Straight Talk: End-to-End CDMO/CMO Business Models

In an industry roundtable, DCAT Value Chain Insights examines the current and future state of the end-to-end business model for CDMOs/CMOs, in which one provider offers development and manufacturing services for both active pharmaceutical ingredients and drug products. Is this the model of the future or not?

The end-to-end business model: where does the industry stand?

The end-to-end business model, or the so-called “one-stop shop,” by which a single contract development and manufacturing organization (CDMO)/contract manufacturing organization (CMO) provides development and manufacturing services for both active pharmaceutical ingredients (APIs) and drug products, although not new to the industry, has taken on greater visibility due to several recent high-profile deals. Over the past several years, companies such as Cambrex, Lonza, Catalent, Thermo Fisher, and Alcami have used acquisitions to build end-to-end service models, joining established end-to-end providers, such as Siegfried, CordenPharma International, Piramal Pharma Solutions, and Almac to name a few.

A key question before the industry is whether the end-to-end business model for CDMOs/CMOs will be the wave of the future and what role will traditional CDMOs/CMOs with segmented offerings (either API or drug product) have in the future. To answer that question, DCAT Value Chain Insights gained the input of pharmaceutical companies and industry consultants to gain their perspectives.

Participating in the roundtable are:

  • Enrico Polastro, PhD, Vice President and Senior Industry Specialist, Global Pharmaceutical and Fine Chemicals Practice, Arthur D. Little;
  • Valdas Jurkauskas, PhD, Vice President, CMC Development and Operations, Akebia Therapeutics;
  • Jan Ramakers, Director, Jan Ramakers Fine Chemical Consulting Group; and
  • Rick Panicucci, PhD, Senior Vice President of CMC, QED Therapeutics

The current and future state of the end-to-end business model for CDMOs/CMOs

Question: Traditionally, the CDMO/CMO sector is segmented by those CDMOs/CMOs providing API development and manufacturing services and those providing formulation development and drug-product manufacturing. With several recent high-profile deals, several of the large CDMOs/CMOs have created end-to-end service models. Do you see this as a continuing trend in the industry, and if so, why, and if not, why not?

ADL e polastro web

Enrico Polastro, PhD
Vice President and
Senior Industry Specialist, Global Pharmaceutical and Fine Chemicals Practice
Arthur D. Little

Polastro (Arthur D. Little): The idea of an ‘end-to-end’ CDMO/CMO model finds its roots in the 90’s when some financial sponsors approached large pharmaceutical companies offering to acquire major parts, if not their entire industrial assets, and to operate these assets on their behalf. At about the same time, other financial investors tried to assemble CDMO/CMO platforms covering both the drug substance and the drug product by clustering players with a narrower focus. However, these attempts were not successful as probably pharmaceutical companies were not yet ready to delegate to an ‘untested’ third party the entire supply chain for a given product.

Following the evolution of the pharmaceutical industry and the increasingly prevailing view that manufacturing is an activity offering limited opportunities for securing a competitive edge, the ‘end-to-end’ CDMO/CMO model has been revived over the past several years.

The question whether such a model will eventually succeed and prevail is still open as making it work creates substantial challenges for CDMOs/CMOs. These challenges include: increasing organizational complexity that may offer a risk to impact responsiveness and flexibility; having the ability to offer the same mastery in the full spectrum of operations; and the reluctance of customers to depend on a single supplier.

Akebia VJurkauskas

Valdas Jurkauskas, PhD
Vice President, CMC Development and Operations
Akebia Therapeutics

Jurkauskas (Akebia Therapeutics): As there is growing demand for enhanced capabilities, greater capacity and oftentimes global reach, I believe that the mergers and acquisitions (M&A) trend will continue. At least ostensibly, M&A strategy is focused on offering end-to-end development and manufacturing services and the newly molded contract development and manufacturing organization being a single strategic partner to the customer. There is a certain appeal of the potential to simplify the manufacturing and distribution network, reduce sponsor’s resources demand, accelerate development, and control the cost.

We are also seeing internal mergers at global manufacturers, where underperforming business units are being added to high-revenue-generating units. For instance, within the same CDMO, drug-product or analytical services are being merged under API, providing opportunity for the underperforming business units to tap into the robust clientele of a high performing unit.

Jan Ramakers

Jan Ramakers
Jan Ramakers Fine Chemical Consulting Group

Ramakers (Jan Ramakers Fine Chemical Consulting Group): When pharma outsourcing first started a few decades ago, companies would only outsource fairly early-stage intermediates. Later they slowly started outsourcing more advanced intermediates and registered intermediates, followed by outsourcing of drug substances. During that period, the relationship between pharma companies and CMOs changed to partnerships. CMOs became an integral part of the manufacturing of drug substances. Over time, the pharma industry started to really like using CMOs as it made them more flexible, without having to invest vast amounts into their own manufacturing facilities. The logical step then was for the CMOs to move into the segment that follow the chemistry. Initially, many CMOs started to offer lyophilization services. When this proved to be a good addition to the services offered, the next logical step was to move into formulation/drug-product development and manufacture. This integrated service certainly benefits the pharma industry. It makes it easier to start drug-product development while drug-substance development is still going on for new drugs. For existing drugs, the integrated service offering makes it easier to tweak and/or develop new formulations. All of this provides the pharma companies with a lot of flexibility of course. As a result, I think this trend will continue in the foreseeable future.

QED RPanicucci photo

Rick Panicucci, PhD
Senior Vice President of CMC
QED Therapeutics

Panicucci (QED Therapeutics): I expect this trend to continue. Given pharma is no longer building additional capacity, there will be opportunity for CDMOs that provide end-to-end services.

CDMOs/CMOs: does size matter in the end-to-end model?

Question: In terms of the CDMOs/CMOs that adopt the end-to-end model, do you see it more relevant for larger CDMOs/CMOs or is it also relevant for medium to small-sized CDMOs/CMOs? In other words, does size matter for the adoption of the end-to-end business model?

Polastro (Arthur D. Little): Operating an end-to-end model under a single roof is more realistically envisaged by larger CDMOs/CMOs given the breadth and depth of resources needed for properly and credibly covering activities in both drug substances and drug products.

Alternatives for smaller CDMOs/CMOs eager to offer end-to-end type of services include engaging in some form of alliance with players having a complementary scope of activities to provide prospective customers an integrated back-to-end set of capabilities. An example of such an alliance is represented in the field of antibody drug conjugates (ADCs) through the Proveo partnership. In this alliance, AGC Biologics (formerly CMC Biologics) produces the monoclonal antibody; Cerbios-Pharma is responsible for the cytotoxic payload production and its coupling; and Oncotec Pharma Produktion GmbH and IDT Biologika GmbH handle the fill–finish of the drug product. The main issue in such alliances is their ultimate coherence to maintain and align the roles of the various parties.

Another model for a smaller CDMO/CMO is to focus on selected product niches to offer an entire range of services. An example in ADCs is BSP Pharmaceuticals, whose range of services in this field range from coupling to fill–finish.

Jurkauskas (Akebia Therapeutics): For an organization to be able to offer end-to-end services, it needs a ‘critical mass,’ i.e., talent and operational resources, a robust client base and healthy cash flow, and an existing or readily expandable manufacturing capacity. Thus, the end-to-end model may be more suited for larger contract organizations.

Ramakers (Jan Ramakers Fine Chemical Consulting Group): I think it would benefit both smaller and larger CDMOs/CMOs. Having said that, the usual and most logical way to get into drug-product development and manufacturing is to acquire a company that is involved and experienced in this business. Usually small CMOs don’t have access to sufficient funds to acquire a reasonably sized drug-product development company.

Panicucci (QED Therapeutics): No, size does not matter in this case. Although the bigger companies will have more capacity and technologies to offer.

Advantages and disadvantages of the end-to-end model

Question: What do you see as the advantages and disadvantages of the end-to-end business model for CDMOs/CMOs from the CDMO/CMO view? From the sponsor view?

Polastro (Arthur D. Little): The advantages or the attractiveness of an end-to-end business model for the CDMO/CMO are to: (1) capture a larger share of the value added; (2) increase its share of the customer/pharma company sourcing budget; and (3) enhance its status as a ‘strategic’ supplier by making itself more indispensable and difficult to replace by the customer. Potential disadvantages or issues for consideration for the CDMO/CMO are: (1) increased organizational complexity; (2) the ability to excel in both drug substance/molecule building and drug product/formulations, two activities involving very different skill sets; and (3) the risk to appear as a ‘jack of all trades’ in the eyes of customers.

From the sponsor/customer point of view, the attractiveness of relying on an end-to-end service provider include: (1) having a single reference point for the entire project/supply chain; (2) avoiding technology transfers and hand-overs between different CDMOs, possibly leading to shorter timelines; and (3) enhanced accountability and transparency by eliminating the problem of finger pointing among the various suppliers handling different parts of manufacturing. Potential drawbacks are: (1) increasing dependence on the supplier; (2) loss of bargaining power; and (3) a risk to having a sub-optimal situation compared to a set-up where different CDMOs are selected on a who-is-the-best basis.

Jurkauskas (Akebia Therapeutics): From a sponsor’s manufacturing and compliance point of view, having multiple sites under a single quality systems umbrella could simplify qualification and integration of multiple sites into the clinical and commercial supply chain.

From a contract organization’s point of view, the end-to-end model presents opportunities to broaden capabilities and to diversify its customer portfolio.

Ramakers (Jan Ramakers Fine Chemical Consulting Group): The end-to-end model has a lot of advantages for the CDMOs as they are getting more extended/larger projects from the sponsors. The associated disadvantage for them is that they lose more business at once when a project is stopped because they are losing both the manufacturing of the drug substance and the development / manufacturing of the drug product.

The advantage for the sponsors is that they can either downsize their own R&D in drug-product development or use it for other purposes. Also, the sponsor companies using CDMOs have lower investment costs for new facilities. In addition to that, they are more flexible, if for instance, a product fails. The disadvantage for the sponsors is that they are more tied to a specific CDMO than before as their operations become more interlinked than in the past, which makes it more difficult to switch to different supplier than previously.

Panicucci (QED Therapeutics): Advantage: one project manager for the entire project. Disadvantage: my experience is that drug-substance and drug-product organizations do not talk to one another enough and usually one organization performs better than the other.

End-to-end service models and sponsor companies

Question: Is the end-to-end service model more attractive for certain types of sponsor companies, for example, smaller pharmaceutical companies compared to larger pharmaceutical companies, or does the size of the sponsor company not come to bear?

Polastro (Arthur D. Little): The end-to-end service model could be of potential interest for both large, established pharmaceutical companies traditionally backward integrated in manufacturing as well as Emerging Pharma companies applying a virtual model. The former could leverage end-to-end outsourcing for products, such as cell therapies, where they have no in-house capabilities as an alternative to their own investments. An extreme set-up for these players would be to divest their entire manufacturing activities/industrial operations to an end-to-end CDMO/CMO, which would operate these activities on their behalf. For Emerging Pharma companies, relying on end-to-end service providers would be a natural move as these types of sponsor companies have little, if any, of their own drug-substance and drug-product manufacturing capacity.

Jurkauskas (Akebia Therapeutics): A productive, long-lasting relationship between a sponsor and contract organization is built when the service-providing partner understands the client’s needs and the sponsor understands the contract organization’s capabilities and capacity. However, this is not always the case.

Smaller pharmaceutical companies, having limited resources and experience, may benefit from the end-to-end services. The outsourcing of development and manufacturing to the end-to-end service provider may improve technology transfer and knowledge sharing, which may reduce time and cost. However, even for small pharmaceutical companies, it is important to have at least some diversity in their contract organizations network, especially as companies’ product portfolios grow.

Ramakers (Jan Ramakers Fine Chemical Consulting Group): In principle, size does matter. Larger sponsor companies may have sufficient in-house capacity to do things themselves if anything goes wrong at one of the CDMOs they are using. If anything goes wrong with the CDMO, it is inconvenient in the short term, but not a show-stopper. Smaller sponsor companies typically don’t have much flexibility and quite a few don’t have any manufacturing facilities at all, so the only way for them to get products to the market is by using CDMOs.

The future of traditional CDMOs/CMOs

Question: Going forward, how do you think the traditional business model of CDMOs/CMOs specializing in either API or drug-product development and manufacturing services will fit in the industry? Do you see continued viability for this model? What place do traditional CDMOs/CMOs have now in the market and how do you see their role in the future?

Polastro (Arthur D. Little): Traditional ‘specialist’ CDMOs/CMOs focusing on either drug substances or drug products will continue to exist as scenarios calling for the pharmaceutical industry to embrace a fully virtual model for their development and manufacturing operations does not appear to be credible at least over the short to medium term. In addition, end-to-end CDMOs/CMOs are unlikely to be able offer the full range of molecule building and formulation capabilities covering the entire spectrum of pharmaceutical products. Within this frame, traditional, narrowly focused CDMO/CMO players offering truly distinctive capabilities and excelling in selected areas will continue to thrive.

Jurkauskas (Akebia Therapeutics): With very few exceptions, traditional contract organizations built their business by growing either drug-substance or drug-product development and manufacturing capabilities. CDMOs specializing only in drug-substances or drug products will continue being key partners as they offer valuable development, manufacturing, and compliance experience.

Ramakers (Jan Ramakers Fine Chemical Consulting Group: I think there will always be a role for CMOs that are specialized in either drug-substance development and manufacture or drug-product development and manufacture as there will always be sponsor companies that don’t need both services, for one reason or the other.

Panicucci (QED Therapeutics): There is still a place for the traditional model, especially for specialized technologies. However, once CDMOs can offer exceptional end-to-end service, then this model will die.

Other key trends

Question: If not moving to an end-to-end model, how do you see traditional CDMOs/CMOs adopting their business models or capabilities set? In other words, what do you see as key trends impacting CDMOs/CMOs?

Polastro (Arthur D. Little): The key for CDMOs/CMOs will continue to be associated with: (1) the ability to continue to adapt their services to the evolving requirements of the pharmaceutical industry—acquiring when and where needed new capabilities; (2) excelling in the areas retained for focus; (3) remaining flexible and responsive and avoiding forcing on customers ‘one-fits-it-all’ type of solutions; and (4) maintaining an adequate balance between service/one-to-one types of products with catalogue/one-to-many products.

Jurkauskas (Akebia Therapeutics): The progressive contract organizations will continue to enhance their process and analytical development capabilities, which are essential to enable technology transfer. The “D” in “CDMO” is equally important to the “M.” The contract organizations that do not invest in development capabilities are less attractive.

Ramakers (Jan Ramakers Fine Chemical Consulting Group: There are a number of options for those CDMOs/CMOs that are not moving to an end-to-end model. They could move backwards into providing more R&D services, such as solid-state work. Another option is to move more into the generics space to service producers of generic drug substances.

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