The CDMO/CMO Report: The Year Ahead in Bio/Pharma Outsourcing
What can the markets for bio/pharmaceutical outsourcing expect in 2023? DCAT Value Chain Insights examines key trends and highlights in major manufacturing segments: API and drug-product manufacturing.
Issues to watch for in 2023
Many of the factors impacting the broader bio/pharma industry will impact growth for bio/pharmaceutical putsourcing and the CDMO/CMO market. Key trends to watch for in 2023 are highlighted below.
Inflationary pressures and raw materials cost pressure. Without question, inflationary pressures—in the form of escalating energy and raw material costs—represented the most significant news development in 2022, and the key question for 2023 is will there be relief. The bio/pharmaceutical industry was not alone in dealing with higher costs in 2022 as the global economy and markets faced strong inflationary pressures in 2022. As the global economy emerged from the pandemic, markets responded to increased demand, and with that, came supply challenges to meet that demand on a production, transportation, and overall supply-chain level, which contributed to rising costs. That situation, later combined with the volatility in energy markets, particularly in Europe, stemming from the war in Ukraine and the European Union’s (EU) actions to decrease its reliance on the supply of natural gas from Russia, resulted in shifts in supply-demand fundamentals for energy. This not only affected production and transportation costs, but the chemicals manufacturing value chain, in the form of higher feedstock costs and the resulting negative impact on commodity and downstream chemicals.
This situation has had direct impact on the bio/pharmaceutical industry, on bio/pharma companies, CDMOs/CMOs, and other suppliers, particularly in Europe and a key question is how energy markets in Europe will fare this winter and in 2023. Two industry groups, Medicines for Europe, which represents generics and biosimilars companies and manufacturers in Europe, and the European Chemical Industry Council (Cefic), which represents European chemical manufacturers, both issued calls to action to European authorities to address the inflationary pressures in energy, raw materials, and transportation, and the negative impact on bio/pharmaceutical and chemical production.
EU authorities have taken action to reduce the EU’s dependence of Russian gas, which had accounted for 40% of natural gas supply to Europe prior to Russia’s invasion into Ukraine in February (February 2022), to reach levels of about 14% as of September (September 2022). It also has put into place natural gas storage requirements and coordinated gas demand reductions in the EU to address energy supply and cost issues. To address dramatic price rises in electricity, it has taken measures to help reduce the cost of electricity for consumers (both businesses and households), and measures to redistribute the energy sector’s surplus revenues to final customers. These measures are in particular response to address the energy issues for this winter, but industry groups say that more action is needed to address both short-term and longer term needs. How the energy picture will unfold in Europe and the resulting impact on raw materials costs is the number one item on the industry’s watchlist for 2023, including for CDMOs/CMOs, which face margin erosion due to these escalating costs.
Further complicating the outlook for raw materials and active pharmaceutical ingredient (API) supply is China. Although on a global basis, the COVID-19 pandemic eased in 2022, it still continues to present challenges globally and in the bio/pharmaceutical industry specifically. An uptick of COVID-19 cases in China in 2022 led the government there to implement a zero-COVID policy, forcing lockdowns in select regions of the country that impacted production and supply. Although the Chinese national government eased its zero-COVID-policies later in 2022, the effect was also an increase in COVID-19 cases due to increases in travel and interaction. In 2023, it will be important to watch any residual impact on raw materials and API supply from China.
China is an important source of raw materials, intermediates, and APIs, particularly APIs for the generics market. There are over 3,000 APIs companies worldwide, of which China accounts for 48% and India 19%, according to a recent analysis by the Chemical Pharmaceutical Generic Association, which represents Italian manufacturers of active ingredients and intermediates for the generics market. A well-chronicled and continuing trend over the past decades is the increasing shifting of API manufacturing from the highly regulated markets (US, EU) toward low-cost Asian countries, particularly China and India. For example, 80% of API import volume for the EU comes from five countries: China (which accounts for 45%), India, the US, the UK, and Indonesia, according to a recent analysis by the European Commission.
Bio/pharmaceutical industry growth in 2023. A key indicator for global bio/pharma industry performance in 2023 is the US bio/pharma market, which accounts for approximately 40% of the global market. After reaching growth of 12% in 2021, in large measure due to COVID-19 products, growth in the US bio/pharma market has and is expected to continue to moderate to pre-pandemic levels. Spending on medicines in the US, at net manufacturer prices, reached $407 billion in 2021, up 12.1% over 2020, as COVID-19 vaccines and therapeutics became widely available and added $29 billion in related spending, according to the IQVIA Institute for Human Data Science. In 2021, the non-COVID medicines market in the US grew more slowly, at only 4.9%, with growth tempered from the growing impact of biosimilars, which increased significantly, offsetting increased use of branded medicines.
While spending growth slowed in 2020 to less than 1%, from a combination of impacts on volume and spending on newly launched medicines, the pandemic impact was reduced in 2021. US net spending over the five-year period of 2017–2021 grew at a compound annual growth rate (CAGR) of 4.6%, including for COVID-19 products, but only 3.1% for all other medicines, reflecting a slowing trend without these new treatments. Medicine spending in the US grew $82 billion over the five-year period of 2017–2021, with COVID-19 products contributing $29 billion. In the prior five-year period (2016–2020), US medicine spending increased by 4.3%. Prescription drug use in the US reached a record level of 194 billion daily doses in 2021 as new prescription starts for both chronic and acute care recovered from the slowdown recorded in 2020. Spending on medicines in the US is expected to return to pre-pandemic growth trend lines by 2023 despite year-to-year fluctuations and incremental spending on COVID-19 vaccines and therapeutics. The IQVIA Institute projects a CAGR of 2.1% (range of 1-4%) for the US market through 2026, which is comparable to pre-pandemic levels, and total US market size in 2026 of about $450 billion on a net manufacturer price basis.
New drug approvals in 2023. Product innovation is important not only for bio/pharma companies but also for the CDMOs/CMOs that support those new products. A key question for 2023 is whether the bio/pharma industry will rebound from a downturn in new drug approvals in 2022. The number of new drug approvals is an important measure of new product innovation in the bio/pharma industry, and the results from 2022 show a downturn from recent trends. The US Food and Drug Administration’s (FDA) Center for Drug Evaluation and Research (CDER) approved 37 new drugs in 2022, significantly down from the 50 new drugs approved in 2021 and the 53 new drugs approved in 2020. The new drug approvals include both new molecular entities and new therapeutic biologics approved by the FDA’s CDER and does not include vaccines, allergenic products, blood and blood products, plasma derivatives, cellular and gene therapy products, or other products approved by the FDA’s Center for Biologics Evaluation and Research. The 37 new drug approvals, in fact, represent a recent low for new drug approvals over the last decade; only 2018 and 2013 had lower levels of new drug approvals, with 22 new drug approvals in 2018 and 27 in 2013.
For CDMOs/CMOs, not only are the number of new drug approvals important but so is the product mix. An important development in 2022 was the reduced share of small molecules in new drug approvals. In 2022, 59% of the new drug approvals by FDA’s CDER were small molecules, significantly down from recent years, when small molecules accounted for approximately three-fourths of new drugs approvals. In 2022, 22 of the 37 new drug approvals were small molecules, representing 59% of new drug approvals. In comparison, between 2018 and 2021, small molecules averaged 74% of new drug approvals. In 2021, small molecules represented 72% of new drug approvals, 75% in 2020, 79% in 2019, and 71% in 2018.
The decrease in small molecules’ share of new drug approvals is largely due to the overall decline in new drug approvals in 2022 and a corresponding decline in small-molecule drug approvals and a rise in new biologic drug approvals. In 2022, the FDA’s CDER approved 22 new small-molecule drugs and 15 new biologics, with the 15 new biologic drug approvals representing a recent high. The 15 new biologic drug approvals in 2022 was only recently eclipsed by the 17 new biologic drug approvals in 2018 and surpassed recent new biologic drug approvals of 14 in 2021, 13 in 2020, and 10 in 2019.
Bio/pharma industry deal-making and venture capital funding in 2023. Other important trends for CDMOs/CMOs to watch for in 2023 relate to deal-making and financing levels among their customers: bio/pharma companies. Last year (2022) saw a decline in bio/pharmaceutical industry deal-making comparative to 2021, and so a key question is what will happen in 2023.
In 2022, the value of pharma and biotech mergers and acquisitions (M&A) tallied to $158.5 billion, a 41% decrease in deal value comparative to 2021, according to a PwC analysis. The number of deals in 2022 was 258, a decrease of 30% compared to 2021. Amgen’s pending $28-billion acquisition of Horizon Therapeutics, a company focused on rare diseases, was the largest deal in 2022. The deal was announced in early December (December 2022). Pfizer’s $11.6-billion acquisition of Biohaven Pharmaceuticals, a New Haven, Connecticut-based bio/pharmaceutical company focused on the treatment of migraines, was one of the largest acquisitions in 2022 aside from Amgen’s pending $28-billion acquisition of Horizon Therapeutics. In 2023, PwC expects M&A to more closely resemble prior years with a total deal value in the $225 billion to $275 billion range across all subsectors. Ample corporate cash, the need to continue to invest to address medium-term pipeline gaps and the resetting of biotech valuations will provide the backdrop for an active year, according to the PwC analysis.
Emerging Pharma companies are an important customer base for CDMOs/CMOs and the flow of venture capital funding into these companies is an key barometer to evaluate the financial health of the Emerging Pharma sector. One key trend to watch for in 2023 is whether investor appetite will pick up following slowing momentum in the second half of 2022 in overall venture capital due to overall macroeconomic activity, most notably inflationary pressures, tightening monetary policy and rising interest rates, and geopolitical uncertainty.
“Although earlier-stage deal activity and fundraising totals showed remarkable resiliency in 2022, the overall slowdown in annual VC [venture capital] activity reflects the sizable headwinds presented by ongoing macroeconomic factors, rising interest rates, and frozen avenues for start-up liquidity,” said John Gabbert, founder and CEO of PitchBook, a research and intelligence firm that partners with the National Venture Capital Association (NVCA) in analysis of venture capital funding in the US, in a NVCA January 12, 2023. press release. “Unable to justify the sky-high valuations seen in 2021 and retreating from the ‘growth-at-all-costs’ mindset seen in recent years, many investors are pulling back until the ecosystem returns to a more palatable normal.”
These trends in overall venture capital funding in the US is also reflected in the bio/pharma industry, which saw a decline in venture capital funding in 2022 compared to a very strong 2021. For the bio/pharma industry, venture capital funding in the US in 2022 was $30.7 billion, down from the $39 billion in 2021, which was considered an outlier year, but on par with 2020 levels of $29.6 billion, according to a NVCA/Pitchfork analysis. Although total venture capital funding in the biotech and pharma industry in the US was down in 2022 comparative to 2021, median and average US biotech and pharma venture deal values remained relatively the same. In 2022, median and average US biotech and pharma venture deal values were respectively $9.8 million ($9.7 million in 2021) and $33.5 million ($31.7 million in 2021). Valuations reached record highs in 2022 with median and average US biotech and pharma venture pre-money valuations respectively at $38 million ($35 million in 2021) and $128.2 million ($107.6 million in 2021).
Small bio/pharma companies’ innovation surge in 2023. A key development to watch for in 2023 is whether small bio/pharma companies, again an important customer base for CDMOs/CMOs, will continue to lead in product innovation. In 2022, small to mid-sized bio/pharma companies accounted for 24, or 65%, of new drug approvals. This continues multi-year trends that show a surge by smaller companies in new product development.
Consider these numbers from a recent report by the IQVIA Institute for Human Data Science. Emerging Bio/pharma companies are responsible for a record 65% of the molecules in the industry’s R&D pipeline without a larger company involved, up from less than 50% in 2016 and 34% in 2001. The number of products filed with the US Food and Drug Administration (FDA) by Emerging Bio/pharma companies has grown four-fold over the last decade and now accounts for 42% of products filed with the FDA, up from 11% in 2012. A significant portion of oncology drug development, the largest therapeutic sector in the bio/pharma industry, comes from Emerging Bio/pharma companies, with oncology representing 39% of the Emerging Bio/pharma pipeline and more than 1,500 oncology products in development.