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The industry will see an impact from financing, M&As, advanced therapies, generic drugs, and the retail market in 2018.
It was a great year for much of the bio/pharmaceutical contract manufacturing and development (CDMO) industry in 2017. Research organizations continued to generate hundreds of new candidates, while venture capitalists and private equity investors maintained a robust flow of new funding to emerging bio/pharma companies, which are highly dependent on CDMOs. An active deal environment provided rich exits for CDMO founders and investors.
The momentum from 2017 looks like it will continue into 2018, but one should never extrapolate today’s trends inexorably into the future. Here are five industry themes to watch closely for their potential impact on the CDMO industry.
The demand for CDMO services has historically been tied to funding cycles for emerging bio/pharma companies, and 2017 was the fifth year of the upward slope of the funding cycle that began in 2013. The capital raised by emerging bio/pharma in 2017 should certainly maintain demand for CDMO services through 2018. Indeed, new business bookings by clinical contract research organizations (CROs), a bellwether for development activity, remained quite strong through 2017.
CDMO executives should keep a close eye on the fundraising environment, however, especially the public equity markets. Availability of capital can be impacted by factors external to the industry that change investor psychology, even when underlying industry fundamentals are unchanged. Those factors include a general economic slowdown (which many economists are predicting for 2019), rising interest rates (a reality), and political uncertainty (2018 is an election year in the United States). On average, emerging bio/pharma -companies have only 12-15 months of cash of hand, and they are likely to slow their spending at the first sign that raising new capital could be difficult.
CDMO executives should keep a close eye on the fundraising environment, especially the public equity markets.
There were some very large deals in the CDMO industry in 2017, and a lot of smaller ones. Private equity firms continue to be drawn by the high level of drug development activity and the opportunity to roll up small CDMOs into larger entities. Larger CDMOs continue to pursue strategic acquisitions that add technical capabilities and provide entry into new market segments.
The industry will see more M&A activity in 2018, but the pace may slow down. Valuations have gotten quite high, even for smaller properties that require investors to fund substantial additional capital for capacity expansions and upgrades. Financing will get progressively more expensive as interest rates rise during the year; that could force valuations down but potential sellers may balk at taking lower valuations than their competitors got just a few months ago.
One development to watch for is a very big deal involving an industry leader, along the lines of Thermo Fisher’s acquisition of Patheon and Lonza’s acquisition of Capsugel in 2017. The largest CDMOs need to do deals to deliver on promises to investors and to increase their ability to service global bio/pharma companies with their billions in manufacturing and R&D expenditures. It would not be surprising to see another large private equity firm or strategic buyer from outside the industry make a game-changing entry into the CDMO industry.
New treatment modalities such as gene therapy, cell therapy, and antibody drug conjugates are becoming a bigger part of the new drug pipeline. Most of the candidates are early stage, with a high percentage still owned by academic institutions, but some initial clinical successes in actually curing once-incurable diseases is stoking investor interest, and established bio/pharma companies are actively buying up advanced-therapy companies.
Advanced therapies present a challenge for CDMOs because their business model and technology often don’t fit the traditional CDMO model. Many of the candidates are autologous (i.e., they involve taking cells from a patient, processing them with the sponsor’s technology, and re-injecting them into the same patient). That is very different from the CDMO model of producing multiple units of a single product.
Still, a number of entrepreneurial CDMOs have positioned themselves for advanced therapies, and several established CDMOs have built positions that are expanding with acquisitions and internal investment. Demand for these services appears strong, and the industry can expect to see further M&A activity in this sector during the year, as major CDMOs look to add advanced therapies to their portfolios.
Pricing and margins for generic drugs continue to spiral downward, and regulators and payers are determined to keep the pressure on. In the US, the FDA commissioner has promised new procedures and regulations to speed approval of generic drugs, and the nominee to head the Department of Health and Human Services has promised to focus on bringing drug prices down. In Europe, the turn from branded to commodity generics has undermined the industry’s profitability as governments use tendering to purchase pharmaceuticals.
CMOs will do well to follow developments in the retail supply chain, because they could create new opportunities and challenges.
The pressure on generics has significant implications for the bio/pharma CMO industry. Much of the industry has been dependent on branded generics, especially the European CMOs. Lost volumes and narrowed margins, compounded by overcapacity in solid dose manufacturing, are forcing CMOs to restructure, including facility shutdowns.
The problem could be compounded by the restructuring efforts of the large generic-drug companies themselves. Some, like Teva, are committed to downsizing their sprawling and inefficient manufacturing networks. Others, like Sandoz, are reportedly preparing to exit the solid dose portion of their business, which is also likely to result in plant closings. The risk to CMOs is that some of the closed or divested manufacturing facilities will end up becoming CMO operations themselves, worsening the overcapacity problem.
CMOs will do well to follow developments in the retail supply chain, because they could create new opportunities and challenges. The pharmaceutical industry was rocked at the end of 2017 when the retail and mail order pharmacy giant CVS announced that it intended to buy health insurer Aetna. If the deal were to go through, it could drive a lot of changes in the healthcare delivery system, concentrating more market power in the hands of a few large integrated providers.
The CVS-Aetna announcement came in the midst of speculation that Amazon is preparing to enter the drug distribution business. The online retailing giant threatens to disrupt the way patients get their drugs today thanks to its large customer base, skill in app-based ordering, warehousing and distribution scale, and willingness to take low profit margins.
The kind of market power that might be accumulated by CVS/Aetna and Amazon could create new demands on drug sponsors and manufacturers over issues such as price, inventory maintenance, just-in-time delivery, and packaging. CMO executives should probably devote some time to understanding the implications of those downstream changes and begin thinking about how they should respond.
Vol. 31, No. 1
When referring to this article, please cite it as J. Miller, “What to Watch for in 2018," BioPharm International 31 (1) 2018.