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

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


BioPharm International


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 to outsource?

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.

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.

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 both scenarios.

The calculations provide several key findings from a biologics company perspective.


Figure 7
First, based on our calculations, the initial investment required to self-manufacture is high: about $400 million. A biologics company will likely be unable to explore this option if it does not have the ability to raise such capital.




Figure 8
Second, the decision to outsource manufacturing or self-manufacture is dependent on the expected revenues for the drug. At high expected peak revenues, it makes sense to self-manufacture (Figure 7). This is to be expected, as there is a high likelihood of achieving the desired results, and the biologics company does not have to pay a premium to the CMO to share the risk. On the other hand, below the $200 million revenue level, the investment in a manufacturing plant would result in a net loss.

Finally, outsourcing can help reduce the variation in NPV across revenue levels. Even though the average NPV in the self-manufacturing case is higher than with outsourcing—$570 million versus $348 million—the variation in NPV also is much higher. The standard deviation for self-manufacturing is $626 million, in contrast to $272 million for the outsourcing scenario. This is primarily because of the lower upfront investment required for outsourcing.


Figure 9
From a CMO perspective, there appears to be a high sensitivity to expected peak revenues. During initial negotiations, it is essential that the CMO understand the revenue risks to which it will be exposed and negotiate compensation accordingly.

The model assumes that an existing plant is being remodeled for the new drug, thus lowering initial investments. If the CMO builds a brand-new plant for the product, the plant NPV will go down significantly. This suggests that the CMO must be able to absorb initial losses with a plant to get long-term returns.

In summary, we believe CMOs can add value for both the biologics company and its investors (Figure 9) when:

  • The company does not have access to the capital required to build a plant.
  • There is moderate-to-high risk of loss of revenue.
  • The company would prefer to focus on other aspects of the value chain, such as drug development and commercialization.
  • The drug is not a blockbuster but can still produce acceptable results (for example, if it targets a small patient population).


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