is typically a proxy of growth for the CRO/CDMO sector. Significantly, for the first time in 18-months funding into the sector seems to have stabilized over the past two quarters at levels seen just prior to the pandemic [Figure 1]: “If we’ve already reached the bottom, then one level of uncertainty (risk) will be reduced, and more predictability can be factored into the future spending habits of emerging pharma. So will a belt loosening ensue 2024?”

Figure 1: William Blair Equity Research. July 2023

In fact, total funding into the sector through July is $30.2 Bn and for full year 2023 is trending well ahead of 2022 [Figure 2]. The only notable absence is in the continued weakness of IPOs, and this is exacerbated by clogged exits – i.e., investors who saw a pathway to exit just two years ago are now stuck until the valuations come back for former levels.

Scanlan added that while there are still ‘too many emerging pharma companies vying for too little capital’ the situation is now potentially changing. The number of companies with active R&D pipelines globally has grown from nearly 4,800 in 2020 to over 5,500 in 2023 (Figure 2). That’s an increase of nearly 15%, while funding levels have dropped to nearly half the 2020 levels during the same period. For CDMOs, the impact of this has been a short-term slowing of development pipelines, as biotechs look to maintain a financial cushion.

Figure 2: Piper Sandler & Co. September 2023

Scanlan predicts however, the market is now turning. “There are signs of an improving VC funding environment, but this needs to coincide with increasing pharma M&A and a healthier IPO environment. We believe softer demand, particularly from emerging pharma and in earlier phases of development, will extend for a period of 12-18 months. However, the investment banking community is already signalling a pickup on deal activity starting in late 2023 and accelerating into 2024.”

Taking a step back, Indian CDMOs appear [anecdotally] to have had the softest landing and the best 12-month growth prospects, but in the medium term, the development pipeline remains very strong and biological CDMO valuations remain high reflecting the growth expected in the years ahead.

One change that has slowed, is the noise around onshoring, which is now presently a battle of two competing forces. The forces that originally ignited the supply chain re-alignment surge (Covid, geopolitical tensions, risk mitigation) have been partially offset by calming geopolitical tensions, easing supply chain disruptions, and the current funding challenges prompting renewed focus on cash management (i.e., re-considering lower cost regions for outsourced services). There is also the realization that disentanglement from off-shore sources such as China is exceptionally complex, and many supply chains ultimately lead back to China-made raw materials.

Figure 3: Piper Sandler & Co. September 2023

The other significant (positive) macro factor for CDMOs is the well documented workforce shedding at big pharma we have seen in 2022 and particularly in the early part of 2023, which will almost certainly bolster demand for CRO/CDMOs in 2024. Therefore, Scanlan concludes the long-term fundamentals for CRO/CDMOs are excellent given the number of compounds sitting in all phases of development, and continued market dynamics that favour increases in outsourced penetration rates in the coming years.

Ellis Daal added: “Our role is simply to ensure that the sector has all the tools, the right networking platforms, and information to meet their perfect partners. CPHI is very much the heart of pharma as we are at the inception point of many of these longer-term collaborations.”

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