Contract manufacturing organizations (CMOs) should brace themselves for more competition this year as the tide of spending on outsourced manufacturing appears to be slowing down. That’s according to results from BioPlan Associates’ 13th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production. In this year’s study, we examine, among many aspects of the industry, budget trends within biomanufacturing.

Biomanufacturers’ outsourcing budgets have enjoyed a rebound in recent years, swinging from a contraction in funding in the recessionary years, to hikes averaging close to 4% over the past 2 years. In 2016, things seem to be changing. Based on our survey of 222 qualified individuals at biopharmaceutical manufacturing facilities, we estimate that budgets for outsourced biopharmaceutical manufacturing will increase by an average of just 2.4% this year. That’s the lowest increase of the 12 industry areas we measured, below the next-lowest (new facility construction, 3.5%), and less than one-third of the growth anticipated in new capital equipment spending (of 7.9%).

What’s interesting to see is that the proportion of manufacturers expecting to increase their outsourcing budgets has not dipped appreciably. This year, roughly 36% of respondents plan to hike their outsourcing budgets, relatively on par with last year’s 39% and 2014’s 37%. This suggests that the magnitude that budgets are growing is on the decline. In other words, manufacturers who may have upped their outsourcing spending by 10, 20% or even more over the past couple of years might now be tempering that growth. Alternatively, those same manufacturers might be in the process of being replaced by others whose budgets had remained flat but are now inching up.

Neither of these scenarios is bleak for CMOs in and of themselves. But they are an interesting development in light of other budget trends identified in our study. Chief among those is a positive shift in budget growth for in-house biopharmaceutical manufacturing. Whereas budget growth had been on the decline for in-house manufacturing—down to a 2.8% projected increase last year—it has jumped this year to an estimated 4.9% increase. 

Together, these trends signal a budget shift from outsourcing, to in-house manufacturing, which may be a more worrisome trend for CMOs if it remains over a sustained period.

It isn’t all bad news, though. While budget growth for outsourced biomanufacturing may be declining, the slack may be picked up by spending on outsourcing of other aspects including R&D. Separately in our survey we asked biomanufacturers to estimate their change in spending on outsourcing of R&D or manufacturing in the next 12 months. We found that 56.5% are planning an increase of some degree, the largest proportion in at least the past 5 years. In fact, almost 1 in 10 respondents intend to increase their spending in these areas by more than 50%. The resultant average increase in spending on outsourcing of R&D or manufacturing—of 14%—is above last year’s estimated increase of 13%, and also trends higher than 2014 (13.5%) and 2013 (10.4%).

In combination with the data showing a slowdown in outsourcing budgets, our study results suggest that outsourcing budgets may be shifting away from manufacturing and towards R&D.

What do budget trends mean for CMOs?
This year’s budget results showing lower spending growth on outsourced biomanufacturing may portend increased competition among CMOs. This in turn may flatten the recent price increases for CMO services, as contract manufacturers compete for business.

There are signs that clients are looking to outsource in order to cut costs, meaning that pricing might be a bigger issue for them than in recent years, if CMOs are to convert additional in-house processes to outsourced operations. And some of these operations will be increasingly going offshore. According to our survey, almost 1 in 5 (18%) biopharmaceutical manufacturers last year outsourced manufacturing to non-domestic service providers specifically to cut costs. That continues a general trend in offshoring to cut costs, up from 14.3% last year and triple the percentage from 2011 (5.7%).

Meanwhile, this year one-sixth of respondents (16.7%) report having outsourced manufacturing to domestic service providers in the prior 12 months as a cost-cutting mechanism. As with offshoring, this marks another increase, up from 14.9% last year and more than double the proportion from 2011 (7.1%).

These increases are again interesting in light of other data showing that outsourcing of jobs as a cost-cutting mechanism is either flat or receding. It seems that the pendulum is swinging away from outsourcing jobs to outsourcing manufacturing in order to cut costs. Nevertheless, the implication for CMOs is that pricing may become a more pressing part of the outsourcing decision calculation.

Separate results from our study suggest that it already is an important factor. We asked biotherapeutic developers to rate the importance of various factors when considering outsourcing manufacturing to a CMO. We found exactly 8 in 10 saying that it was “important” or “very important” that CMOs demonstrate the cost effectiveness of their services. While this figure has not changed in recent years, relatively speaking, cost-effectiveness is becoming more important.

Demonstrating cost-effectiveness of services is now the 7th-most important issue for clients of the 19 identified issues. Pricing was the 8th-most important last year and the 10th-most important the year before. As such, pricing seems to be gradually rising the ranks when it comes to the issues that matter to clients.

Of course it is not the most important one. Instead, with competition potentially rising for outsourcing budgets, CMOs should heed the following issues that clients take into account when considering outsourcing manufacturing:

• Establishing a good working relationship;
• Complying with the client’s quality standards;
• Offering a secure supply (control of capacity);
• Protecting intellectual property; and
• Sticking to a schedule.

What are CMOs spending their budgets on?
Biotherapeutic developers aren’t the only ones with budgets, obviously. To see how contract manufacturers’ own budgets are trending, we isolated CMO respondents from our sample and analyzed the data.

The results show that hiring and equipment are important budget areas for CMOs this year. The largest increase is pegged for hiring new operations staff, while spending on hiring of new scientific staff is also expected to see double-digit growth.

Sandwiched in between, CMOs, as with biotherapeutic developers, are also earmarking large increases for new capital equipment, as virtually all the CMOs we surveyed will be increasing their spending on this area to at least some degree.

Not far behind, CMOs are hiking their spending on new technologies to improve efficiencies and costs for downstream production. This appears to be a greater budget focus than upstream innovation, although many are nonetheless also increasing their spending in this area.

It’s not too surprising that downstream innovation is a key budget area for CMOs. In fact, downstream processing advances rank as their third-most important biomanufacturing trend, behind only manufacturing productivity/efficiency and continuous bioprocessing. Not surprisingly, given the emphasis that CMOs place on single-use/disposables—it is disposable purification technologies that top the list of innovation that CMOs want their suppliers to develop first, of the 23 innovative areas identified.

Other specific downstream advances that CMOs wish to spend their budgets on this year, and where they are actively considering for production issues or problems include:

• In-line buffer dilution systems;
• Single-use disposable TFF membranes;
• Single-use pre-packed columns; and
• Use of high capacity resins.

The presence of single-use devices is to be expected give that, when asked what they’ve done in the past 12 months to improve downstream purification operations, CMOs were most likely to say that they’ve investigated single-use disposable downstream devices.

Meanwhile, the increased spending on hiring makes sense in light of the emphasis that CMOs place on staffing to avoid future capacity constraints. Indeed, 4 of the top 5 areas that CMOs believe will likely create future capacity constraints relate to the inability to hire and/or retain experienced scientific, technical and production staff.

Conclusion
The spending climate for outsourced biopharmaceutical manufacturing is changing. This year’s increase in budgets for outsourcing, at 2.4%, is well below the hikes seen in previous years. This slowdown in budget growth has occurred parallel to an increase in budgets for in-house manufacturing, suggesting that the tide may be gradually turning away from the outsourcing expansion of recent years and back towards a maximization of in-house resources and capabilities.

Among CMOs themselves, there appears to be quite an appetite for increased spending, likely driven by the expansion of the outsourcing market in recent years, which has been driven in part by the advent of biosimilars. CMOs are earmarking large increases for new operations and scientific staff, separately acknowledging that process development staff—both upstream and downstream—are proving to be the job positions they are finding most difficult to fill.

New capital equipment and innovative technologies are also slated for budget increases for CMOs. With contract manufacturers typically taking the lead in adopting innovative technologies, our data indicates that trends continue to favor their investment in single-use disposable devices. With downstream advances on the agenda this year, disposable purification equipment is likely to be near the top of the list for CMOs.

With competition increasing among CMOs, they’ll be spending to secure the best staff and the newest technologies to offer as differentiators in order to win business.

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Eric S. Langer
BioPlan Associates

Eric S. Langer is president and managing partner at BioPlan Associates, Inc., a biotechnology and life sciences marketing research and publishing firm established in Rockville, MD in 1989. He is editor of numerous studies, including “Biopharmaceutical Technology in China,” “Advances in Large-scale Biopharmaceutical Manufacturing”, and many other industry reports.  elanger@bioplanassociates.com  301-921-5979.  www.bioplanassociates.com