Vendors see opportunities as outsourcing demand rises; may compete with CMOs
Vendors to the biopharmaceutical manufacturing industry are seeing an opportunity to offer valuable services that complement their products. This is increasingly a strategic priority for introducing new products, according to BioPlan Associates’ latest annual industry study, the 13th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production.1 This could be seen as a response to rising demand for outsourced services, and comes as vendors are seeing growing business from offering services.
Based on our survey of 191 vendors to the biopharmaceutical manufacturing industry, our study shows that more than eight in ten vendors are either very likely (23.1%) or likely (59%) to offer more services that complement their existing products. In fact, they’re about equally as likely to plan more complementary services as they are to plan the introduction of more products (82.1% and 81.9%, respectively). In another nod to their services plans, more than seven in ten are likely to introduce more service offerings. This may put them in direct competition with contract manufacturing organizations (CMOs).
Vendors’ Services Growth Rivaling Equipment Sales
The continued attention paid to services is likely due in part to the prior success vendors have had experienced. When we asked suppliers to estimate their sales growth across various segments, we found them averaging services (e.g. engineering, validation, CRO) growth of 14.4%, up from 12.1% in last year’s survey and 11.8% the year before. In fact, services growth is now above the levels seen from 2007 through 2011, when they ranged around 12%.
Yet, sales growth for equipment and instrumentation remains the most buoyant, at 17% this year. Although sales growth has receded in recent years, down from 18.7% in last year’s study and 19.7% in 2014, the growth continues to demonstrate the vibrancy of this market segment.
Technological improvements in cell culture technology may be impacting vendors’ consumable sales both negatively and positively. The various technological improvements in bioprocessing have led to increased upstream titers, but also decreases in volume of culture media usage, with many bioprocesses simply being operating at lower scale. Continued improvements in expression systems and culture media supplements are key technological factors supporting reduced growth in sales, such as culture media. But on the other hand, the increased use of more expensive serum-free and bioprocess-specific-optimized culture media has likely enhanced this market sector’s sales growth, in terms of revenue. Similarly, prices for basic bioreactor bags may be reduced, but users are increasingly customizing these, such as adding their own custom manifolds, ports, imbedded sensors, etc., which adds significantly to base prices.
As such, comparing sales growth for various segments of vendors’ business shows that services growth (14.4%) is about on par with raw materials and consumables (14.5%) growth, and is closing in on equipment and instrumentation (17%) sales growth. For its part, the other supplier segment we measured, CMO marketing, is growing at a 12.8% rate, up from last year’s 11.8%.
Vendors’ Services Prices Set to Increase
One factor in revenue growth for suppliers will be their change in pricing. And on this front, we see that along with the increase in services, suppliers plan to increase their pricing also.
Services pricing growth has remained relatively muted in recent years, however. Respondents to our survey estimate that they hiked their pricing for services by 2.4% last year, right within the 2-3% range seen between 2010 and 2015.
That 2.4% services pricing growth was higher than for instruments (1.5%), but lower than other sectors. For example, suppliers estimated that they increased their consumables and materials pricing by 3.2% last year, their disposable, single-use device pricing by 3.4%, and their CMO marketing pricing by 5%.
The story changes when looking forward, though. This year, suppliers project that they will increase their services pricing by a hefty 4.1%, outpacing pricing growth for disposable, single-use devices (3.6%), consumables and materials (3.4%), and instruments (2%). The only area eclipsing services in expected pricing increase this year is CMO services, set for an impressive increase this year.
To justify increased prices and minimize their effects or customers, vendors will need to clearly demonstrate the value of their products and services. Value-added components of an offering, such as training, may help to offset price increases and close sales. Those vendors that take the time to develop strong customer relationships and that more clearly understand their customer requirements should be able to both grow market share and also better support any needed more price increases. For now, pricing increases don’t seem to have affected customers to a great degree: only about three in ten vendors say that customers are demanding lower prices, a figure that has barely budged over the past five years.
Figure 1. Biophama Suppliers’ Business and Marketing Plans, 2016Why More Services?
The vast majority of vendors aim to increase the level of services they provide – and offer new ones – and this is likely a reflection of the direction the biopharmaceutical manufacturing market has taken in recent years: more outsourcing.
Indeed, the breadth of biopharmaceutical manufacturing outsourcing continues to grow across numerous activities, making outsourcing an increasingly attractive market. To quantify just how common outsourcing has become, we identified 24 activities and asked respondents to indicate which – if any – they were outsourcing to at least some degree. We found that roughly nine in ten respondents (89.7%) are outsourcing analytical testing or bioassays to at least some degree, and that at least seven in ten are outsourcing the remaining activities in the top five. Other areas of opportunity include:
- Toxicity testing
- Fill/finish operations
- Validation services
Additionally, a majority reported outsourcing at least some activities for sixteen services, ranging from contract research to cell line development. Of note, these figures have trended up in recent years for many activities, even among the lesser-outsourced activities. Some of the larger areas of growth this decade include:
- Analytical testing of bioassays;
- Cell line stability testing;
- Host cell protein analysis testing;
- API biologics manufacturing;
- Project management services; and
- Upstream process development.
Figure 2. Vendors’ Average Pricing Changes, 2009-2016 (projected)In other words, outsourcing - particularly of testing services - is becoming more and more common, providing a potentially lucrative area of opportunity for suppliers.
Suppliers to Benefit
Some vendors are increasingly bundling-in bioprocessing-related regulatory support and other services. For example, bulk culture media sales may include contracting for media and process optimization. And it’s worth noting that the contrary is also occurring, with various service companies previously best known as CROs, increasingly offering biopharmaceutical CMO services; and Lonza, the largest CMO, increasingly offering culture media, reagents and other products.
Some areas of growth for suppliers in terms of service offerings include validation, contract research, media optimization, and cell line development. The proportion of biomanufacturers engaging in at least some outsourcing of these activities has increased fairly strongly since 2010. And the outlook for some is also healthy, led by validation services.
Indeed, about one in six respondents to our survey project that they will be outsourcing validation services at “significantly higher levels” in the next twenty four months. For context, that puts validation services as fourth on the list of activities set for future growth, behind only analytical testing of other bioassays, fill/finish operations, and API biologics manufacturing.
Close behind, about one in eight respondents are expecting to significantly increase their outsourcing of cell line development, good for the fifth spot out of the twenty four activities measured.
Conclusion
Steady growth reported by vendors providing services to the bioprocessing industry attests to the integral roles and importance of these services provided to biopharmaceutical companies. The trend toward outsourcing and sales bundling has prompted many vendors to add more services to their equipment and consumable offerings.
Moreover, the growth of the biopharmaceutical industry in emerging markets, the increasing need for validation services, and the continued development of new products will continue to provide service providers with opportunities.
Suppliers will need to ensure that the quality of those services remains high. Currently, biomanufacturers surveyed for our study indicate that that vendor change notifications and change control issues are a bigger issue than poor service quality. Still, they are more apt to complain of poor service quality than of poor product quality, suggesting that as suppliers integrate more services with their products, they will need to make the necessary efforts to keep them of comparable quality.
It will be interesting to see what – if any – impact is felt by traditional contract manufacturing organizations as equipment-anchored companies begin to offer process development and related services traditionally only offered by CMOs. These equipment-anchored suppliers envision process design and other services as complementing and increasing their mainstream equipment and supplies sales, with the services obviously favoring process development and scale-up using their own products. While this enables larger sales of more bundled products and services – maximizing sales for the vendor as well as convenience and potential cost-savings for clients, it further increases reliance by customers on their selected vendors and means that bioprocessing CMOs and equipment/reagent suppliers will be competing to sell similar services to the same base of clients. This has the potential to see them butting heads in the marketplace.
References
- 13th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production, April 2016, Rockville, MD www.bioplanassociates.com/12th
Eric S. Langer is president and managing partner at BioPlan Associates, Inc., a biotechnology and life sciences marketing research and publishing firm established in Rockville, MD in 1989. He is editor of numerous studies, including “Biopharmaceutical Technology in China,” “Advances in Large-scale Biopharmaceutical Manufacturing”, and many other industry reports. [email protected] 301-921-5979. www.bioplanassociates.com
Survey Methodology: The 2016 Thirteenth Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production yields a composite view and trend analysis from over 200 responsible individuals at biopharmaceutical manufacturers and contract manufacturing organizations (CMOs) in 30 countries. The methodology also included over 150 direct suppliers of materials, services and equipment to this industry. This year's study covers such issues as: new product needs, facility budget changes, current capacity, future capacity constraints, expansions, use of disposables, trends and budgets in disposables, trends in downstream purification, quality management and control, hiring issues, and employment. The quantitative trend analysis provides details and comparisons of production by biotherapeutic developers and CMOs. It also evaluates trends over time, and assesses differences in the world's major markets in the U.S. and Europe.