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Biologic Manufacturing – Part 1 – Market Analysis & Postcoronavirus Outlook – 16 November 2021

  • Public Equity
  • Healthcare
  • Global
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Specialist

Former VP at CMC Biologics AS

Agenda

  • Recent trends and developments in biologic contract manufacturing and key players' competitive positioning across geographies
  • M&A and organic growth strategies and outsourcing trends
  • Growth expectations across microbial fermentation, mammalian cell cultures and CGT (cell and gene therapy)
  • Q4 2021 industry outlook and growth dynamics for large and small players

Questions

Transcript

1.
What dynamics have shifted in the biologic CDMO [contract development and manufacturing organisation] industry since our 2019 Interview [see Biologics Manufacturing Sector – Update & 2020 Outlook – 19 December 2019]?

Specialist (SP): It’s been an extraordinary time for us. The industry has gone from showing great potential to delivering remarkable results. I would say, when I look at the industry overall, it’s very stretched now. We’ve got quite a lot of issues related to COVID, not just in terms of the obvious ones, but ripple effects through normal processes, first CDMOs and start-up CDMOs. We’re seeing increasing and heavy investment, which is great, but we’re also seeing a lot of challenges in actually delivering those investments with the various supply chains, so it’s a very dynamic time now in biotech.

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2.
Can you expand on the challenges in delivering investments? What else do you think is making this so challenging, beyond supply-demand dynamics?

SP: Both existing and new players in the market are facing the same challenges in terms of their supply chains. Since the Executive Order of the US on, I think it was 14 January, material supply is a constant challenge, and that’s having significant effects on production plans and the ability to actually get materials to the marketplace. There are quite a lot of issues with licensing. Obviously, the regulators haven’t been coming out to do inspections.

Most of the regulators have significant waiting lists now and it’s harder to get inspected to gain a licence if you’re a new player, or to extend a licence if you require further oversight from the regulator. Finally, the marketplace in terms of building facilities is explosive. For the first time, we’re starting to see significant delays in getting the actual capital equipment necessary to build, develop or grow biopharmaceutical facilities in line with our business goals.

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3.
How should we assess demand’s relation to capacity and greater costs with that dynamic currently?

SP: Demand is huge. There’s no shortage of demand in the market. We’re being hit by a number of different forces affecting demand. Firstly, capacity. Obviously, there are massive amounts of vaccine production going on using a whole host of different technologies for COVID, and that, of course, has consumed a lot of the capacity in the marketplace, but in addition, we see more and more biosimilars coming off patent, and there are various races going on for those.

On top of that, we have ever-increasing pipelines of new biological entities, which are approaching the point that they can go into manufacturing. Effectively, if you’ve got a CDMO then it’s a busy place and there are not really a shortage of potential clients out there

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4.
What’s the addressable market vs the last 2-5 years across microbial fermentation, mammalian cell cultures, CGT [cell and gene therapy] and plasma purification? To what extent does the suppling dynamic vary across each category?

SP: Microbial continues to grow relatively steadily. It’s not on such a dramatic growth curve as vaccine production and antibodies and so forth, but it’s growing, so that’s great. It’s sustained that for a couple of years, where previously it had been either flat or suffering. Mammalian cell cultures are super busy, absolutely super busy. A good example of this is the COVID vaccine.

Instead of it being a standard egg-based flu vaccinestyle material, the likes of which we’ve all grown very used to in the past, we’ve now got all sorts of RNA technology going into it, and of course this is taking up a lot of mammalian cell culture capacity. On the blood products, as far as I am aware they continue to grow extremely well. We’ve seen some M&A activity with players buying into that marketplace, although I don’t see that as a hot area as mammalian culture.

Third Bridge (TB): You mentioned mammalian and coronavirus impacts, but the supplying dynamic around cell and gene therapy seems particularly acute, given how complex that supply chain is. Could you expand here?

SP: On the mammalian side it’s really becoming the preferred technology, and a lot of the science behind it is coming off a patent as well, which is enabling a lot of newer organisations into the game where previously they were prohibited or there were significant costs to licensing technology from the initiators, so there really is explosive growth on the mammalian side. We’re seeing impacts on that right the way throughout the supply chain, because everybody wants very, very similar materials and they want them yesterday.

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5.
How are supplying dynamics developing by region?

SP: I think it’s relatively stable across all regions. There’s massive demand in all regions on this. In terms of the litres, the scale of bioreactors that are most popular right now are 500-2,000 litres. Those are super, super busy. As an example of how busy they are, it’s almost impossible to buy a 2,000-litre bioreactor and have it delivered in the foreseeable future, because the demand for those is huge. We’re starting to see increasing demand on the bigger tanks, both because of COVID but also because of some of the biosims that are coming off patent and getting into the marketplace.

If I were building a CDMO facility right now, I would definitely try and get some 500-2,000 litre bioreactors as my first port of call, because I know that they will be very busy, and I’d probably plan to get the bigger bioreactors if I was starting from scratch in a few years time, when they’re actually available to build.

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6.
Is the prioritisation of COVID-19 vaccines and general supply chain tightness still resulting in material shortages for CDMOs? Would you say those material shortages are improving? How is that trending?

SP: Material shortages have become the norm now in manufacturing, and they’re affecting everybody. The only people who get a pass on this are those who are actually making COVID vaccines. The suppliers are permitted to ship materials to those as an urgency, so we’re seeing dramatic delays, I mean really dramatic delays, in materials.

It’s becoming increasingly hard to get all the SKUs together to make a batch. On the supply side, the material suppliers are busily building more capacity as fast as they can, but realistically we’re going to see this picture for the next, I’d say, 12-18 months. Even after the wave of COVID has passed, there’s so much past-due demand and also so much additional new demand that the suppliers, they’re not just struggling, they’re at a relatively crucial position right now.

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7.
Can you quantify the dramatic delays in materials? How has it trended? Has it become more acute as the pandemic has gone on? You mentioned it will be exacerbated given how much past-due demand there is and given new demand. How have you been expecting some of these delays to trend?

SP: Let’s look at some numbers. Most CDMOs are finding that their material on-time and full delivery has gone from between 70-90% pre-pandemic to between 20% and 40% depending on how big they are and how much leverage they have with suppliers. The security of supply is really in question. On top of that, some of the most crucial materials, for example the rubber bungs that go into syringes, are in constant challenge, and you can see, from order, the normal lead time have delays of between six and 18 months when the supplier comes back with the confirmation of order.

We’ve effectively had to re-write our entire supply chain strategy across the whole market to start to absorb this and try and work around it wherever possible. There’s a massive amount of market diversification happening as a result. Companies who had a preferred supplier are now having, through no intent of their own, no choice. They’re having to take secondary, tertiary supplies. Often this is happening pretty much at the last minute and that’s leading to a great number of delays and costs in the industry as we try and qualify new suppliers, qualify new materials in time to meet that schedule that was fixed before the pandemic kicked off. This is one of the hottest battles that’s going on in the marketplace right now.

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8.
What are your expectations for newer technologies in terms of CDMOs for cell design and processing? Has anything else shifted this broader dynamic since our previous Interview?

SP: It’s interesting, because when we last spoke I was talking very much about the growth of single-use technologies. However, what the pandemic has shown us is the supply chain risk on those. For example, it’s almost impossible to buy a 2,000-litre bioreactor bag from some manufacturers right now, and that’s where the majority of market capital has been spent in building bioreactors of that scale. This has triggered, I suppose, a refreshment of interest in building stainless steel again. There’s a growing recognition that stainless steel, while more expensive and lengthier to build, is actually pretty usefully reliable at times like pandemics. Where the whole market was really starting to focus on more and more penetration of single-use technology, now I sense a lot of the market is starting to look back on stainless steel and say, “Actually, it will be very useful for us to have a core of stainless steel processes that we can call upon if there are major supply chain issues, particularly with the disposable materials that we need in single use.”

I think, with the demand being as it is, there’s also a push towards simpler technology. The ideas of going out and doing perhaps some of the fun things like perfusion are less popular now. I think it’s more what can you make, as opposed to what exciting stuff do you think you could make. The market is recognising the challenges.

Also, I think there’s a lot more interest in some of the technology and purification in terms of things like in-line dilution. A lot through a cost perspective, but more from simplicity and security of supply, because if you don’t have to buy in three different dilution levels of a buffer, but you can make it using a simple material in some water and the in-line dilution technology, then right now that’s really useful, really, really useful. I actually see, from a pure manufacturing perspective, there’s less interest in the exotic.

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9.
You noted the dynamic of stainless steel and single-use has shifted. Could you discuss the costs or margin considerations due to these perhaps shorter-term changes to stabilise the current dynamics?

SP: The biggest cost with stainless steel is building the facility to house it, because you have to build an awful lot of ancillary equipment with stainless steel, so it’s got a much higher capital cost, it’s got a much slower timescale in terms of being able to get up and running if you’re going to build a stainless steel facility. This is one of the major reasons why everyone went for single-use technology. The actual cost to run is relatively similar, actually. When you look at the numbers they’re relatively similar.

There’s not a huge difference, once you’re up and running, between the costs of a stainless steel bioreactor and a single-use bioreactor. In theory, you get more capacity with single-use bioreactors, because you can turn them around faster, but again, that logic was built on the concept that you would have plenty of materials to strip out and put a new batch in, and that logic, of course, has been completely shot to pieces in the last 18 months.

The general rule is that building a stainless steel facility will cost you 20-40% more, depending on the scale and the complexity that you want, and it will take probably an additional year of validation to prove that everything is clean and sterile so you can actually go into production vs a ballroom concept, a clean room that you can use for single-use technologies. I would anticipate the market is going to favour stainless for a little while, certainly until, I think, 2024, early 2025, where I think the supply chains would have fully recovered. Then we’ll probably start to see things moving back in the direction of single-use technology.

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10.
How does cost break down by geography, particularly considering Asia? To what extent does this geography have an increasing role in the biologic manufacturing market, particularly in how it’s impacting capacity?

SP: At present, cost isn’t a huge factor, which is a really weird thing to say when you’re talking about a business, but cost isn’t a massive factor. It’s never been top of the list of the selection criteria when choosing a CDMO. We’re seeing the costs in Asia rise relatively quickly, and they’re becoming more similar to the costs of some of more western countries. Of course, it’s always going to be most expensive to manufacture stuff in western Europe or the USA.

However, I think what’s really driving selection of CDMOs right now rather than cost is, do you have a licence, do you have materials and do you have capacity? Those have become absolutely the primary concerns. I think we may see some more generic-style market cost improvements as the biosims come in, because those will give the CDMOs that manufacture them the opportunity to spread their operating costs over a far larger volume of materials, and logically that means that they’re going to be able to offer cheaper CDMO slots to new entries, but the biosim market is still in outbreak mode.

I think in about four or five years it will be mainstream, and will look very similar to the small molecule generics market that we’ve all grown to know and love over the last 30 or 40 years.

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11.
In our previous Interview you noted that brand recognition will always come first above cost, particularly in the complex segments of biologic manufacturing. Do you expect that pendulum to swing back? You said you expect this to resemble small molecule manufacturing longer term, but when do you think it’ll happen? What key factors need to occur for that to materialise?

SP: I think the brand recognition piece has actually blown up in the faces of those who have brands. Their order books are so overloaded that you simply can’t get a slot. It’s not that particularly different to trying to buy a Louis Vuitton handbag. It doesn’t matter how much you’ve got, you still have to wait for two years before the damn thing is delivered. I think that’s created a wonderful market opportunity, which is growing every day, for people to move away from the traditional brands in favour of, “Let’s get our product on the market sooner, potentially up to two years sooner than if we go with the safe bet and go with the top brands.”

I actually think they’ve created a problem for themselves. Of course, we see them all building capacity as quickly as they can, but I don’t think they’re keeping up with demand, I really don’t. Certainly, their capacity-build programmes, nobody has anticipated COVID and that’s just created more challenges for them.

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12.
You mentioned there’s a lot of building out capacity. Whose ability to add on capacity, organically or inorganically, have you been most impressed by? Are there any big brands you’d highlight as impressive, or do you think they’re all struggling across the board?

SP: I think they’re all struggling. Lonza have got a long-term plan and they’re gradually building, I think it’s the Ibex facilities in Visp in Switzerland, but they’re not keeping pace with the rest of the market. I think it’s good to see that they’re growing, but I don’t think they’re growing fast enough. I see far more aggressive moves from AGC Biologics, Alvotech. Of course, WuXi have always been record pace when it comes to building and growing. I’m just looking at my notes.

Of course, there’s been plenty of M&A activity from Catalent and Thermo, as they’re starting to muscle into the market too. I do think that they’re growing as fast as they can and, realistically, if they want to accelerate that pace they won’t be able to until 2024, because of the supply issues for the actual equipment that they need to put into their processes. On top of that, we’ve got some geopolitical challenges now with equipment purchase, with some suppliers being squeezed by a couple of the larger super powers to say, “You will supply our market first or you won’t supply anything into our country, period.” That’s had a painful effect on equipment supply.

I really think. if you were looking at these companies, the plans that they have announced are not going to change, because I just don’t think that they can resource any acceleration in their growth plans unless they go buying somebody else.

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13.
You mentioned Lonza has a longer-term plan and hasn’t been able to keep up with the market pace. What have you been most impressed by about the company’s approach vs any limitations or qualms with this longer-term strategy?

SP: I’m impressed with what they’re doing in Visp. It’s often nicknamed the toast-rack philosophy, in terms of you build one box and then you build an identical box next to it, just like slices of toast in a rack, and that’s what they’re doing in Visp. They’re not changing the design at all, which means that the second, third, fourth and fifth buildings go up faster than the original building. The regulators become comfortable with them, they know exactly what to expect and they already know, when they go in to do their first GMP inspections, where the strengths and weaknesses are.

Of course, Lonza have the opportunity to defend and improve, so I think that’s a really good plan. I just think that the location is very, very unwise. It doesn’t get much more expensive than manufacturing in Switzerland, particularly in the Alps. I don’t see them investing as strongly in some of the other countries that they have a presence in. I also think their structure is starting to get a little confusing.

For example, the Visp facility is really all about capacity improvement, but they’re still operating with capacity out of their London facility. My feeling is that they should start to look at restructuring, and perhaps make London a scale-up-and-launch facility only, and perhaps not even the launch, just the scale up, because they have enough molecules in their portfolio for that, and really have a better tech transfer profess and a one-stop process to either Visp or Singapore or one of their other locations, rather than the two-step that they’re currently doing. I always feel Lonza are under-invested. There’s too much conservatism in their investment profile compared to their brand and their order books.

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14.
: Catalent has been moving significantly towards biologics manufacturing, in significant investments and divestments on the small molecule front. Can you expand on the company’s positioning and what it’s done that’s impressed you vs players such as Lonza, which you say is still under-investing even with all its focus here? How do you expect Catalent to fare?

SP: I’d say Catalent is one to watch. They’re new into the marketplace in terms of their new owners. Their new owners are far more aggressive. They’re looking at end-to-end portfolio as opposed to organic market growth, but I would anticipate that we’ll see that play out with Catalent. Plus, of course, a lot of the molecules that Lonza, Boehringer Ingelheim and so forth, make end up at Catalent for fill-finish, so now that they’re starting to offer drug substance manufacturing as well as drug product, then it starts to beg the question to companies, “Why would we use someone who’s going to have to book a slot and doesn’t have that connection with Catalent than they have with something that they can manufacture internally?”

I’m very interested to see how Catalent grow. I think they have a greater opportunity to grab market segment than those who don’t have their largescale fill-finish facilities and reputation in the marketplace.

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15.
You grouped Thermo and Wuxi together as particularly focusing on M&A to grow in biologics. What are the potential limitations to this? You mentioned Lonza might need to rethink its geographic footprint when considering organic growth. Do you have any expectation for potential challenges around M&A as a way to expand?

SP: I think there’s plenty of opportunity out there. The question is whether Lonza’s pockets are deep enough, because I would anticipate most of the M&A activity is going to come from two sources, from venture capital, which is now pouring into biotech, and from the larger pharmaceutical companies, who’ve obviously done very well out of COVID. Not just with the vaccines, but also with all the other meds that we all bought in vast quantities.

They’ve got plenty of investment cash, and they know that they’d don’t have a massive amount of capacity. The likes of Pfizer, I would expect them to get quite acquisitive in the next few months potentially, because they’ve got a lot of cash to burn, and that puts them in a position to look at their portfolio and say, “Let’s buy some smaller CDMOs and turn them into Pfizer and start to move away from using CDMOs.” I think it will fuel that insourcing.

As I said, the venture capital side, I think, there’s a huge amount of interest, huge. As we’ve watched the impact on the financial markets of the pandemic, the safest place to be is biotech. With results coming out of some of the bigger companies like Danaher, Thermo Fisher, of 20% growth in margin from last year to this year, those are very, very interesting numbers and they’re drawing a lot of investment in.

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16.
What outsourcing rate are you expecting for CDMOs from smaller biotech and pharma companies? To what extent might the potential for larger companies to acquire their own facilities inform those expectations?

SP: I think the outsourcing will continue to grow significantly. If you listen to any of the CEOs from any of the large players, they’re all talking about an expectation that the outsourcing trend will continue and do very well indeed.

It’s not just about outsourcing from the big boys like GSK and Novartis and whatnot, it’s also outsourcing from the smaller players who just cannot afford to build the technology, build the facilities. There are so many of those with the extraordinary pipeline of new biological entities coming into the biologic sector that CDMOs are in a fantastic position to enjoy this for the foreseeable future.

Most of the products that are being licensed in are going into launch phase in the next few years, so the scientific originators won’t actually have enough money to start building their own facility if they want to take that path, most likely for another five or six years. Then it only makes sense if they’ve got a pipeline of interesting products to utilise in their own facility. I wouldn’t anticipate any major changes to the CDMO market and the outsourcing demand.

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17.
How do you think Thermo is playing in the biologics industry? The company has been quite acquisitive across the board, most recently with its PPD acquisition, which to some extent changes that dynamic.

SP: This next bit goes for both Thermo and Danaher. They’ve got a stated intention to get into the marketplace to provide end-to-end solutions. They’re in a beautiful position to do this now. I think both of them have recognised that if they can make the transition from raw material supply, analytical supply, diagnostics, into full end-to-end processing, then they can do extraordinary things in the marketplace. They’ve got the financial depth to be as acquisitive as they want. You can see with both of them that they’re slowly building their portfolio.

Both of them have a model of utilising their own equipment and their own materials, which is exactly the way to go, so that they have the most secure processes. I’m very interested to see where they go, because I think they’re going to add a real energetic dimension to the marketplace, certainly compared to the organic growth that you see with the likes of, say, as an example, AGC. AGC don’t have the same support network that Thermo Fisher do, or Danaher do. They won’t be able to be as quickly acquisitive, potentially with not just businesses but technologies that the big boys can play with.

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18.
You mentioned Danaher intends to expand in biologics. What are you expecting here, particularly postacquisition of Aldevron in August 2021? What might its positioning be, particularly given how great the opportunity is?

SP: I think they’ve done very, very well with drug substance manufacturing. They’ve got a lot of technology in drug substance. I would be surprised if they didn’t start looking at drug product. That makes a lot of sense, and that gives them the full end-to-end reach, not just in terms of drug product manufacturing facilities but also suppliers who supply critical elements, like syringes and all those pieces. That really fits in with their logic and methodology.

They’re certainly looking very, very closely at all of the single-use materials, and they’ve invested heavily in those manufacturing capabilities so that they can offer more in-house than outsourced materials to their customers and they’re pushing their customers quite hard in that regard.

I would watch to see, what are they missing in their portfolio to do end-to-end biologics manufacturing? Do they have the R&D? Do they have the cell development? Do they have the drug product? I would expect to see them filling those gaps as quickly as they can.

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19.
You said WuXi set a record pace in growing and adding capacity. Can you expand, particularly considering the company’s geographic positioning? Where is it winning out the most vs any potential challenges in specific geographies?

SP: I think WuXi have established themselves fantastically. When we last spoke a couple of years ago, they were the young upstart coming in from China. Now, they’ve largely built facilities in all the key marketplaces which gets them in front of all the key regulators, which, of course, is building a reputation with regulators, it’s building a reputation in the marketplace. Their offering is quite simple and easily repeatable.

They’re not building anything particularly exotic. It’s all about capacity and offering that capacity into the marketplace. I think WuXi have done a cracking job. I see them now starting to challenge Boehringer Ingelheim, Lonza and Samsung, particularly, because they’ve built some larger-volume facilities. I think WuXi, they’re becoming more and more mainstream than when we first began.

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20.
You mentioned that geopolitical issues, particularly because of the pandemic, have led to a shorter-term push towards domestic manufacturing across the board. Beyond that, are there any potential longer-term implications of the pandemic, or anything additional that you think is important or overlooked?

SP: No, I don’t think so. The Chinese are getting stronger and stronger in terms of their regulatory piece and their recognition that this is a key marketplace and a key technology. I wouldn’t anticipate that burden easing or relaxing at all. What has been very, very clear during the pandemic is that the Chinese government have really got behind any Chinese manufacturers to make damn sure that they get what they want when they want it. That does give them an edge.

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21.
Could you expand on sterile fill-finish? We discussed some under-investment in this category in our previous Interview. Where does this stand since we last spoke?

SP: When COVID broke out and we recognised that we needed to make the vaccines, it was immediately obvious that we didn’t actually have the global capacity to roll out the vaccines in the time scale that the governments were talking about. We’ve got market demand now, which is fantastic, from the usual sources, the likes of Pfizer saying we need someone to do fill-finish.

We’ve also now got new demand, as many governments recognise that they have a strategic issue, that they didn’t have the capacity to make their own vaccines and support their own people. There’s strategic intent and investment coming from a lot of governments now to build their own vaccine manufacturing. A great example is this, VMIC in the UK, who didn’t really exist two years ago. Their facility would be up and running very shortly. The market has changed dramatically, and I anticipate that to continue.

I think the world has now recognised that there are risks that traditional pharmaceutical companies couldn’t support. A lot of the politicians are now showing unprecedented levels of interest in investing in their industry. When I think of the number of politicians I’ve seen flitting around the companies that I work in in the last couple of years, it’s more than I’ve seen in the last 20 years put together. There has definitely been a change there, and they all want to be able to put things into syringes in their own countries.

I think we’re going to see a lot of demand on fill-finish for the smaller scale. Fill-finishes, as you probably know, it falls into two key categories. There’s the smaller scale, which is dependent on people doing a visual inspection of the process. This is where, traditionally, you do the pre-clinical work.

Then there’s the large-capacity stuff which has got automated inspection. It’s very expensive to build, maintain and qualify. That, of course, is where you tend to get the large-scale vaccine production. The likes of the flu vaccine go through those. I think we’re going to see a lot of demand for the small scale because that has been a missing piece really, and certainly that’s what really surfaced during COVID, is who can actually get clinical trials out to the market fast enough to meet a global issue like that? That’s where the governments seem to be investing.

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22.
Can you expand on the cost profile and margin implication, particularly when assessing smaller CDMOs, larger CDMOs and informed by the factors you’ve spoken to today?

SP: The costs are going up. Most suppliers have indicated that they’re expecting to pass on cost increases of around about 5% YoY for the next few years. Of course, this is as they pass on the costs of building additional capacity to keep up with market demand.

I’m not aware of any supplier that’s giving any cost reductions or who is able to keep a flat cost structure right now. They’re all putting up inflation plus level cost increases. Of course, that’s going to come straight onto the cost of goods for the marketplace, particularly from the CDMOs, because they won’t be able to afford to absorb that cost themselves.

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23.
Where are cost increases coming from? Labour dynamics are a continuing concern in the industry. Does anything else stand out as informing that cost profile disproportionately?

SP: I think labour cost is starting to rise significantly, and this is in all marketplaces, because the demand for experienced biotechnologists necessary for any level of facility is such that the labour market is truly international now. If you’re running a facility in any country, you’re looking at candidates from all over the world. That’s moving away from the traditional cost structure, where you’d have a local work force, into a more hybrid structure.

Of course, the actual costs per person are much, much greater.

TB: Is there anything else beyond labour that you think is complicating the situation, or anything that has disproportionately increased of late?

SP: Yes, absolutely. The waiting list of the regulators. The FDA is running about 12-14 months behind in terms of being able to go and perform inspections to actually give licenses out to CDMOs or any pharmaceutical company. Most inspections stopped the best part of 12 months during the worst parts of COVID. If you need a new licence, getting it is very, very difficult.

There have been all sorts of clever things about using cameras on sticks and so forth, so the regulators don’t actually have to come and visit, but it’s still rather trepidatious, and, of course, the regulators are super busy because they’ve been told to stop everything except for COVID for political reasons and because of the pandemic. If you’ve got a novel new molecular entity that you’re trying to get through that they don’t consider as particularly important, it can be a long wait. I think we’ll see the pain point moving from raw material and equipment supply into regulatory capacity probably in H2 of next year, and it will last for a while.

 

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24.
What EBITDA margin would you expect after cost and price increases normalise?

SP: On biologics, normally see a margin of between 20% and 40% depending on the scale and the complexity, which is why everyone wants biologics over small molecule, because the margins there are tiny.

We’ve all heard of these penny tablets. Margins will stay at a good level. The market is comfortable paying for them. Again, we can see that with COVID, with the price of the Pfizer BioNTech, which was, what, USD 50 a shot vs AstraZeneca, which is a USD 5 a shot. The politicians and the health authorities were more than happy to use those.

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25.
Given we discussed branded companies with brand recognition simply not being able to keep up with demand and having long lead times, how sustainable a strategy for players such as Lonza would cherry-picking their projects be? You mentioned this is backfiring for a lot of players and making space for smaller CDMOs. Can you expand and discuss how this is impacting Lonza or similar peers?

SP: I think Lonza, again, have made a mistake in that. They’ve been cherry-picking for a number of reasons, both to support their own technological offerings, to utilise intellectual property that they’ve already got and the capabilities that they’re already got, which is all great, but it has put many people in the market off, because ultimately, if you have a product and you want someone to make it, you don’t normally expect that you will have to go through some kind of selection criteria. It should be the other way around.

There are a lot of CDMOs, they’ve done well out of this in saying, “Whatever it is, we will make it for you.” The market knows that they’re hinting about the likes of Lonza, and to a point Boehringer Ingelheim and some of the others who have technological preferences that they won’t shift from. I think the cherry picking is something that they probably shouldn’t continue to do. However, because of the strength of their pipeline, they don’t have to make any dramatic changes.

I think if they were smart, they would start building faster, more basic facilities, the likes of what WuXi do, and start putting new products into the pipeline, what we should not cherry-pick, that can go into those basic facilities now, with a view to being able to fill the tanks in 2024-25. I don’t see them making that change of direction yet.

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26.
Are you impressed with any smaller CDMOs’ ability to add scale or win over some of the share that Lonza couldn’t, given the missteps you mentioned?

SP: Absolutely. I’m full of admiration for Alvotech and AGC Biologics. I think they’ve done phenomenally well. Of course, you can’t have this conversation without talking about Oxford and Jazz and Fujifilm in the UK, who have really capitalised on the COVID demand.

They’ve gone from medium to large, I don’t know if they’re large, but their reputation has grown much beyond their facility capacities. Those guys have done tremendously well, really impressed with those.

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27.
Do you have any commentary on Charles River’s entry into CGT manufacturing? What are you expecting from it as a manufacturing competitor?

SP: I think, for the smaller players, they really have to focus on what can they deliver. Not over-promise, but actually deliver what they can. I think the market is now a lot more comfortable with players who don’t have a licence for full GMP manufacture, who can just do clinical phase 1, 2, material only, because there is such a market for those with all the vaccines and the COVIDs and whatnot of this world. I think they’ve got better opportunity than they had.

I think the market being able to cherry pick a manufacturer who had a licence, had the reputation, didn’t have a terrible cost structure, was in the right region, has been challenged. I actually think the smaller guys have got a much better launch pad now than they had two years ago.

TB: How might that dynamic play out for Charles River, particularly given its work on the preclinical CRO [contract research organisation] front?

SP: Charles River are doing fantastically well, very, very impressed with those. Let me just look at my notes. I think what Charles River have done of their investments are very, very smart. Of course, Charles River are behind a lot of the PCR machines. Two years ago, no one knew what a PCR machine was. Now, we’ve all got brutal experience of them. Charles River are in a real cash-generation territory.

I think what they’ve done in their M&A activity before the pandemic has put them in a really good position. They have a fantastic  reputation because of their analytical capabilities. What they’ve done, for example, with Distributed Bio is already paying dividends.

If you look at their Q3 results, they’re already seeing benefits from having Distributed Bio in there. On top of that, it has given them a much stronger pipeline of potential materials that they can market. I’m very impressed with Charles River. From my perspective, they’ve gone from a large analytical company, I always used to associate them with their labs, to now really stretching towards that endto-end manufacturing piece that we discussed earlier

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28.
Has there been any recent shift towards increased efficiency and flexibility? Would you expect anything in this regard near term?

SP: I already talked to this a little bit. There’s an enormous amount of cash in the marketplace right now. I’d expect to see some swift M&A activity from the likes of Pfizer, Sanofi, all those who have done well out of the vaccines have got an awful lot of cash. I think we’ll see some quick activity there.

In terms of things that might hold them back, it makes more sense right now to buy someone else than to try and build someone else. I think we’ll see the preference shifting from building shiny new sites in exotic places around the world to finding someone who has got a site built that they can already buy. Anyone looking into the marketplace right now will recognise that it doesn’t matter how much cash you’ve got, you can’t get a bioreactor in less than two years.

If you want a reasonable return on investment, then the time to build rather than to go through M&A has just picked up an additional 12-18 months on top of the normal five years to go from greenfield to fullyoperational licensed facility. I’d see that really pushing perfectly into the M&A market space.

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29.
Do you have any further commentary or anything else you’d like to touch on? What’s your 12-18-month outlook for the biologics manufacturing industry?

SP: I was thinking about this before the call. We’ve talked about staff, we’ve talked about materials, equipment, licensing delays. The other piece is that we’re seeing increased headwinds on biosimilars in terms of legal challenges. It used to be 50/50 as to, if you launched a biosimilar, whether the originator would take you to court. It’s now becoming a lot more common and frequent that they will absolutely take you to court, and even go as far as the Supreme Court in the USA, even if they know they’re going to lose.

That’s inevitably going to have an impact on some companies as to whether they wish to go down the biosimilars route, who perhaps have already launched in that direction but don’t necessarily fancy the extraordinary cost of litigation. Litigation can cost almost as much as a clinical trial. In terms of the cost per molecule to get out to the market, that’s a very good defensive strategy by the originators.

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