Sajal Kapoor IIC Webinar Notes and Summary

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Credits – IIC, Sajal Kapoor



  • Need necessary experience to scale up the production, with new technology and regulatory  compliance
  • Innovator mitigates the risk – of drug failing and capacity built for it going redundant before commercial launch
  • Additional manufacturing capacity
  • Reduced/Avoiding OpEx – Even without any revenues, there is some expenditure on plants – Eg: Syngene built plant Mangalore plant over years …it is not earning revenue but still there is some operational expenditure and depreciation.
  • Mitigate risk of supply shortage – if your plant is offline due to any reason- qualifying another plant will take time , so qualifying and partnering is done upfront, right at beginning
  • Reduced time to market
  • Favourable Macros – Rising population, insurance penetration,ageing societies, rare diseases – lots of CDMO partnerships happening – smaller CDMO bring technology skill and capability and could partner in their respective domain
  • Small and virtual biotech companies need manufacturing infrastructure – Eg: A small lab in university working on biologic or chemical entity need outsourcing partners
  • Innovators looking to focus on their core which is relationship with hospitals and front-end , not interested in research and commercial side

Regional Landscape –

  • Asia Pacific Leading – China/India emerging fast – some issues related to IP theft in China, so traffic increasing towards India and South Korea
  • Asia has lower Capex/Opex compared to EU/US

Highly fragmented business –

  • Highly regulated
  • High Entry barriers
  • High Switching cost (costly,time consuming,regulatory burden)
  • Majority Privately held
  • Specialised business – What Suven can do, Neuland cannot and vice versa
  • Sticky business with long term partnerships

Drug Discovery

  1. Pre-clinical –

Looking for molecules which are naturally occurring or synthetically produced in a lab or bio-engineered and then try and do “Lead Generation”-ensuring that there is a patentability aspect related to this new molecule . After Lead generation we move on to “Lead Optimization” – making sure that all the characteristics that are required by disorder/disease are met by this lead candidate. Next is Pre-clinical development, which is ensuring that the molecule is developable – once this is done, innovator will file an IND (Investigational New Drug)

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Time for this whole process 5-6 years

Once IND is filed and Regulators find that the drug has got what it takes and is probably safe for human trials …go-ahead is given for the Clinical Phase

2. Clinical Phase –

Phase 1 – Human trials are undertaken, safety,how the drug is moving in the body

Phase 2 – Trials focused on Medicine Efficacy and Dosing on larger volume of patients

Phase 3 – Multi-location, Multi-Country, Global volume human testing undertaken and lot of data is generated to file NDA (New Drug Application)

Time for the above Phases – 6-7 years

NDA Dossier will be 100s of pages , so from regulatory standpoint scientific expertise to review will be needed…during this time there will be 3-way communication amongst Innovator-CDMO Partner- Regulator

3. Commercialisation

If Regulator is satisfied with NDA dossier, go ahead for Phase 3 submission , i.e, for commercialisation of the drug- manufacturing comes into play and typical life-cycle of the drug or chemical entity starts- Patent Protected for 15 years – gives revenue certainty – high margins

CRO – Sharing people, i.e, scientists with Innovator and helping them convert fixed cost into variable cost , CRO services can be paused without damage to the life cycle of discovery drug, but you cannot disturb the plant which are supplying commercial volumes or clinical volumes for life saving drugs are involved. Labour intensive. Low Operating Leverage.

CMO – Sharing Manufacturing .Capital intensive, no  need to staff up in advance , can add near to clinical trial. High Operating leverage. Once commercialisation starts – Asset turnover improves, RoCE , RoE jumps

Emerging Trend – CRO getting into CMO, CMOs trying to get into CRO through acquisition etc.Innovators desire to minimize their interactions with multiple vendors so prefer capable companies CRO+CMO operations (integrated partners).

In the case of multi-year IT services contracts, bulk money is made during the Execution phase and less during warranty/service period due to lower billing. In CMO-CRO , make money while drug discovery by billing for their scientists regardless of whether drug is successful or not , but make more money if drugs is successful and  reach commercialisation phase

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Biologic custom synthesis much more sticky than chemical custom synthesis because you do not want to change the partners once cell-line is established,mammalian and microbial etc are up and running

CDMO Integration options –

  • Vertical : Research – Drug Development – Manufacturing – Packaging
  • Horizontal : Solids – Sterile Liquids – Semi Solids – API Manufacturing

CDMO Business Models – 

  • Speciality CDMO : Domain/Technology Focused
  • Capacity Consolidators: Prefer inorganic Growth
  • Vertical integrators: offer broad range of services from lab to commercial scale manufacturing

CDMO Partnerships –

  • Fee for service – limited capital deployment from innovator, limited relationship management
  • Take or Pay – Little more capital deployment but require relationship management – take pre-agreed volumes or pay the supplier
  • Dedicated Suite – Buyer gets requisite control over the production capacity, volume , timing etc and more certainty in terms of quality. Eg: Novo manufactures Insulin at Torrent’s plant (like US Embassy in our country)
  • Joint venture – Eg: Lonza-Sanofi, Lonza owns the facility but Sanofi funded 50% so it gets to use 50%…capacity can be juggled as per requirement…Sanofi can produce 60% and pay extra to lonza .Trust and Capability needed.
  • Global Enterprise – Innovators and CDMO co-invest in new assets globally and share assets , common in auto/consumer electronic – eg: Toyota, Bosch, GSK and Samsung biologics


  • Increasing Pharmaceutical, Speciality Chemicals research , development and manufacturing outsourcing (capex/opex avoidance risk mitigation)
  • Increasing number of virtual biotech , small biotech and small to mid-pharma with inadequate development, scale-up infrastructure.
  • Technological advancements and new operational techniques
  • Help Big Pharma transform fixed cost to variable
  • Faster Research at lower cost.

Risks –

  • Protection of client’s IP
  • Breach of Data Protection (Regulatory Compliance)
  • Ever-evolving and fragmented regulatory environment (Complaince in Mexico vs in US)
  • Competitive marketplace unless CDMO has some unique advantage
  • High dependence on skilled labour
  • Supply Chain disruptions
  • Customer concentration
  • Innovator pausing or suspending development
  • Termination of relationship

CDMO Critical factors for success- 

  • Respecting Innovator’s intellectual property, trust takes time to build…innovator will start with one molecule and then give more and more molecules to the company
  • Immaculate Regulatory Compliance Record
  • Superior technology Investments
  • Agility and supply chain
  • R&D, Documentation, Data integrity and manufacturing excellence
  • Client-centric Mindset
  • Adequate human capital investments (Skills and capacity)
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Valuation Framework-

  • Supply side easier to predict than demand side- can see where is gross block, WIP…Companies exiting will give advantage to low cost manufacturers (US generic space)
  • Focus on B/S and Cash Flows
  • Circle of Competence – Piramal going into finance – aim to be better in your league
  • Management – vision, track record,integrity issue, remuneration
  • Industry Structure
  • Business Economics (commodity or not) : Entry barriers, exit barriers for customers, RoCE> Kc
  • Psychology
  • Narratives and numbers: Numbers should match the narrative
  • Good businesses will generate increasing operating cash flows over long term
  • YoY Variability can happen
  • An odd year with a dip or -ve cf is not an issue
  • Poor quality business fail to operating compound cash flows

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Sneh Kagrana

Sneh Kagrana

Sneh loves to write about the things that surround the financial system of the world. He shares his wisdom on a daily basis through his new venture - Daily Shots.
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