Chemical Pharmaceutical CDMO – almost everybody wants to be one

8

What is CDMO in Fine Chemicals?
According to Peter Pollak (1) Contract Manufacturing (CM) is the antonym for Outsourcing. CM constitutes the “Königsdisziplin”, that is, the most prominent activity in the fine chemicals industry.
Peters’ definition of Outsourcing: «The transfer of an industrial activity – production or service – that so far was carried out in-house to a third party through a contractual agreement.
Note: If outsourcing is done with an overseas partner, it is also referred to as “offshoring.” (And today, there is the term “onshoring” or “reshoring”).

 

Other quotes from Peter:

• “Within CM for pharmaceutical companies, entry gate is number 2, when the new drug is in Phases II and III.”
• “Newcomers must start their business development effort already at Phase I. “
• “Entry gate number 4 is linked to the decline phase of the life cycle, when patent expiration is approaching.”
• “The chance of a particular fine chemical company to build up a rewarding exclusive business depends on a “two-level demand hierarchy”, namely,

 

1. The overall outsourcing policy of the customer base, primarily the pharmaceutical industry, if we are looking at it from the perspective of a Big Originator Pharma company, a Medium Sized established pharma company or a Startup/Venture company.
2. The fine chemical company must succeed in acquiring a particular business. This depends on the abilities to meet the customer’s needs. As the “hardware” of the top-tier fine chemical companies does not differ very much nowadays and complies with high standards, the success factors have shifted to the “software”. This statement implicates that for successful CDMO business a strong and dedicated Business Development/Marketing & Sales Team must take care off.

 

This leads me to an analogy with the approach of famous scientists and of how new insight and progress is emerging, where Werner Heisenberg (2) and others distinguish between the physical such as mathematical formulas, or in our case SOP’s, Workflows or Rules, I call them the HARD FACTORS, and the psychical part with ideas, intuition and attitude which I call the SOFT FACTORS.

 

The Soft Factors can be as important as the Hard Factors (which are plants, available capacity, R&D resources, location, financial strength, chemistry and technologies).

 

As Soft Factors I define – even if it sounds a bit worn out – Customer Orientation, Reliability, Open Books Policy (for costing and pricing), inform you client ready away if there is a problem such as technical issue (equipment breakdown, foreign matters in the product, I remember where we had a case where pieces of a glass-lined reactor were in the product), delays due to late arrival of raw materials for example. Flexibility in production planning, as the CDMO providers need to follow the logics of the customer’s clinical development program for example.

 

Current state and trends
Walking around during CPhI Barcelona 2023, attending DCAT 2024 and other events, it seems that almost everybody wants to be a CDMO today. However, entering this field needs first to gain experience, also the hard way, and as we have seen with the example of the fulminant announcement and start of Euro API, it does not always work out as some high-level business plans anticipate.
So we could distinguish between the well-established CDMO’s and those newcomers and “wanna-be” CDMO’s.

 

Typical well established CDMOs are of course Lonza, Dottikon, Siegfried, F.I.S., Flamma, Dipharma, Fareva, Helsinn, Hikal, Porton, some components of today’s Seqens and other larger groups, I apologize if I do not quote the entire list. These guys have been in the CMO, CDMO, CRAMS or call it as you like for decades, adapting to an ever-changing landscape. In fact, it is the consensus between the old foxes in our industry that Peter Pollak was the “inventor” of the CDMO business, or let’s better call it the “CDMO service” starting in the early 1990’s. In these days, the pharma industry was much more vertically integrated, and most large pharma company had its own manufacturing sites.

 

This has completely changed, as today, still some pharma companies do have their own API sites, but much more is outsourced, as running a fine chemicals plant is capital intensive, and often, pharma built plants or entire sites for one product. This repeats by the way with Novo Nordisk for their Semaglutide, and let’s see in maybe 10 years from today if they will divest this again, as Roche did years back with their Florence, Virginia site, with Patheon.

 

So, it looks as if the cake today is bigger and that there is more room for CDMO providers. But how much room?

 

Let‘s look at some numbers:

 

The total global CDMO market is estimated to be US$ 50.58 Bio in 2024, increasing to US$ 68.04 Bio by 2032.

 

According to a market study of the Chemical and Pharmaceutical Association CPA (3), the global APIs market in 2020 was US$ 187 Bio, of which, please note, still 83.4 % were small molecules, captive production (in-house with pharma companies) contributed with 62 % or US$ 96.72 Bio, and 35.5 % with third parties, i.e. US$ 59.28 Bio. Global R&D pipelines showed 35.5 % of oncology APIs.

 

According to Precedent Research market report 2023, for API market demand, the USA were and are still leading with 38.31 %, followed by Europe with 28.3 %, Asia Pacific 22.4 %, Latin America 5.3 % and other countries with 5.8 %. The Compound Annual Growth Rate (CAGR) worldwide average is forecasted as 6,3% from 2023 to 2030. The prevision of growth in China is 4.1% and in India 5,7%. In the Sud-East Asian area the CAGR estimated is 6.4%. Regarding the API category, oncology is well above average with 11% growth per year. On the contrary, antibiotics stagnate at 3.3% of growth.

 

Remarkable information is that about 70% of all synthetic intermediates used worldwide come from China and that 95% of small molecules contain at least one Chinese component. This percentage approaches 100% if fermentation products are excluded.
This picture will not substantially change in the next 3 – 5 years – but! – China and India, so far a suppliers market, and in particular China, are on the way to become originator countries for new drugs by themselves. In the last 10 years, hundreds of biotech companies were founded in China, and they have started to generate new drugs. Who knows, maybe in 10 years, Europeans might go to acquire CDMO projects from customers in China or India?
The CDMO market has become very competitive. Going around during CPhI 2023 in Barcelona or DCAT week in New York in March 2024, almost every company now claims to be a CDMO. So more players for the same cake, even if it is still growing.

 

According to CPA (2), there are about 3’310 API companies worldwide, which can be broken down to the following classes:

 

• Big Pharma API sites approx. 132 (4 %), mostly in Western Europe, USA, Canada and Japan;
• Established API manufacturers 260 (7.3 %), mostly in Western Europe, USA, Canada and Japan;
• Less established API manufacturers (0.8 %), mostly based in Asia-Pacific and Latin America;
• Local 490 (14.8 %), mostly based in pharmerging countries (all API makers in Russia and Ukraine are rated as “local”, for example);
• Potential future manufacturers, interested in supplying APIs to regulated markets, with limited or unknown performance 600, mostly in Asian countries, Latin America or Eastern Europe;
• Unrated manufacturers 1820, mostly in pharmerging countries;

 

Considering Established and Less Established manufacturers gives a number of approx. 390 – 400 API makers, which can actually be considered as competitors among each other. On the other side, there are over 600 API makers wanting to also serve regulated markets, and out of this pool, every year new players are emerging.

Remarkably, the USA with the largest API demand only shows 2.1 % of total API makers. We shall see if this will increase in the next future due to the new legislation in the USA for “reshoring” essential drug production.

 

A short study of Mundi Care Life Sciences Strategies, Germany (4), says that in 2020, 2/3 of currently valid CEP’s for APIs are held by Asian manufacturers. According to MundiCare, Europe has lost its strong position as API producer, and Asia is significantly outperforming Europe. Today, many European suppliers focus on special APIs (apart from their legacy products which are still being sold and sometimes seeing a revival). Once an API company has registered CEPs, it has the potential to also become a CDMO, as we can see today, strolling around in the aisles of the events in our industry.

 

The typical size of a CDMO ranges from US$ 20 Mio to US$ 500 – 700 Mio. In sales, serious competitors are about 250 – 300 in total. Thus, the overall market value of APIs and Intermediates are not really relevant for a single CDMO provider as a total market size of US$ 187 Bio. and a turnover of less than US$ 1 Bio. would only represent 1.5 % of the total market. During my career in leading positions in the European CDMO space and in the 10 years of my own consulting activity for mainly European CDMO‘s I learned that for doing business successfully, the total market value and the relevant market studies do not provide useful data and information to build a sound strategy. On the contrary, acting countercyclic can generate new growth as we need to prepare in harsh times to get back to growth. This of course requires cash for maintaining the organization and doing important investments, both to maintain the plants at state-of-the-art and to invest incrementally, i.e. in new technologies or new types of equipment.

 

Rather, although it sounds simple, there is a logic how to build stable and successful CDMO business. Supposed a company has manufacturing plants, R&D, QA, QC and other resources in place (The hard success factors), the spearhead is Marketing & Sales, or BD.

 

I think, the actual trend for almost everybody to become a CDMO is a kind of a business pandemic or a hype, which I already saw approx. 25 years back, when a study of the Deutsche Bank in 1999 anticipated that only the big ones would survive in the Fine Chemicals market and that the small ones would disappear. To gain size, many of those providers offered themselves as a “one-stop-shop”. Today, in 2024, we still see an entire “ecosystem” of CDMO providers, small ones doing barely US$ Mio in sales like S.I.M.S., Italy, the big shots like Lonza, Thermofisher, F.I.S., SK pharmteco, and an entire pulk of the medium players such as Flamma, Dipharma, Dottikon Exclusives, Procos etc. (I apologize if I did not mention other providers for the sake of space).

 

My guess, those who have gained the experience and real understanding how the CDMO service and business works, will still be around in the next decade, those who made impressive business plans based on market data and financial consultants, may quit again once they will have realized that doing CDMO is difficult, takes a lot of time to build and maintain substantial business, capital intensive, full of surprises as you fully depend on your customer and how its products are advancing and succeeding in the clinical development process.

 

Nowadays, Private Equity is an important source of financing for many CDMO’s. Most of the larger providers are founded by PE, recently, F.I.S. had to be sold to Bain Capital because the – by the way good operational performance – could not sustain anymore the demand for funding of the company. Often, when a CDMO provider runs into troubles, PE comes in and tries to turn it around.

The larger a group grows, the more inertia and less flexibility (important to serve your customer) usually happens. Privately and often, family owned, CDMO’s have the advantage of being small to medium sized, if financially well managed, be master of their own decisions, for example not only looking at the financial performance of the company but to build enough reserves to survive critical stages if the market goes down or if an important customer stops buying from you because of too much inventory built. This can represent a loss in sales of 10 – 20 % in one year. Being loyal to your employees is another plus, staff fluctuations in such companies are much lower than in large groups, and often, people stay for an entire work life with you. Typical family controlled companies are Dottikon Exclusives and Helsinn Healthcare Advanced Synthesis and Cerbios Pharma in Switzerland, Dipharma, Flamma, SIMS, Indena, Olon, Erregierre in Italy, Medichem, Farmhispania in Spain or Hovione in Portugal.

 

Also, I can observe that in Asia as an example, size is seen as a success factor. Cohance Lifesciences was formed with the support of Advent PE combining 3 companies first and continuing to acquire more to grow by acquisition. A European example is Siegfried which grew by M&A to net sales of CHF 1.272 Bio. (approx. US$ 1.44 Bio.). The South Korean SK Pharmteco, part of the third largest industrial complex in South Korea SK Group aims to reach sales of US$ 2.1 Bio. by 2025. The Chinese Zhejiang Yongtai Technology Co. Ltd, has grown from a specialist in fluorinated intermediates and APIs to an approx. US$ 1.2 Bio. group offering APIs, CDMO, Final Dosage Form CDMO, Biologicals and more.

 

Such growth can be achieved by M&A in the first line, but once you have accrued a number of different sites based in different parts of the world, consolidation needs to be done to avoid redundancies and to keep cost under control. Entering new technologies is another way, as the pharmaceutical technology landscape has become very differentiated with:

 

• Highly Potent APIs
• Flow- and Continuous processes
• Green and sustainable chemistry
• The use of AI for analytical, plant simulation, process simulation
• Antibody Drug Conjugates
• Biosimilars
• mRNA and other RNA molecules
• Peptides
• MAbs
• A trend to develop Orphan Drugs

 

As previously mentioned, China is another important factor in the CDMO and APIs space. At the level of global politics, ways to reduce dependency from Chinese suppliers are under discussion or partially already implemented. Most probably, if you buy an intermediate from India instead of China, your Indian manufacturer will still buy its raw materials from China. As of today, there seems to be no way to ignore China as a Supply Chain Market, moreover as single providers still give an excellent service. As in other parts of the globe, the established CDMO’s continue to provide good services and have also made remarkable progress in new technology implementation. Nanjing Dorra Pharma has built flow- and continuous know-how at their two R&D centers, started with Spray Drying at lab scale, is implementing Automation at its manufacturing sites and more.

 

Moreover, the domestic market in China is growing for CDMO and APIs. At some companies, the domestic revenues in CDMO are still larger than revenues generated abroad.

 

The pharmaceutical market and the attached industries, like API manufacturing and CDMO services are global. Dividing this landscape into at least two “blocks” would mainly impact on the healthcare services in so-called Western countries, the patients would mainly suffer from this, healthcare cost would further increase in an ongoing increasing situation.

 

The main task of each government should be to secure the safe supply of drugs to its citizens, also by making essential drugs again domestically. But could a European or US company make again its own Ibuprofen (for which in some countries there are in fact shortages). As an example in Switzerland, there is a shortage of Lorazepam (brand name Temesta, by Pfizer), because it is the only approved drug, and in fact, many pharmacies cannot deliver this drug, not because of a problem with China, but because Viatris (the generic branch of Pfizer) decided that the Swiss market is maybe too small and that therefore, they will only deliver every now and then some products. On www.drugshortage.ch, there are 782 package types in short supply, of which 305 APIs are affected (status 25.7.24). While in Italy, there are at least 20 generic versions (maybe too much). So why are there no generic versions in Switzerland? Certainly not a problem caused by a lack of supply from China or India, but a problem made in-house.

My conclusions:

 

• As CDMO’s we need to understand our customers and render the best service possible using and developing our hard and soft factors;
• Build a strong BD and Marketing & Sales organization to stay in the mind of your potential and existing customers;
• Keep your plants, equipment and assets at least state-of-the-art providing the necessary Capex;
• Train people to build on their strengths and improve skills;
• Try to be proactive to anticipate problems and bottlenecks with your customer’s products;
• Play open books to understand cost and optimize cost together with your customer;
• Once a business friend of mine told me that he still remembers when I said during a presentation “to stay humble”; in fact as a CDMO we render a service and should not cherry picking on projects and products;
• Do process maintenance for both your captive and CDMO products, as there is always a competitor around the corner who wants to do it at lower cost or with a better process;
• Keep your technology toolbox up-to-date buy using Innovation Management (even if you are a small company);

 

To close with a few questions from Peter Pollak, notably from 2011, which we can discuss in a face-to-face chat:

 

“What does it take a fine chemical company to survive in this harsh business environment?”

“What are the important differentiators distinguishing the winners?”

 

Curious about your feedback and comments, I hope we can chat during one of the forthcoming events.

References and notes

1. Fine Chemicals, The Industry and the Business; Peter Pollak; Wiley Second Edition 2011; ISBN 978-0-470-62767-9
2. Quantentheorie und Philosophie; Werner Heisenberg; Reclams Universal Bibliothek Nr. 9948; 1979, Printed 2016; ISBN 978-3-15-009948-3
3. Changing Trends in the Global APIs Market – edition 2022; Chemical and Pharmaceutical Association, CPA, Milan
4. Where do our Active Pharmaceutrical Ingredients come from? – A World Map of API Production; Mundi Care Life Science Strategies, September 2020;