Pharma’s CDMOs are sticking to strategic 'fitness' programmes to increase capacity and operational muscle, and compete for elusive market share
As the contract services industry passes into the last quarter of 2017, most of the important players in the contract development and manufacturing (CDMO) space are no doubt anticipating solid revenue opportunities and growth, but only if they have the capabilities and operational capacity to compete for increasingly complex small molecule formulations and sophisticated large molecule medicines headed for global markets.
Although strong, industry spending is potentially moderating. In the near-term, though, most current statistics point to solid progress. For example, EvaluatePharma analyses reveal current global pharmaceutical markets are expanding at a compound annual growth rate of 6.3%, with R&D spending maintaining a 2.8% CAGR during the projected period until 2022.1 According to EvaluatePharma, that R&D spend will also add 50% more revenue during the same period. QuintilesIMS projects overall global drug spending to reach $1.5 trillion by 2021, but notes it will now be growing at about half the CAGR forecasted 2–3 years ago, with analysts readjusting projected market growth value down by close to 35%, or approximately $127 billion.2
For contract manufacturing and development service companies, opportunities for growth and success are reflected in the rising overall demand for pharmaceuticals and the healthy growth rates predicted for global pharmaceutical contract manufacturers. Mordor Intelligence projects that the contract manufacturing sector will likely expand at a 6.4% CAGR, reaching $84 billion in 2021.3 Grand View Research’s estimates of growth rates are slightly more pessimistic, citing a CAGR of greater than 6.0% annually… but with an overall value of $45.2 billion by 2022.4,5
Looking at what’s driving pharma and CDMO business lately, contract manufacturing leaders continue to initiate organisational and operational strategies for more of the robust, active pharmaceutical ingredient (API) business, capturing more of its value by instituting efficient flexible manufacturing. So, what’s the potential for 2018 and beyond? For now, Clarivate Analytics’ Kate Kurht sets the current API market at $140 billion on the supply side, a data point she presented at API Supply and Demand at Sharp Sourcing, a one-day conference that the Drug, Chemical & Associated Technologies Association (DCAT) held in June.6
Mordor Intelligence predicts the market for APIs is growing at a 6.5% CAGR and will reach $225 billion in 2021. According to Kurht, the market is split roughly 60/40, with the former going to in-house commercial producers and the latter to merchant, contract manufacturing service suppliers. Some analyses, Kurht affirms, show the merchant pharma supplier share reaching closer to 50%; but, for the most part, that segmentation will likely endure for the foreseeable future.
Most in the industry are well aware of the challenges involved in cost-effectively providing safe, affordable and effective drugs. Drug manufacturers are intensely tasked with being first to market with effective, safe medicines. Consequently, many are investing in operations to elicit competitive efficiencies from all aspects of their operations.5 Big Pharma is certainly driving the contract manufacturing supply chain; but, the reasons for outsourcing to CDMOs have changed in response to competitive and socioeconomic market forces.
Respondents to the 2016 Nice Insight CDMO Outsourcing survey revealed the top five reasons driving outsourcing decisions:
A year later, the top reason that 2017 Nice Insight Contract Development and Manufacturing Survey participants cited was “access to specialised technologies.” The other top four reasons included improving quality, attaining operational/technical expertise, outsourcing as a strategic activity and, lastly, cost control.8
Equipment spending is up. CDMOs have continued to execute strategic decisions made 2–3 years ago, obtaining advanced, specialised and flexible capacity to differentiate themselves, grow and be competitive for the long-term — in spite of what appears to be a softening in demand for contract manufacturing services in the near-term. Between 2016 and 2017, the percentage of those with annual outsourcing expenditures of $50 million or more dropped from 71% to 56%, respectively, among respondents to the Nice Insight CDMO Outsourcing Surveys. In addition, more respondents expect their companies to decrease spending (52%) as opposed to increasing (39%) this budget. This lull can be attributed to a diminished number of FDA approvals in 2016, dropping nearly half in comparison with 2014 and 2015, which were both peak years for the industry. Nevertheless, the necessity to be as competitive and agile as possible has not abated M&A activity; public and private equity financing and capital investment continue.
Consolidation has seemingly peaked, with the May announcement of Thermo Fisher’s acquisition of Patheon for $7.2 billion. Patheon is set to become part of Thermo Fisher’s Laboratory Products and Services segment once the deal closes later this year.9 All of this follows Patheon’s M&A activity, which has pointed in the direction of acquiring increasingly competitive positions in API services, formulation and drug-product manufacturing capacity. Patheon acquired biologics from Gallus, softgel expertise from Banner, solubilisation technologies from Agere, small molecule API expertise from IRIX, and scale from the former Roche API manufacturing facility in Florence (SC, USA).10–14
Also of note is the Lonza acquisition of Capsugel for $5.5 billion, which closed in July of this year.15 According to the company, the acquisition aligns with Lonza’s strategy of accelerating growth and delivering value by complementing its existing offerings. On announcing the close, Lonza CEO, Richard Ridinger, said: “Lonza and Capsugel have a highly synergistic customer base and market approach, complementary business models and closely aligned corporate cultures with a strong commitment to ethics and compliance. All of these aspects will facilitate a seamless integration.”15
In a very thorough report, DCAT’s Patricia Van Arnum accounted for some 18 announced expansions by summer 2017, noting capacity investment by STA, a subsidiary of WuXi, a collaboration between Lonza and Sanofi, a new gene therapy facility for Brammer Bio and expanding filling and lyophilisation operations at Alcami.16 Those are just the most notable high-dollar deals in a year that includes AMRI and Parexel’s move to private financing and Catalent’s acquisition of Accucaps and its softgel capabilities.17–19 The list of mergers and acquisitions is almost as long as the list of facility expansions and capital spending, which has also trended upwards throughout the year.
CDMOs and companies seeking opportunities in drug manufacturing are preparing to support their client’s global strategies by investing in full-service facilities. Will current trends in consolidation be sustained? That remains to be seen, but general global pharmaceutical consumption and market growth are projected to continue — although it may grow steadier with time. In either case, CDMOs are positioned to provide the expertise, capacity and operations needed to support demand.