What is so attractive about CDMO’s in Pharmaceutical Companies?

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CDMO’s to be considered as next stepping stone for Pharma Companies…

SHUCHI.P.NAHAR

Link: https://myweekendspot.blogspot.com/2020/07/a-masterclass-on-global-custom.html

In recent years, pharmaceutical outsourcing has grown in popularity amongst drug developers across the industry. Companies are increasingly outsourcing to contract development and manufacturing organisations (CDMOs) due to the benefits outside expertise can bring to their business.

So, what are the benefits and how are current CDMO market trends shaping ?

Pharma CDMO Trends

The pharmaceutical industry is expected to be worth $1.5 trillion by 2021. The key trends driving this level of demand for pharmaceutical products include the world’s ageing population, rising healthcare standards in developing countries and expensive breakthrough therapies. This rapid influx of demand means that companies are faced with higher R&D costs and a need to invest in new capabilities.

Consequently, this makes it more difficult to lower the cost of pharmaceuticals, leading some companies to seek outsourcing partners to generate savings.

Source: Grandview research

The CDMO Market

As the industry continues to grow, the CDMO market is increasingly segmenting. The outsourcing sector primarily segments by type of services, such as API development and manufacturing or drug delivery, however segmenting by technologies is also an emerging trend. Thirdly, segmenting by location is a popular approach.

CDMO activity predominantly occurs in Europe and the US. Although a main location, supplying to the European market from outside presents many hurdles, such as the need to retest imported products and the variations in packaging required due to the multiple languages spoken across the market. In contrast, the US market has a common language and regulatory landscape for 300 million citizens, which helps to reduce logistical issues. 

There is scope for mergers and acquisitions (M&A), with over 325,000 M&A transactions occurring in the US since 1985 , meaning that there is a large capacity for market penetration and market share. There is also an added possibility of President Donald Trump offering companies that relocate production to the US a financial incentive.

Although western markets are often favourable locations, emerging markets also attract the attention of CDMOs. For example, India is a prime location for the CDMO market as it has secured US Food and Drug Administration (FDA) approval for a large volume of its drug products and is home to a highly skilled workforce. As the access to healthcare in emerging markets improves, and the level of generic manufacturers in India increases, there is a significant rise in demand due to the fact the country can cater for large volumes of product with more cost-efficiency.

Another way in which the outsourcing market is segmenting is by value proposition. Customer diversity continues to evolve along with the evolution of the CDMO market. In order to effectively respond to customer demands, the industry is prioritising their efforts around drug delivery, development support and scale-up reliability.

A prevailing trend in the CDMO market climate is a preference for outsourcing to CDMOs that provide a full-service offering. This is because these CDMOs operate across multiple locations and markets, offering support throughout the entire drug development and manufacturing process and catering for varying regulation requirements. Outsourcing to a single CDMO enables drug developers to reduce complexity, and in some cases lessen time to market, as they are dealing with one team.

 “Capacity consolidators”, whereby CDMOs advance their services via acquisitions, are gaining momentum too.

Opportunities to Reduce Costs

There is an opportunity for CDMOs to make a significant contribution to the cost basis of the industry, potentially reducing the overall industry cost of goods sold (COGs) by more than 10% (or about $34 billion) by utilizing best-in-class practices from the pharmaceutical industry and other industries. 

However, the changes and improvements that are required will not be easy or inexpensive. There are also regulatory risks involved that must be managed. Still, there are major benefits if more cost-effective medicines reach the market while continuing to allow the industry to make a fair return on investment.

These improvements have been discussed for years. The manufacturing infrastructure was built decades ago and is inefficient and costly. It is imperative that the industry face up to the challenge and drive improvements. To effect these changes, the industry must embrace technology and manufacturing and accept CDMOs as long-term strategic partners. 

This will require a sharing of risks (costs and regulatory challenges) and benefits (fair profits). Reducing the average COGs of the industry from 27%–28% to 15%–18% requires an integrated effort to establish a new process that is aligned with market needs.

Pharmaceutical Supply Chain

The current supply chains for most of the companies in the industry are large, underutilized, dispersed, inefficient, and operating at only about 30% capacity utilization. Most run, on average, a five-day, two-shift operation. This only represents 47.6% (80/168) of the installed capacity. They also have on average 300–500 contract providers. These must all be periodically inspected, contracts must be periodically updated, and a monthly sales and operations planning (S&OP) process must be executed.

All companies need to update and rationalize their supply networks. Old, inefficient, or under-invested sites should be closed. Underutilized sites should be sold, and internal centers of excellence should be identified and appropriate volumes consolidated into these core sites. Sites should only be retained if capacity utilization can reach or exceed 60%–65%.

Opportunities for CDMOs

Contract development and manufacturing organizations that succeed must: (1) deliver product where needed and when needed on-time, OTIF, and on a sustainable basis; (2) meet or exceed the regulatory requirements of the markets served and the customers’ expectations; and (3) do so at a fair price.To survive, CDMOs must become competitive with the lowest-cost providers by significantly increasing productivity and efficiency and to reducing the pharmaceutical company’s COGs while making a fair profit.

Tools for Pharmaceutical Companies and CDMOs

Both pharma companies and CDMOs must implement best-in-class practices from all industries to significantly increase productivity and efficiency to reduce industry costs. Some examples of tools being partially utilized in the industry are listed.

Lean Six Sigma

This process improvement methodology has been effective across many industries. Embracing and systematically embedding this process will focus on eliminating waste and reducing variability. It is estimated that 90% of the activities, and 50% of the costs in a normal process are not needed. Lean Six Sigma provides all involved with a way to challenge and improve everything. There are a number of effective components that are key to the pharmaceutical industry.

Quality by design (QbD)

This aligns development with manufacturing so that the process is designed and developed with long-term outcomes considered. This is key, as many current pharmaceutical manufacturing processes lack this focus and are inefficient for commercial manufacturing, and at this point have become difficult to impossible to change owing to regulatory risk.

Right first time (RFT) 

Doing things with a RFT mentality reduces costly rework and shortens overall cycle time.

Process/cycle time improvement

Process inefficiency and cycle time are major contributors to costs. Process improvements will drive productivity and increase process yields. Cycle time reduction will allow major reductions in inventory, including both unfinished and finished goods.

Technology

Utilization of cost-effective technology will also drive efficiency and productivity improvements, including: Parametric control/release, 3D printing,Robotics, Artificial intelligence,Continuous flow processing, and Cellular manufacturing/factory in a box.

Merger & Acquisitions

Mergers and acquisitions help CMOs offer integrated bioprocessing services to their clients, which, in turn, makes CMOs/CROs an attractive and feasible option for the rapid product launch. In recent years, the biopharmaceutical industry has witnessed a significant number of consolidations. These consolidations were mainly aimed at business expansion and to stay competitive in the biopharmaceutical contract manufacturing and services market.

Although the biopharmaceutical CMO and CRO industry itself is relatively developed, the inception of new bioprocessing tools, novel therapeutics, and the priority shifts in bio/pharmaceutical industry pertaining to products has resulted in an increase in the pressure on the contract biomanufacturers. As a result, Contract Development and Manufacturing Organizations (CDMOs) are adopting different business models for addressing their clients’ and stakeholders’ needs in the best possible way.

Furthermore, integration of single-use systems in production facilities helps the CMOs to economically expand the manufacturing capacity. The single-use products offer fast turnaround and limit allied activities, such as cleaning and changeover validation. However, the contract negotiations between CMOs and customers is observed to be difficult owing to the regulatory landscape and complexity of service. Clients and CMOs are facing issues pertaining to the IP rights, warranty, and liabilities, prices, and timelines which increases the complexity of negotiations.

Capacity Utilization

Consumer goods companies run at greater than 85% capacity utilization. The pharmaceutical industry runs at about 30%–35%. An aggressive understanding and focus on increasing capacity utilization will generate major efficiency and productivity improvements that will significantly reduce the cost/unit of product manufactured.

The above examples are only a subset of the spectrum of opportunities for improvement across the industry. These are no longer vague concepts but rather well-recognized tools delivering for best-in-class companies whose value has been demonstrated both within pharma and across other industries. The benefits are difficult to comprehend or imagine and challenging to achieve, but at the same time are possible to realize and will be critical to the industry’s future.

CDMOs offer long-term supply security and share the risks due to their robust financial structures. Sponsors also get access to advanced technologies and expertise like High Potent Manufacturing, Isolator technology for injectables etc. which otherwise requires investment for separate containment area. This helps the sponsor to focus on their core competencies.

In addition, CDMOs take care of end-to-end supply chain that reduces a sponsor’s effort associated with management of inventory and logistics. This in turn helps to eliminate penalties associated with rescheduling due to delays. CDMOs offering integrated services help reduce time to market by performing all steps under one roof.

                                                                Shuchi.P.Nahar

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Shuchi Nahar
Shuchi is NISM Certified Equity Research Analyst, CFA - Level 1, a student of Law and Finance, and an aspiring CS.
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