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2021-12-06| In-DepthInterviewsM&A

How CDMOs are Restructuring the Biopharma Landscape – An Interview with Bobby Sheng

by Tyler Chen
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When pharma companies need to outsource their drug development and manufacturing, they partner with contract development and manufacturing organizations (CDMOs).

Estimates show that the global CDMO market reached $160.1 billion in 2020 and is expected to grow to $236.6 billion by 2026 with a compound annual growth rate (CAGR) of 6.5%. The boom in CDMO services has accelerated drug production, allowing more drugs to reach the market at a faster rate. 

Bora Pharmaceuticals is a CDMO that has been on a roll. The company gained attention with its acquisition of GlaxoSmithKline’s (GSK) facility in Canada and Eisai’s production plant in Taiwan.

In an interview with GeneOnline, CEO of Bora Pharmaceuticals, Bobby Sheng gives his take on how to cultivate a CDMO by taking into account three trends that define the industry as well as the prerequisites for a successful CDMO M&A. 

Drawbacks of In-House Production Underlie Need for Specialists

 

According to Sheng, there are two main reasons that explain the rise in the number of CDMOs: the high cost of drug production and maintenance and the benefits of specialization. 

As the technical bar for drug development is raised, smaller companies are shut out of the competition. To make their mark, some decide to specialize in outsourcing, in-licensing from pharma companies to develop and manufacture. 

For large pharma, owning production plants may burden rather than boost profits. In the case of GSK, the cost of maintenance at one of their vaccine plants reaches $18 billion annually, while in-house production of key drugs could hit a staggering $60-$80 billion. It would be difficult for the company to reap sizable profits as the cost of production rises in proportion with revenue. 

Therefore, a growing number of pharma companies would prefer to license or shed their pipeline candidates to CDMOs. This allows the pharma to concentrate on blockbuster drugs and new drug development. Meanwhile, the CDMO offers multi-level support on the production side.  

Related Article: BIOPLUS INTERPHEX 2021 – CDMOs: The Manufacturing Hub for the Next Generation of Therapeutics

Three Key Strategies to Succeed 

 

Although Taiwan has launched an initiative to cultivate CDMOs, Asia already has behemoths such as South Korea’s Samsung Biologics and China’s WuXi Biologics. To secure a place on the world stage, an aspiring CDMO must focus on four trends that are shaping the future of the industry, says Sheng. 

1. Towards large-molecule biologics

First, CDMOs should prepare to transition away from small molecule production and towards large-molecule biologics. The future market potential of biologics, which includes gene and cell therapies, is vast. However, a shift may be difficult for most companies given the advanced equipment and knowledge needed to produce biological drugs. 

“While Bora has the capability to fulfil orders for any sort of small molecule drugs, we are moving towards biologic production,” says Sheng. 

2. Large pharma companies focus on their key pipeline

Secondly, large pharma companies are shedding midstream and downstream factories to focus on their key pipeline, as the cost of maintaining the plants is becoming a liability. Sheng notes that “a drug produced in-house could take up 30% of production capacity, yet the company has to shoulder production and maintenance costs.”

It would be better to sell the plants to a CDMO, and let them handle drug production instead, he says. “By doing so, both sides win.”

When Bora purchased a production plant from longtime partner Eisai, both sides benefited. Bora was able to help Eisai produce its drugs, while the latter was relieved of the burden of production. The former further benefits as it could use the remaining production capacity to take orders from other companies. 

3. Regional CDMOs are gaining relevance

Thirdly, regional CDMOs are gaining relevance. An international CDMO may be able to ship its products worldwide, but thanks to geographical barriers, transport restrictions, or supply bottlenecks, an outsourcer closer to home may be more desirable.

Asia-focused CDMOs face challenges in particular. Unlike companies in the EU which can freely transport goods between the 27 member states, Asian countries possess their own sets of laws and restrictions. “Just because a product is made in Taiwan does not mean it can be sold across Asia,” says Sheng. 

The approval status for a product varies across Asian countries, and a CDMO must get their production plant registered in the specific country to sell. If the company lacks the legal know-how to operate in a foreign country, it could fall foul of the country’s laws and regulations, creating a sticky situation.  

On a side note, Sheng notes that information technology (IT) is finding its way into the CDMO space. Its incorporation has allowed CDMOs to manufacture drugs at a faster pace with consistent quality. 

Related Article: Mainstream Generic Drugs Become Stumbling Blocks for Drug Innovation: A Deepdive into China’s Patent Trends

Acquirers Look for “Technique” and “Talent” 

 

Stepping back from the trends, Sheng shifts his focus to M&A in the CDMO space.

“An M&A can be a quick and easy way for a company to expand,” he says. The process forgoes the need to set up another company or product line from the ground up and retains talent in the acquired company. However, an M&A could also fail due to a myriad of factors. As a company that is assessing 10 to 20 potential targets, Bora has to be careful. 

Under Sheng, Bora prioritizes a target’s technologies, followed by its talent pool. A unique platform would be observed to see if it has any value. On the other hand, Sheng said the company would not buy “short-term” assets that may return $1-$2 billion in the near future. 

“Many people assume that using acquisitions to increase revenue should be a part of a company’s growth strategy, but it’s more of a waste of investors’ cash,” he argues. “The value investor focuses on turning a five to a ten, and a ten into a twenty, instead of solely buying a twenty.”

Many CDMOs sink into “deal fever” where purchasing an asset becomes the sole objective of an acquisition, rather than stopping to consider whether the move has value or not. 

Sheng also addresses the humanistic side of M&As, noting that a merger could fall apart simply because of a discrepancy in company cultures. 

A deal could also fail when the acquiring company falls short of the seller’s expectations. When a pharma considers selling a factory to a CDMO, they will look into the buyer’s quality control (QC) and assurance (QA), management, IT, financial security, and environmental health and safety (EHS), among other aspects. Failing any one of those assessments could put an acquisition in peril. 

Before Bora bought GSK’s Canada facility, the company had to go through extensive evaluation from the latter. This included two to three visits to Taiwan by GSK and a comprehensive review of Bora’s QA, EHS, and IT capabilities, among others. 

CDMOs as a Driver of Pharmaceutical Growth

 

The model of CDMOs offers pharma companies a way to slash operation costs, allowing them to focus on the development and marketing of key pipeline candidates.

In addition, a CDMO can help clients diversify their offerings. A defining example is Bora, which has shot into the international spotlight with its acquisition of GSK’s Canada facility and has become one of Taiwan’s hottest investment targets. Its success is an example of how CDMOs drive growth in the pharmaceutical industry.

 

Interviewed and written by Tyler Chen

Translated by Joy Lin

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