The Massive Future of Pharma Contract Manufacturing Beyond 2020

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Written By: Shuchi Nahar | Shuchi’s Blog | Linkedin Profile

Contract Manufacturing (CDMO) Industry Insight

The global pharmaceutical contract manufacturing & contract research market size was valued at over USD 123.1 billion in 2016.

Pharma Contract Manufacturing Future
Pharma Contract Manufacturing Future | Source: ET

Cost-saving and time-saving benefits associated with the implementation of outsourcing is responsible for driving industrial growth.

Contract Manufacturing Insights
Contract Manufacturing Insights

Companies are investing in infrastructure, personnel, and technology in order to gain a significant share of the outsourcing revenue.

Increasing demand as a consequence of the ongoing patent cliff of the biologic drugs is expected to fuel demand.

The presence of end-to-end service providers that are engaged in providing value-added services for an integrated or risk-sharing business model is expected to bolster progress in this industry.

Moreover, new product launches and novel drug delivery mechanisms are anticipated to drive outsourcing demand.

The industry has been alternating between the cycles of inadequate and excessive production capacity for the contract as well as captive manufacturers.

Hence, it is important for Contract Manufacturing Organizations (CMOs) to make cautious decisions pertaining to capacity expansion and choice of deals.

CDMO Global Market

The contract manufacturing market is estimated to grow to $157.7 billion in 2025, a compound annual growth rate (CAGR) of 6.9% since 2018, outpacing the pharmaceutical industry as a whole.

Even for the biggest pharma companies, CDMOs have graduated from the supply chain to more ratified value chain partners – no minor attitudinal adjustment.

Fierce competition cost pressure, constant technological innovations, and increasing consolidation activities raise the question of which steps [CDMOs] can take to secure or expand their position in this contested market.

“Should they focus on their core business or broaden their range of services? Should they follow the market trend and consolidate or try to grow organically?”

Which of these options would most benefit Outsourced Pharma readers?

  • Contract Manufacturing (CDMO) is in a growth phase.
  • Additional manufacturing capacity
  • Avoiding redundant manufacturing capacity(Capex avoidance before commercial launch)
  • Opex reduction/avoidance is another driver
  • Mitigate the risk of supply shortage
  • Reduce time to market ( If internal capacities are limited)
  • Favorable macros (increasing population, insurance coverage, aging societies, rare disease)
  • Small and virtual biotech need manufacturing infrastructure

Widespread Growth

Here’s a look at that estimated 6.9% CAGR growth by the service sector.

Contract Manufacturing Market
Contract Manufacturing Market

You can see consistent growth across the board. Next here’s a look at where it’s taking place. 

  • Asia Pacific region is leading
  • China, India are top  in API/CDMO
  • US/EU have advanced ecosystem
  • Asia has lower Capex and Opex relative to US/EU
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Contract Manufacturing Market by Regions
Contract Manufacturing Market by Regions

This can generally characterize by great fragmentation despite the strong merger and acquisition activities in recent years.

And it’s not only CDMOs acquiring their competitors.

“Large life sciences companies and private equity firms were responsible for some of the largest deals in the sector (e.g., in 2017, Thermo Fisher Scientific paid 18.2 times Patheon’s earnings before interest, taxes, depreciation, and amortization (EBITDA) to acquire the leading CDMO.”

Nonetheless, the precipice of 2020, the Contract Manufacturing market remained “highly fragmented, with more than 75% of participants having revenues below $50 million, and the five leading CDMOs holding only 15% of the total market share.”

Which can only mean one thing: More changes are coming to a CDMO near you.

CDMO Business Model

CDMO Business Model
CDMO Business Model

The segmentation of the pharmaceutical CDMO value chain follows three major categories:

  • Drug And Process Development,
  • Active Pharmaceutical Ingredient (API) Production And
  • Finished Dosage Form (FDF). 

Close to these CDMO core segments are drug discovery and development support, provided by contract research organizations (CROs) as well as contract packaging services, which are provided by CDMOs or specialized contract packaging organizations (CPOs).

Tasks outsourced to CDMOs by pharmaceutical companies cover the entire value chain of a drug’s life cycle, from drug development and preclinical and clinical trials to commercial production.

While traditional CMO services were cantered on their core competencies in API bulk manufacturing and formulation, CDMOs have also moved into adjacent segments along the manufacturing value chain. 

  • Specialty CDMO has a domain technology focus.
  • Capacity consolidators prefer inorganic growth
  • Vertical Integrators offer a broad range of services from lab to commercial-scale manufacturing

These tasks, which in the past have been covered by pharmaceutical companies themselves or by contract research organizations, include medical chemistry, support for preclinical in vitro and in vivo studies, and formulation and process analytics development.

CDMO Fragmentation

CDMO Fragmentation
CDMO Fragmentation

Source: IIC Presentation

As the Contract Manufacturing industry is relatively immature and fragmented, there lies more growth opportunity.

The majority of players are very small. There is an absence of overall market leadership.

CDMO is a contract related service business which is sticky with long term customer relations.

Many smaller CDMOs are either private entities or part of PE portfolios.

Here are the key pointers that prove the industry as fragmented.

  •        Highly regulated industry
  •        High barriers to entry
  •        High switching cost
  •        Highly competitive industry
  •        The majority are privately held
  •        Challenging for small companies to sustain.
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Contract Manufacturing Facing Growth Imperatives

With some exceptions, today Big Pharma tends to want fewer, more integrated partners, and so that is a path to survival for many CDMOs.

Options for CDMOs
Options for CDMOs

The branches in the decision-making tree for those CDMOs are vertical or horizontal integration, and acquisition or organic growth.

Also Watch: What Will Be the Biggest Change in the Pharma Contract Manufacturing industry?

Vertical Integration

CDMOs can strengthen core areas and establish themselves by extending their service portfolio.

In general, this kind of expansion “is less costly and involves lower initial risks than horizontal integration, because the CDMO can build on existing knowledge. It also fulfills most regulatory requirements and enables cross-selling to existing customers.”

With 25% of APIs under development highly potent and trending up, offering HP services is a logical step for many CDMOs, although building HP facilities can be a costly investment.

The study also predicts the pharmaceutical-packaging outsourcing market will grow at 7.3%, due to new and more rigorous packaging and handling requirements.

New technologies – think “smart packaging – allow for improved functionality and help a CDMO stand out from the competition.

  • Vertical integration generally was seen as more straightforward
  • The customer gets to consolidate sourcing

Horizontal Integration

CDMOs that want to diversify their risk or position themselves as fully integrated service providers can start offering services for other dosage forms, expanding into a new dosage form tends to be an expensive and risky endeavor.

Barriers to entry include high upfront costs, lack of expertise and reputation, and finding qualified employees.

Interestingly, the sterile liquids are the fastest-growing dosage form in the Contract Manufacturing market.

Profit margins are highest in this segment, making it an attractive dosage form for new market entrants.

Solid dosage forms are becoming less attractive (compared to liquid forms), but “remain a profitable and growing segment,” as this remains the most common dosage form for newly approved drugs.

Acquisition or Organic Growth in Contract Manufacturing

“Considerations about whether organic growth or acquisition is the more suitable method of expansion should be factored in right from the beginning, as they are closely intertwined with the feasibility of different strategic options [facing CDMOs].”

Acquisitions allow CDMOs to expand relatively quickly.

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They add new technologies to portfolios and access to new customers, again opening opportunities for cross-selling. Some CDMOs are also looking to gain a more global footprint through a merger.

The caveat: Only ~50% of mergers across all industries succeed, “and the choice of acquisition or organic growth is strongly linked to the financial means of the CDMO.”

Contract Manufacturing Opportunities and Risk

Opportunities

  • Increasing pharmaceutical specialty chemicals research, developments, and manufacturing outsourcing (Capex, Opex avoidance, risk mitigation)
  • An increasing number of virtual, small biotech and small to mid pharma with inadequate development,scale-up infrastructure
  • Technological advancement
  • New operational techniques
  • Help big pharma transform fixed costs to variable
  • Faster research at a lower cost

  Risks

  • Zero tolerance culture for clients IP protection
  • Breach of data protection (Regulatory Compliance)
  • Ever evolving and fragmented regulatory environment
  • Competitive marketplace unless CDMO has some unique advantage
  • High dependence on skilled labor 
  • Supply chain disruptions
  • Customer concentration 
  • Innovator pausing or suspending development 
  • Termination of relationship

Conclusion on Contract Manufacturing Future Prospects

CDMOs that want to succeed need to consider their reaction to the current trend and evaluate their strategic options. Capabilities company size, ownership, risk preference, organizational culture, and available capital are just some of the factors that must be taken into account. 

CDMOs face excellent growth opportunities in a pharmaceutical market environment where using outsourcing service is becoming the new norm.

Critical Success Factors

  • Respect for innovator’s intellectual property 
  • Immaculate regulatory compliance track record
  • Superior technology investments
  • Agility and supply chain reliability
  • R&D, documentation, data integrity, and manufacturing excellence
  • Client-Centric mindset
  • Adequate human capital investments(Skill & Capacity)
  • Adequate research, development, and manufacturing infrastructure

Disclaimer: In this article, I have tried to summarize the learning from one of the webinars held by the Indian investing Conclave. 

Insights by: Sajal Kapoor  | Moderated by Jatin Khemani 

I have also cumulated all the learnings from various publicly available documents on CDMO. Hope the article is helpful.

Sources: IIC Webinar | PwC Research Report on Contract Manufacturing and Biologics Outsourced Pharma | Grandview Research Reports on Healthcare and Pharmaceutical industry

Read more content on Pharma Industry here.

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Cover Image: ET

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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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