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Emerging regional markets show promise as CDMO globalisation trend grows

Gareth Macdonald — 7 Sep 2021

Opportunities for CDMO expansion are extending to Latin America and Africa, say experts

With China and India now established as fast growing contract manufacturing hubs, Latin America and Africa will be the regions presenting the next big opportunities for CDMOs as globalisation of the sector continues.

This is the consensus view of experts in the biopharmaceutical outsourcing sector who say the pace of growth is showing no signs of slowing down.

According to a recent study, the global contract development and manufacturing organization (CDMO) market will be worth $302 billion by 2026, up from around $177 billion in 2020.

And the key word is global. Although North America and the European Union are still the largest markets for CDMOs in value terms – worth around $45 billion and $40 billion, respectively, the fastest growth rates are seen elsewhere.

Kevin Bottomley, partner at Results Healthcare, notes a similar pattern.

“The US and Europe will remain the major focus for CDMOs, especially with the increased focus on life sciences and the current nationalisation of drug supply chains in these markets,” he says. “That said, other markets are growing. China will be a big growth market and we will see Chinese companies playing a bigger role on the global scale.

He adds that Eastern Europe, Latin America and especially Africa offer opportunities for development.

China

China is the world’s second largest pharmaceutical market. It is also a major exporter of drug intermediates and active pharmaceutical ingredients (APIs) thanks largely to the country’s well established fine chemicals industry.

The CDMO sector, in contrast, is less mature. Until 2015, drug approvals in China were contingent on the developer investing in manufacturing capacity, which damped down demand for contract manufacturing services.

However, in 2015 the Chinese Government introduced a scheme allowing the approval of products made by contractors.

The impact of this and other regulatory measures – notably the Drug Administration Law adopted in 2019 - has fuelled the growth of the CDMO market, according to Adam Bradbury, analyst at GlobalData.

“China is not only potentially the largest healthcare market in the world, but it is also making strides in growing its domestic and export pharmaceutical manufacturing, a major emphasis of China’s ‘Twelfth Five-Year Plan’ ending in 2015,” he says. “The 13th plan continues funding these improvements with an emphasis on biopharmaceuticals and foreign investment. China is a major API and intermediate manufacturer for the global drug industry, and it heavily influences other Asia-Pacific (APAC) manufacturing markets. Much of the investment has also been in upgrading the GMP level of facilities.”

He adds that recent regulatory changes inside China, including allowing drugs to be approved with contract manufacturing, will significantly affect the global pharma supply: “At present India and China manufacture a large proportion of the world’s generic drugs and can price the drugs competitively due to lower overhead costs.”

A similar take was presented in a study by Frost & Sullivan, which revealed that between 2016 and 2020, the Chinese CDMO market increased in value from RMB10.5 billion to RMB31.7 billion at a robust five-year CAGR of 32%.

The authors write that “driven by a number of positive factors such as expansion of pharmaceutical market and favourable government policies, the growth rate of the China-based CDMO market outpaced the global CDMO market in the past five years.

“This growth is expected to continue, and the market size is expected to reach RMB123.5 billion by 2025, representing a CAGR of 31.3% from 2020 to 2025, which is much higher than the estimated global CAGR of 14.0%.”

India

India is another major source of chemicals used in pharmaceutical production and products. It also has a rapidly expanding contracting sector, according to research by specialist recruiter, Mantell Associates.

According to author Harry Jones, “The Indian market is expected to witness the highest growth in the CDMO space due to the low cost of the R&D and manufacturing side, not to mention the highly skilled workforce.

“The biggest advantage in outsourcing to India is the cost benefit compared to the United States and Europe; it is estimated that the cost of outsourcing to India will be 37.5% lower than this competition.”

Jones also says Indian CDMOs outperform their counterparts by “having far higher EBITDA margins from 25-35% compared to 10-20% margins of their European and US competition.”

Latin America

Like China and India, Latin America has a fast-growing pharmaceutical market and, as a result, a rapidly expanding contract manufacturing sector.

Recent analysis indicates the region’s CDMO sector is worth more than $11 billion a year and growing. Brazil represents around 78% of the market, according to the authors, who say a developing biotechnology hub in the north-eastern region of the country is a key driver.

“The presence of numerous GMP-certified plants and low manufacturing costs are attracting investors from other regions to establish their presence in this country, consequently impacting the market share positively.”

Africa

While not as fast growing as markets in Asia and Latin America, Africa is starting to see an increase in contract manufacturing activity.

In July, for example, Sweden-based CDMO Recipharm signed a deal to join with the Moroccan Government to establish both capacity and capability for the manufacturing of vaccines and biotherapeutics in Morocco.

According to CEO Mark Funk, “we will be able to work to offer Africa a concrete opportunity to gradually gain health independence from western countries.”

However, while there are opportunities in Africa, there are likely to be challenges, says Harry Jones from Mantell Associates: “While I can see the African contracting sector emerging on the global stage in the next few years there will have to be a targeted approach until the size of the skilled workforce is sufficient.”

Consolidation

The growth of regional CDMOs has not yet been reflected in industry M&A activity, according to GlobalData’s Adam Bradbury, who says investors remain focused on larger, established markets.

“US contract manufacturing organizations and their facilities continue to remain attractive targets for foreign and domestic acquirers because of their specialized capabilities,” he says. “The US had the largest number of company or facility acquisitions during 2018–2020, far more than India and China, which have a similar quantity of manufacturers and production sites.

“A significant proportion of US deals targeted high value biologics and specialized capabilities such as companies/facilities with containment or solubility enhancement.”

The relative lack of M&A activity in emerging markets has also been noted by Kevin Bottomley, who suggests the complexity of making deals outside the US and Europe is likely a factor.

“Contract manufacturing is a great business to be in with lots of potential for growth over the next five to ten years,” he says, pointing out that while the emergence of regional CDMOs create an opportunity for greater M&A activity, “if it were easy, it would have been done already.”

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