Looking beyond the one-stop-shop hype: what's driving the CDMO market

Pipeline diversification, emerging therapies and shifting customer demands are the real dynamics reshaping the contract manufacturing market, according to experts.

Almost every article written about contracting reports that demand for outsourced manufacturing services is growing and states that the CDMO sector is consolidating. While these observations are accurate – pharmaceutical companies are farming out more work and M&A activity is increasing [1] – neither is new.

The volume and range of pharmaceutical manufacturing work outsourced has been growing for four decades [2]. Likewise, the CDMO sector has always been fragmented – which makes it ripe for consolidation [3]. The vogue for the “one-stop-shop” – a contractor that offers a wide range of services – is one trend (or cliché) often trumpeted in articles about the CDMO space, with recent focus very much on companies attempting to extend their offering to provide services earlier in the product lifecycle. The idea is that sponsors prefer full-service partners because they accelerate projects by streamlining transfer steps and minimize oversight requirements.

To really understand what is shaping the CDMO sector one needs to look beyond the clichés and focus on the medicines; these are the lifeblood of the pharmaceutical industry and the dynamics impacting their development and commercialization are what drive change in the contracting space.

Speed-to-market

Drug companies have always wanted to get product to market quickly. The difference in recent years is that regulators have started to recognize this through accelerated approval pathways and the impact on CDMOs has been significant, says Jean-Christophe Hyvert, Chief Commercial Officer, Lonza Pharma, Biotech & Nutrition.

“CDMOs need to have a much more flexible offer and have the capacity and expertise to scale up quickly and adjust rapidly to demand,” he says. “This drives the need for more in-house R&D and investment in technology for process intensification and more flexible assets.”

Heiko Schmidt, Senior Manager PwC Management Consulting, Head of the Pharma & Life Sciences business, Customer Practice, has also noted the impact demand for rapid manufacturing scale up has had on CDMOs. “Continuous manufacturing has already been adopted by many companies to improve efficiency of manufacturing processes, minimize waste and reduce costs. “Thus, in a mid to long term view, especially large CMDOs will put Production 4.0 on their agendas if they have not already done so.”

CDMO Strategies

While it is true some CDMOs have adopted the one-stop-shop strategy, it does not dominate the sector, according to Joern Leewe from EY-Parthenon: “One-stop-shop strategies can only be offered by the very big players. Otherwise, more and more companies try to find their niche and specialization in order to get higher margins.”And there are other challenges associated with the approach, according to Adam Bradbury, Associate Analyst, GlobalData PharmSource. “One-stop shop is a strategy that will have variable success in attracting clients, particularly if cost reduction of drug development and production is a primary motivator for CMO selection,” he says. “Smaller CMOs focusing on one type of manufacturing service will often be able to provide the service cheaper than larger CMOs.”

Mergers and Acquisitions

The one-stop-shop concept is often cited as a consolidation driver – larger contractors buy smaller specialists to expand the range of services they offer. Again, in Bradbury’s view, the actual M&D dynamics are more nuanced. “An industry talking point in recent years is CMOs acquiring or developing capabilities to become a one-stop shop, that is to say full-service providers of both API and dose, so clients do not require other contract service providers for the manufacturing process,” he says. “GlobalData PharmSource has found that in many cases one-stop-shop driven acquisitions are a myth, with smaller CMOs often acquiring similar capabilities to what they already possess,” he says.

Joern Leewe, Partner strategy Life Sciences at EY-Parthenon, has also noted the trend. He says many CDMOs that have conducted acquisitions are now trying to bring the margins up: “In some cases there are no real synergies between the different acquired companies and consolidation is challenging.”

Adding early development CRO capabilities

More recently some larger CDMOs have taken the one-stop-shop concept further by adding capabilities earlier in the pharmaceutical development cycle. “Over the last few years we have seen CDMOs extend into the ‘distal’ parts of the value chain, adding capabilities for drug product formulation, dosage forms and packaging,” says Lonza’s Hyvert. “As timelines speed up and more smaller companies look to outsource, it could benefit customers to also access the ‘proximal’ end, giving them everything they need to get to IND as quickly as possible. “We have seen increasing interest in our pre-clinical development services and there are clear advantages for sponsor and CDMO to work together from an early stage.”

But for smaller CDMOs, expansion into the CRO space may be more challenging, according to Schmidt at PwC: “We know there have recently been a few acquisitions of CROs by CDMOs; however, I do think this is not a major trend. The CRO industry requires entirely different core competencies than the CDMO business and vice versa. “Furthermore, chances of a CRO project becoming a CDMO project are low. Also, there are different margins that can be achieved in these two businesses,” he adds.

High potency

For Bradbury at GlobalData Pharmsource, it is the increase in highly potent drugs entering development pipelines that is having the biggest impact on CDMOs. “New technologies and the ability to provide specialist offerings such as containment manufacturing and solubility enhancement are definitely major factors currently for CMOs as APIs become increasingly complex”. He adds, “in general, the number of high potency drug approvals has increased over the last decade, which may be a positive sign for CMOs as small and mid-cap companies lack the expertise for regulatory compliance and high containment facilities and seek to outsource NMEs requiring special handling.“CMOs’ ability to handle demand flexibly and scale up or down as appropriate will be vital in the face of this difficult-to-predict volume demand as special designation products such as orphan drugs become increasingly approved,” he adds.

Complex therapies

Industry interest in advanced therapies is another change driver according to Leewe: “Cell and gene therapies are on many sponsors’ minds and many services companies are evaluating how to participate in these new technologies.” How CDMOs get involved depends on the company, says Hyvert at Lonza. “New modalities such as cell and gene therapies are driving organic and inorganic growth, depending on the CDMO.” He adds that while some companies such as Patheon Thermo Fisher and Catalent have chosen to make large acquisitions, Lonza’s strategy has been to build on existing expertise in this space with smaller acquisitions such as Pharmacell in the Netherlands to expand geographic reach and larger CAPEX projects for expansion such as the construction of its facility in Houston, US.

The emergence of products targeting the microbiome is also impacting CDMOs, according to Hyvert, who says the new market prompted Lonza’s joint venture partnership with Chr. Hansen [4]. “The new company, BacThera, will develop GMP manufacturing of drug substance and drug product for the growing pipeline of microbiome-targeting therapies,” he says.

Like the expanding cell and gene therapy sectors, growth of the bio-pharmaceutical industry is another change driver in the contract development space. According to Hyvert, a growing number of smaller pharma companies are bringing drugs to later stages in clinical trials, creating an opportunity: “As many of these companies focus their resources on discovery and securing funding, they are looking for outsourcing partners who can deliver an end-to-end offer to simplify their supply chain and who also have expertise in areas such as regulatory, formulation development and handling more complex products.”

Consolidation in the still extremely fragmented CDMO sector is expected to gain momentum as players look to adapt to the shifting demands of their pharma client base while weighing up value extraction and cost reduction opportunities in the process. However, it appears that the age of the ‘mega-CDMO’ is still a long way away. The sheer complexity of the drug product lifecycle means that the one-stop-shop approach is largely beyond the means of all but the very largest players, despite calls for a full-service offering, so for now the focus remains very much on streamlining and enhancing their service offering to provide greater flexibility and ability to scale up quickly.

Interested in learning more? Join us at CPHI North America in Philadelphia from 9-11 September, where we’ll host a panel discussion on this topic, featuring representatives from Pfizer CentreOne, Patheon Thermo Fisher,  PharmSource and Lonza. Visit our website to see the full agenda and to register your place: https://www.cphi.com/northamerica/en/home.html

References

[1] https://www.clearwaterinternational.com/assets/pdfs/L7177-Clearwater-International-Pharma-Report-2019-FINAL.pdf

[2] https://resultshealthcare.com/wp-content/uploads/2019/11/Outsourced-Pharmaceutical-Manufacturing-2020-White-Paper_Results-Healthcare.pdf

[3]https://www.researchgate.net/publication/335612001_Is_Industry_Consolidation_Mergers_Acquisitions_Good_or_Bad_for_Biopharmaceutical_CDMO_Users

[4] https://www.lonza.com/about-lonza/media-center/news/Tensid/2019-08-29-08-30-English.aspx