The Industry's Growing Reliance on CDMOs
Towards more trust from the biopharmaceutical ecosystem
There is no slowdown in sight for America’s ever-so-busy CDMOs. In recent years, the democratization of the outsourcing manufacturing model, consolidation of actors within the segment (there were 244 CDMO transactions between 2017 and 2021) and a shift from big pharma to smaller biotechs developing drugs and advancing pipelines, have established CDMOs as key players of the life sciences industry. And with the CDMO market forecast to grow at a CAGR of 11% until 2023 according to Market Data Forecast, that segment is likely to continue to outpace the growth of the pharmaceutical sector in the near term.
The onshoring conversation
The pandemic was a warning to the US that it did not have enough drugs for its population. In 2022, US CDMOs were first in line to highlight an almost taboo topic that the pandemic put back into the spotlight: the weakness of the US supply chain for essential medicines and components needed for the nation’s health. Indeed, the pandemic showcased the brutal reality that most manufacturing for pharmaceuticals is done overseas, with numbers as high as 70% or 80% of global capacity in India, China, and Korea for some categories. As the pandemic highlighted weaknesses in multiple organizations in terms of their reliance on ineffective supply chains, cries for onshoring (or reshoring) manufacturing capabilities became louder in the aftermath of the Ukraine War in March 2022. Between Covid-19 and the war raging in Ukraine, US policymakers understood the limits of “friend-shoring”: friends are not immune to natural or man-made disasters.
This offers opportunities throughout the pharma supply chain for companies based in North America. Playing to its onshoring strategy, Nivagen, for example, continues its push towards sterile injectable products. A 2022 financing of US$45 million will allow the firm to invest in a 63,500-square-foot state-of-the-art sterile manufacturing R&D facility in California. This will benefit the whole US value chain according to president and CEO Jay Shukla: “By reshoring product manufacturing, we will be able to streamline our supply chain, reduce manufacturing costs, and ultimately time to market for new product launches.”
Geopolitics will undoubtedly have a more significant impact on the pharmaceutical industry going forward. Coupled with changing regulations at the FDA level, the US is likely to see operations that flooded offshore being brought back inland in the near term. Hyderabad-based Aragen gathers 60% of its revenue in the US and capped off its stellar 2022 year by extending collaboration with Merck in September to help the pharma giant advance its therapeutic candidates pipeline. CEO Manni Kantipudi, who won the ‘CEO of the Year Award’ at the CPhI Pharma Awards 2022, detailed how health and geopolitical turmoils created synergies between US and Indian firms: “The pandemic and the Russia-Ukraine war have significantly impacted supply chain management globally. On the manufacturing side, we are seeing companies reallocating their investments from China and taking it back to the US or Europe. This had a ripple effect and as manufacturing companies in the US reached capacity, these CDMOs started collaborating with companies in India.”
Bringing the manufacturing back to the US after decades of offshoring to Asia is a Herculean task, and one that is met by several industry leaders with skepticism. Working to advance the business interests of CDMOs, Gil Roth, president of the Pharma and Biopharma Outsourcing Association, would like to see more of the manufacturing occur in the US, but remained realistic regarding the task ahead: “It would take decades and add a huge cost to drugs to reshore the supply chain” he stated, adding: “Within the dosage form space, there is plenty of manufacturing capacity and room for expansion in the US. With APIs, it is a different story.”
With rising tensions between leading powers, trade arm-wrestles, and ongoing conflicts, the current fully globalized supply model of the industry is likely to shift to a hybrid one. Pfizer CentreOne is the pharma giant’s CDMO arm, and recently acquired Abzena’s Sanford, NC, site to bolster its manufacturing capabilities. Leveraging the firepower from Pfizer, the CDMO remains a key piece of the US supply chain puzzle and assesses a shift in practices in the near term. As explained by Pfizer CentreOne’s, global business development lead, Tom Wilson: “Instead of an increase in onshoring or localization, I see something inbetween happening, such as regionalization and diversification of key supply chains.”
“I do not believe that complete onshoring of manufacturing back to the US is feasible. There currently is a significant push to reduce the cost of medicines and healthcare overall, so creative use of offshoring and onshoring is necessary.”
Anish Dhanarajan, Co-Founder and CEO, Vici Health Services
New chemistry approaches
Applying sustainable practices can offer competitive advantages beyond the industry and the community in which CDMOs operate. In 2021, Boehringer and Novartis introduced the iGAL 2.0 for a greener future for manufacturing in compliance with the UN Sustainable Development goals. With an increasing amount of CDMOs being awarded high ratings from Ecovadis for their sustainability practices, today, science-based targets initiatives and metrics (such as full waste recycling, green power percentage, and low process mass intensity) are a given across high-revenue CDMOs like Aragen, CordenPharma or Pfizer CentreOne. The latter is deeply involved in green chemistry practices, namely, the ability to remove chemical steps and replace that within enzymatic reactions in API manufacturing.
One of the most telling success stories in green chemistry is Pfizer CentreOne’s Enviero Progesterone. Enviero is a first-of-its-kind green chemistry progesterone. Celebrating its fifth anniversary, the green chemistry-driven API represents a step-change in progesterone processing efficiency and sustainability. By eliminating metal catalysts and the bulk of the organic solvents, environmentally damaging waste emissions have been reduced by more than 70%. Talking about the widespread adoption of the compound and the broader industry push towards green chemistry, Tom Wilson, global business development lead at Pfizer CentreOne, detailed: “Green chemistry is a growing trend. That growth is translated by the transition from a premium offering to an expectation, to a foundation. In the US, we are starting to see that transition from premium to expectation.”
With green chemistry becoming an expectation, synthetic organic chemists will see their role take another dimension in the future as CDMOs take on the task of making APIs green. “We are seeing a trend toward using synthetic organic chemistry to manufacture small molecules as these solutions provide precision at the production stage” explained Nick Shackley, SVP and COO of Veranova, a leading CDMO in the development of specialist and complex APIs.
Shockwaves from Europe
Beyond supply chain delays, the energy and military crisis in Europe prompted a spike in raw material costs across the pharmaceutical industry. But, in the spirit of not letting a good crisis go to waste, some noticed that the volatility in energy markets will offer opportunities down the line for manufacturers in the US. Canada-based GL Chemtec saw more demand for its services in 2022, and president Gamil Alkhami anticipates further work for US manufacturers as pharma clients will want to mitigate risks: “Europe's energy crisis and the ongoing conflicts in the region have prompted some customers to reach out to CDMOs in North America to reduce risk,” he explained.
As more firms decrease their reliance on Asian markets, the US offers a variety of opportunities for manufacturers looking to be as close as possible to where the innovation happens. Dipharma, an Italian firm that recently completed the second phase of expansion at its Kalamazoo, MA, facility, sees 40% of its turnover coming from North America. Andrea Confetti, exclusive synthesis business unit leader, expanded on the reasons behind the US’ competitive advantage: “There was a significant increase in energy and raw material costs which affected the economics of companies operating in our sector in Europe. Additionally, the supply of raw materials is still significantly dependent on the Chinese market.”
“It is important to note that long-term demand remains strong and growing. The aging population worldwide requires more medicines for treatment and prevention. Although the economy faces significant pressure, the marketplace's demand and customers' needs will help alleviate these challenges over time.”
Tim Tyson, Chairman and CEO, TriRx Pharmaceutical Services
Determining a strategic orientation
As CDMOs and CMOs adapt their offerings to meet ever-changing demand, key players seem to be embracing a digitalization push. US organizations like Scorpius BioManufacturing, INCOG BioPharma, and Adare Pharma Solutions all digitalized their Quality Management Systems (QMS) in 2022. Doing so reduces the potential for manufacturing mishaps, and, according to Adare’s CEO Tom Sellig: “Upgrading our digital systems gave us a world-class platform to streamline our processes and allow us—both from a training and compliance standpoint and from a quality management standpoint— to up our game in a cloud-based system.”
The pandemic, the onshoring conversations, and the outsourcing model have redefined the concept of contract manufacturing. In order not to replicate the mistakes from the past, some emerging players are intent on developing new manufacturing models that will guarantee access to key medicines for all populations. Roger Erickson, Interbiome’s CEO and founder, deplored that the health of the median US citizen has been declining over the past 30 years despite the industry’s technological prowess. He suggested: “We see a need to get into the foundational stages of small-scale drug manufacturing of both neglected and abandoned, yet still needed, drugs, which calls for the creation of a new CMO business focused on affordable sustainability.”
Overall, signs point towards cautious optimism for the CDMO segment in 2023 and beyond. Whether active in the small or large molecules space, broad or limited patient populations, the current environment suggests CDMOs should pursue strategic relationships with big pharma (in other terms, follow the money). Pandemic-related factors aside, a significant portion of the heightened demand for CRO/CDMO services has been driven by VC-backed pharma firms. As analyzed by Brian Scanlan, operating partner at Edgewater Capital Partners, the private equity that acquired GL Chemtec in 2022: “If you are a small CRO/CDMO and have 100% exposure to VC-backed emerging biopharma, you might want to consider changing your strategy and getting some exposure to big pharma who are flush with cash.”
“Demand ramped up in 2022. During Covid-19, CDMOs suffered from great resignation. Client uncertainty rose as programs were exacerbated by a backlog in clinical trial slots, and supply chain issues.”
Robert Lee, President - CDMO Division, Lubrizol Life Science, Health