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Strong CMO/CDMO Market Outlook for 2016, but Beware Moderating Factors

Increasing consumption of medicines around the world; a more robust pipeline of drug candidates and an increasing rate of FDA NDA/ BLA approvals; the growing number of biologic drugs in development, many by traditional pharma companies that lack biotech expertise; the entrance of numerous small, virtual startups into the market that have no manufacturing capacity; the rise in patent expiries and increasing generics competition, which is driving a greater need for cost efficiencies and access to novel, proprietary technologies for achieving product differentiation; and the increasing complexity of both small- and large-molecule drugs such as antibody-drug conjugates and highly potent compounds will all continue to drive growth in the contract manufacturing market in 2016.

Spending is Up

Visiongain (February 2015) estimates that the global contract pharmaceutical manufacturing market will grow at an average annual rate of 7.5% from $54.54 billion in 2013 to $79.24 billion in 2019.1 This strong growth is supported by the results of Nice Insight’s annual survey of professionals in the pharmaceutical and biopharmaceutical industries; participants have indicated that their companies have dramatically increased year-overyear spending on outsourcing for the last four years. Most notably, while the percentage of respondents whose companies spent more than $50 million on outsourcing remained fairly stable at 24%-24% from 2013- 2015, the number of respondents nearly tripled to 71% in the new 2016 Nice Insight CDMO Outsourcing survey of nearly 600 pharmaceutical and biotechnology executives seeking outsourcing. Likewise, manufacturing equipment needs are shifting; as seen in the Nice Insight 2015 Pharmaceutical Equipment Annual Study, 54% of respondents (n=560) indicated that their companies spend over $100 million on equipment per year.

Importantly, 75% of respondents to the new CDMO survey expect that their companies will increase expenditures on contract services (research and manufacturing) over the next five years. Another 18% expect their level of outsourcing to remain the same, while just 4% predict a decrease. Furthermore, while threequarters of respondents currently use 0-10 CDMOs and/or CMOs, 7% use 11-20, and 5% use 21-30; 69% of participants in the CDMO survey expect to increase the use of contract development and manufacturing organizations (CDMOs) and contract manufacturing organizations (CMOs) going forward, with 29% expecting the number of manufacturing partners to remain the same, and only 1% anticipating a decrease in the number of partners. All of these numbers clearly indicate that strong growth in the pharmaceutical and biopharmaceutical contract manufacturing sectors can be expected for some time to come.

Interestingly, while the last set of data appears to contradict the notion that sponsors are whittling down their manufacturing partners to a select few (vide infra), these numbers may in fact reflect the strong growth in the number of drug candidates and an overall greater need for support. In fact, 56% of respondents to the 2016 Nice Insight CDMO Outsourcing survey indicated that an expanding R&D portfolio is driving their increasing use of CDMOs and CMOs. Companies also seem to be increasing their use of outsourcing as part of the manufacturing strategies (60%), perhaps because they have had positive experiences with outsourcing to CDMOs and CMOs in the past (59%).

Consolidation Concern?

Service providers should be cognizant, however, of the investment activities underway at both sponsor companies and their competitor CMOs. In addition to many large, even mega, deals at the sponsor level (e.g., Pfizer’s recently announced $160 billion acquisition of Allergan), the pharma-biotechs are investing significantly in internal manufacturing capabilities, through the expansion of existing or additional new manufacturing facilities and/or the acquisition of production capability. This is the case with Shire’s pending acquisition of Baxalta and its pipeline and manufacturing capacity. This in-house expansion activity is largely due to pipelines that are much more robust than have been seen for many years. Some sponsor companies are also acquiring CMOs in order to achieve greater vertical integration. Again, look to Pfizer and its acquisition of Hospira and their One2One CMO.

It is also worth noting that many sponsor firms are looking to simplify their CMO networks by working with CDMOs that can support their projects from the development phase through clinical trials and on to commercial API production, as well as drug product formulation, manufacturing, and packaging. The pharma-biotechs are establishing more collaborative relationships with a smaller set of carefully selected, preferred suppliers. Such an approach, unlike the use of a large number of tactical suppliers, leads to simplification of the supply chain for increased management, and reduced costs and development timelines. CDMOs with fully integrated capabilities and cultures, systems, and processes that support these types of collaborative relationships are an important component of this type of outsourcing strategy.

The Rise of the “CDMO”

This trend is in turn leading to heightened M&A activity amongst CMOs as they attempt to transform themselves into CDMOs. A few recent notable examples include Merck KGaA’s acquisition of Sigma Aldrich, Pfizer’s purchase of Hospira, the merger of Patheon and DSM and the acquisition of Gallus Biopharmaceuticals by the newly formed DPX Holdings, the merger of Cambridge Major Laboratories with AAIPharma, and the acquisitions of Bend Research and Xcelience by Capsugel.

Also worth mentioning are the activities of AMRI (Albany Molecular Research Inc.), and the launch of Avara Pharmaceutical Services, a private, wholly owned subsidiary of American Industrial Acquisition Corporation (AIAC). AIAC, which was founded in 1995, consists of 60 manufacturing sites and more than 8,500 employees in 15 countries, generating $1.2 billion in revenues, providing contract manufacturing and technical services to the biopharmaceutical market. There are too many others to list, as is also the case with internal investments by CMOs and CDMOs. Leading the pack in that area is Catalent, which also recently acquired several companies (Pharmapak Technologies, Redwood Bioscience, and Micron Technologies). Both Catalent and Patheon have also announced initial public offerings to raise capital for further expansions.

All of this activity certainly suggests that the CDMO concept has been fully realized in the contract manufacturing marketplace. Today, just 30 CMOs/CDMOs account for more than half of the industry’s revenues, according to PharmSource.2 These combined firms have developed a global footprint, with large-scale capabilities for greater cost efficiencies, service offerings (including development and final formulation/drug delivery), and access to advanced technologies, and are positioned to be competitive with in-house sponsor capabilities.

Deliver Big or Go Home

A key implication of this trend, however, is increased demand for those CDMOs that can provide measurable added value that sponsor organizations cannot realize on their own. This will create more challenges for traditional CMOs and less competitive CDMOs. It will be interesting to see which CDMOs rise to the top in this highly competitive landscape. At a minimum, a contract service provider must have a track record of success, financial stability, and an industry reputation for doing quality work. In fact, quality has also supplanted cost savings as the key criterion when sponsor companies are seeking contract service partners, while poor product and service quality remains the top source of dissatisfaction, according to the 2016 Nice Insight survey results.

CDMOs that are willing and able to collaboratively develop operating procedures, use dedicated project managers, demonstrate a clear willingness to make long-term commitments, and customize protocols for different projects will also have an edge, according to survey participants. Specialized technical capabilities are also increasingly important, particularly those that ensure high bioavailability, efficacy, and safety, even for the most complex and challenging-to-formulate APIs. Those CDMOs that can provide such differentiating solutions cost effectively, and under the accelerated timeframes required for drug substances that are granted orphan drug, breakthrough therapy, and/or fast track designations from the FDA, stand out even more.

Get Yourself “Preferred”

Outsourcing for such complex products serves as an efficient and cost-effective way for sponsor companies to gain access to the most advanced technical solutions, and CDMOs that can offer novel, proprietary technologies have the greatest chance of attracting their attention. As sponsor firms continue to pare down their vendor numbers and establish preferred/ strategic partnerships with fewer, integrated suppliers, technological capabilities will equate directly to completive advantage. Indeed, the introduction of innovative new technologies to the lab, manufacturing plant, and supply chain is helping service providers attract projects from sponsors looking to be first to market with differentiated products, according to participants in the Nice Insight survey. In fact, the preference for “Preferred Suppliers” rose to 43% from 35% last year, while the preference for tactical suppliers dropped from 35% to 31%. Use caution, however: over 50% of survey respondents also indicated that they would switch CDMOs for poor quality and lack of ontime delivery.

So where will the opportunities lie for CDMOs in 2016? Companies with truly integrated offerings and unique technical capabilities will enter into collaborative capacity management and long-term, multiproject relationships. Emerging markets, value-added generics (so-called supergenerics), and biosimilars will provide other potential opportunities for growth to contract manufacturers with the global reach and technical capabilities necessary to capitalize on them. Those that are positioned to leverage these opportunities and survive the more competitive contract manufacturing marketplace are likely to benefit from improved pricing and increased margins.

Oh, We’re Global Now

These statistics clearly suggest that the results of the new 2016 Nice Insight CDMO Outsourcing survey should be highly indicative of the conditions in the global CDMO marketplace. Initial analysis of the data indicates that survey participants utilize contract manufacturing services in all key pharmaceutical and biopharmaceutical markets around the world. Most projects are outsourced in the U.S./Canada (30%), Europe (14%), and India (12%), but a reasonable amount of activity is also taking place in China (9%), Singapore/ Southeast Asia (8%), Japan and Korea (7%), Argentina and Brazil (7%), Eastern Europe and Turkey (7%), and the Middle East (6%).

The obvious, #1 reason respondents give for outsourcing to both traditional CMOs and CDMOs is to improve quality. Other important drivers include the desire to improve time to market, increase efficiency, reduce cost, and leverage contractor regulatory expertise. Participants of the 2016 Nice Insight CDMO Outsourcing are also looking to gain competitive advantage and access to specialized technical and operational expertise by outsourcing to CMOs and CDMOs.

And they are doing so for projects at all development phases, although the largest percentage of respondents indicated that they are outsourcing Phase II projects to CDMOs and CMOs. A similar number of respondents are using manufacturing services for Phase III (54%), Phase I (53%) and Pre-Clinical (including discovery phase) (51%) projects. This strong distribution reflects the recent industry investment in innovation and the currently robust drug pipeline, with drugs steadily moving toward commercialization. Phase IV/Post-Launch projects are outsourced by 39% of survey respondents; the lower percentage reflects the attrition that occurs as safety and efficacy are evaluated. However, the fact that Phase II projects are most often outsourced and the high percentage of participants outsourcing Phase IV projects may indicate that new programs that are designed to eliminate unlikely candidates are achieving the desired results.

References

1. Visiongain, Pharmaceutical Contract Manufacturing World Market To Reach $79.24bn In 2019. Press Release, February 10, 2015.

2. PharmSource, Contract Dose Manufacturing Industry by the Numbers, 2015 Edition, July 2015.

View the full 2016 Q1 Pharma's Almanac here.