A year-end review should include more than the ticking off of tasks and events. It should involve more grey matter. It should demonstrate your power to synthesize.
Or at least, to put one and one together. I’ve selected two such items to help kick start the annual festivities.
Less Is More (Although We Worried There Was Too Little)
Consider these topics: mergers and acquisitions among drug development and manufacturing service providers, and supplier capacity (particularly for biologics).
Hopefully you read some of our editorials on these subjects over the year. What stands out immediately upon reviewing the editorials is what isn’t there: So little space devoted to piecing these two subjects together.
“M&A and capacity?” you say. “Pretty natural partners for discussion.”
Yes. But before we are too hard on ourselves (okay, on me), let’s dive a little deeper.
In 2018, we did give short thrift to the idea that increased M&A among CDMOs was in pursuit of either lessening or increasing capacity, but only because of what biopharma leaders told us, and reports including from our own ISR Reports, demonstrated:
Capacity itself was not the upfront driver of our M&A that textbook supply-chain consolidation might indicate. There was a twist involved.
The ascendant objective driving the business momentum for provider M&A has been that established biopharma customers want to work with fewer vendors, and particularly those who can (here it comes) capture existing capacity under one organizational roof.
Of course this was not absolute. Yet, as we eggnog our way to the final days of the year, it’s revelatory to stop sipping for a moment to articulate what we were doing as an outsourcing industry in 2018.
We were in fact redistributing that captured capacity and technologies. They moved from the auspices of relatively smaller service providers to those of much larger ones, for more and better utilization by bigger biopharma customers.
Some readers may point out that redirection will undoubtedly produce “synergies” and “economies of scale,” leading to overall positives in the market. These can include easier management of further capacity growth, and the financing for the adapting and implementing of newer technologies. In other words, a build out of more and upgraded capacity as a result of the M&A activity.
Yes, but it’s just as true (as readers know) that following consolidations – and who has proven this more than Big Pharma itself? – capacity reductions in the aggregate are not uncommon. “Consolidation” by definition is an exercise in both company and capacity reduction.
In fact, Outsourced Pharma has been told repeatedly that capacity reductions are already impacting and threatening a particular segment of our industry: our growing number of start-up biotechs, virtuals of all kinds, and young niche technology and platform drug developers. These organizations tell us they already feel as if capacity, capabilities, and technologies are being lifted from the open market and placed at the feet of established companies, most specifically Big Pharma.
Enough For Everyone?
Again, consolidation to take out capacity is by no means unusual in practice (and the application of basic economics and market theory). But it becomes problematic when simultaneously the market seems to be calling for more capacity – or at least more access to certain capacity.
So nobody on the buy side was looking to lessen capacity via M&A on the sell side. Bigger sponsors were looking to streamline supply-chain operations (a worthy cause) by capturing more capacity via fewer but more strategic service-provider relationships.
(Perhaps the sole reason we could come up with for bigger biopharma to want to reduce capacity overall would be to cut the legs out from potential biotech competition. Anybody out there think that’s a part of this?)
Through all this, from my perch at Outsourced Pharma, I spent time this year assuaging readers there is and will not be a capacity crunch – particularly the one feared in bioprocessing, which a lot of this is about. I now see this may have been less than spot on.
That’s because during this exercise of annual review, we see more clearly how we’ve undergone this major exercise of redistributing available contract capacity, providing more to Big Biopharma on the one hand, but as a result, taking out options for smaller biotechs.
Of course – as they do at each M&A announcement – the acquired arms of the bigger service providers will insist this is not the case: They commit to always serve the smaller guys and gals, they say, but now they will be able to do so even better.
Just recently I brought readers an example of this in an editorial, “This CDMO Deal Significant Sign Of The Times.”
And importantly, Outsourced Pharma readers were also introduced to an example of a nascent regeneration of smaller service providers serving smaller customers, in this article, “Service Provider Establishes U.S. Home For Smaller Drug Sponsors.” This may prove to be one of the most important topics of 2019.
So will bigger biopharma successfully streamline their supply chains, and capture the capacity, services and technologies under the umbrellas of fewer (and bigger) service providers as they desire?
And will the start-ups, virtuals, and established smaller biotechs find new options to provide them the unique solutions they need?
We’ll only get those answers well after this year’s eggnog has been finished off.
*Some of the 2018 Editorials mentioned above:
2 Reasons Your CDMOs Are Consolidating: Money & Muscle
This CDMO Deal Significant Sign Of The Times
7 Reasons There Was Never Going To Be A Bioprocessing Capacity Crunch
Time To Silence Capacity Alarms For Bioprocessing?
New U.S And Canadian Facilities Boosting Biologics Capacity