CDMOs Benefit from the Growing Biologics Market

The contract development services business enjoyed phenomenal growth over the past decade, fueled by a doubling of the new product pipeline. Although the industry has experienced a downturn in its fortunes in 2009, a new analysis suggests some significant upside for companies helping to develop biopharmaceuticals.

Jim Miller

PharmSource recently completed a major analysis of the clinical supply chain market. We modeled the spend for clinical trial material (CTM) development and manufacturing, including process development and manufacturing for active pharmaceutical ingredients (APIs), formulation and manufacturing of dosage forms, and associated analytical activities. We conducted extensive interviews with both buyers and sellers of clinical supply chain services to understand the key behaviors and trends driving the industry. The analysis goes into considerable depth on analytical chemistry activities.

OUTSOURCING HIGHLY PENETRATED

The PharmSource analysis estimates industry-wide annual expenditures on CTM development and manufacture (small and large molecules) at about $9.3 billion, divided almost evenly among process and formulation development, analytical development and testing, and manufacture of CTM. The biggest bucket of spending is in early development (preclinical and Phase 1), thanks to the large number of projects in the pipeline and the high cost of API characterization and process development, especially for large-molecule compounds.

Of the $9.3 billion in total expenditures, the development and clinical-scale manufacture of large-molecule candidates account for nearly 60% of the total, or $5.4 billion. The development and clinical manufacture of APIs account for 90% of that $5.4 billion expenditure, with development of the drug product (dosage form) accounting for the rest of the spending.

The most revealing aspect of our analysis is the degree to which contract services have already penetrated the clinical supply chain. We estimate that as much as two-thirds of CTM development and manufacturing expenditures are already outsourced. That's a much larger proportion than we expected when we started our analysis. The principal source of contract services' large share is the small and mid-size bio/pharma companies, which account for 88% of the outsourced spend. Small- and mid-size bio/pharma companies tend to be highly dependent on contract services and account for 75% of the candidates in the new drug development pipeline. By contrast, the large global bio/pharmaceutical companies, which account for a quarter of the new drug pipeline, make up just 12% of outsourced spend.

BIG API INVESTMENT

For the large-molecule segment, the big market driver has been the large number of candidates in the pipeline and the heavy expenditure on process development and clinical supplies manufacture at the early development stages. There were more than 1,800 large-molecule candidates in development at the beginning of 2009 (excluding vaccines, cell therapy, and oligonucleotide candidates), and 60% of those were in the late discovery and preclinical stages. Costs for process and analytical development for early-stage candidates easily run in the $3–5 million range, even before the candidate gets into human testing, and initial GMP batches will add another $2–3 million. Spending for outsourced API development and manufacturing services exceeds $3 billion, more than 60% of the total industry expenditure (Table 1).

Table 1: Expenditures on large-molecule API development (USD, millions)

LARGE MOLECULE UPSIDE

The PharmSource model clearly highlights the dilemma faced by contract development and manufacturing organizations (CDMOs). They benefitted greatly as the number of early development candidates grew to over 6,000 at the end of 2008, a 55% increase from 1999, and are now suffering as the number of compounds slips back. Faced with a shortage of capital, early-stage companies have been forced to halt work on many candidates and expend funds on remaining candidates more cautiously. Our model projects that a 20% drop in the number of early development candidates would result in a 10–15% drop in outsourced development spending, which is in line with what we are seeing now.

Our model points to some substantial upside opportunities for the large-molecule segment of the market, however. The continuing shift in mix from small- to large-molecule compounds will likely be a significant boon to the contract services industry. We expect that if large molecules grow to 30% of the pipeline from their current 22%, total outsourced development spend will grow by 15%. Of course, where that spending takes place will shift as well. CDMOs specializing in large-molecule API characterization, process development, and manufacture will increase their market share while small-molecule API manufacturers will lose share.

Of course, which companies will be around to participate in the growing biologics market opportunity is still open to question. The contract services market is going through a significant restructuring as it adjusts to changing realities in the world of finance and the bio/pharmaceutical industry. We have already seen one contract biomanufacturer go out of business (QSV Biologics) and one other shut down its manufacturing operations (Wuxi Apptec, which continues to offer cell line development and analytical services). There will be significant opportunities for contract service providers as we come out of the restructuring process, but there will definitely be winners and losers.

Jim Miller is the president of PharmSource Information Services, Inc. , Springfield, VA, 703.383.4903, jim.miller@pharmsource.com