Outsourcing: Biologics Manufacturing: The CMO Advantage - The biologics CMO market—especially in mammalian cell culture—is still relatively undeveloped and represents a significant opportu


Outsourcing: Biologics Manufacturing: The CMO Advantage
The biologics CMO market—especially in mammalian cell culture—is still relatively undeveloped and represents a significant opportunity.

BioPharm International
Volume 20, Issue 2

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 issues.

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.


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 perspective.

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