Why Are Cell-Therapy Outsourcers Unhappy? Investors Know

By Louis Garguilo, Chief Editor, Outsourced Pharma

Kineticos Ventures shared some private research with me. This was most striking.

Percentage of (early-stage) cell-therapy companies unhappy with:

• pricing at external partners (60%)
• flexibility when it comes to scheduling (55%)
• geographic proximity (54%)
• production timelines (50%)
• available capacity (46%)

As the band CCR used to sing in the song Feelin’ Blue,  “If it’s happy, you can say I ain’t.”

Can investors improve the mood?

Shailesh Maingi, founder and chair of Kineticos Ventures (see part one), believes they can. In fact, he's been at it for some time.

This part two with Maingi focuses on how investors can influence a specific sector such as cell and gene therapy (CGT), on both the sponsor and CDMO sides of the outsourcing dance.

How It Works

Biotechs come out of the gates with new science and technology. They must be fueled by a proper level of funding.

A large chunk of that funding pays for the utilization of external service partners. Those service providers also require investments to keep up with that science and technology, and adequately serve customers.  

What we need, then, believes Maingi, is ecosystem investing.

“Our overall investment thesis is that we are in the early stages of a revolution," he says. 

“Based on research we've done specifically on the cell-therapy market, for example, there's about 2,000 active clinical trials. But there’s nowhere near enough outsourcing capacity long term, especially in certain sub-sectors like ex-vivo cell therapy manufacturing.

“Moreover, people are still learning how to outsource more effectively as all this innovation is taking place. So we're in the early days for cell therapy. The marketplace and the science is compelling.”

Outsourcing options need to be as well.

People And Positioning?

Frank Lis is a General Partner along with Maingi at Kineticos Ventures. Lis, like Maingi,  is an experienced pharma-industry professional. Among the highlights of his career, he was instrumental in the establishment of Catalent (when it was spun out of Cardinal Health in 2007).

He’s also all-in on investing in cell-therapy companies and creating CDMOs to adequately serve them.

 “CDMO is a broad category; there're different levels,” Lis says.” Some are good, some aren’t. Some have good margins, others terrible margins.”

Among a plethora of factors when investing – “What is their individual value proposition?” is his key question – Lis zooms in on human resources. That is, the leaders running the CDMO and those professionals performing the work.

“People are critical in this CDMO space,” he says.

“Most everybody has similar pieces of equipment, buys the same bioreactors, et cetera. It is the people behind it that make it happen. When you're doing any kind of diligence of a CDMO, I say the team that is running the company is most important.”

In other words, the professionals at the CDMO add to the productivity and the bottom-line profitability, key metrics for any investors. And who among our readers doesn’t want a financially secure and productively managed CDMO as your partner?  

Maingi says when he looks to invest in (or even establish) a CDMO, he starts with this question:

"What is their participation strategy?"

By that he means which segments of the markets are they participating in? Which services do they offer? “A small-molecule CDMO is different than a CGT CDMO,” he says

A main difference is the requisite technology-adoption curve. For example, small molecule technologies have been around for decades. “The market is still large; it just doesn't grow very much.”

In the U.S., Maingi explains, some of that is driven today by what might be called “industrial policy,” with older technologies assigned lesser investment priority both in terms of government largesse and private-investment decisions.

“Older technologies get shifted to China, India, other lower-cost producers. The U.S. desires to keep the higher margin, higher complexity work. That's happened throughout my lifetime,” he says. “Small molecules to mAbs, now to cell-and-gene therapy.”

“Therefore, to the extent that CDMOs can participate in higher growth, more complex areas, their strategy is beneficial for attracting the investment community.”

But it appears there’s  not enough of those dollars being put to work, particularly for service providers emerging and growing along with their cell-therapy customers, as our unhappiness gauge above demonstrates.

To continue to build up advanced-technologies, “a lot of CapEx is going to be required” on both sides of the drug development and manufacturing outsourcing equation.

New, expanded, upgraded facilities and labs, equipment and other tangibles are needed. To this list and echoing Lis, Maingi adds “and competitive hiring is essential.”

“In the CGT space – on the service side – there's a clear out war for talent,” says Maingi, and it starts in the C-suite and on boards, he says.

“If you don't have some professionals that others recognize as thought leaders, you're not going to get as much work from clients, or funding from investors.”

Moreover, today those experienced and “recognizable leaders” smoothly (and quite often) travel back-and-forth between sponsors and CDMOs when taking on new positions.

That adds to the competitiveness, but it is also indicative of an investing ecosystem at human-resource equilibrium.

Most Profitable

Maingi returning to strategy.

“From an investment standpoint, you think about a lot of different things, but that market-participation angle is really important,” he iterates.

“Investors will pay a lot more money for a CGT company than a SM company. An organization doesn’t have to be profitable in order to sell for $500 million in this newer space.”

Which should directly correlate to CGT-supporting CDMOs also being the beneficiary of more funding – more mergers, or as we saw in part one, carving.

“I always consider whether we are riding the wave or creating it,” Maingi says.

“In cell-and-gene therapy we are riding the wave. There're billions and billions of dollars being invested in this area. That's going to continue for a long time.”

Other investors, Maingi says, may feel the exact opposite about opportunity – small molecules aren’t growing as much or getting the attention, but they are stable and have good profit margins. Or they see niche or other counter-trend opportunities. Those, too, are industry-helpful investment theses.

“We’re early-stage, growth investors,” counters Maingi. “We need to see growth from the time we invest until the time we sell a company, which is usually about five years.”

And growth needs to emanate from both the biotechs and the CDMOs for either to succeed. Maingi and Lis have this ecosystem investing as a personal mission and business goal.

That might make everyone a bit happier.