Industry Consolidation and the Rise of One-Stop-Shop CDMOs in Biotech Manufacturing

According to a report by Grand View Research, the global market for biopharmaceutical contract manufacturing was valued at approximately USD 12.14 billion in 2017 and is projected to reach USD 21.7 billion by 2025, representing a compound annual growth rate (CAGR) of 7.5% during the forecast period.

The success of the biopharmaceutical market is inseparable from numerous Contract Manufacturing Organizations (CMOs), which undertake commissioned production services for pharmaceutical companies, providing process development, formulation development, clinical trial supply, active pharmaceutical ingredient (API) manufacturing, intermediate production, and packaging.

The existence of CMOs significantly reduces the costs for pharmaceutical companies to bring new drug products to market. Some CMOs provide client companies with expensive R&D technologies, helping accelerate the market launch of their products; such outsourcing enterprises are also known as Contract Development and Manufacturing Organizations (CDMOs).

Artery New Medicine (WeChat ID: biobeat1) has compiled and translated insights from several industry experts on the contract manufacturing sector, based on interviews conducted by GEN, a prominent U.S. biotechnology magazine. The discussions cover topics such as corporate acquisitions, one-stop services, and low-risk strategies.

The interviewees for this session include the following six individuals:

Mark Quick (Vice President of Corporate Development at Recipharm)

Paul Jorjorian (Vice President, Biologics, Thermo Fisher Scientific)

Eric Langer (Partner at Bioplan Associates)

Steve King (CEO of Artius Bioconsulting)

Tom Isett (Director of iBio)

Robert Erwin (President of iBio).

GEN: A current trend in the biopharmaceutical contract manufacturing industry is consolidation, exemplified by Thermo Fisher Scientific’s recent acquisition of Patheon and Catalent’s acquisition of Cook Pharmica. How will this wave of acquisitions impact contract manufacturing in the biopharmaceutical sector? Opinions vary across companies. From your company’s perspective, is this a positive or negative trend, and why?

Mark Quick: At Recipharm, we view mergers and acquisitions as a positive trend. Notably, although the industry is undergoing consolidation, it remains highly fragmented, with the top five companies accounting for less than 15% of the market share. This creates a complex environment for drug developers when deciding whether to outsource.

Through acquisitions, CDMOs can increase outsourced capacity and expand their geographic business footprint. Recipharm’s M&A strategy focuses on strengthening end-to-end drug development and manufacturing services, thereby enabling us to serve as a single strategic partner for our clients. By providing the services customers need, we streamline the supply chain, offer more cost-effective solutions, and accelerate time-to-market for pharmaceutical products. These advantages are highly beneficial to pharmaceutical companies.

Paul Jorjorian: Although there is currently much discussion about industry consolidation, according to the 2017 PharmSource report, between 2013 and 2016, less than 8% of company revenue in each core service area was actually consolidated through mergers and acquisitions.

For us, integration facilitates growth and enables us to offer a broader talent pool to small biotechnology companies. Based on client feedback, we can reduce the number of contract partners they need to engage, as collaborating with multiple CDMOs/CROs is resource-intensive.

Overall, providing end-to-end solutions is beneficial and adds value for customers. We are able to offer streamlined end-to-end supply chains for biopharmaceutical companies of all sizes, including services such as small and large molecule development, active pharmaceutical ingredient (API) procurement, viral vector manufacturing, formulation design, clinical supply chain strategy development, clinical trial material development and distribution, and execution of clinical and commercial product launches, comprehensively covering all stages and scales of the industry.

Eric Langer: Yes, the biopharmaceutical CMO sector has been undergoing consolidation and mergers for decades. One of the historical challenges to CMO growth has been the need to secure skilled technical teams capable of handling emerging technologies. Thus, the issue becomes that while successful CMOs often acquire the technology, they typically lack teams with the requisite expertise. The solution lies in acquisitions (to gain access to specialized teams).

On the other hand, in our annual reports over the past 15 years, nearly all CMO clients have stated that relationships and customer service are critical to selecting a CMO. As CMOs grow larger, they may overlook the importance of managing these relationships. The faster a company expands, the greater the likelihood of such mishandling of client relationships. Therefore, beyond industry consolidation, a customer-centric orientation is essential, yet this remains lacking in some larger CMOs.

Steve King: Over the past few years, the CDMO industry has undergone significant consolidation and expansion, with the aim of creating “one-stop-shop” services for companies developing biologics. From the customer’s perspective, this means fewer choices among CDMO providers for individual development activities. While the concept of a one-stop shop is appealing, the question remains whether large CDMOs possess the capability and value proposition to support emerging biotechnology companies in diversifying their service offerings.

Tom Isett and Robert Erwin: When therapy developers opt for one-stop-shop services, they can save significant time and reduce vendor management costs if they are dissatisfied with the services or lead times of large CDMOs, as there remain ample choices in the CDMO market. Therefore, we view consolidation positively. For new companies in the pharmaceutical sector that require CDMO involvement, we proactively prepare a broader range of services. Our company has recently expanded our core cGMP drug substance manufacturing to include fill/finish capabilities. This enables us to collaborate with clients while shortening their development timelines and saving them money by avoiding redundant activities.

GEN: Like many industries, CMOs start small and then expand through acquisitions (potentially achieving one-stop service). However, as companies begin to engage in more and more services, this growth may have negative impacts, leaving these services inadequately prepared. From your company's perspective, could you discuss the pros and cons of this viewpoint?

Mark Quick: At the time of acquisition, the CDMO not only gained new technologies and capabilities but also expanded its team of experts. For instance, Recipharm recently acquired Sanofi’s Holmes Chapel inhalation business in the UK, a facility specializing in the manufacture of novel respiratory products. Through this acquisition, our inhalation drug product development team at Research Triangle Park will combine its expertise with that of the 450-member team to launch Recipharm Inhalation Solutions. This is an end-to-end service for the development and manufacturing of inhalation products. It means that clients can take their projects directly from development to market through a single CDMO. We are not offering this service “ill-prepared”; rather, we are enhancing our portfolio in this field by leveraging combined expertise.

Paul Jorjorian: The acquisition we completed is part of the company’s growth strategy to meet customers’ increasing demands. Acquisitions provide a means for CDMOs to establish collaborations with relevant service providers. By implementing practices and then establishing corresponding standards, I believe this approach can save customers time while enabling them to benefit from our collaborative problem-solving efforts.

Eric Langer: One-stop service is a goal many strive to achieve, but the reality is that each CMO possesses certain key areas of expertise, yet not all of them. Therefore, if clients insist on using only one vendor, they will be unable to access comprehensive, top-tier expertise across the board. Essentially, the cost-effectiveness of one-stop services is compromised because clients cannot select the best-in-class provider for each specific activity.

Steve King: The crux of the issue lies in whether any CDMO can deliver truly top-tier services across all domains. The CDMO industry is characterized by substantial competition, necessitating continuous expansion into an increasing number of therapeutic and technical areas. Since much of the growth has been driven by mergers and acquisitions (M&A), the key question is whether there are enough small providers with high-quality service capabilities to sustain this growth. However, the reality is that some small CDMOs possess superior platforms and capabilities, and the large CDMOs that acquire them gain a competitive advantage in those specific areas. This means that other expanding large CDMOs are left to acquire only the remaining small CDMOs with lower levels of specialized capabilities.

Tom Isett and Robert Erwin: We have been relatively conservative in expanding our capabilities to ensure that we can deliver high-quality services. Particularly as a small enterprise in this field, we recognize that the premium customer experience associated with our products is critical to our future success. When growth is achieved through acquisitions, it inevitably requires integrating multiple organizations, which makes maintaining high service levels in any given area increasingly challenging. However, such integration is essential if larger CDMOs are to effectively provide the high-quality services necessary for small biopharmaceutical developers to advance their R&D-related technologies prior to acquisition.

GEN: After years of stagnation, gene therapy has now become a hot spot in clinical medicine. However, blockbuster drugs of massive scale have not emerged in the early stages. Traditionally, CMOs have adopted conservative business models, potentially missing significant opportunities to expand their portfolios. Are CMOs willing to adopt less risk-averse strategies?

Eric Langer: There are over 800 cell and gene therapy candidates in clinical trials, most of which require personnel with specialized expertise for their handling. Contract Manufacturing Organizations (CMOs) may be the only viable route for manufacturing specific cell or gene therapies. I believe many mainstream CMOs have recognized this. We are witnessing acquisitions and investments in the cell and gene therapy sectors, indicating the onset of growth in this field.

Steve King: The business models in this industry are becoming increasingly aggressive, particularly within the biologics sector. Industry growth has indeed been accompanied by successes in drug development by certain companies (such as Genentech). These CDMOs not only deliver successful product development but also help advance the science and technology underpinning biomanufacturing. In terms of clinical success and technological advancement, cell and gene therapies remain in a relatively early stage; however, from a CDMO business perspective, this may be the hottest segment. Some smaller CDMOs with expertise in emerging fields are taking an assertive approach, which appears to reflect a more aggressive mindset across the industry.

Tom Isett and Robert Erwin: The emerging technology market offers numerous opportunities, making exploration in these areas increasingly attractive. With the surge in interest in cell and gene therapies, new supporting opportunities have emerged in this field, such as viral vector filling and other ancillary services. Beyond these emerging sectors, there are other areas of growth interest, such as regenerative medicine, particularly the biofabrication of whole organs like kidneys, livers, and lungs. If the CDMO industry keeps pace to fully realize the potential of these fields, we would not encounter the challenges currently seen in cell and gene therapy.

GEN: The U.S. economy has experienced a prolonged period of positive growth (11 years), and younger workers in the CMO industry may have never witnessed an economic recession or downturn. In light of this, what advice would you offer companies on navigating such challenging times?

Paul Jorjorian: No single business can justify an economic recession. As a CDMO, we design for total demand and provide cost-effective solutions to our clients; therefore, we are less inclined to focus on the success or failure of any single drug.

Eric Langer: Over the past 25 years, the biopharmaceutical industry has weathered economic recessions while maintaining steady growth of 12% to 14%, even during challenging periods. The nature of these downturns suggests that the healthcare sector will continue to demonstrate robust growth despite global economic fluctuations. This is one of the reasons why biopharmaceutical CDMOs have commanded relatively high valuations over the past decade. The industry itself appears to be in an interesting bubble; young professionals who develop in-demand skills, such as process development, may well avoid experiencing any true hardship in their careers.

Steve King: This is a hot topic in the investment community, as an economic recession could impact biotechnology funding and drug pricing, which in turn may affect the broader CDMO industry. The current fundraising environment has been robust, meaning that capital will continue to be deployed in the short term to advance drug candidates. In the event of a recession, there will still be a need to advance promising new drugs; however, in a capital-constrained environment, companies may place greater emphasis on value, which favors smaller enterprises with simpler operational and organizational structures.

Tom Isett and Robert Erwin: Flexible manufacturing operations allow for scaling up or down at any time, enabling appropriate adjustments to production batch sizes and avoiding the waste associated with overproduction. Furthermore, younger workers will be more engaged with innovative CDMOs that are capable of adapting to constantly changing demands.

GEN: Another concern regarding the acquisition business model is that large CMOs may control a significant portion of the supply chain, which could enable them to compete directly with other CMOs with whom their clients are negotiating. This poses a substantial risk. How would you recommend addressing it?

Steve King: This is a very interesting developmental phenomenon to me. Traditionally, there was little overlap between companies providing reagents or equipment and those offering services. However, with Thermo Fisher’s acquisition of Patheon and its subsequent expansion into the cell and gene therapy sector, this scenario has become increasingly common. The trend is even more pronounced in contract development and manufacturing (CDMO) involving single-use systems, which increase raw material costs associated with operations and require a continuous supply of disposable materials—in some cases, sourced from competitors. In this environment, CDMO supply contracts and rigorous supply planning will be critical.

Compiled and edited by Wang Chan

Original article link: https://www.genengnews.com/topics/bioprocessing/the-current-state-of-contract-manufacturing/