February 15, 2010 (Vol. 30, No. 4)
Eric S. S. Langer President and Managing Partner BioPlan Associates
Practitioners Cite Depth of Experience and Formation of a More Mature and Stable Business Model
The biopharmaceutical industry’s capacity pendulum has taken wide swings over the past decade—from shortfall to overcapacity—as companies built up production for projected pipeline products that failed to materialize. In the ramping-up process, the industry has made major investments in facilities, equipment, technology, and staff.
The economy has knocked many industries right out of their socks. Yet the biopharma industry has generally been relatively uninjured, according to BioPlan’s 6th Annual Report and Survey of Biopharmaceutical Manufacturing. Most budget line items decreased less than 3% and some actually increased. This year, budgets have begun to turn around and most areas have experienced a rebound.
Today, the question among many CMOs and drug innovators is whether we’re back to the “old normal” or whether the industry has established a “new normal.” According to Erik Laursen, vp of business development at CMC/ICOS Biologics, “most CMOs in this industry experienced a drop in business the first quarter of last year. As a result, CMOs became much more cost sensitive and competitive in their service delivery. There was also some minor price erosion. That has now been stabilized, and starting in Q4 of last year, we saw a lot more RFPs as business picked up.”
The recent financial pinch on CMOs appears to have been short-lived. Yet the lessons learned may be here to stay—continuously streamlined operations, keeping costs competitive, and ensuring service delivery is consistent with industry demands are signs of operational maturity. CMOs are increasing service quality; capacity gaps are being filled, including 2,000 L and 5,000 L; and customer needs are being considered more now than in the past as the economic crunch has compelled many to redouble efforts to operate more collaboratively and cost effectively.
Part of the reason for optimism is that virtually all biopharmaceutical developers sooner or later use the services of CMOs, whether for manufacture of clinical or commercial supplies, process development, testing, or for fill-finish operations. So, drug developers have a vested interest in the health of this sector.
CMOs, which tend not to be publicly traded, generally prefer not to air capacity problems. As a result, tracking the status of the biopharmaceutical CMO industry—its shortfalls, surpluses, and trends—can be challenging. Problems impacting this segment include economic uncertainty from slower than expected development pipelines, FDA regulatory concerns, and capacity problems resulting from blockbuster drugs reaching the market.
The Situation Today
Although some innovators and CMOs are experiencing excess capacity, biopharmaceutical manufacturing demands for available capacity, including that of CMOs, appear relatively balanced overall. Preliminary data from BioPlan’s 7th Annual Report and Survey show that only 18% of biomanufacturers today are experiencing anything greater than minor capacity bottlenecks at the clinical stage and 30% at the commercial scale. This compares with 32% for clinical stage and 39% for commercial scale last year.
Some of the larger biopharmaceutical companies are cutting back on the number of products they have in development, often resulting in idle manufacturing capacity. As a result, some of these innovator companies are now offering CMO services and joining the ranks of contract manufacturers.
So far, this has not caused any apparent market disruption for mainstream CMOs, with demand for CMO services remaining rather steady. Although innovators would like to see more idle CMO capacity (to drive down CMO prices), and CMOs would like even higher utilization rates and more demand (higher prices), the industry remains healthy and benefits from a relative lack of major capacity imbalances.
One common issue that CMOs appear to be having is that smaller companies are continuing to cancel contracts, due to problems with financing. But this loss of business is being offset by increased business from big pharmas. Chris Eso, vp of business operations at Avid Bioservices, confirms that there is a good balance between capacity and client demand. “We are seeing increased demands at the commercial 100 L scale, and we expect to add more at the 300–1,000 L scale.”
The biopharmaceutical CMO industry overall appears to be doing rather well. Growth has paralleled that of the biopharmaceutical industry. Many CMOs are now rather mature and many, if not most, offer a wide range of manufacturing, testing, discovery, screening, regulatory, and other services. Current annual industry revenues have been variously estimated at over $2 billion, with this projected to grow rapidly by 2014.
This assessment is consistent with the data on services segment growth from BioPlan’s 6th Annual Report, which recognized 14% annual growth in services over the past three years (since 2007). The biopharmaceutical CMO industry is likely now approaching $3 billion in revenue, taking in about 2.4% of all biopharmaceutical product sales revenue.
Current and Future Trends
CMOs are expecting cost savings from innovations, including expanded use of disposable equipment and increased yields from improved expression systems and cell lines. This complements trends among drug innovators, particularly larger ones, which are becoming increasingly risk- and cost-averse.
The biopharmaceuticcal industry is also outsourcing projects at an increasing rate, which contributes to the future prospects for CMOs. Despite this additional business, CMOs continue to be a competitive bunch, as they vie for projects to keep their facilities running. The ongoing credit crunch could end up slowing major expansion projects, forcing both innovator companies and CMOs to implement technological fixes to further increase capacity.
New CMOs continue to enter the market, both in developed and developing countries, with many countries offering lower costs but having limited requisite expertise, facilities, and quality programs to manufacture at FDA/EU cGMP standards. The market for CMOs will continue to expand as dozens of companies enter the biosimilars/biogeneric markets.
BioPlan’s 7th Annual Report & Survey of Biopharmaceutical Manufacturing & Capacity provides new perspectives regarding current and future capacity issues facing CMOs and the broader biopharmaceutical industry. Preliminary data from this year’s study shows continued investments in capacity expansion for manufacture of both clinical- and commercial-scale biologics. With biopharmaceuticals one of the few bright spots for expected growth in pharmaceutical industry sales and profits now and in coming years, investments in biopharmaceuticals development and manufacturing capacity simply make good economic sense.
Recent years have seen significant investments in and expansions by biopharmaceutical CMOs, paralleling capacity expansions by innovator companies. However, while investments in biopharmaceuticals increase, especially in comparison with other pharmaceuticals, most respondents indicated that their companies are also working hard to decrease operational expenses as much as possible.
When CMOs were asked in this year’s study whether they have increased prices for biopharmaceutical manufacturing services, about 75% reported no significant increases. In terms of specific areas where prices were reported to have increased, the largest proportion of responses (20%) reported price increases for clinical supply manufacture. There has been a significant increase in demand in recent years for smaller-scale manufacturing as biologics make it through the pipeline.
Future Capacity Bottlenecks
CMOs are currently experiencing relatively few problems, with little CMO capacity idle. While idle capacity can be tolerated in innovator firms, it can be disastrous for CMOs in terms of lost revenue and profits. By a slim majority, survey respondents (both CMOs and drug innovators) predicted that their manufacturing facilities would experience only minor, if any, capacity constraints in the next five years (up to 2014). This includes 53% predicting no, or minor constraints, for early-stage clinical supplies, and 55% predicting no, or minor constraints, for later-stage (Phase III) clinical supplies.
BioPlan’s survey shows that most manufacturers of monoclonal antibodies are reporting yields typically just over 2 grams/L, while yields using newer mammalian cell culture technologies are now typically 10 gram/L or more. These results indicate that many of the future CMO and innovator expansions in manufacturing capacity may well come from implementing improved processes, rather than more costly and time-consuming building and certification of new manufacturing facilities.
As one would expect, with only about one in ten pipeline products moving through each major stage in product development, most contract manufacturing projects involve drugs produced at smaller scale for clinical trials, not large-scale manufacture for commercial sales. However, the major opportunities for CMO profits, including long-term supply contracts, involve large-scale manufacture for commercial sales.
When biologic drug innovators were asked where their most significant increases in outsourcing will be in 2011, the largest proportions reported expecting increases in contracting for validation services (24%), fill and finish (24%), and testing/product characterization services (21%). In addition, 13% indicated they would increase biopharmaceutical API (bulk) manufacture, and 9% said they would increase full biopharmaceutical (including fill and finish) manufacturing services.
The CMO segment has a bright future. The biopharmaceutical industry’s demand for additional CMO capacity will grow as new products are approved and greater numbers of products make it through the pipeline. As these events transpire, CMOs’ successes in cost reductions, process improvements, and technology implementation will take on increased importance.
Now that budgets are beginning to rebound and RFPs are beginning to flow once again, CMOs must begin to meet customers needs better than they have in the past.
“The economic crunch has compelled most CMOs to redouble efforts to deliver what potential clients demand,” Darren Head, president and CEO of Cytovance, explained. “We’re now bringing on specific capacity requirements, increasing collaborative partnerships, and, most importantly, ensuring that we’re being cost effective for our clients.”
Whether this represents a “new normal” for the industry or not, it appears obvious that the CMOs still standing have evolved a more mature operational approach, and have become more cost sensitive, and competitive in their service delivery.
Eric S. Langer ([email protected]) is president at BioPlan Associates. Web: www.bioplanassociates.com.