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

CDMO's to be considered as the next stepping stone for Pharma Companies...

Twitter Handle: @shuchi_nahar

In recent years, pharmaceutical outsourcing has grown in popularity amongst drug developers across the industry. Companies are increasingly outsourcing to contract development and manufacturing organizations (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's 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 aging 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.

The demand for healthcare and innovative solutions is growing globally with chronic diseases on the rise. The global pharmaceuticals market is expected to grow from $1,228.45 billion in 2020 to $1,250.24 billion in 2021 at 1.8% CAGR.

The global pharmaceuticals market is projected to rise at a considerable pace driven by the increasing investments in product R&D. The efforts put in to develop efficient products will bode well for the growth of the overall market in the coming years.

Increase in Investment in R&D

While R&D spending is increasing, innovator companies continue to be challenged by the declining rate of investments in R&D. In the pharmaceutical industry, a considerable proportion of drug candidates fail during the regulatory process. This increases the average cost to develop and secure marketing approval for a new drug. The declining returns are encouraging many drug developers to outsource large parts of their R&D activities, along with leveraging new technologies, to make drug discovery and development cost-efficient and faster.

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 the 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.

Although western markets are often favorable 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.

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 to varying regulatory requirements. Outsourcing to a single CDMO enables drug developers to reduce complexity and in some cases less 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.

Opportunities for CDMOs

The global pharmaceutical CDMO market was valued at $160.12 billion in 2020 as compared to $148.5 billion in 2019. It is expected to reach $236.61 billion by 2026, registering 6.5% CAGR during 2020-26.

·     The CDMO service sector has gained a specifically unique edge to address some of the challenges that drug developers are facing amid the COVID-19 pandemic. This pandemic has impacted multiple aspects of the pharma and biopharma industry, from drug development, clinical trials, supplies, manufacturing to supply chain logistics.

·    Opportunities for CDMOs Larger companies view CDMOs as vital partners and build strategic integrated long-term partnerships.

·    CDMOs can receive co-investments from firms that finance specialized development and manufacturing facilities at strategic CDMOs. CDMOs using advanced technology and specialized expertise create a niche given the increasing number of complex and high potency compounds.

·    They can capture projects at an early stage and profit from upselling opportunities.

·    CDMOs engaging in continuous manufacturing benefit in the form of increased operational efficiency reduced costs and minimal wastages. Increased number of small and medium-sized pharmaceutical companies with no manufacturing capacity responsible for an increasing share of new drug approvals

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. Several effective components 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 has become difficult to impossible to change owing to regulatory risk.

The right first time (RFT)  - Doing things with an 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.

Contribution by small pharma/biotech to new drug development globally

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 the bio/pharmaceutical industry about products have increased the pressure on the contract bio manufacturers. 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, the integration of single-use systems in production facilities helps the CMO's 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 are observed to be difficult owing to the regulatory landscape and complexity of service. Clients and CMOs are facing issues about 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 product's the cost/unit of product.

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 areas. This helps the sponsor to focus on their core competencies.

In addition, CDMOs take care of an end-to-end supply chain that reduces a sponsor’s effort associated with the 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.

Link to Master Class on Global CDMO's: https://myweekendspot.blogspot.com/2020/07/a-masterclass-on-global-custom.html

Twitter Handle: @shuchi_nahar

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