At first glance, it could be seen as a cheerleader chant to pep up the crowd supporting a football or basketball team. You are right, but in fact, it is not.
Amongst the outsourcing industry, the CDMO’s are the modern kings. They are the new X factors, those who have talents that you need! You might be wondering already if the guy who wrote this article is a little crazy but in fact that’s the reality for CDMO’s. You will understand by reading this article that a good CDMO has a gold value today, a value to attract investment money almost equal to the bonds market issued from a safe state rated AAA.
Nevertheless, combining those two letters together is not enough. The aim of this article is to help clients and investors to better understand what makes a difference so as to better filter their future partner selection. Let’s have a strategic view on this market leaving the technology and innovation to scientists.
A Market Fragmented with Multiple Differentiation Factors
There are differences and to be honest, these can be significant ones. This is essentially because this concept of CDMO is a very young one. Since its inception almost 15 years ago, the outsourcing market was driven essentially by CRO’s that were ending a decade of consolidation and CMO’s offering their capacity of production, CDMO’s, even five years ago were still marginal. All of the sudden, we saw an increasing number of companies calling themselves CDMO’s, a bit like the Roman empire twenty centuries ago adopting Christianity as the official religion despite, at its inception, being persecuted… by the Romans themselves.
I even remember internal discussions four years ago among Amatsigroup upper management (the previous name of Eurofins CDMO Europe) and our former private equity advisors about the acronym we should use to build up our brand: CRO, CDD (Contract Drug Development), CMO or CDMO? Fortunately, the nature of the services we offered meant we were a CDMO and not CMO and/or CRO, we took the decision to be part of the CDMO family so as to build our brand successfully. I cannot imagine what would have been our SEO digital success if we would have selected the CDD acronym.
In this jungle, there are a number of players with a huge variety of services or focus, sometimes drastically different from each over. For instance there are some active within the drug substance field and others within drug product only, some have biological focus others have a chemical API focus, some have development capabilities others are manufacturers only, some have innovative niche technologies versus ones that have not transitioned from their conventional-form molecule portfolio, some focus on earliest phases with scale up whilst others rely on later phases and huge commercial production volume and some, in most of the cases, the biggest, with sales in excess of EUR 500M are combining all (sometime built up through external growth).
Using this acronym becomes now the new standard but nevertheless, if you drill down into the details, whether you are a CdMO or a CDmO makes a huge difference to your offering and your competencies. Big “D” small “m” versus a big “M” small “d” are not the same kind of beast.
As far as I’m concerned, I differentiate the CDmO’s that are leveraging their limited capacity of manufacturing to fully support the development pathway of their clients with efficiency versus the newly converted CdMO’s which are looking to penetrate the earliest phases of the supply chain to offer end-to-end services or to fill their free capacity normally dedicated to larger scale of production.
The M&A Trend and Consolidation
The market is moving despite being highly fragmented due to the variety of players listed above. People who are following the evolution of the outsourcing market can easily make a parallel with the CRO industry consolidation that started at the beginning of the new millennium. In almost two decades, several juggernauts have popped up with revenues equal to mid-sized pharma making a few billion dollars in sales.
Is this the trend that the CDMO market will follow? The future will tell us, nevertheless there are some specifics that may need to be highlighted:
- CDMO industry is more and more technology driven and CAPEX intensive, it requires a mix of complex expertises (formulation, manufacturing, analytics, clinical packaging with cold conditions) and different quality levels depending on molecule toxicity (highly potent, cytotoxic) independently from volumes.
- Acquiring Phase I opportunities for big CROs has been a way to attract customers earlier to support them towards very lucrative Phase III trials. Newly integrated Phase I opportunities became loss leaders which affected the overall financial attractiveness of this niche market.
- For a CDmO, COGS for producing clinical materials has a certain threshold and cannot be leveraged through volumes to benefit from economy of scale. In other words, for the true CDmO the development costs cannot be the loss leader of the commercial manufacturing.
- The costs for entry for newcomers within the CDMO arena are huge especially in the field of fill and finish or for building capacities for gene therapies.
Ten years ago, we also faced a significant event which affected the finance and business world called the “crisis of the subprimes”. The pharmaceutical industry, like other industries, suffered too, resulting in a lot of cost cutting and cost savings. Outsourcing policies became the preferred choice for the industry and a lot of employees were made redundant, facilities were shut down or sold to CMO’s, with the focus being put on the most promising molecules achieving later phases with a higher probability of success. The direct consequences of this outsourcing strategy has been that many companies were spun out or carved off from pharma companies and a wave of new start-up companies emerging which are now flourishing. Large pharma were still watching the most promising ones, surviving up to Phase II to acquire them or license their molecules to mitigate risks after proof of concept.
The new entities that started without a molecule but perhaps with a brilliant idea, those who acquired molecules no longer a priority from their former employers or the virtual companies of one or two individuals absolutely needed support from a CDMO to help the molecules, new indications, or ideas progress to the clinic…in these instances the CDMO can also be considered as a babysitter.
In parallel, over the same period starting in 2008, we have seen accommodating policies from Central Banks who supported financial institutions through quantitative easing (QE). As a consequence, this massive flow of incremental money was invested in the most promising gold nuggets throughout capital development or private equity. CDMO traction became an attractive proposition for those investments as well.
Combining this flow of money with the scarceness of attractive targets for sale created a very narrow funnel of acquisition opportunities leading to a price inflation on valuation. Added to this was the evolution of low interest rates (even now negative) which made cash available for investing rather than for saving. Consequently, the combination of flow of money, rareness of opportunities and negligible interest rates pushed up the M&A valuations with huge multiples on EBITDA. The medium-term outlook does not suggest any cooling down of this trend to “buy at any price”.
To illustrate what was described above, if I could quote one my former colleagues, un-doubtful industry leader: “at that speed, we will see soon more Private Equities flying around in the corridors of life sciences tradeshows or exhibitions than exhibiting companies to acquire”.
The Client Choice: Who is My Favorite CDMO?
There is somebody who should be central in that discussion: the customer. What do they want? Do they know what they want? How can we help them to better understand their needs and requirements? Today, a client looking for CMC services needs a clear understanding to help filter the CDMO jungle to really meet his expectation.
Indeed, there are a lot of small companies that really need support and coaching on how to bring their clinical compound to the proof of concept. Sometime, they start from a blank page and need full support under tight timelines due to their funding constraints. They are looking for expertise and flexibility that only a real CDMO can offer. Indeed, they are not yet thinking about their industrialization process, their prime goal is to successfully move through the earliest non-clinical and clinical phases for their molecule which can always be the last resting place for so many of them.
As stated earlier on this article, a CDMO can also be considered as a baby-sitter as the clients are fragile. Indeed, they need our expertise and flexibility but also they’ll need close attention and sometimes patience as well. Their backbone is their cash, their oxygen comes from respecting the deadlines they have with their investors to achieve key milestones. Whether these deadlines are relevant or not that’s another story, but that’s the role of a real partner like us to try educating them on what is feasible or not.
This is why when talking to some of the big players, newly branded as CDMO, they could get the feeling that they are neither a number one priority nor, indeed, a priority at all. Rather just a number in their selection process among a long list of prospects for those big CDMO’s. Maybe less flexible, offering deadlines from development to production which are not fitting their expectation also because their project is considered as too small versus collaboration with mature, thus, “less risky” pharmaceutical companies. As a consequence, those extended timelines could affect their short term cash position with an increase of the cash burning rate due to those delays which kill them softly.
As a conclusion, a high quality, human-orientated CDMO with the expertise and flexibility to achieve key relevant milestones should rank first for a biotech trying to choose a partner. Surprisingly, price, although important as well, comes after for the well-funded customers. However short term cash and cash flow management still remains the number one consideration (and constraint) for the majority of biotechs.
Now and Tomorrow
The key question for a CDMO is how to match demand and capacity constraints? Clearly there is a shift towards biologics recognized by all the industry. Biologics account now for almost 50% of the pipeline in number but also a big share of the USD 182 billion R&D spending in 2019 per Evaluate Pharma recent report.
As a consequence, the attractiveness of those (clients and subcontractors) positioned on the more conventional dosage forms for small molecules has been impacted (oral, liquids, capsules, etc.). Most of the recent market studies shown indeed low single-digit growth rates (2 to 3% yearly) e.g. far below the double-digit growth from biologics or injectable forms.
Overall, innovative technologies, services from drug substance to fill and finish especially for biologics, parenterals overall for small scale manufacturing, highly potent and cytotoxic capacities are drastically missing on the market. The scarceness of CDMO’s offering these services is linked to a significant barrier of entry: the huge cost of investment and timelines needed for being ready to operate. The boom in personalized medicine for treatment of various kinds of cancers and genetic disorders is also increasing but the lack of combined development and production capacities are creating a bottleneck … fueling the fire for buying at any price.
About the Author
Frédéric Gaussens is currently Vice-President for Eurofins CDMO Europe. With almost 15 years of experience within life science outsourcing industry, he held different upper management positions in Finance Control, Business Development / Key Account as well as Strategy / M&A that he handled with success among well-known global pharmaceutical outsourcing leaders (contractor laboratories, CRO and now CDMO). www.eurofins.com/cdmo