Grand View Research reports that the global biopharmaceutical contract manufacturing market size was valued at $12.14 billion in 2017 and is projected to reach $21.7 billion by 2025, showing a CAGR of 7.5% during the forecast period. The success of the biopharmaceutical market can be majorly attributed to contract manufacturers, states Grand View Research.
Reduction in overall investment required to bring a new drug product to market, providing access to expensive technologies, quick entry of products in markets, and greater flexibility are some advantages offered by contract manufacturing organizations (CMOs), also known as contract development and manufacturing organizations (CDMOs). This has prompted several large companies to outsource their biopharmaceutical manufacturing operations, notes Grand View Research.
GEN spoke with several industry experts to get their take on the direction contract manufacturing is heading. The discussion topics ranged from merger and acquisition (M&A) activity, to one-stop-shops to adopting less risk-aversive strategies. The respondents are:
Mark Quick, VP, Corporate Development, Recipharm
Paul Jorjorian, VP and General Manager, Biologics, Thermo Fisher Scientific
Eric Langer, Managing Partner, Bioplan Associates, Inc.
Steve King, CEO, Artius Bioconsulting
Tom Isett, Director, iBio
Robert Erwin, President iBio
GEN: An ongoing trend today in biotechnology contract manufacturing is consolidation in the industry, notably Thermo Fisher’s acquisition of Patheon and Catalent’s acquisition of Cook Pharmica. There are different views on how this acquisition trend will affect contract manufacturing in the pharma/biotech industry. From the point of view of your firm, do you look upon this as a positive or negative trend, and why? Do you feel that a few large firms provide sufficient competition for clients, or would it be preferable to have the choice of a number of smaller firms?
MQ: At Recipharm, we view M&A activity as a positive trend. It is important to note that while the sector is consolidating, it remains extremely fragmented, with the top five companies owning less than 15% of the market share. This creates a complex environment for drug developers making outsourcing decisions.
By acquiring new facilities, CDMOs can add new and complementary capabilities, increase capacity, and expand geographical reach. Recipharm’s M&A strategy is focused on strengthening our end-to-end drug development and manufacturing services, so we can be a single, strategic partner for our customers. By offering all the services our customers need, we simplify their supply chain, provide a cost-effective option, and improve the speed at which drugs progress to market. These are positive aspect of the process for both drug developers and patients.
PJ: While there is much discussion concerning consolidation in the industry, according to the 2017 PharmSource Report, between 2013–2016 in each of the major service segments, less than 8% of companies and segment revenues were consolidated as a result of M&A.
For us, consolidation has contributed to our growth by enabling us to offer a broader talent base for small biotechs to leverage, and based on feedback from our customers, they prefer to reduce the number of contract companies with which they are affiliated because working with multiple CDMOs/CROs is a resource drain.
Overall, offering an end-to-end solution is a good thing and adds value for the customer. Thermo Fisher’s acquisition of Patheon supports this by providing an integrated offering that allows us to provide a simplified, end-to-end supply chain for pharmaceutical and biopharmaceutical companies of all sizes. Our Pharma Services business can develop or source drug substances for large and small molecules, provide viral vector contract development and manufacturing services, design formulations, create clinical supply chain strategies, develop and distribute clinical trial products, and execute drug product launches for both clinical and commercial sectors, offering a comprehensive range of services spanning all phases and scales of the industry.
EL: Yes, consolidations and mergers have been going on in the biopharma CMO business for decades. One of the historical challenges to CMO growth has been that acquisition of the skilled teams of experts needed to meet the constantly emerging technical work can’t easily be done “grass roots.” The issue, then, becomes where can a successful CMO find technical expertise they often don’t have; often the answer is through acquisition. Catalent’s acquisition of Paragon is an example of a niche expertise, in this case, gene therapy, complementing a larger portfolio. The question might not be so much one of classic loss-of-competition within the industry, but rather would the industry be better off with a larger CMO leveraging the smaller CMO’s competence, with their business and broad technical acumen to create an overall better service offering. That’s debatable, but smaller CMOs generally can’t achieve the kinds of expansions possible with a synergistic partner.
On the other hand, virtually all CMO customers say, in our annual reports over the past 15 years, that relationships and customer service is critical to selecting a CMO. As CMOs get bigger, they can lose sight of the importance of managing those relationships. And the faster companies grow, the more likely this is to happen. So along with industry acquisitions, must also come a customer orientation that, among some larger CMOs has been said to be lacking.
SK: There has been considerable consolidation and expansion within the CDMO industry over the past few years with the goal being to create “one-stop-shops” for companies developing biologics. From a customer perspective the main impact is fewer options with regard to CDMO service providers for individual development activities. While the concept of the one-stop-shop is attractive, the question is whether the big CDMOs can or will offer the value and capabilities across the different service offerings that emerging biotech companies need (i.e., they may be competitive for some development services and on the high end for other services). Companies that have grown somewhat more organically may have an advantage here since they are more likely to have efficiently integrated the service offerings to achieve the best cost structure although the majority of the growth in the CDMO space has been through M&A activity.
TI and RE, iBio: Appreciating that there are those that worry about increasing supplier power as a result of the consolidation, we generally view the trend favorably for biologics developers. There can be notable time savings and lower supplier management costs when a therapeutic developer chooses to take advantage a one-stop-shop and if a client is dissatisfied with the performance or wait times with the big, consolidated service providers, there is still ample choice in the CDMO market with notable innovation in the space. So, we see it as positive. For those companies coming in as relatively new players in the CDMO space we foresee the advantages in offering a wider range of services. Our firm recently expanded beyond our core cGMP bulk drug substance manufacturing to offer fill/finish capabilities as well. This can allow us to work with our clients to simultaneously shorten their development timelines while also saving money by avoiding the need to duplicate activities such as analytical method qualification/validation often associated with using multiple vendors.
GEN: As in many areas of industry, CMOs started small and grew larger through acquisition or by expanding their offerings (the one-stop-shop concept). Yet this growth may have negative consequences, as firms take on more and more services, for which they may be ill-prepared. Could you discuss the pros and cons of these arguments, especially from the point of view of your company?
MQ: When acquiring facilities, a CDMO not only adds new technologies and capabilities to its organization, it also expands its team of experts. For example, Recipharm recently acquired Sanofi’s inhalation business in Holmes Chapel, UK, which specializes in the manufacture of novel respiratory products. By combining the expertise of this 450-strong team with our inhalation drug product development team in Research Triangle Park, NC, we have been able to launch Recipharm Inhalation Solutions, an end-to-end service for the development and manufacture of inhalation products. This means customers can access one solution to take their projects directly from development to market. Instead of being “ill-prepared” to offer this service, we have combined expertise to enhance our offering in this in-demand area.
PJ: The acquisitions that we have completed were part of a deliberate growth strategy to be able to meet the growing needs of our customers. The consolidation of offerings allows the CDMO to establish ways of working with adjacent services, e.g., drug substance and drug product. By adopting best practices and then establishing standard practices, I would argue that the customer benefits with faster timelines and collaborative problem solving.
EL: One-stop-shopping is a concept that many would like to achieve, but the reality is that each CMO will have key expertise, but not all the critical expertise. So, if a client wants only one vendor, then they won’t be getting all-around top-notch expertise. Essentially, the cost of one-stop-shopping is compromising due to loss of access to selecting the best service provider(s) across multiple activities.
SK: This really goes to the point of whether any one CDMO can really offer top services in all areas. There is quite a bit of competition within the CDMO industry to continue expanding into more and more areas and new capabilities. Since most of the growth takes place through M&A activities, the question is whether there are an adequate number of smaller providers that offer high level services to continue to feed the growth equally. The reality is some emerging CDMO service providers have superior platforms and capabilities and the big CDMOs that acquire those companies have a competitive advantage in that area. This means that the other expanding CDMOs are left with acquisition targets that may have inferior capabilities for a specific capability.
TI, RE: We have been relatively conservative in expanding our capabilities to ensure that we can offer high level services across the board. Particularly as a smaller player in the space, we recognize that a high level of customer experience across our offerings is critical to our future success. That simply becomes harder and harder when growth takes place through acquisition which necessarily means that multiple organizations now have to come together as one which can be difficult. However, this integration is essential if the larger organization is going to effectively offer the quality services needed by smaller biologics developers in the areas of technical specialty previously provided by the pre-acquisition CDMO.
GEN: Gene therapy, after many years in the doldrums, is now a hot area of clinical medicine. But potentially mega blockbuster drugs based on this strategy didn’t take off early. Traditionally, CMOs are conservative in their business models and may miss important opportunities to expand their portfolios. Should CMOs be willing to adopt a less risk aversive strategy?
EL: With over 800 cell and gene therapy candidates in development or in clinical trials, a substantial portion or even the majority will need manufacturing expertise, that at present doesn’t exist. CMOs may be the only way to get a particular cell or gene therapy manufactured. And I believe many of the mainstream CMOs recognize this. We’re seeing acquisitions and investment in cell therapy and gene therapy areas that indicate we’re only seeing the beginning of developments in this area.
SK: The industry is becoming more and more aggressive in its business model, in particular in biologics. The growth of the industry really followed many successes within biologics drug development by companies such as Genentech which not only provide successful product development but also helped advance the science and technology behind the biomanufacturing side of the business. Cell and gene therapy are still in a relatively early stage in terms of clinical successes and technology development, yet it has been perhaps the hottest area in terms of CDMO activity. The aggressiveness of the larger CDMOs to gobble-up smaller players with expertise in these emerging areas does seem to point to a much more aggressive mindset within the industry.
TI, RE: There is a lot of opportunity within the emerging technology markets which makes exploring those areas quite attractive. With the surge of interest around cell and gene therapy, new opportunities arise to support this area such as viral vector fill/finish as well as other support services. Beyond these emerging areas are other growing areas of interest such as regenerative medicine, and in particular, biofabrication of complete organs, such as kidneys, livers, and lungs. Technologies are advancing at a rapid pace and we’re anticipating the needs in biofabrication. Therefore, we don’t see the same problems with advanced biomanufacturing needs that the industry encountered with cell & gene therapy, provided that the CDMO industry keeps pace to allow these areas to reach their full potential.
GEN: The U.S. economy has been on a long period of positive growth (11 years!), and younger workers in the CMO industry may never have experienced a time of recession and economic setback. Is this a concern, and how would you recommend that companies plan for lean and difficult times?
PJ: No business is recession proof, but CDMOs by design aggregate demand and provide cost effective solutions for our customers. We could, in theory, see increased demand and opportunity as innovator companies rationalize their networks in a recession. We are also less prone to the success or failure of a single drug.
EL: Biopharma has seen 25 years of consistent 12–14% growth through recessions and hard times. This includes the supply, services, and equipment providers to the industry. This recession-proof nature suggests that healthcare areas will continue strong growth despite fluctuations in global economies. This is one reason the valuations on biopharma supply companies has been relatively high over the past decade. The industry seems to have an interesting bubble around itself, and those younger workers may never see truly hard times if they can develop skills that will be in demand, like process development, and others.
SK: This is a hot topic within the investment community since a recession could have an impact on biotech funding and drug pricing, which could in turn have an impact on the broader CDMO industry. The current funding environment has been robust, meaning that for the immediate term, capital will continue to be deployed to advance drug candidates. In the event of a downturn, there will still be the need to advance promising new medicines, however, in a capital restricted environment companies may be looking to be even more value conscious which could mean an advantage for smaller players with simpler operations and overhead structures.
TI, RE: Flexibly constructed operation that allows for ready scale-up or scale-down could become a real advantage. The ability to right-size production batches to avoid the need to produce multiple batches, which is costly, could be a key advantage. Beyond that, younger workers will do well to be involved with more innovation minded CDMOs that have the agility to respond to changing conditions. The ones that are anticipating the needs of tomorrow and adopt new technologies to meet their needs.
GEN: Another point of concern with the takeover business model is that a large CMO may control a large portion of the supply chain which may put them in direct competition with companies with which they are negotiating. Do you feel this is a significant risk, and how would you recommend dealing with it?
SK: To me this is a really interesting development. Traditionally there was very little overlap between the companies providing reagents or equipment and those providing services. With the Thermo Fisher acquisition of Patheon and subsequent additions in the cell and gene therapy space, the situation has now changed significantly. This is even more pronounced when one considers the recent adoption of single-use systems which has significantly increased the cost of raw materials associated with runs and the need of a consistent supply of the disposable materials which, in some cases, could potentially be controlled by a competitor. In this environment, iron clad supply contracts and rigorous supply planning will be critical.