Third, we believe that CMOs can provide an attractive alternative to the difficult capital investment problem biotech companies
typically face when they need to build manufacturing capabilities for products nearing commercialization. The significant
costs required to build a plant, coupled with uncertainty about the product's effectiveness and lack of manufacturing skills
and experience, can make the decision to invest in a plant less attractive.
A biopharmaceutical company's use of a CMO can be compared with leasing versus building office space. For example, if XYZ,
Inc. wanted to expand its offices, it would look to lease office space rather than build its own building. Leasing would be
the logical choice because building office buildings is not XYZ's core competency and does not provide it with a competitive
edge. Furthermore, leasing would provide additional flexibility as market environments change.
Finally, CMOs can help mid-size R&D companies gain value before they are purchased. When their products reach Phase 2 and
Phase 3 trials, mid-size R&D companies often partner with or are acquired by other companies. This typically happens because
these companies don't have the capital or resources to support commercialization. By engaging the services of a CMO, these
companies may have the opportunity to mature further and potentially become fully integrated companies themselves.
CRUNCHING THE NUMBERS
Having explored the industry role of CMOs, the next step is to determine if a CMO can add value to the biotech industry as
a whole. Under what conditions does it make sense for a biotech company to self-manufacture, and when is it more effective
For this research, we created a valuation model to determine cash flows and the net present value in two scenarios:
- A biotech company self-manufactures.
- A biotech company outsources manufacturing to a CMO.
Assumptions made in the model for a sample biologics manufacturing plant are laid out in Table 1. The calculations shown use
illustrative numbers and are meant for comparison purposes only.
Table 1. Assumptions made in the economic modela
For the first scenario, the net present value (NPV) was calculated for the investment made by the biotech company in setting
up a biologics manufacturing plant. For the second scenario, the NPVs for both the biotech company and the CMO were calculated.
A conservative approach was taken, and it was assumed that the plant used by the CMO is a single-product facility. If multiple
products were produced in the same plant, costs per product would decline.
Figure 7. Net present value for a biotech company self-manufacturing its drug
The NPV was calculated at four different expected peak revenue levels for both scenarios: $1.5 billion, $1 billion, $500 million,
and $200 million. The expected peak revenue levels incorporate the revenue risks involved with the drug. The risks could include
product development, manufacturing, and commercialization risks. Figures 7 and 8 summarize the results of the analyses of
Figure 8. Net present values for a biotech company outsourcing its manufacturing to a CMO
The calculations provide several key findings from a biologics company perspective.