Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report.

Jim Miller

	The bio/pharmaceutical industry is still buzzing about President Trump’s meeting with pharmaceutical executives on Jan. 31, 2017 (1). While promising the industry lower taxes and less regulation, the President emphasized that those benefits will come only if the industry lowers drug prices and moves more manufacturing back to the United States.
	
	The President’s insistence that manufacturing move back to the US set off a wave of promises from the bio/pharmaceutical industry about the number of jobs that might be created, including a projection by the head of the industry trade association PhRMA that the industry would create 350,000 jobs during the next 10 years if the tax and regulatory changes were enacted. At the same time, it triggered some excitement about the opportunities that might await the contract manufacturing industry in the US if bio/pharma companies chose to outsource the manufacturing of products moved back from offshore sites. 

	Certain segments of the contract manufacturing organization (CMO) industry have in fact been very US-focused. PharmSource research has shown that of the 99 new drug applications (NDAs) and biologic license applications (BLAs) approved by FDA in 2016, the drug product for 40 (40%) was manufactured exclusively in a facility owned by the sponsor or the sponsor’s partner while 59 had the drug product manufactured by a CMO as either the primary or secondary source. Of the products manufactured at a CMO, 52% of the manufacturing sites were in the US, but only 20% of the captive sites were in the US (see 

	The picture for APIs was not quite as favorable for the CMOs. Of the 40 small-molecule NDA approvals that use an identifiable CMO to manufacture the API, only 9 (24%) are made at US manufacturing sites; European API manufacturers account for 70%, a reflection of the traditional dominance of European fine chemical manufacturers. Still, the nine made in the US is still three times the number made in sponsor-owned API manufacturing sites located in the US. Most in-house small molecule API manufacturing was also concentrated at European manufacturing sites. The three outsourced biologic APIs (out of 15 total approved biologics) in 2016 were all made in US facilities.
	 

	Moving pharma manufacturing is complicated

	
	Leaving aside the fact that bio/pharmaceutical manufacturing has never really left the US, the realities of the current bio/pharmaceutical manufacturing environment make the prospects for wholesale movement of drug manufacturing a long-term proposition, for the following reasons: 

	Capacity for manufacturing innovative drugs is tight across the industry, especially for APIs, both small molecule and biologic, regardless of the location of that capacity. Capacity at CMOs is especially tight for anything but immediate release solid-dose products.

	While global bio/pharma companies have spent more than $50 billion in just the past five years on new plant and equipment, much of that new capacity has been built in tax-favored locations such as Ireland and Singapore, and in emerging markets. Only about a quarter of the projects have been in the US. There just aren’t many US manufacturing facilities that products could be transferred into from offshore. The facilities that are for sale are old and ill-suited for modern products like biologics.

	It takes nearly four years to design, build, and qualify a greenfield manufacturing facility. Large-scale biologics facilities can cost $1-2 billion. It will take time to make and implement the decisions to build the necessary new capacity.

	Lead times for ordering/receiving key equipment such as filling lines for injectables are approximately 18 months these days. It takes at least another year to install and qualify it. So even expanding a current facility is likely to be a three-year proposition.

	CMOs don’t have a lot of spare capacity and don’t have the cash to invest in massive capacity increases themselves. Patheon’s recent acquisition of Roche’s small-molecule API facility in Florence, SC, was attractive because it was inexpensive and because the facility had lots of unused capacity. Much of the ongoing capacity expansion in the CMO industry is customer-funded.

	It can take up to two years to transfer a single product to a new manufacturing site (process transfer and scale-up, validation, stability protocols, regulatory filings, etc.). To move multiple products at one time will take armies of technical, quality, and regulatory staff. Even if enough people with the right skills were available, the time and cost of hiring all those people would be prohibitive.
	
	Even if these challenges could be addressed in a timely and cost-effective way, increasing the US share of bio/pharma manufacturing is not likely to yield the benefits that the administration might be hoping for, especially if it is demanding lower drug prices at the same time. For one thing, any new capacity that is built will likely involve the latest, most efficient technologies, including continuous manufacturing, process analytical technology, and single-use contact parts, so fewer jobs would be created. Further, the new facilities would be designed to maximize the use of labor-saving automation and intelligent systems.

	Finally, it should be remembered that many global bio/pharma companies are headquartered outside the US, notably in Europe and Japan, and will be under their own domestic pressure to keep manufacturing in-house. America-first manufacturing policies are likely to invite retaliation from other countries, which will blunt the job-creating impact.
	
	Realistically, moving bio/pharma manufacturing back to the US in a meaningful way will be a 7-10-year process and is unlikely to deliver a big increase in manufacturing jobs. The bio/pharma industry may find it more expedient to just find ways to put some window dressing on the issue while waiting out the President’s term in office.

	1. R. Hernandez, “President Trump Meets With Pharma Manufacturers,” 

, Jan. 31, 2017, www.pharmtech.com/president-trump-meets-pharma-manufacturers-0 

Articles

What are the pros, cons, and practicalities of moving pharma manufacturing back to the US?
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Should More Pharma Products be Made in the USA?


	Vol. 41, No. 3
	March 2017
	Pages: 84-86

	When referering to this article, please cite it as J. Miller, "Will Pharma Manufacturing Move Back to the US?," 

Moving global manufacturing operations may be more complicated than it appears.

Will Pharma Manufacturing Move Back to the US?

A year ago, the outlook for contract services was a little uncertain. Equity markets’ appetite for public offerings from emerging bio/pharmaceutical companies had significantly diminished: valuations of emerging bio/pharma companies, as measured by the NASDAQ Biotechnology Index (NBI), had declined by 15% from their highs in mid-2015, and by mid-February, they were off another 28%. Because contract development and manufacturing organizations (CDMOs) and contract research organizations (CROs) get so much of their business from externally-financed companies, the negative energy surrounding emerging bio/pharma did not bode well for the industry.

	The valuations and levels of public offering activity in 2014 and 2015 were not sustainable, and the NBI has never gotten back close to the levels it reached in 2015. Nevertheless, fundraising by emerging biopharma companies held its own in 2016. Financing for emerging bio/pharma from venture capital, public equity, and partnering sources was ahead of 2013 levels, and those companies showed no fear of spending liberally to progress their pipelines though clinical development. Public reports for more than 300 companies tracked by PharmSource show that R&D spending by those companies has risen every quarter since the beginning of 2015.

	Not surprisingly, this has been great news for CDMOs and CROs. Most publicly-traded services providers achieved revenue growth well in excess of 10% in 2016 (based on interim results), especially in those services that cater to clinical development (clinical supplies manufacturing, analytical services, clinical packaging, and clinical research). Many CDMOs have told PharmSource that they are operating near capacity, and customers may have to wait as much as six months for a manufacturing slot.

	The significance of external funding can be seen by looking at early-phase clinical trials sponsored by emerging bio/pharma companies. Phase I and II clinical trial registrations by emerging bio/pharma companies, as recorded in 

, were up 55% higher in the first half of 2016 versus the first half of 2012 (see 

) (1). Just over half of those companies (55%) are publicly-traded companies, while 45% are funded by venture capital. Clearly the tide of early development by emerging bio/pharma companies has risen thanks to the robust external funding environment.

	The bio/pharma industry’s recent performance is encouraging, but what is really important is what the industry can expect going forward. There is a sense that the outlook is positive but with some significant uncertainties.
	 

	Clearly, general economic sentiment since the November 2016 presidential election has been positive, with an expectation that the regulatory environment will be less restrictive and FDA will be approving more drugs more quickly. There have even been suggestions that a venture capitalist might be appointed to run the agency (no appointments had been announced at the time this column was written). However, emerging bio/pharma investors haven’t been moved much by this news as the NBI has remained at the same level it has been at for the past 12 months.

	Enthusiasm for the bio/pharma industry may have been dampened by the president-elect’s campaign promise to go after high drug prices, including allowing Medicare to directly negotiate drug prices. The dismantling of Obamacare could further reduce spending on drugs, especially in hospitals and other institutional settings. Coupled with the aggressive efforts by pharmacy benefit managers to reduce private sector spending on drugs by reducing utilization and prices, overall drug spending is likely to face considerable headwinds. That could dampen new investment in the industry, especially if it becomes more difficult for novel treatments to get formulary access.
	 

	One positive indicator for CDMOs and CROs is the robustness of venture capital investment. Venture capital money has always been more dependable than public equity, even during the years of the global financial crisis. In 2016, even though public equity dropped considerably, venture capital maintained a pace that was close to what it was in 2015 and nearly 60% higher than it was in 2012. Looking ahead, according to the blog 

, life-science venture funds are raising record amounts of new money that can sustain emerging bio/pharma companies for an extended period (2).

	Of course, few venture capital or public equity investors place bets on emerging bio/pharma companies with the expectation that they will commercialize their pipeline candidates on their own. Rather, they hope their companies will be acquired, or at least have their candidates licensed by, a global bio/pharma company. Acquired or in-licensed products account for a third to a half of product approvals gained by global bio/pharma companies in recent years, and their reliance on externally-sourced candidates appears to be greater than ever. According to a report published by Deloitte in December 2016, global bio/pharma companies are getting only a 1% return on their investment in internal R&D (3). 

	So the stars seem to be aligning for a continued healthy environment for CDMOs and CROs. The biggest risks will come from what happens to drug pricing and coverage; and from a system-wide economic shock that negatively impacts the entire economy. The former is likely but over an extended number of years; and the latter can’t be predicted.

Biotech Venture Capital Mythbusting Redux

,” Nov. 21, 2016,. 
	3. Deloitte, Balancing the R&D Equation: Measuring the Return from Pharmaceutical Innovation 2016.

Rising R&D numbers and positive external funding for bio/pharma projects a strong outlook for the contract development and manufacturing market in 2017.

Stars Seem Aligned for Healthy CDMO/CMO Market

A year ago, the outlook for contract services was a little uncertain. Equity markets’ appetite for public offerings from emerging bio/pharmaceutical companies had significantly diminished: valuations of emerging bio/pharma companies, as measured by the NASDAQ Biotechnology Index (NBI), had declined by 15% from their highs in mid-2015, and by mid-February, they were off another 28%. Because contract development and manufacturing organizations (CDMOs) and contract research organizations (CROs) get so much of their business from externally-financed companies, the negative energy surrounding emerging bio/pharma did not bode well for the industry.
	
	The valuations and levels of public offering activity in 2014 and 2015 were not sustainable, and the NBI has never gotten back close to the levels it reached in 2015. Nevertheless, fundraising by emerging biopharma companies held its own in 2016. Financing for emerging bio/pharma from venture capital, public equity, and partnering sources was ahead of 2013 levels, and those companies showed no fear of spending liberally to progress their pipelines though clinical development. Public reports for more than 300 companies tracked by PharmSource show that R&D spending by those companies has risen every quarter since the beginning of 2015.

	
	Clearly, general economic sentiment since the November 2016 presidential election has been positive, with an expectation that the regulatory environment will be less restrictive and FDA will be approving more drugs more quickly. There have even been suggestions that a venture capitalist might be appointed to run the agency (no appointments had been announced at the time this column was written). However, emerging bio/pharma investors haven’t been moved much by this news as the NBI has remained at the same level it has been at for the past 12 months.

	
	One positive indicator for CDMOs and CROs is the robustness of venture capital investment. Venture capital money has always been more dependable than public equity, even during the years of the global financial crisis. In 2016, even though public equity dropped considerably, venture capital maintained a pace that was close to what it was in 2015 and nearly 60% higher than it was in 2012. Looking ahead, according to the blog 


	Vol. 41, No. 1
	January 2017
	Pages: 22-24

	When referring to this article, please cite it as J. Miller, "The Tide Stays High," 

Robust venture capital investment gives CDMOs and CROs a positive outlook for 2017.

The Tide Stays High

	Trade shows provide a good opportunity to gauge the temperature of the contract development and manufacturing organization (CDMO) industry and find out which trends and concerns are most on people’s minds. Five themes really stood out from conversations at the CPhI Worldwide event held in Barcelona in October 2016.

	Mergers and acquisitions continue to create the most buzz around the industry, and speculating about which contract manufacturing organizations (CMOs) are the next target or the next acquirer is a favorite topic of conversation. The industry certainly seems set up for a surge of mergers and acquisition (M&A) activity. 
	
	There are 15-20 private equity-owned CDMOs that have reached the typical five-year holding period that private equity firms seem to target. Further, the major industry players are focused on expanding their breadth of capability (i.e., the range of processing steps they can conduct and the number of technologies in their toolbox). Acquisition is the preferred pathway to expanded capability because it entails less time and less risk than internal development, and the need for specialized technologies (e.g., solubility enhancement or small-volume fill/finish) means that even small targets can be attractive to a large buyer.

	Certainly the buy side of the M&A dance is eager to participate. The larger CMOs have access to both debt and equity financing, and acquisition is part of their story for equity investors. Many private equity firms are anxious to participate in the drug-development sector, and interest rates remain low. The big hurdle to M&A today seems to be inflated seller expectations of what they are worth. Buyers are willing to pay up, but not for the exorbitant multiples some sellers appear to be expecting.

	CMOs are starting to get creative in how they work with their clients, especially the global bio/pharmaceutical companies. While the traditional one-size-fits-all contract manufacturing model is still the core of the business, CMOs are finding new ways to deconstruct their value proposition and reassemble the elements into new offerings more tailored to individual client requirements.  
	
	For instance, by offering dedicated suites equipped with client-owned machinery, they are enabling bio/pharma companies to enjoy the benefits of controlling their own production assets while avoiding the costs of building and operating an entire standalone manufacturing facility. There have also been discussions of CMOs taking over the operations of bio/pharma facilities without actually acquiring the sites, an arrangement that, among other benefits, enables the bio/pharma company to deal with unused capacity without having to create its own CMO business operation. Another model that is starting to spread is the CMO as a general contractor responsible for managing a product’s entire supply chain.

	These new business models appeal to bio/pharma companies of all sizes and are proving to be particularly suited to housing new or product-specific manufacturing technologies where there isn’t an installed base of shareable capacity. These new models may also prove to be effective for addressing a big problem faced by global bio/pharma companies: an overwhelmingly large number of CMO relationships resulting from their licensing and acquisition activities.

	While scale that can support breadth of capability is becoming increasingly important in the CMO industry, the opportunities for smaller service providers have been expanding rapidly. This is not just a function of the growth in the development pipeline and corresponding need for clinical trial materials; it also reflects the growing number of niche products that are getting commercial approval. CDMOs that would have been once considered only for clinical supplies are filling their capacity with small commercial products, both generic and innovator, and they are undertaking capacity expansion projects to address the demand. 
	
	The appeal of smaller CDMOs for commercial products is obvious: they are often more flexible and easier to work with than larger CMOs (which may not even want the smaller business), and their fill lines are often better suited to smaller batches, especially lower line losses of expensive APIs. But these opportunities don’t come without risks: smaller companies may not be able to afford the levels of quality assurance and regulatory compliance expertise that larger CMOs can offer, and they may not have the resources to respond quickly with remediation efforts when problems arise. Nevertheless, smaller CDMOs are addressing a growing niche in the market and are themselves becoming important acquisition targets.

	Combination products are becoming more prevalent as bio/pharma companies increasingly turn to drug-delivery devices to differentiate their products. Combination products create both opportunities and challenges for CMOs. The opportunities come from the growing demand for higher-value filling requirements, and the need to assemble and package the filled device. The challenges come from the non-standard nature of the devices and the fact that many of them are designed to appeal to the patient without much regard for manufacturability: most still require costly and complex manual assembly.
	
	The combination device trend creates opportunities for CMOs to differentiate themselves through alliances with device makers, strategic relationships with clients sponsoring combination products, and innovations in device filling and assembly processes. The industry might also see more combinations of device developers and CMOs (e.g., acquisitions of device companies by CMOs or device companies moving into filling or assembly).

	CDMO industry executives are keenly aware that emerging biopharma companies have enjoyed an extremely favorable fundraising climate in recent years, and how long the strong funding environment lasts is on their minds. A recent unpublished PharmSource analysis of data from 

 indicates that the number of Phase I and II trial starts by emerging bio/pharma companies (i.e., companies with no commercial products that depend solely on external financing to support their pipelines) is 55% higher in 2016 than it was in 2012. Because emerging bio/pharma companies are dependent on CDMOs for nearly all of their process development, formulation, and manufacturing requirements, the fortunes of CDMOs are closely tied to the fortunes of emerging bio/pharma.

	The financial markets certainly suggest some concern is justified. Initial and secondary public offerings remain way down from 2015 levels, and the NASDAQ Biotech Index is off 20% from its 2015 highs. Venture capital flows have remained steady, but emerging bio/pharma companies need support from public-market companies to maintain a high pace of development.

	No one expects a precipitous decline in development activity in the foreseeable future, but CDMO executives are watching financial markets carefully to make sure they aren’t blindsided.

M&A activity, new business models, fundraising limits, offerings from small CDMOs, and combination products are driving decisions in the contract services market..

Internal and External Factors to Shape CMO Industry

	hen referring to this article, please cite it as J. Miller, "Five Themes That Will Drive the CMO Industry," 

CMO executives are focusing on M&A activity, new business models, and fundraising limits.