Dynamic Conditions Create Pricing Challenges in Biopharma Equipment Markets

Competitive dynamics in the biopharma and pharmaceutical space have generated a strategic shift among manufacturers. Large pharmaceutical organizations are shuttering manufacturing operations, while bankruptcies have risen among contract development and manufacturing organizations (CDMOs). The result is an oversupply of used equipment on the market.

With the threat of additional plant closures and bankruptcies on the horizon, companies that operate in or lend to this industry need to understand the value of their equipment. They also need to define their plans for these assets: whether to use them as collateral for loans or liquidate them as they restructure their operations. A variety of trends complicate the task of valuing biopharma equipment in today’s market.

Industry Overview: Shifting Priorities Shutter Plants & Pressure CDMOs

Despite a longer-term trend toward continuous manufacturing models, large pharmaceutical companies recently appear to be leaning more toward batch-oriented processes. The results have been factory closures and job cuts among major pharmaceutical manufacturers, sometimes even at relatively new facilities. Where this shift causes imbalances between the equipment used in previous manufacturing processes and the equipment needed to support new processes, operators find themselves attempting to liquidate assets into a saturated—even oversaturated—secondary marketplace.

This issue has become especially acute for CDMOs. These firms already face liquidity issues, thanks to a difficult fundraising environment and high interest rates. If CDMOs can’t obtain the capital they need to adapt to shifting industry demands, either by selling their equipment or using it as collateral for loans, bankruptcy becomes a real threat.

Used Equipment Market Saturated

CDMO bankruptcies produce an oversupply of used equipment in a space with a relatively small resale market. The equipment used in biopharmaceutical manufacturing tends to be highly specialized. The primary candidates to buy it are other pharmaceutical companies or, in some cases, manufacturers in the chemicals industry.

Even when buyers exist, the cost of repurposing equipment can quickly become prohibitively expensive. Transportation costs mount with the distance large equipment must travel. For equipment moving from one region to another, retrofitting costs can come into play, especially if electrical supply specifications differ between the buyer’s and seller’s geographic area.

Further complicating matters, lead times for new equipment have fallen since their pandemic-era peak. Constrained supply during the COVID-19 pandemic increased organizations’ willingness to pay premiums for used equipment they could put into use relatively quickly. With more equipment available and shorter wait times for new equipment, the premiums on used equipment have all but disappeared.

Equipment Values Can Vary Widely & Wildly

Although a great deal of used equipment has become available, the rise in supply has been uneven in part because the age and type of equipment used differs from plant to plant. The value of any single piece of equipment depends on a variety of factors:

• Basic bulk manufacturing equipment such as tanks, reactors, mixing, filtration and separation equipment could be salable into chemical or petrochemical industries. Broader demand means type of equipment may hold its value better than other types of equipment.
• The size of the resale market for more specialized equipment used in production and packaging depends on the number of potential buyers using similar processes. As production and packaging processes change, this type of equipment can become functionally obsolete even if it remains technically operable.
• The age of an asset matters even more in categories like laboratory equipment, where obsolescence can come on rapidly.

The condition of the equipment also makes a difference. Many types of biopharmaceutical equipment require special maintenance and handling to retain their resale value. In situations where operators aren’t using equipment anymore, they may wish to keep it operational to support its resale value. Likewise, decommissioning of facilities must be handled carefully by providers with the appropriate expertise to keep equipment as easy to re-commission as possible. By contrast, deferred maintenance and improper decommissioning can reduce the resale value of a facility’s assets.

Amid all these moving parts, the market for used equipment is changing rapidly and unpredictably. Changes in global trade policy, supply chain sustainability and the level of ongoing liquidations can affect current valuations at any given moment.

Market Outlook

The ongoing, rapid changes in the market for used biopharmaceutical equipment make its future trajectory difficult to predict. As long as the combination of factors causing liquidations remain in play, the value of any type of equipment could change from day to day. The tendency for equipment to become unusable over time due to deferred maintenance or obsolescence means sellers have a limited capability to wait out a down market. The complexity and unpredictability of the market also means there’s no guarantee patient sellers can achieve better prices in the future.

Implications for Lenders & Sellers

To produce a realistic valuation of biopharmaceutical equipment today, it is critical to know what assets an organization has and the condition the equipment is in. As companies become stressed, they may feel pressure to curtail maintenance activities to save money in the short term. That lack of maintenance can become a net negative if it decreases the ultimate value of an asset at liquidation.

To preserve as much value as possible, assets must be decommissioned carefully by people who understand the resale market well and know where to focus their resources. Organizations should consider working with a partner or expert who knows how to manage this process and which partners to bring on board to do it properly.

Realistic pricing is paramount. The volatile value of equipment and its tendency to become obsolete quickly can produce growing losses for organizations that hold out for unrealistic prices. Getting pricing right requires an up-to-date understanding of market dynamics, as well as command of all the details about the types of equipment available for sale.

As asset experts in the biopharma industry, Gordon Brothers can be a key partner in future sales, consolidations, and winddowns. Our firm can assist lenders in taking a deeper look at biopharma machinery and equipment to review changing values or over exposure. To learn more, reach out to one of our experts or contact us.