What’s Next for the CMO Industry?
CMOs that offer an innovative service-oriented model will dominate the industry.
Contract manufacturing and contract development and manufacturing organizations (CMOs and CDMOs) are an entrenched and critical component of the bio/pharmaceutical industry, but they have proven to be more important to some segments of the industry than others. A bio/pharma company’s relationship with its CMOs depends a lot on its size and product portfolio.
Not surprisingly, CMOs have been most successful meeting the needs of small- and mid-size bio/pharma companies. Nearly 80% of the products approved by FDA on behalf of small bio/pharma companies (companies with just one or few products) are contract manufactured, while 50% of the products sponsored by mid-size companies ($500 million to $5 billion in revenues) use a CMO. Small- and mid-size companies typically lack the cash needed to build a modern bio/pharmaceutical manufacturing facility and cannot bear the financial risks in the event their products don’t succeed commercially. CMOs are crucial to the existence of small and mid-size bio/pharma companies, and the converse is almost equally true.
The CMO industry, however, has been challenged in overcoming the insistence of global bio/pharma companies that manufacturing of their newest, highest-value products be kept in-house. Analysis by PharmSource has shown the outsourcing of drug-product manufacture for new molecular entities (NMEs) by global bio/pharma companies has dropped sharply during the past 10 years, from 60% of new NME approvals in 2006 to 20% in 2015 (Figure 1).
It would appear that the manufacturing networks of the global bio/pharma companies have finally caught up with their pipelines. When the wave of new biologics approvals hit, global bio/pharma companies were not prepared, and they depended more heavily on major CMOs to launch their products. In the past 10 years, however, they have invested heavily in manufacturing facilities to accommodate this transition from an organic chemistry-focused platform to a multi-technology platform incorporating cell biology and even more novel technologies. Global bio/pharma companies have spent nearly $100 billion in just the past five years to build up their biopharmaceutical manufacturing base, including very large-scale facilities to house mammalian cell culture, microbial fermentation, and filling of vials and prefilled syringes.
Manufacturing is capital-intensive
These developments point to two realities that face the CMO industry: global bio/pharma companies prefer to keep manufacturing in-house, and only they have the resources to bring about a large-scale transformation of the industry’s manufacturing base in a relatively short amount of time. The reasons are easy to understand.
Bio/pharmaceuticals are a product business. While the industry press often focuses on intellectual property creation, and licensing fees are important to emerging bio/pharma companies, the bulk of industry revenues are generated from sales of the actual products themselves. So, far from being a “non-core competency” as some contract manufacturing proponents tell themselves, manufacturing is crucial to the existence of the bio/pharmaceutical industry. It should come as no surprise that companies would want to maintain control of their main revenue generators by manufacturing them in-house.
Further, capital investments of the magnitude needed to manufacture the rapidly-expanding portfolio of biologics can only be supported by the kind of profit margins and cash flows that biopharmaceutical product companies can generate. The bio/pharmaceutical industry has gone through a technology revolution as biologics capture a growing share of revenues and product pipelines, and a whole new manufacturing infrastructure has been required to make those new products. To create that infrastructure, capital spending by the 25 largest bio/pharmaceutical companies in each of the past three years has exceeded the revenues of the entire drug-product manufacturing sector. So while CMOs have been critical for helping global bio/pharma companies make the transition to biologics, they don’t have the resources to provide all of the manufacturing capacity the industry needs.
Positioning and innovation
CMOs can’t compete with captive capacity on scale. If they are going to capture a meaningful share of global bio/pharma manufacturing expenditures, they need to do two things effectively: position their offerings toward those activities for which they can compete effectively, and innovate their business models to address the broad range of objectives that global bio/pharma companies seek to achieve in their manufacturing arrangements.
Global bio/pharma companies have shown a clear propensity to outsource certain categories of activities (Table I). Activities that involve seldom-used technologies and capabilities, are highly novel, or are high risk, are likely to be conducted at a CMO. For instance, global bio/pharma companies frequently turn to contract manufacturers of highly potent APIs (HPAPI) and dosage forms incorporating HPAPI, because they require very specialized capabilities that CMOs can amortize across multiple clients. CMOs have manufactured the first antibody-drug conjugates (ADCs), which similarly require very specialized facilities and which are still unproven commercially. CMOs have also been leaders in investing emerging technologies such as cell and gene therapy, being among the first companies to establish facilities and improve the technology. Other specialized requirements that are often outsourced include drug delivery and clinical packaging.
Global bio/pharma companies are also more likely to outsource requirements that involve mature technologies or that involve highly routine activities. Global bio/pharma companies are increasingly using CMOs to manufacture their small-molecule APIs, even for new molecular entities; the double-digit growth rates in recent years of CMOs manufacturing small-molecule APIs bear testament to the increased willingness to outsource those requirements. Routine analytical testing, including testing products using validated methods and raw materials testing, has long been outsourced.
By contrast, global bio/pharma companies continue to invest heavily in technologies and capabilities that are fundamental to their long-term strategies, notably biologics manufacturing and manufacturing of key dosage forms including injectables and inhalation. They also tend to hold on to activities that generate knowledge about their molecules and which supports their strategies as it accumulates, such as knowledge gained in characterizing molecules and developing analytical methods and formulations.
Where CMOs have been successful in winning manufacturing business from global bio/pharma companies, it is often because they have addressed the broader considerations involved in making manufacturing decisions. Traditionally, CMOs have focused on addressing the basic supply concerns of security of supply and unit cost, which mostly come down to matters of price and capacity. But, as illustrated in Table II, global bio/pharma companies have a much broader array of objectives and options to consider when determining how to design their supply chains and whether to manufacture in-house or outsource, as follows:
- Financial considerations can often skew the decision. Generous tax incentives and subsidies and lower tax rates may drive companies to construct a facility in a country, while balancing exchange rate exposures may also drive decisions on where costs are incurred.
- Regulatory factors will play heavily into sourcing decisions. Regulatory regimes in many countries favor local manufacture over imports, as do reimbursement policies. Local labor laws may make it difficult or expensive to close a manufacturing facility even if outsourcing the products made in it would be more cost effective.
With the increased use of in-licensing and acquisitions to build product pipelines, manufacturing plans must be able to accommodate products that are not currently in their pipelines and have not yet been identified. That may mean maintaining unutilized capacity to handle unexpected demands.
To address these broader considerations, leading CMOs are reconsidering their value propositions to develop innovative service offerings. In particular, they are realizing that they can disaggregate the range of activities they perform in order to manufacture a product, and repackage them into offerings that create more flexible solutions for their global bio/pharma clients.
The primary example of that new thinking to date is the growing number of deals in which CMOs are hosting and operating dedicated manufacturing operations for clients. Typically, these arrangements involve the client funding, and some cases operating, dedicated equipment in a leased suite at a CMO facility. The client enjoys the flexibility and security of having its own dedicated manufacturing operation but at much lower cost, because it can share fixed and operating facility costs like warehousing, air and water systems, and site security.
The future belongs to innovators
The history of the contract manufacturing business has generally been one of CMOs acquiring outmoded legacy facilities from pharmaceutical companies to manufacture late lifecycle and generic products. Few CMOs have participated in the innovator drug portion of the industry: from 2006-2015, more than 150 CMOs got at least one new drug application (NDA) approval but just 10 account for more than 50% of those approvals, and most only got one NDA approval in 10 years.
In the next five years, most CMOs will remain mired in the commodity capacity CMO model, stymied by a lack of strategic vision or limited capital. However, based on recent industry developments, a handful of CMOs will offer a more innovative CMO model that will be truly service-oriented and innovative, and will be more appealing to global bio/pharma companies. Those are the companies that will dominate the industry and inspire customers and investors.
This article is reprinted from the August 2016 issue of Pharmaceutical Technology magazine.