Jim Miller, President, PharmSource Information Services, Inc., sounds as much like a travel agent as a pharma outsourcing prognosticator at his DCAT Week ’17 market overview on pharmaceutical contract development and manufacturing: Pharma’s billions for biologics are staying home; small molecules continue to hit the road.
The Road To Revenue Growth
Miller starts with a look at FY 2016 revenue growth for API contract manufacturers versus growth for drug product manufacturers. The first cohort includes public names like Lonza and Cambrex; the second like Patheon and Catalent.
As Miller measures “CMO organic revenue growth” in 2016, the API CMOs are performing nicely, with 6 of the 7 companies listed on a slide he presents us well into double-digit growth. On the other hand, “the dose CMOs” saw limited advancement.
“There’s been a significant difference in performance in the two parts of the manufacturing industry,” comments Miller. “With respect to the contract API side, those are primarily small molecule companies. So it’s not biologics taking off that’s driven tremendous growth in large molecule API manufacturing, although there of course has been large molecule growth.
Miller explains that in terms of “publicly reported performance,” reflecting in the rearview mirror is an image of a drug industry that has “ultimately fully embraced contract manufacturing for small molecule APIs.” He says part of this is simply because of the way small molecule APIs are manufactured. “These are multiple synthesis steps, and pretty much every molecule is touched by a CMO at some point in the synthesis process.” This also reflects the fact that as they become “a mature technology,” small molecules are an area where global companies are fully comfortable with having CMOs doing the work for them.
Conversely – and plenty more on this in a moment – global bio/pharma companies “have by and large switched their own internal focus to large molecule API manufacture, and that’s where their investment has gone.”
With respect to drug-product services specifically, Miller comments: “It wouldn’t be too much to say it’s challenging. Companies in that industry have generally guided towards moderate, single-digit growth. It’s certainly an area where barriers to entry are lower, and where there’s a lot of fragmentation. Again, Big Pharma - I would say particularly for injectables - has been slower to outsource their requirements than has been the case with small molecule API.”
Summing up: “We’re still looking at an industry that on an annual basis has its drug product companies growing to close to 10 percent annually. But it’s the API guys who have had the most rapid growth in recent years.”
NDA And Away
Miller also tracks where the outsourcing industry is going by looking at who receives NDA approvals, and measuring what percentage of those approvals have been outsourced.
He says the focus on NDAs is “both appropriate and necessary,” because this data is more readily available in terms of manufacturing arrangements than for ANDAs. Most NDAs get approved both in North America and Europe, with about 60% approved first in the U.S. and then ultimately in Europe, and about 40% approved first by EMA and then the FDA. “So it’s representative of the opportunities in the industry,” says Miller.
And what this measurement shows is stark. Again, small molecule API manufacturing has done quite nicely. Historically, it’s tracked in at well over 50% in terms of percent of NDA products that are contract manufactured, and that percentage rose in 2016 to an impressive 64%. What’s most glaring is the trend line reversal for large molecule NME outsourcing. Over the last ten years, it’s steadily declined from around 49% to a low of 25% in 2016.
“Obviously, these divergent trends are not because biologics haven’t been successful,” Miller explains. “Rather, it’s because Big Pharma has invested a tremendous amount of capital in internal biologics manufacturing capacity. While smaller or mid-sized companies continue to depend heavily on CMOs for capacity, large pharma companies have invested heavily in having their own capacity. They’ve realized they had way too little capacity as far as ten years ago, when they first started to roll out their large molecule products. Big Pharma is kind of catching up with literally billions of dollars in internal investments.”
Follow The Cash
The above taken together, Miller reminds us that in broad terms of overall penetration, the outsourcing industry is roughly where it was ten years ago, and the segments of the drug industry that continue to depend most on CMOs are small and mid-sized companies.
Not surprisingly, these companies make up 80% of customers for smaller-sized commercial CMOs (defined generally as being under $500 million in revenues). Small and mid-sized drug owners “rely heavily on CMOs for all their manufacturing requirements. That reliance has been consistent, and this group ranges from 50 to 60% for all CMOs.”
The challenge for outsourcing remains with Big Pharma. “Large molecule NMEs are a growing part of global biopharma’s pipeline and portfolio, but as the years have gone by, Big Pharma’s outsourcing of the manufacture of those products – both for the API and for the fill-finish aspect – has declined sharply.”
This is attributed to those capital expenditures Big Pharma has laid out for their own facilities in support of their pipelines. According to Miller, well over $100 billion has been invested by the top 25 companies in new plant equipment in the last ten years.
Miller captured information on about 150 of these projects in recent years. The biggest single category is large molecule API, with 35 major projects, including companies building facilities primarily for mammalian cell culture. Only 10 projects were investments in small molecule API.
“I’d argue this is not a failure on the part of the CMO industry to capture more of the growing large molecule market,” says Miller. “Frankly, the CMO industry would never have the vast resources to put that kind of capital investment into building up the capacity that global biopharma companies needed from when they started rolling out their pipelines of biologics.
“This is just a fact. It’s where the cash is,” concludes Miller. “And if Big Pharma wants to look more to CMOs, they would have to fund that capital investment to get the kind of capacity built up over the lifespan of many years. That’s the reality of the economics of the industry today.”
DCAT Week ‘17 is the annual event of the Drug, Chemical & Associated Technologies Association (DCAT)