‘There will be a shakeout in the CDMO industry’

Swedish Recipharm has been on an acquisition spree, buying out Italian CDMO, Mitim Srl in February, and completing acquisition of India-based Nitin Life Sciences and announcing another deal with Kemwell in April. Viveka Roychowdhury quizzes Mark Quick, Executive Vice President, Recipharm and Dr Chetan Sobti, CEO, Nitin Life Sciences on the consolidation in the CDMO market and whether quality concerns will drive a shift towards insourcing

Going by the recent acquisition of Nitin Lifesciences and now Kemwell’s CDMO businesses, Recipharm seems to be targeting emerging markets and more specifically, India. Post these deals going through, what will be the share of Recipharm in emerging markets, in terms of global CDMO business?

Mark Quick (MC): Recipharm sees emerging markets as an important source of growth for two main reasons. Firstly, with the increasing spend in healthcare in these markets it is growing at a far quicker rate than the traditional developed markets albeit from a low level. In order to grow and become a leading CDMO we felt it was important to have exposure in these markets. Secondly, our customers are all looking to work in emerging markets, for very much the same reasons. We are therefore able to provide access to these markets and particularly India through our investments there. It is actually very difficult to provide hard numbers on Recipharm’s market share of emerging market sales.

What is Recipharm’s market share of the global CDMO business?

MC: Again this depends how you define the global CDMO business. There are various studies around but in terms of position in global CDMO’s we are certainly within the top 10.

How much of Recipharm’s business currently comes from emerging markets? Which is the fastest growing among these countries? (Kindly mention which countries are covered as emerging markets for the company.)

MC: Post transactions (Nitin and Kemwell) approximately one third most of which will come from India.

Is Recipharm looking for more such deals? What kind of companies would fit the bill, in terms of filling the gaps of the existing portfolio of products, services, dosage forms, etc?

MC: We are always looking at opportunities to expand through acquisition and would not rule out further transactions in emerging markets. We are looking to fill some gaps in technologies too including pre-filled syringes and cytotxic production. In terms of markets, we are looking at the US and potentially other markets in emerging Europe, Latin America and Russia

How will the deal with Recipharm change the outlook and operations for Nitin Lifesciences?

Dr Chetan Sobti (CB): We are very pleased to be partnering with Recipharm and see a number of advantages. Firstly Recipharm will bring a larger customer network to Nitin just as we will bring new customers to Recipharm. In addition, Recipharm will be able to add strength and support to Nitin particularly with the MNC’s who will get a great deal of confidence from the Recipharm brand. We have an excellent position already but this transaction will reinforce things.

Your company is essentially debt free and has been doing reasonably well, with a CAGR of over 20 per cent since 2012FY. What made you sell 74 per cent stakes to Recipharm?

CB: We recognised that to take the company to the next level and develop it, we needed to partner with a company who could bring a more international and global perspective. We were very pleased to meet with Recipharm and over the time have built up a strong trust and relationship. The deal will allow us access to Recipharm’s wider expertise and customer network which will in turn help Nitin to develop.

Do you envisage further consolidation in the CDMO space in India? Are deals like yours, and the more recent one with Kemwell, a sign of this trend?

CB: This is probably going to be the case. In any fragmented market, there will over time be consolidation. I think there will be a shakeout in the industry with some of the weaker CDMO’s falling by the way side and the stronger ones developing. India is certainly an attractive market.

Pharma manufacturers across the globe have to face increasing scrutiny on GMPs. Between 2008 and 2014, the number of product recalls and warning letters received by pharma companies globally tripled. At least one pharma facility worldwide has entered into a consent decree every year since 2008 globally. Some pharma MNCs are reverting to insourcing, reversing the outsourcing trend, citing better tracking of quality. Your comments.

MC: There will no doubt be movement between outsourcing and insourcing particularly where an issue has occurred. However, the clear trend is for more outsourcing. Pharma companies are becoming more aware of costs and having underutilised facilities is not only costly but also carries risk in itself. I do not see any reverse in the outsourcing trend. What I do see is that customers will be far more discerning when they place a contract with a provider. There will be much more indepth due diligence to ensure that the partner has the capabilities and longevity to deliver the product at a satisfactory quality. The last thing a company wants to do is have to take back in house or transfer a product once it has been outsourced.

CB: I agree that there has been some insourcing, but this is certainly not a reversal of the trend. We have seen a number of MNC approaches specifically to address concerns about quality with other suppliers.

Pharma manufacturers in India have been particularly hit by 483s and warning letters. Would this be one reason to anticipate more such takeovers of CDMOs in India, as pharma MNCs would prefer a global name on their supplier list as a risk mitigation strategy?

MC: We thought about this issue very much before our investments in India and visited lots of facilities. It is clear that there are some facilities which are not up to the standards that they should be at. However, in Nitin and Kemwell we certainly saw a very good picture. I would agree that a MNC placing an order would ideally like to see a global CDMO as a supplier and this indeed could lead to more takeovers of local companies by organisations similar to ourselves. So far though, we have not seen this.

CB: I think that there will be a natural move to consolidation as the market matures. In addition, companies and in particular MNC’s tend to want to deal with fewer suppliers. However, I am not certain the 483 issue will actually drive the consolidation. The Nitin name has always stood for high quality and this is what Recipharm saw when they conducted their evaluation.


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