M&A in Pharma and CRO/CMO Industry
Experts Explain How to Turn Challenges Caused by Consolidation into New Business Opportunities
Recently, the pharmaceutical contract development and manufacturing organization (CDMO) industry has been extremely active in M&A, as is the pharma and generics industry itself. The recent acquisitions of Capsugel by Lonza and of Patheon by Thermo Fisher Scientific constitute only the tip of the iceberg of the rising M&A activity in the CDMO industry.
Amid consolidation, the industry thrives. There continues to be a demand for contractors that offer full service manufacturing, but industry expectations for such suppliers are evolving. In recent years, many drug companies have tried to reduce the number of suppliers they work with, forming strategic partnerships with contractors that offer a broad range of services. The aim is to speed-up time-to-market, increase efficiency, and minimize oversight burden.
While this trend continues, other factors such as the increasing quality expectation from customers and authorities and the demand for traceability have emerged, influencing the range of capabilities that a full-service contractor is expected to provide. Further, pricing pressures (particularly in the generics sector), the advent of new production technologies, and the entrance of new players are changing the market dynamics and put even more pressure on CDMOs, worsening also the overcapacity problem. CHEManager International asked executives and opinion leaders in the chemical and pharmaceutical market to share their experience and advice. We wanted to know: "What current market developments are most challenging for Pharma CDMOs and how can they tackle them?"
Simply click on the company name to get straight to each expert's statement: Avista Pharma, Biesterfeld, Cambrex, Carbogen Amcis, Catalent, CatSci, Cerbios, CG Chemikalien, CRB Group, Evonik, Johnson Matthey, Lonza, Main5, Optima Pharma, Pharma Waldhof, Siegfried, Umicore, Catalent Nottingham
Read the insightful answers of the experts here:
One of the most challenging areas we face in the pharma CDMO space today is “timing”. Every innovator that approaches a CDMO has a specific timeline to deliver in order to achieve their next milestone and ensure the success of the program or, in some instances, the success of their organization. While it’s not economically practical to have a team of scientists waiting at the bench for programs to arrive, a CDMO needs to be able to react quickly to the innovator’s requests and achieve their timelines. Here at Avista Pharma it’s a delicate balance to maintain enough depth at the bench to deploy resources immediately upon contract execution, while ensuring we don’t have much idle bench and manufacturing suite times. To date, we have scaled our resources (facility, equipment and scientists) to the demand and it’s an area we evaluate weekly.
Timothy Compton, vice president Sales, Avista Pharma
Being a distributor for specialty chemicals across Europe, one of our central business sectors is the sale of raw materials for pharmaceutical production. There, we rise to the challenge of working with contract development organizations and contract manufacturing organizations, which demand a specific focus and individualized support. There are high standards in this sector regarding the selection of raw materials, assistance during development and production, support when facing regulatory and qualification issues as well as the guarantee of a qualified supply chain. Our response to this involves ensuring balance in our portfolio so that we can offer products both for new developments and production as well as for solving formulation problems, where our expert teams can also help through technical support.
In addition to a specialized product portfolio, there is a strong demand in the pharmaceutical industry, in particular for a GDP- and GMP-certified distributor, to ensure the quality and safety of pharmaceutical products. We have made it our strategic undertaking to stay abreast of these requirements. Therefore, during the last year, we established an ongoing qualification process for SAP in order to ensure that our IT processes are in line with the pharmaceutical industry. In addition, we have also been awarded the GDP certification by an independent audit.
Andreas Lekebusch, business manager Healthcare, Biesterfeld Spezialchemie
There have certainly been years when conditions are better or worse but innovative, flexible, customer focused organizations that operate at the highest quality level in a price competitive market are likely to succeed.
The small molecule CDMO market continues to grow for perhaps the most sustained period since the 1980s and 90s. In such periods it is normal to anticipate the onset of a downturn, however, there is no sign of that, but key factors, such as the number of NCEs approved, related investment in clinical development, and propensity to outsource could change. Competition among CDMOs is always increasing and at Cambrex we believe that we need to maintain a leadership position by ensuring the highest quality, and making a difference with our customer service, innovation and delivery. Our experts really make the difference.
Big Pharma continues to consolidate preferred supplier lists which can mean a CDMO finds itself excluded from a particular customer for years. However, CDMOs are not in a position to be a preferred supplier to more than just a few Big Pharma companies, otherwise the volume can be too high. Also, the supplier lists change. The customers find that there is a technology its suppliers cannot provide or they are operating at full capacity and cannot meet a new deadline, this is when new suppliers shave the opportunity to break in. It is not really any different to winning any new customer. But tenacity and patience are key during the years you are somewhat frozen out.
Simon Edwards, vice president Global Sales & Business Development, Cambrex
Generally, today’s drug development pipeline is more complex, often using molecules with particular delivery challenges. With so many programs driven by small, venture-capital backed companies without the resources of large pharma, finished dose outsourcing will increase. The number of new drugs approved per billion US dollars spent is falling, mainly because of a lack of efficacy, often discovered at phase 2 or later, when significant resource has been invested. The industry needs to work to find programs that offer the best chance of the active reaching, engaging with the target, and eliciting a response, or otherwise killing the program before spending more. It’s far too expensive to develop all candidates that show promise, and is why customers often turn to development partners to help get to a “go/no go” decision fast.
But no drug shows efficacy if it stays in its pack! There is increasing recognition that for a patient to comply with their dosing regimen, we need to make drugs in forms that aid compliance to the end of the course of treatment. Whereas it was once enough to be able to treat a condition, it’s now increasingly about “how can I live a normal life with my condition?”. Many patients endure having to take medicines at whatever prescribed interval, that may be hard to swallow, taste awful, or induce some undesirable side effect, but apply those same conditions to the young, the old, or the already infirm and most would agree we need to find better treatment technologies.
Chris Halling, director Global Communications & Marketing, Catalent
API batch failure is a problem that has plagued the pharmaceutical industry for decades, with a historically high rate of manufacturing defects causing significant financial losses and potentially delaying drugs reaching the market. Process optimization, in which the steps in a manufacturing route are refined to improve efficiency and robustness, is a crucial tool in helping to avoid this problem. However, a great challenge faced by contract organizations is ensuring that their customers’ assets undergo fit-for-purpose process development at each stage of drug development.
The traditional linear model of drug development, in which a manufacturing route is defined sequentially, with lean investment in the early stages and intensive process optimization at the end stage, is still commonly used in the industry. However, with this model, any process steps that fail upon scale-up will often not be uncovered until late into development. By proactively evaluating process steps early, contractors are able to immediately address any problems and reduce the risk of batch failure occurring further down the pharma pipeline.
A further challenge presented to contract organizations is that customers often resist investment in making process improvements early in drug development. High drug development attrition rates and the continuous need for process development can lead customers to believe that it will not add immediate value to their product, or provide a return on investment. An outsourcing organization must therefore build up strong relationships with all customers, effectively communicating how affordable process development can be incorporated into their programs – thereby reducing the risk of future batch failure in addition to improving efficiency and achieving an acceptable return on investment.
Ross Burn, CEO, CatSci
A simple question but difficult to answer in a simple way. Outsourcing of drug substance and drug product manufacturing is strategic for start-ups and small to medium pharma companies with no in-house manufacturing capabilities. Internal know-how and competences are usually very technical and cGMP manufacturing is not an internal competence usually compensated with consultants.
As CDMO the first challenge is receiving a proper tech package. Expectations are to go directly to the cGMP production based sometimes on medicinal chemistry processes developed at milligram scale. The second challenge starts from the quotation submission and negotiation. If a familiarization run at R&D to confirm a proper technology transfer is understood, the proposal to work on the development in order to make the process viable at industrial scale is seen as unnecessary.
Start-ups have cash – sometimes limited – and their priority is to spend it in clinical trials not in API development and manufacturing in a proper way. There is often a lack of understanding of the ROI for investments done in the development and manufacturing at companies with high reputation and excellent track record. In fact, the CMC part will be carefully reviewed during the due diligence prior to finalize a licensing agreement. A weak CMC part will lower the value of the deal.
Last but not least, an important challenge that CDMOs are facing is the flexibility of their internal portfolio & project management system, leader and teams to adapt to each project dealing with different customers. Having a CDMO leadership or a partner leadership is very different and there are all variables in between the two opposites.
Gabriel Haering, CEO, Cerbios
We perceive that drug companies reduce the number of their contractors by consolidation. They are looking for full-service providers, have increasing quality expectations and presuppose high flexibility. To ensure a continuous supply and mitigate the impact of any product shortage, most drug companies follow a second source supplier strategy, challenging the planning certainty for the individual contractor. CMOs, on the other hand, are expected to provide sufficient production capacities for long-term projects based on potentially increasing demands. This is hard to fulfil, especially when it comes to expansion of human resources. In a market suffering shortage of skilled labor due to full employment, short-term hiring of qualified personnel is a real challenge.
These challenges are tackled by specializing in high-quality bulk products, e.g. consumables for the expanding biotech industry, by continuous improvement of process know-how, and by increasing the level of automatization. We offer high responsiveness and flexibility combined with attractive logistic solutions. Our company strives for strategic cooperation with drug companies and supports them very early in product and process development. Our goal is to let our capacities grow along with their increasing demand over several years.
Stephan Maier, pharmacist and qualified person, CG Chemikalien
There are many factors, and not only one drives the CDMO industry.
Firstly, our customer base has changed dramatically. A large percentage of our revenue came from big pharma companies; however, it’s significantly reduced within Carbogen Amcis as we also now service many small biotech companies. No longer is our business just about chemistry or biology, whether your customer is large or small there’s a need for competent and effective project management to ensure deliverables are met. This is a key element to a CDMOs survival.
Everyone is feeling the pressure from the rising costs and increasingly scarce resources. There needs to be some understanding between clients and suppliers that addressing these issues will take time. This is still a conservative industry in many respects and consequently, we may miss opportunities to move the technology needle further than other industries.
To create strong customer relationships there has to be an agreement which serves both. The practice of deferred payment terms can be a burden for suppliers and can (in the long run) drive up the price of the project for clients. This doesn't benefit both organizations and most importantly doesn't help patients.
The key to establishing great customer relationships is having clear goals, communicated at the start and embedded in the culture of that relationship from all levels of the organization, not just management. We need each other to survive and to create new drugs for patients; this is a serious responsibility and cannot be emphasized enough.
Mark Griffiths, group CEO, Dishman Carbogen Amcis
Pharma customers are constantly being challenged to improve their processes in terms of cost reduction. For Evonik, as a supplier/developer of catalysts, this means constantly developing tailor-made catalysts for each process. A "one-size-fits-all" catalyst grade does not work for our customers who expect a catalyst with a high selectivity – meaning less by-products – and at the same time a high yield. To achieve this, we need to use all of our experience and tools, including for example high throughput screening, to find the best catalyst in our portfolio or develop a new catalyst which will exceed their expectations.
The cycle times for bringing new synthesis generations to launch are shortening. For us this means developing new catalyst generations faster. We addressed this challenge by operating R&D groups in each region to be in close contact with the customers enabling us to react faster to their changing needs.
In addition, regulatory requirements from government agencies are increasing. For this aspect of the business we need to stay in close contact with our customers and follow their lead, constantly improving our quality systems to match our customers’ requirements.
Pharma customers in the Western world are still shifting production to contract manufacturers in e.g. India. We have seen this trend and reacted accordingly. Evonik manufactures catalysts for the pharmaceutical industry in Dombivli, close to Mumbai, where we can offer the whole catalyst cycle: fresh product – refining – precious metal handling.
Martin Bauer, head of Precious Metal Powder Catalysts, Evonik
Focusing on customer needs is the key to a successful contract development and manufacturing organization (CDMO) like Johnson Matthey (JM). In addition to managing client expectations, perhaps the biggest challenges for any project is balancing the parameters that direct successful project completion: development cost, time taken to deliver a solution, and the risk to the customer. This triangle must be optimized for all pharmaceutical development projects.
With any development project, it is essential to minimize the risk, while working within available time and cost limits to maintain the project scope and client expectations. One of the most challenging developments occurs when unforeseen difficulties with synthesis, formulation or development requires a detailed solution. In such cases, it is important for the client to know they can rely on the CDMO to find an appropriate solution.
Experience and on-demand expertise are two critical components that help ensure a CDMO can guarantee a project’s success. At JM, we have both, offering customers a broad range of scientific expertise and physical capabilities covering custom pharma solutions, APIs and life cycle management, controlled substances, and catalysis. Our combined offering helps us identify practices that reduce the risk of any project, while also allowing us to explore time-saving opportunities for instance by potentially running processes in parallel. It is our experience in research, development and manufacturing that allows us to design bespoke and pragmatic approaches to customer problems.
Outsourcing and partnering are growing – and changing – across the pharmaceutical industry. We see more outsourcing as part of the business models of smaller biopharma companies that 1) hold most of the early-stage pipeline and 2) typically need both development and manufacturing partnerships. Accessing end-to-end solutions, at phase- and product-appropriate scale, can be especially attractive for smaller companies and can help reduce complexity, timelines and risk for their drug programs.
Pipeline challenges are also driving increased outsourcing across biopharma. The majority of small molecules face bioavailability challenges requiring enabling technologies (or combinations of technologies) to meet target product profiles. An increasing number of molecules are highly potent and require specialized handling. Additionally, the ability to meet accelerated development timelines – from fast track / breakthrough designations, orphan drugs, 505(b)2 requirements – has become increasingly critical. To meet these challenges, a range of specialized technologies, processing and infrastructure is needed with the phase-appropriate capacity in place to support drug programs from concept to commercialization.
Finally, it is worth citing the role of “flexibility” in meeting the needs of today’s biopharma customers. Medicines are increasingly specialized, with patient-centricity trends continuing to drive product development. Customer needs differ from virtual companies to established “big pharma.” And the needs of drug programs themselves can differ between programs – from end-to-end solutions or any combination of product requirements from API, particle engineered API, to finished drug products. CDMO business models also have to be flexible and tailored to the customer and program.
To help pharma companies overcome drug development challenges, CDMOs need a broad toolkit and depth of expertise, qualities which we are constantly working to create, refine and grow to help our customers find continued success.
Lee Newton, vice president & business unit head API Development & Manufacturing, Lonza Pharma & Biotech
The pharmaceutical industry suffers from many unspecified processes and misses the interdisciplinary understanding of interfaces and deliverables to seamless integrate services outsourced to CDMOs into the own value chain. While the CDMO industry historically has been growing decentralized, the IT infrastructure and data flows approach a central business process model for R&D, including the onboarding of all elements in the process chain such as manufacturer and contract partners. Within the implementation of the new clinical trial regulations, quality management needs to be a central digital hub for any process connected with product quality and patients’ safety. The growing competitive situation puts budgets under stress and increases the pressure on lean development and organizational structures. Especially those R&D projects with involvement of co-development partners need solutions to embrace the complexity. The CDMO industry is facing major challenges within the next five years – and any solution model needs to consider the R&D business process model, the supporting IT architecture and the human as main elements.
Tore Bergsteiner, managing director, Main5
Currently, we see a trend for more biotechnology products and individual therapies for patients. The variety of products increases drastically and many of them are very potent. Therefore, machines have to be highly flexible to process these products, containers and batch sizes. It has to be recognized that the life cycle of products will be much more dynamic and new product varieties and containers have to be filled. This calls for more flexible and reconfigurable solutions that will enable the life cycle management. We will definitely consider this during the conceptual design in order to meet our customer requirements. Two specific examples: the trend towards flexibility is solved with the utilization of robots. We are also developing a process solution for the isolator and freeze-drying field at the Metall+Plastic location in Radolfzell and at Optima Pharma in Mornshausen, that will reduce the current cycle times significantly. Another development that we recognize: we have an increasingly wide range of customers from small start-up companies to manufacturers of biosimilars. Our customers also include those that are highly specialized contract manufacturers up to large pharmaceutical companies.
Gerhard Breu, chairman, Optima Pharma
Data integrity is for the time being one of the top priorities of the US FDA during audits. And the increasing number of warning letters does indicate that quite some companies struggle to fulfill all documentation for historical data. Such lack of data does not necessary mean a creative approach to data and quality, but may be the result of new interpretation of guidelines.
In times of supply chains going around the globe, the need to have a strict control over all materials entering a manufacturing process becomes more and more time consuming and expensive. Depending on the state a company is located, even the same law may be interpreted differently. In addition, depending on the region, the regulatory status of supply chains can be seen differently as well: some may define a material as being a starting material, in other regions the same material in the same process may be categorized as an advanced intermediate. So, from a company’s perspective, the decision not to make a product available to all countries worldwide may be the consequence. Here, one may ask whether it will be best from a patient’s perspective not to get access to a drug because the need for documentation differs from region to region.
For years, at Pharma Waldhof we have been investing continuously to keep our knowledge about our supply chains on a high level. However, we do believe that a global harmonization not only of rules but of the relevant interpretation would be helpful.
Lukas von Hippel, managing director, Pharma Waldhof
Responding and proactively addressing the ever-changing trends in pharma is perhaps the largest challenge for a CDMO. One of the most impactful developments is the rise in popularity of digital healthcare. It has placed increased pressure on CDMOs to develop and manufacture the high value chemicals required to manufacture digital solutions. This includes synthesizing electronic chemicals or high purity materials for equipment amongst others, demanding innovative chemistries.
But, developing sustainable syntheses are becoming a necessity for the pharma industry. To meet these needs, Umicore’s Horizon 2020 strategy aims to establish sustainability as a competitive edge for Umicore and its customers, and position the company as a recognized leader in this space. Umicore has demonstrated its commitment to sustainability in three key areas.
Firstly, it provides access to the vast metathesis technology competence, made possible through the successful acquisition of Materia’s catalyst business in January. Secondly, it has established expertise in large scale manufacturing of complex metal containing chemicals and catalysts. It provides our customers with easy access to sustainable technologies, allowing the creation of highly efficient synthetic routes or elegant chemistry powered by renewables. Finally, it’s societal alignment to the United Nations Sustainable Development Goals (UNSDGs) has translated into doubling its metal recycling capacity. Umicore can now address the issue of metal scarcity by offering customers increased capacity to recycle waste catalysts. In addition to sustainability advantages, it also translates into our sustainable procurement framework, ensuring our supply chain conforms to the UNSDGs.
Christophe Le Ret, global marketing director Precious Metals Chemistry, Umicore
As more and more CDMOs emerge, they begin supporting larger, sometimes global, client bases with the necessity for products that are more targeted, efficacious and cost effective.
In recent years, we have noticed that our CDMO clients need to incorporate flexibility into their facilities in order to have a marked competitive advantage. The companies with room to expand and with equipment and facilities that can be adapted for multiple products or changes in process platforms are the most equipped to take on major industry changes. In essence, we need to build the facility to be able to handle a range of platforms, scales, throughputs, containment strategies, etc. such that our CDMO clients can then market their facility based on that bracketed range with a “if you build it, they will come” mentality. It’s the complete opposite of traditional facility design because it forces us to “option-eer” and design off assumptions.
Over the past few years, the pharmaceutical industry has seen a plethora of new processing technologies, design approaches and construction methodologies that allow for increased flexibility – closed/continuous processing, single-use systems, ballroom manufacturing, modular/”podular” construction and prefabrication – to name a few.
By bringing together the best in current industry thinking and process closure technologies, companies can create innovative facility design solutions that dramatically reduce capital and operating costs while increasing regulatory compliance. These methods significantly reduce facility complexity, initial capital investment, energy consumption, project schedules and cost of goods.
Steve Attig, senior process engineer, CRB Group
In a strongly fragmented and rapidly consolidating CDMO market, which has high demands on quality and technological innovation, one cannot be satisfied with the status quo, but has to continue developing and to actively shape one’s business environment. Siegfried’s challenge for the future is to reach critical size also in the drug products sector. This will add to our high level of dynamics and continue to raise the company’s intrinsic value. The core of our strategy aims to strengthen Siegfried’s position as a leading integrated supplier to the pharmaceutical industry. Additionally, we to enter or enhance our exposure to new technologies like micronization and fill/finish of biologics. We plan to reach this level of growth by developing internal structures as well as acquiring strategically suitable companies.
Rudolf Hanko, CEO, Siegfried
An area of the industry where CDMOs play a particularly important role is in the development and provision of clinical trial materials for new drugs. Clinical trials can take up to 6 years to complete prior to submission for market approval, with costs often in excess of $30 million. There is a constant pressure for CDMOs to reduce the product development time to clinic. It is not uncommon for the target timeline from the availability of drug substance to Phase I clinical trial to be set at six months, compared to typically twelve months in the past.
An additional challenge is that the majority of new drugs emerging from discovery are poorly soluble. Therefore, they require more sophisticated formulations to ensure that they are orally bioavailable – demanding more time and resources for development. CDMOs, therefore, have to take smarter approaches when conducting drug product development.
Efficiencies can be made to drug development programmes to provide guidance on formulation design through the use of absorption modelling and simulations, based on the known and predicted attributes of the drug substance. The use of miniaturized screening protocols for them selection of appropriate formulation strategies can also enable decisions on development pathways to be made faster and with greater confidence.
A CDMO must be able to increase speed and competence in order to provide the ‘best chance of success’ for a drug candidate in clinical evaluation.
Rob Harris, Chief Technical Officer, Juniper Pharma Services now trading as Catalent Nottingham