The biopharma industry is going through disruptive times. Although private equity (PE) funding and deal activity in biotech surged in the years leading up to the COVID-19 pandemic, and peaked in 2021 amid the unprecedented speed and innovation of the vaccine development process, both started receding once the pandemic ended.
The impact of this volatility has been felt throughout the pharma value chain, including by service providers that play an integral part in the development of innovative products. According to our research, PE deal activity in pharma services dropped 15 percent per annum between 2021 and 2023, largely because of the higher cost of capital and limited availability of attractive assets.
In such a scenario, PE investors evaluating an investment in pharma supply chain services are likely to encounter biotech financing challenges and destocking issues within the production value chain, among other near-term concerns. But here’s the good news: The segment’s long-term investment opportunity remains promising. Our analysis has revealed that global pharma supply chain services represent a $77 billion profit pool, with several growth pockets across the value chain and modalities, including large-molecule drug substance manufacturing and finished dosage formulation for injectables.
In this article, we will explore three notable investment themes: innovative large modalities and drug classes (such as antibody-drug conjugates [ADCs] as a novel treatment class for cancer); high-growth subsegments for inputs and niche services (including sterile fill finish); and specialized drug delivery device components (for example, the value chain for glucagon-like peptide-1 [GLP-1] therapies for the treatment of type 2 diabetes and obesity).
In recent years, the rapid advancement of science and drug delivery technology has increased the complexity of launching a product, resulting in growing demands on biopharma supply chain players. With support from PE firms, biopharma companies can expand their capabilities and offer broader solutions to their customers, addressing a significant unmet need.
A period of peaks and troughs
Pharma supply chain services, an understudied segment of the pharma industry, include diverse businesses with distinct business models. The segment spans raw materials and inputs providers; biopharma contract development and manufacturing organizations (CDMOs); drug delivery and containment players; as well as packaging, storage, and distribution companies.
Given its criticality to the pharma industry, this industry segment has historically proved to be a resilient investment for PE and public-market investors. By investing in pharma services, investors avoid taking any specific asset risks associated with the clinical or commercial success of individual drugs. Moreover, the segment’s growth trajectory has also typically mirrored that of the broader biopharma industry. Over the past decade, for example, a surge in innovation—most notably the speed of vaccine development during the COVID-19 pandemic—resulted in biotech funding increasing to nearly $180 billion in 2020 from roughly $110 billion in 2015, reflecting a 10 percent compound annual growth rate. During the same period, PE deal activity in pharma services grew at 6 percent per annum, with several headline investments in supply chain services.
Since 2021, performance has stagnated. Between 2021 and 2023, biotech funding dropped to $73 billion, down roughly 30 percent per annum, while PE deal activity in pharma services dropped by 15 percent per annum (Exhibit 1).
Meanwhile, the TSR performance of public biopharma supply chain services companies has also slowed over the past three years and is now more in line with their customer counterparts (that is, pharma and biotech). Our pharma supply chain services index, which analyzes how the biopharma supply chain services industry performs relative to the pharma and biotech industries as well as the broader market, reaffirms the slowdown. From 2018 to 2022, the index outperformed major industrials markets as well as pharma indexes, but performance started fluctuating thereafter (Exhibit 2).
In our view, pharma stocking and destocking postpandemic is likely to have led to the change in performance trajectory. From 2020 to 2022, pharma customers built inventories of raw materials and finished drugs, driving robust TSR growth (45 percent CAGR) among life sciences supply chain players. From 2022 onward, increased destocking of raw materials and finished drugs to reduce inventory and improve balance sheet health started affecting service provider revenues.
To win new business in such an environment, many players will need to address gaps in their commercial execution capabilities, often by leveraging lead generation, pricing, and contracting best practices from other B2B service companies.
Capturing value in the pharma supply chain
Although pharma companies face greater capacity constraints at present, long-term growth in the pharma services industry continues to be bolstered by several factors: 1) growth in the end markets (expected CAGR of about 3 percent for small molecules, 6 to 10 percent for large molecules, and upward of 25 percent for some new modalities); 2) growth in outsourcing, which could contribute an additional one to two percentage points of growth; and 3) above-market pricing growth (in some instances) in areas requiring technical or scientific expertise such as biologics drug substance manufacturing (projected growth of up to five to ten percentage points).
Pharma companies are also likely to need more sophisticated services and products from external providers to launch innovative therapies and vaccines—a boost for pharma services providers that can offer solutions in high-growth areas such as ADCs, gene therapies, and injectable delivery technologies.
It is also worth noting that not all pharma services companies have been hit hard by the ongoing volatility. Our analysis shows varied performance due to fundamental differences in the capabilities and end-market exposure among suppliers and service providers. Drug delivery and containment players and biologics-drug-substance-focused CDMOs, for example, had the strongest and most consistent performance from 2019 to 2024, while integrated CDMOs and inputs/raw materials companies delivered mixed results (Exhibit 3).
At an industry level, this variability in performance could be a function of “where to play”—a company’s exposure to specific end markets, therapeutic areas, modalities, and/or molecules. And at an individual company level, “how to play” is becoming crucial: Companies that want to outperform are expected to rethink their approach to operational efficiency, as well as their go-to-market and sales techniques.
Our analysis reveals that the global pharma supply chain services industry has a profit pool of $77 billion, with several high-growth pockets of value (Exhibit 4).
How can PE investors capitalize on this opportunity?
A successful investment thesis, in our view, can incorporate the modality exposure (that is, the class of drug molecule: large or biologic versus small) as well as the value chain segment (that is, service offerings such as raw materials and inputs, drug substance, drug product, devices, packaging, and distribution).
For private equity firms, this segment presents significant opportunity for value creation. Many companies do not have mature capabilities, and applying operational-efficiency levers (for example, improved overall equipment effectiveness/throughput) can accelerate revenue while minimizing overhead and fixed costs. Further, investors can also embed more sophisticated B2B practices (for example, dynamic deal scoring and AI-driven lead generation) to drive top- and bottom-line expansion.
Based on our value pool analysis, three investable themes in particular can offer attractive growth and profitability potential for PE investors:
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Increasing exposure to higher-growth and innovative large modalities and drug classes. Demand for manufacturing of innovative large modalities has accelerated across the value chain. Examples of high-growth modalities include ADCs (with an expected CAGR of 23 percent), cell therapy (with a CAGR of 42 percent), and gene therapy (with a CAGR of 42 percent). Growth in these modalities is driven by an uptake of recently launched drugs and the more than 100 new pharma launches expected between 2024 and 2028.
On the other hand, small molecules, which comprise roughly 50 percent of pharma revenues today and about 90 percent of all therapies, are growing at roughly 5 percent per annum due to stabilizing demand and price compression for generics and branded molecules that have lost their exclusivity.
In our view, investors can position themselves for strong growth over the next three to five years by increasing exposure to these innovative large modalities—both by virtue of the capabilities required for service delivery and a customer base that is overindexed to large molecules.
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Exposure to high-growth subsegments for inputs and niche services. PE investors can find opportunities in select strong-performing pharma supply chain subsegments in raw materials, consumables, and expertise-driven services. Notable ones include the following:
- Bioprocessing inputs for cell therapies and ADCs present opportunities for investment.
- Single-use bioreactors/consumables for use in drug substance manufacturing are promising areas for investment.
- Small-scale drug substance manufacturing services and finished dosage formulation or sterile fill finish of injectables also offer investment prospects. Several pharma leaders have announced both in-house builds and CDMO acquisitions, as demand for blockbuster therapies skyrockets from indication expansion and improved patient access. In our view, high-quality sterile fill finish remains capacity constrained, based on comparisons of investments announced to date and go-forward demand projections for injectables.
Demand for niche scientific expertise is growing in many areas. One such business model is analytical services and methods, in which a growing pipeline of cell and gene therapies and novel monoclonal antibodies is propelling the growth of a subset of pure-play providers that have made strategic bets in key technologies (for example, cell and gene therapy methods development) where they have distinctive technical or scientific expertise. These specialists further benefit from the fact that integrated CDMOs have historically not invested in this sector other than as an add-on to secure larger manufacturing contracts. While the segment is relatively small, with only a handful of pure-play providers likely to come to market in the next two to three years, investors have an opportunity to build additional scale through M&A and organic investment.
- More investments in specialized drug delivery device components. The surge in GLP-1—and the growth of newer device-delivered injectables—is expected to create new winners in the pharma supply chain. Demand for GLP-1 autoinjectors is expected to create a large market for device or syringe technologies, primary containment components, and raw materials across the value chain by 2028. Investing in these companies either through traditional M&A or carveouts has the potential for strong returns in the mid to long term. Investments are likely to continue across the final assembly steps for autoinjector assembly, where we expect demand to outstrip supply by 2027 at current levels. We already see drug delivery and containment players outperforming the market and this segment overall (as seen in Exhibit 3). It remains to be seen, however, if and when the launch of oral GLP-1s will affect GLP-1 injectables demand—and thereby demand for key segments of this industry (such as sterile fill finish and delivery devices and containment).
Investors who believe in these themes would also do well to develop granular insights on the underlying drug pipeline that may influence the pharma supply chain outlook in the years to come. In spite of its complexity, the biopharma supply chain is rich with opportunity. Successful investors can leverage industry tailwinds and drive value creation across a range of proven levers, working with their companies to build solutions for biopharma customers and accelerate performance.
