William Downey05.01.09
Biopharma CMO Market Report
Optimism remains high among bio-contract manufacturers
By William Downey
In recent years, the biopharmaceutical contract manufacturing market has experienced double-digit annual growth rates. These growth rates result from the increase in the demand for biotechnology drugs, increased outsourcing by the biotechnology and pharmaceutical companies, and an increase in the number of biotechnology companies and biotechnology drugs in the product pipeline. Furthermore these growth rates have compared favorably with the growth of the U.S. prescription drug market, which grew at 1.3% in 2008, down from the 3.8% growth rate in 2007, according to an IMS Heath press release, March 19, 2009. Despite lower growth in the prescription drug market, the worldwide economic slowdown, and a drop in the financial markets, biopharma-CMOs remain cautiously optimistic about their market.
In the latest report by HighTech Business Decisions, Biopharmaceutical Contract Manufacturing 2009: Expanding Markets, New Capacities and Improved Performance, our analysts interviewed 48 pharmaceutical and biotechnology manufacturing directors and executives from 29 biopharmaceutical contract manufacturers. The information for this article draws from interviews with 28 biopharmaceutical contract manufacturers covering their companies’ plans for future production capacity and services to meet the needs of their clients. This article will cover the impact of the current economic environment has on the demand for bio-CMO services.
Description of Respondents
For our study, HighTech Business Decisions analysts interviewed 28 executives from contract manufacturing organizations (CMOs) during February and March of this year. These CMOs have locations in North America, Europe, and Asia. The distribution of respondents locations is as follows: Europe – 46%, North America – 43%, Asia – 11%. Some respondent organizations have multiple sites across national boundaries. Those organizations are identified by either their principal place of business or their corporate headquarters location.
Impact of Current Economic Environment
The 28 executives at bio-CMOs discussed the impact that the current slow-down in economic activity and decline in financial markets has on their business and their organization. A summary of responses is shown in Figure 1. The most prevalent answer given by the respondents is that CMOs are being more cautious in their business operations — both in their own spending and in their clients’ financial situations. Here are a few comments that show CMOs prudent actions:
Figure 1: Impact of Current Economic Environment Source: HighTech Business Decisions |
“We are analyzing the financial situation of our clients and it is very important for us in this market to make sure our clients have the funds.” — Contract Manufacturer
“We’re tightening our belt. We’re more cognizant of large capital and staff investments. Every group’s wish list is more heavily scrutinized. We’re taking a less speculative, more objective approach. If bringing in a client calls for capital expenditure, we’ll spend it, but we won’t spend money speculating that if we buy this equipment, we’ll draw clients.” — Contract Manufacturer
“We have had customers put projects on hold or postpone IPO for at least a year. Some companies have laid-off people. We have more discussion about prices and some payments are overdue. Our customers are using us as a bank: loans without interest.” — Contract Manufacturer
“We’re keeping a wary eye on how funding is going and how companies are doing, particularly clinical stage and startup companies, which we focus on.” — Contract Manufacturer
“We’re tightening our belt. We’re more cognizant of large capital and staff investments. Every group’s wish list is more heavily scrutinized. We’re taking a less speculative, more objective approach. If bringing in a client calls for capital expenditure, we’ll spend it, but we won’t spend money speculating that if we buy this equipment, we’ll draw clients.” — Contract Manufacturer
“We have had customers put projects on hold or postpone IPO for at least a year. Some companies have laid-off people. We have more discussion about prices and some payments are overdue. Our customers are using us as a bank: loans without interest.” — Contract Manufacturer
“We’re keeping a wary eye on how funding is going and how companies are doing, particularly clinical stage and startup companies, which we focus on.” — Contract Manufacturer
While most respondents noted that their management is taking a more cautious approach to spending and business in general, 18% of the respondents stated that the current economic environment had no impact on their business. Here are a few selected comments from the CMO executives about the impact to their business:
“We don’t have any problems. Some companies are having trouble raising money, but it has had no impact on our business yet. Sometimes clients are taking a little more time, but they are still coming to us.” — Contract Manufacturer
“The pharmaceutical business is currently not too influenced but everyone is worried about financials and companies, especially small ones. I still see a pretty good year, especially for aseptic fill and finish.” — Contract Manufacturer
“Being in pharmaceuticals, the worldwide financial developments haven’t impacted us. However, biotech companies that are venture-backed are feeling the squeeze.” — Contract Manufacturer
“We’ve considered that in our marketing plan — for instance, whether we will have to work harder to find new sales leads and clients and what that will mean for how we promote ourselves. There haven’t yet been changes elsewhere in the organization.” — Contract Manufacturer
“The pharmaceutical business is currently not too influenced but everyone is worried about financials and companies, especially small ones. I still see a pretty good year, especially for aseptic fill and finish.” — Contract Manufacturer
“Being in pharmaceuticals, the worldwide financial developments haven’t impacted us. However, biotech companies that are venture-backed are feeling the squeeze.” — Contract Manufacturer
“We’ve considered that in our marketing plan — for instance, whether we will have to work harder to find new sales leads and clients and what that will mean for how we promote ourselves. There haven’t yet been changes elsewhere in the organization.” — Contract Manufacturer
Many of the respondents also noted that they expect the economic downturn to hasten the plans of pharmaceutical and biotechnology companies to outsource production to reduce capital spending and reduce costs. Other respondents note the negative impact that lack of capital market funding will have on smaller biotechnology companies and the resultant fewer projects. Finally, a few respondents expect the current economic environment to speed up the industry trend towards consolidation, while other respondents expect an increase in competitive rivalry among CMOs. Highlighting these points are the following comments by some of the respondents.
“We have been financially stable but smaller biotechs and CMOs will have a tough year and undergo mergers and acquisitions. The biosimilar market will increase and larger companies will continue to grow but will outsource rather than do things in-house.” — Contract Manufacturer
“The worldwide financial developments have been beneficial for us. We have more business than we can handle. We need to hire more people.” — Contract Manufacturer
“For us, in our local organization, it creates opportunities. There’s going to be a reduction in expansion of infrastructure at mid-sized or larger pharma and a push to more outsourcing.” — Contract Manufacturer
“The worldwide financial developments have worked in our favor. Companies are being pushed internally, causing them to outsource more. Some R&D activity may be lower. On the whole, the pros outweigh the cons. There is more outsourcing.” — Contract Manufacturer
“We are a privately held company with strong revenues. We have not been impacted. Large pharma has increasingly turned to CMOs for production rather than invest in building facilities. Biotech companies have been negatively impacted by delaying programs, selling or licensing molecules to big pharma.” — Contract Manufacturer
“The worldwide financial situation has been tough on the biotech and pharmaceutical companies. There has been consolidation of smaller and medium-sized biotech companies and pharma pipelines are drying up. Small biotechs in early stages of development are hurting. There has been a slight increase in outsourcing because pharma companies are not building their own facilities and people are focusing on their products in the pipeline.” — Contract Manufacturer
“The worldwide financial developments have been beneficial for us. We have more business than we can handle. We need to hire more people.” — Contract Manufacturer
“For us, in our local organization, it creates opportunities. There’s going to be a reduction in expansion of infrastructure at mid-sized or larger pharma and a push to more outsourcing.” — Contract Manufacturer
“The worldwide financial developments have worked in our favor. Companies are being pushed internally, causing them to outsource more. Some R&D activity may be lower. On the whole, the pros outweigh the cons. There is more outsourcing.” — Contract Manufacturer
“We are a privately held company with strong revenues. We have not been impacted. Large pharma has increasingly turned to CMOs for production rather than invest in building facilities. Biotech companies have been negatively impacted by delaying programs, selling or licensing molecules to big pharma.” — Contract Manufacturer
“The worldwide financial situation has been tough on the biotech and pharmaceutical companies. There has been consolidation of smaller and medium-sized biotech companies and pharma pipelines are drying up. Small biotechs in early stages of development are hurting. There has been a slight increase in outsourcing because pharma companies are not building their own facilities and people are focusing on their products in the pipeline.” — Contract Manufacturer
CMO Responses by Business Model
To further understand the impact the current economic business cycle is having on the biopharmaceutical contract manufacturing market, CMO responses are segmented by their business model and by their clients’ product phase. A summary of the similarities and differences between the two CMO segments is shown in Table 1. For differences between CMO segments, the “+” sign signifies greater than average mentions, while the “-” sign signifies lower than average mentions.
In the first segment, CMOs are classified as either a Dedicated CMO or as a pharmaceutical and biotechnology company that contracts out its services (“Subsidiary”). Dedicated CMOs are those companies whose primary role is to offer contract manufacturing services for the production of biopharmaceutical products using fermentation or mammalian cell culture. These companies have production-scale facilities and offer related services such as process development, purification, and analytical testing. The other type of CMO consists of companies whose primary focus is the discovery and development of biopharmaceutical products. These companies either have dedicated business units that offer contract manufacturing services or that have excess manufacturing capacity to sell. Most of these companies offer full service capabilities and serve internal as well as external customers. In our study, 68% of the respondents are Dedicated CMOs, while 32% of the respondents are Subsidiary CMOs.
Comparing the responses between Dedicated CMOs and Subsidiary CMOs shows that both CMO groups have similar outlooks for a) increases in outsourcing, b) impact on current business operations and c) a more competitive market environment. Two areas with the most divergent views between the CMO groups are a) more conservative business approach and b) the impact that the current situation in the financial markets has on smaller biotechnology companies. Almost one-third of the respondents from Dedicated CMOs mentioned that they are taking a more cautious business approach, while only one respondent from the Subsidiary CMO group mentioned taking a more cautious approach. On the other hand, respondents from Dedicated CMOs mentioned less often the current economic environment as affecting industry consolidation.
CMO Responses by Project Phase
Besides classifying CMO responses by business model, they are also classified by clinical phase of biologic products produced for their clients. In this segment, CMOs are classified as either producing through commercial production (“Commercial”) or producing through a given phase of clinical production (“Clinical”). For those CMOs having commercial production, they include those CMOs who currently produce commercial biologics approved by either the FDA or EMEA. In our study, slightly less than half — 43% or 12 of the 28 CMOs — produced FDA- or EMEA-approved commercial products, while 16 of the respondent CMOs produced products for clinical trials or commercial products for developing markets. A summary of the similarities and differences between the CMO segments is shown in the last two columns in Table 1.
Figure 1: Impact of Current Economic Environment
CMO Business Model |
CMO Projects | |||
Impact of Economic Environment | Dedicated | Subsidiary | Clinical | Commercial |
More cautious business approach |
+ | - | similar | |
Further increase in outsourcing |
similar | - | + | |
Impact on small biotech: fewer projects | + | - | - | + |
No impact on current business |
similar | - | + | |
Industry consolidation | - | + | similar | |
More competitive market environment |
similar | similar |
Source: HighTech Business Decisions
Comparing the responses between Clinical and Commercial CMOs shows that both CMO groups have similar outlooks for a) a more cautious business approach, b) increase in industry consolidation, and c) more competitive market environment. Further analysis between the two CMO groups shows that respondents from Commercial CMOs were more likely to mention a) further increases in outsourcing, and b) the impact the current economic environment has on the smaller biotechnology companies. Also, as might be expected, those CMOs that have commercial projects are more likely to state the current economic environment is not affecting their company’s current level of business.
The biopharmaceutical contract manufacturing market has continued to grow at double-digit rates during the past few years. While impact of the current economic environment is affecting certain segments of the CMO market, most CMOs remain cautiously optimistic about their prospects for the coming year. Other macro trends, such as production outsourcing and the growth in biopharmaceuticals, have a greater impact on the biopharmaceutical contract manufacturing market than the current business cycle. Areas of concern include fewer new projects in the pipeline and increased competition among contract manufacturers for those new projects.