We believe that outsourcing to a CMO can be particularly attractive for small biotech companies that don't have the capital
or access to capital required to make the investments required to build a plant. Currently, there are more than 650 biopharmaceuticals
in development, with two-thirds coming from small companies that have revenues below $1 billion. The large majority of these
companies are unlikely to have the cash reserves required to build a manufacturing plant. To illustrate this point, out of
41 companies in a representative biotech company portfolio assembled by CIBC, a North American financial institution, only
eight have cash reserves of greater than $400 million, the estimated cost of building a manufacturing plant (Figure 6).5 And more than 50% have cash reserves of less than $100 million. Further, debt and equity financing often are not viable
for these companies. Based on our experience and observations, the public markets view inexperienced biologics companies that
lack sufficient manufacturing experience as too risky for such financing.
Without the option to partner with a CMO, many of these small companies will likely be forced to form alliances or become
acquired by large biopharmaceutical interests to realize product commercialization. We believe that partnering with a CMO
can provide an option that could help biologics companies retain greater control of their products. By maintaining their autonomy,
companies would have more control over their future as well, whether they mature into a fully integrated biotech company,
better position themselves for later acquisition, or pursue other options.
2. CMOs can help reduce overall operational risk and time to market. The process of setting up and running a plant is complex and specialized. Slight delays can lead to high opportunity costs
in the form of lost sales. Common causes for delays include setbacks in a drug's Phase 3 trials (such as with Synergen's Antril),
poor capacity planning, a lack of effective manufacturing experience (as in the case of Immunex's Enbrel), and regulatory
For biologics companies without effective manufacturing experience, contracting with an established CMO can reduce these operational
risks and accelerate the time to production. This can be accomplished by leveraging the CMO's experience and skills in setting
up plants and navigating through the regulatory system. This also could translate into significant revenue enhancement, by
reducing time to market and the risk of not meeting market demand.
3. CMOs can help biologics companies focus on the higher value parts of the value chain. For large biotech companies, which already have sophisticated manufacturing and regulatory capabilities, a CMO can provide
a different value proposition compared with that offered to a small biotech. The large companies may have little reason to
devote resources to manufacturing processes that are likely to become commoditized and may not represent a differentiating
capability. Partnering with a CMO can provide these companies with the flexibility to focus their internal efforts and investment
on the pieces of the biotech value chain with the potential to generate greater value.
THE CMO ADVANTAGE
We believe that although biopharmaceutical companies have led advancements in biologics manufacturing to date, CMOs are well
positioned to help solve many of today's difficult production problems.
First, CMOs are likely to increase the rate of manufacturing innovation. Unlike traditional biotech companies, CMOs have many
resources dedicated to analyzing manufacturing issues and identifying improvement opportunities. In traditional R&D-focused
biotech companies, discovery and development efforts typically overshadow manufacturing improvement initiatives. However,
with a CMO, the focus is entirely on manufacturing. With significant incentive to maintain or improve their margins, CMOs
continually seek ways to improve setup times, lower costs, and improve yields. Lonza estimates that technology improvements
in the next decade will substantially improve yields from 1–2 to 5–10 g/L.4
Second, as discussed in more detail later, contract manufacturers do not have the same margin requirements as biopharma companies.
R&D-focused biotech companies typically have operated in an environment of high R&D investment, followed by high-margin commercialization
activities. Manufacturing biologics on a contract basis generally does not yield the same type of returns, making it difficult
for biopharma companies to justify engaging in contract manufacturing. However, a CMO can operate with such margin expectations
and be economically viable. The financial model discussed in the next section of this paper helps to further demonstrate this