#1 Lonza Group AG - Industry dynamics and competitive landscape

Executive Summary

• The biopharmaceutical industry is undergoing a significant shift, with companies increasingly outsourcing their late-stage development and manufacturing operations to Contract Development and Manufacturing Organizations (CDMOs).

• Pure-play CDMOs with a wider range of integrated services are the best positioned players to benefit from the outsourcing trend. These comprehensive offerings allow pure-play CDMOs to support clients throughout the entire drug lifecycle, from development to commercialization.

• While the pharma and biotech industries may have experienced a downcycle, analysts predict a resurgence in 2024 and beyond. This upcycle will likely further fuel the demand for CDMO services.

• While some of the largest CDMOs face specific challenges, Lonza's positioning appears favorable. They might be well-positioned to capitalize on this anticipated market growth due to their focus and expertise.

Pharma & Biotech Industry Dynamics Shift

The pharma & biotech industry is powered for some macrotrends largely known: new drugs discovery technologies, growing focus in personalized medicine and genetically tailored treatments, growing focus in unmet medical needs - e.g. rare diseases - and population aging - especially in Western countries.

However, there are other less covered trends which constitute promising tailwinds for organizations providing outsourcing services in the industry. These trends are: increase in drugs discovery and development costs, shift in drug development model and manufacturing approach shift.

Increase in drugs discovery and development costs

The cost of drugs discovery and development have raised during the past decades. According to Deloitte’s yearly report on biopharma industry innovation [1], top 20 pharmaceutical companies of the world have seen the cost of bringing new drugs from discovery stage to the market to $2.2 billion from $800 million which costed in 1995 as per Tufts Center for the Study of Drug Development.

Main sources impacting increasing costs has been:

• Increasing regulatory requirements.

• Clinical trials: larger complexity to find the right patients and the need of tailoring trials to meet patients medical and behavioral needs.

• Raising operational costs: e.g. raising prices of lab testing animals. Lab testing monkey’s price rose from 1000€ a decade ago to over 50000€ nowadays [2].

Shift in drug development & manufacturing model

Emerging biopharma companies (EBCs) are leading the charge in drug discovery since the end of the previous decade. These companies, typically with less than $200 million in annual R&D spending and $500 million in sales, have seen their contribution to the R&D pipeline surge from one-third in the early 2000s to a commanding two-thirds today. This dramatic shift comes largely at the expense of large pharmaceutical companies' internal development efforts. (See Figure 2).

Driven by innovation but constrained by budget, emerging biopharma companies (EBPs) navigate a challenging landscape. Tight financial resources often force them to live hand-to-mouth, relying on successful completion of each clinical trial phase to secure funding for the next. This creates a crucial juncture: either secure a new round of financing to propel them forward, or explore a merger and acquisition (M&A) deal with a larger pharmaceutical company. Partnering with a "Big Pharma" provides the financial muscle needed to navigate expensive Phase III trials and ultimately bring the drug to market.

Manufacturing approach shift

New biopharma R&D landscape has led to a change on the manufacturing one:

1. Pharmaceutical production ramp-up is costly and slow.

   On average, it takes 6 years to build a new biopharma manufacturing facility. On top of that, an EBC must establish its own quality and pharmacovigilance systems, adding further complexity.

   Limited budget poses an additional challenge for EBCs to commit with large upfront investments in new facilities. Biopharma facilities cost varies depending on the required size (starting from € 10M euros for small pilot facilities).

2. Low manufacturing volumes.

   Lifespan of drugs might be limited by its patents. Moreover, the share of new drugs developed to treat rare diseases present in a small number of people is increasing. Hence, the needed production volumes are smaller, reducing the benefits coming from economies of scale related to large scale manufacturing in a company’s own facilities.

3. Highly specialized workforce required.

   The growing complexity of developing and manufacturing new therapies is creating a critical need for highly skilled workers. Unfortunately, there's a current shortage of these specialists in the labor market, with existing talent often concentrated in specific regions.

Overall, the described developments in the industry are leading to companies of any size shifting their operations focus to R&D and marketing activities while manufacturing gets commoditized and outsourced. And who will benefit from this? This trend raises a key question: who will be responsible for producing the essential treatments and drugs of tomorrow? The answer lies with Contract Development and Manufacturing Organizations (CDMOs). Let's delve deeper into this growing sector and its impact on the future of drug development and production.

What is a CDMO?

A CDMO (Contract Development & Manufacturing Organization) is a company that provides services to the pharma & biotech industry, including drug discovery, development, manufacturing, and packaging. CDMOs work with pharmaceutical companies to bring new drugs to market by providing access to expertise, facilities, and resources that pharmaceutical companies may not have in-house.

According to the services they offer, they can be classified as:

1. Pure-play CDMOs: These companies specialize in providing a wide range of services for drug development and manufacturing, from preclinical development to commercial manufacturing. They usually offer multiple therapeutic areas and drug modalities.

2. Pharmaceutical company CDMO subsidiaries: These companies are subsidiaries of pharmaceutical companies and offer a narrower range of services than pure-play CDMOs.

3. Generics manufacturing CDMOs: These companies specialize in manufacturing generic drugs and often have experience in high-volume, low-cost manufacturing. They often focus on manufacturing small molecules, but some also offer services for manufacturing biosimilars.

Competitive landscape

The biopharmaceutical outsourcing market is expected to grow 6.8% CAGR during the following decade [5], [6]. There is a vast number of companies ready to capitalize this market growth. Most of those companies have a narrow area of expertise within which they offer their service.

The market for Contract Development and Manufacturing Organizations (CDMOs) is fragmented, with few companies offering a comprehensive suite of integrated solutions. As shown in Figure 4, Lonza Group AG stands as the industry leader, providing a broad range of services.

Moreover, there are other considerations and developments in the industry to consider:

1. Catalent, 2nd largest CDMO of the world, has been purchased by Novo Holdings the investment vehicle of the Novo Nordisk Foundation. Simultaneouly to this acquisition, Novo Nordisk purchased three of the filling facilities of Catalent. Hence, I think is reasonable to establish that Catalent’s interests will be conditioned to Novo Nordisk’s ones going forward.

2. Wuxi Biologics, 2nd largest pure-play CDMO in the world, faces potential challenges due to the proposed BIOSECURE Act in the US. This act classifies WuXi Biologics as a "biotechnology company of concern," prohibiting the US government - and consequently companies with contracts with the US government - from contracting with them [6].

3. Samsung Biologics facilities are mainly located in South Korea - with the exception of three sites located in the USA. Geopolitical tension in the region and supply chain disruption risks might be a headwind to the company.

References

1. Deloitte Centre of Healthcare Solutions, 2022 Annual Report on the State of the Biopharmaceutical Industry.

2. Jiménez, Beatriz (Infobae), Más de 50.000 euros por un mono: las grandes farmacéuticas desembolsan millones ante la escasez de animales de laboratorio, 2024.02.21.

3. IQVIA Institute for Human Data Science, Global Trends in R&D 2023. Activity, Productivity and Enablers. February 2023.

4. Frost & Sullivan for Asychem, Pharmaceutical CDMO market study, November 2021.

5. BioSpace, Biotechnology & Pharmaceutical Services Outsourcing Market Size, Forecast 2030, May 2022.

6. A&M, Pharma Contract Development and Manufacturing Organization (CDMO) Predictions for 2030, 2023.

7. David M. McIntosh, Arthur C. Mok, Geoffrey Lin, Lauren Kimmel; The BIOSECURE Act – A Review of the Bill, Responses, and Possible Repercussions, 2024.03.01.