Eric S. Langer, BioPlan Associates09.11.18
Why, during this period of relatively robust global economic growth, are budgets for bioprocess outsourcing beginning to decline? The biopharmaceutical manufacturing segment has shown steady, 12-14% growth over decades in the U.S. and the EU, and even more rapid growth in some emerging regions. However, this steady growth has not applied to the outsourcing side of biologics manufacturing. During economic downturns, for example, biologics outsourcing has tended to contract, as innovators seek to reduce their economic exposure.
According to our 15th Annual Report and Survey of Biopharmaceutical Manufacturing,1 we see a number of key trends affecting outsourcing that will likely continue into the future.
Outsourcing is approaching an equilibrium
Many companies are increasingly preferring to do their own commercial manufacturing, particularly for products expected to attain large markets. This orientation toward in-house manufacturing is occurring because of the advances the industry has made in bioprocessing over recent years. These include: Improved efficiencies, ability to invest in smaller facilities that use more flexible processes and lower capital cost single-use technologies; and titers (productivity) have improved, which has reduced facility sizes, while process steps have been incrementally improved or eliminated. All this makes bioprocessing a more rational core business function for certain drug innovators.
Outsourcing is becoming more strategic
Companies, including Big Pharma that in the past had eliminated in-house capabilities and moved to outsourcing, are often now taking a more rational and sophisticated approach. Companies are weighing their out- vs. in-sourcing options, with a longer-term perspective. While some companies are geared to keep capital costs low, including through outsourcing, others see strategic value in creating company value by developing and increasing their in-house manufacturing competence.
Shrinking pipelines for outsourcing
Companies are now concentrating their resources to fewer products in the pipeline, and proportionally devoting more development efforts. As a result, current in-house capacity may be sufficient for some companies’ pipelines.
Budgets for outsourcing on the decline
In our study, over the past 10 years, we have asked how budgets would change for 12 key areas in bioprocessing. This year, the area with the least projected budget growth was outsourced biopharmaceutical manufacturing, with an average budget increase of only 1.5%, and this relative decrease has been going on since 2014.
On the other hand, budgets for areas such as new capital equipment continue to show significant growth this year at 8.2%—and we note that this is year-on-year growth as well. Much of this involves construction of new facilities and addition of capacity. As the industry matures, some of this spending is the result of increasing latent demand, e.g., as equipment and facilities wear out or age, combined with many companies expanding their manufacturing capacity, more products being manufactured, more new facilities (e.g., for biosimilars manufacture), etc. Additionally, budget increases for improved productivity this year include investing in process lines already in existence, and new technologies for downstream and upstream manufacturing, which received high budget increases—7.0 and 7.1%, respectively.
It is very significant that no budget decreases were reported, clearly confirming an overall increase in bioprocessing budgets among developer companies this year.
Single most important trend
In the study, we also ask about the most important biomanufacturing trend or operational area where the industry must focus efforts. Last year, 5.5% of the industry saw outsourcing as the most critical trend, yet, this year only 1.4% felt the same. In comparison, 16% felt that improving manufacturing productivity and efficiency were the top area. Single-use systems were third on the list.
Incentives for strategic outsourcing
CMOs can provide a strategic advantage, particularly if the task requires specialized expertise, equipment, and infrastructure. For small clients, outsourcing biologics may be the only way to get their products into preclinical and clinical testing, and get them to market. In some areas, adoption of the use of single-use bioprocessing systems has expanded CMOs’ flexibility and capabilities to provide advantages and options. Single-use systems also enable easier technology copying of bioprocessing between the client and CMO. Therefore, product manufacturers more likely view contract manufacturing and outsourced services as an asset to drive strategic decisions than as a way simply to save money or get rid of lower-priority in-house projects. Other incentives that support technical outsourcing include:
In adverse economic conditions, activities that were previously considered essential to retain in-house can become options for outsourcing. But the additional strategic benefits, beyond just cost savings, that outsourcing can bring to product developers can often swing outsourcing decisions. Companies’ outsourcing inevitably leads to less in-house capabilities. In some cases, CMOs and consultants are hired for finding and fixing problems that classically would or should have been resolved by in-house staff. This can create a lack of consistency in bioprocessing and regulatory documentation can lead to delays in product development, approvals, and manufacturing.
Outsourcing market penetration
Outsourcing, on the other hand, is becoming common among a majority of facilities. And the number of companies doing all their manufacturing in-house is declining (see Figure 3). This is likely to be the trend in the near future. In 2018, among respondents producing in mammalian cell culture, 30% indicated they performed all their production in-house—no outsourced production. This is a decrease from 44.2% in 2017. Similarly, 43.1% of respondents indicated they performed all their production of Microbial Fermentation in-house compared to 67.6% in 2017.
Future outsourcing: the good news
Although budgets are tending down, overall results suggest a continuing trend towards more facilities outsourcing at least some of mammalian cell culture. In this year’s study, 72.3% of users projected some outsourcing will be done at their facility within five years (by 2023). We also note that for microbial fermentation systems, the percentage anticipating some level of outsourcing has increased significantly to 58.4%. Respondents using Yeast systems have reported a level of anticipated outsourcing similar to 2016 (42.9%).
Other outsourced activities
In addition to the larger market for outsourced bioprocessing, there are also very significant, but in some cases, relatively lower value services, such as analytical testing, sterility, fill-finish, and other often routine testing and tasks. In 2018, we surveyed 26 different areas of outsourcing. We continued to find that the primary outsourced activities include:
International outsourcing (off-shoring) of biomanufacturing
We asked respondents to consider their five-year time horizon (lead-up to 2023), and to evaluate their facility’s current plans for future international capacity expansion (not domestic). We identified more than 22 countries as potential outsourcing destinations.
Among all respondents, the U.S. ranked highest again as a potential ‘offshore’ outsourcing destination, with 30.1% vs. 26.3% in 2013 of respondents indicating that there was a “Likelihood” or “Strong likelihood” that they would outsource production to facilities there. Following the U.S. was Germany at 25.2% of respondents, followed by China with 21.4% in 2018 (vs 16.2% in 2017); and India with 18.4%.
China and India remain the most popular developing country outsourcing destinations, but patent and IP issues also come into play in these and many other developing countries. With looser or simply no relevant laws and even less enforcement and precedents, IP concerns are significant. In fact, this year when we asked respondents to identify their critical issues when considering outsourcing to a CMO, we saw a significant decrease in the proportion that said it was ‘very important’ for CMOs to have regulatory compliance expertise—38.4% in 2018, down from 46.3% in 2017. Clearly all CMOs need appropriate regulatory compliance experience. But this may simply be an area where CMO competence is increasingly presumed to be universal.
Conclusions
Today, most every area of R&D and manufacturing is at least considered a candidate for outsourcing, and the impact of this is being felt on a global basis. While global economics has a clear effect on short-term budget allocation for outsourcing, overall, the industry plans to continue its long-term view involving more outsourcing, including a mix of outsourced and in-house production options.
Emerging markets such as China and India have become increasingly favorably viewed alongside established markets as potential outsourcing destinations, particularly for research, which can be rather repetitive. And while developing country bioprocessing CMOs/CROs may not see dramatic growth in the short term, their long-term potential is clear. Companies with large domestic populations will need to produce biologics in very large quantities for their local markets. As companies in developing countries ramp-up serving their domestic markets, some of this experience, sooner or later, will result in emerging market CMOs making inroads into major biopharmaceutical markets.
Resources
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
According to our 15th Annual Report and Survey of Biopharmaceutical Manufacturing,1 we see a number of key trends affecting outsourcing that will likely continue into the future.
Outsourcing is approaching an equilibrium
Many companies are increasingly preferring to do their own commercial manufacturing, particularly for products expected to attain large markets. This orientation toward in-house manufacturing is occurring because of the advances the industry has made in bioprocessing over recent years. These include: Improved efficiencies, ability to invest in smaller facilities that use more flexible processes and lower capital cost single-use technologies; and titers (productivity) have improved, which has reduced facility sizes, while process steps have been incrementally improved or eliminated. All this makes bioprocessing a more rational core business function for certain drug innovators.
Outsourcing is becoming more strategic
Companies, including Big Pharma that in the past had eliminated in-house capabilities and moved to outsourcing, are often now taking a more rational and sophisticated approach. Companies are weighing their out- vs. in-sourcing options, with a longer-term perspective. While some companies are geared to keep capital costs low, including through outsourcing, others see strategic value in creating company value by developing and increasing their in-house manufacturing competence.
Shrinking pipelines for outsourcing
Companies are now concentrating their resources to fewer products in the pipeline, and proportionally devoting more development efforts. As a result, current in-house capacity may be sufficient for some companies’ pipelines.
Budgets for outsourcing on the decline
In our study, over the past 10 years, we have asked how budgets would change for 12 key areas in bioprocessing. This year, the area with the least projected budget growth was outsourced biopharmaceutical manufacturing, with an average budget increase of only 1.5%, and this relative decrease has been going on since 2014.
On the other hand, budgets for areas such as new capital equipment continue to show significant growth this year at 8.2%—and we note that this is year-on-year growth as well. Much of this involves construction of new facilities and addition of capacity. As the industry matures, some of this spending is the result of increasing latent demand, e.g., as equipment and facilities wear out or age, combined with many companies expanding their manufacturing capacity, more products being manufactured, more new facilities (e.g., for biosimilars manufacture), etc. Additionally, budget increases for improved productivity this year include investing in process lines already in existence, and new technologies for downstream and upstream manufacturing, which received high budget increases—7.0 and 7.1%, respectively.
It is very significant that no budget decreases were reported, clearly confirming an overall increase in bioprocessing budgets among developer companies this year.
Single most important trend
In the study, we also ask about the most important biomanufacturing trend or operational area where the industry must focus efforts. Last year, 5.5% of the industry saw outsourcing as the most critical trend, yet, this year only 1.4% felt the same. In comparison, 16% felt that improving manufacturing productivity and efficiency were the top area. Single-use systems were third on the list.
Incentives for strategic outsourcing
CMOs can provide a strategic advantage, particularly if the task requires specialized expertise, equipment, and infrastructure. For small clients, outsourcing biologics may be the only way to get their products into preclinical and clinical testing, and get them to market. In some areas, adoption of the use of single-use bioprocessing systems has expanded CMOs’ flexibility and capabilities to provide advantages and options. Single-use systems also enable easier technology copying of bioprocessing between the client and CMO. Therefore, product manufacturers more likely view contract manufacturing and outsourced services as an asset to drive strategic decisions than as a way simply to save money or get rid of lower-priority in-house projects. Other incentives that support technical outsourcing include:
- Need for access to enabling technology (e.g. expression systems, downstream processing);
- Lack of internal expertise (available staff with specialized expertise);
- Need to control budgets and funding;
- Need to avoid investing in facilities and staff;
- Increased capacity needs;
- Response to competitive pressures;
- Urgency: time-to-market; and
- Avoid technology licensing fees and royalties, e.g., for expression systems.
In adverse economic conditions, activities that were previously considered essential to retain in-house can become options for outsourcing. But the additional strategic benefits, beyond just cost savings, that outsourcing can bring to product developers can often swing outsourcing decisions. Companies’ outsourcing inevitably leads to less in-house capabilities. In some cases, CMOs and consultants are hired for finding and fixing problems that classically would or should have been resolved by in-house staff. This can create a lack of consistency in bioprocessing and regulatory documentation can lead to delays in product development, approvals, and manufacturing.
Outsourcing market penetration
Outsourcing, on the other hand, is becoming common among a majority of facilities. And the number of companies doing all their manufacturing in-house is declining (see Figure 3). This is likely to be the trend in the near future. In 2018, among respondents producing in mammalian cell culture, 30% indicated they performed all their production in-house—no outsourced production. This is a decrease from 44.2% in 2017. Similarly, 43.1% of respondents indicated they performed all their production of Microbial Fermentation in-house compared to 67.6% in 2017.
Future outsourcing: the good news
Although budgets are tending down, overall results suggest a continuing trend towards more facilities outsourcing at least some of mammalian cell culture. In this year’s study, 72.3% of users projected some outsourcing will be done at their facility within five years (by 2023). We also note that for microbial fermentation systems, the percentage anticipating some level of outsourcing has increased significantly to 58.4%. Respondents using Yeast systems have reported a level of anticipated outsourcing similar to 2016 (42.9%).
Other outsourced activities
In addition to the larger market for outsourced bioprocessing, there are also very significant, but in some cases, relatively lower value services, such as analytical testing, sterility, fill-finish, and other often routine testing and tasks. In 2018, we surveyed 26 different areas of outsourcing. We continued to find that the primary outsourced activities include:
- “Analytical testing (other bioassays),” with 77.8% of biopharmaceutical companies outsourcing at least some of the activities. Outsourcing is now a common and core activity within most companies, although the tasks outsourced vary.
- “Testing: toxicity testing,” (72.6%) moved to the #2 position on our list in 2017 (80.9%, up from #3 in 2016) and remains there in 2018, and “Fill/Finish Operations,” (66.7%) dropped to back to 2016 levels at the #4 position.
International outsourcing (off-shoring) of biomanufacturing
We asked respondents to consider their five-year time horizon (lead-up to 2023), and to evaluate their facility’s current plans for future international capacity expansion (not domestic). We identified more than 22 countries as potential outsourcing destinations.
Among all respondents, the U.S. ranked highest again as a potential ‘offshore’ outsourcing destination, with 30.1% vs. 26.3% in 2013 of respondents indicating that there was a “Likelihood” or “Strong likelihood” that they would outsource production to facilities there. Following the U.S. was Germany at 25.2% of respondents, followed by China with 21.4% in 2018 (vs 16.2% in 2017); and India with 18.4%.
China and India remain the most popular developing country outsourcing destinations, but patent and IP issues also come into play in these and many other developing countries. With looser or simply no relevant laws and even less enforcement and precedents, IP concerns are significant. In fact, this year when we asked respondents to identify their critical issues when considering outsourcing to a CMO, we saw a significant decrease in the proportion that said it was ‘very important’ for CMOs to have regulatory compliance expertise—38.4% in 2018, down from 46.3% in 2017. Clearly all CMOs need appropriate regulatory compliance experience. But this may simply be an area where CMO competence is increasingly presumed to be universal.
Conclusions
Today, most every area of R&D and manufacturing is at least considered a candidate for outsourcing, and the impact of this is being felt on a global basis. While global economics has a clear effect on short-term budget allocation for outsourcing, overall, the industry plans to continue its long-term view involving more outsourcing, including a mix of outsourced and in-house production options.
Emerging markets such as China and India have become increasingly favorably viewed alongside established markets as potential outsourcing destinations, particularly for research, which can be rather repetitive. And while developing country bioprocessing CMOs/CROs may not see dramatic growth in the short term, their long-term potential is clear. Companies with large domestic populations will need to produce biologics in very large quantities for their local markets. As companies in developing countries ramp-up serving their domestic markets, some of this experience, sooner or later, will result in emerging market CMOs making inroads into major biopharmaceutical markets.
Resources
- 15th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production, 2018, BioPlan Associates, Inc. April 2018. www.bioplanassociates.com
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
