MIND THE GAP 29th April 2022
Ahead of his session exploring the CRO and CDMO landscape and acquisitions at CPhI North America, Brian Scanlan* spoke to us about how CDMOs are rapidly aligning into two groups – very big and small.
In his session entitled ‘In Pharma Services, Where Have All the Entrepreneurs Gone?’ he discussed how some smaller CDMOs have the potential, with the right support, to emerge as mid-sized players. What does this imply for pharma and biotech customers and, with the right tools to enable growth, how many smaller CDMOs can bridge the gap to become large firms?
CPhI North America will take place as a hybrid event, with the online learning and networking sessions running from 9-27 May and the in-person event held at the Pennsylvania Convention Center, Philadelphia, from 17-19 May, 2022.
Chemicals Knowledge Hub: Can you give us an overview of the current market position for outsourced pharma services in the United States?
Brian: At the moment, the market is very crowded in a good way, but there has been a lot of change. In the past five to ten years, various mid-sized pharma service players have been merged up into the large, global multinational concerns, such as the integrated CDMOs or the global CROs.
However, we are left with a giant divide between the really small players and the really big ones. There’s not a lot to bridge that gap and this is causing a discontinuity in the market because the smaller players don’t necessarily have integrated solutions and cannot provide a fully strategic outsourcing solution to their biotech and big pharma customers. However, culturally, they match up extremely well, particularly with the small, medium and virtual pharma companies. These smaller players tend to be entrepreneurial, fast-paced, lack bureaucracy and have a very strong depth of expertise, albeit in a very narrowly-focused window, so it can be a very valuable proposition.
The larger companies have the fully integrated solution. They provide everything, from discovery to commercial, CMC bioanalytical and clinical. The downside is that in these firms, potential clients will often need to wait nine plus months simply to get in.
The other challenge is that if the customer is a small company with a ‘small project’, maybe it’s $200-300,000, they are going to go to the back of the line and risk being overtaken by the larger strategic deals when these get signed.
At the beginning of my presentation at CPhI North America, I will quantify the market from a demand perspective – meaning, what are the molecules in development and the growth dynamics of the demand side in terms of more molecules in development, more outsourced penetration and re-shoring.
I shall also be asking, “Where have all the entrepreneurs gone?” These are the small business owners and technical people who started their companies or are they just cruising below the radar? Many of these don’t have strong marketing or commercial presence and rely heavily on friends and family network connections to get their piece of the pie. However, because of the dynamics of the market they are starting to grow and getting closer to a critical mass. These companies have the potential to grow extremely quickly and to be the next generation of mid-size companies. They will still be able to be fast and flexible, and be unencumbered by bureaucracy, but will be able to offer a wider range of services to their customer base and more critical mass in terms of size which is viewed as a ‘de-risker’ from the client’s perspective. It’s the kind of blend that offers the best of both worlds from the small and large company perspective, but that’s going to take a little time.
Having talked to a few hundred of these business owners about their challenges, what keeps them up at night and their take on the re-shoring phenomenon, the last part of my presentation will reveal what I have discovered.
CKH: You mention some may reach ‘critical mass’. Apart from needing more clients and or larger projects to work on, what else do they need to make this transition?
Brian: Mostly, these are probably going to be companies with less than 50 people and they all have a very common story – a founder, who is the owner, and they tend to be highly scientific. Their existing customer base is generally very happy and willing to give them a wider scope to work, but as of yet the company does not possess the resources to expand their service offering quickly. It’s also why you will see a number of VC and private equity houses like my own company looking to come in and help not only with financial resources, but the management and systems expertise of building bigger businesses. However, this takes real sector and operational expertise.
CKH: What advice would you give companies that are looking to achieve this critical mass?
Brian: I would say, “know what you know and know what you don’t know, plus focus on
business process expertise”.
As a company grows, the importance of the systems and structure increases, so they need to consider what best practices they should be adopting, from where do they get this expertise and, in doing so, ask if they will they lose flexibility. In addition, they need to understand the value of enhancing their commercial engine to help fuel revenue growth and generate the extra profit needed to fuel reinvestment in the company. If the demand for their services gets to a point where they’re starting to feel like they cannot grow fast enough, that’s when access to capital comes in.
CKH: What is generally the goal with these companies?
Brian: Before I answer that question, owners need to decide if they are a kind of lifestyle business. Typically, they employ between 15-20 people, they’re comfortable and it becomes a little bit of an annuity for them. They can go on for 20-30 years like this and enjoy a very comfortable lifestyle. There are others who have more ambition and decide they really want to ramp and grow their business and continue to add people and capabilities. Or sometimes these business-owners are at a point where maybe they’ve done that 20-30 year ride and they want to exit and realise, you know, monetarily, the fruits of what they’ve built over the last 20 years.
CKH: What’s the outlook for these sorts of companies? We hear that everybody is busy, there’s too much demand and maybe not enough contract service organisations.
Brian: Again, I go back to the supply and demand. If you look at the growth in compounds and new therapeutics, in both small and large molecules, it’s compelling – and I will get into this in my presentation, for which I will have more concrete data. If you consider outsourcing penetration, it’s around 50% and continues to increase, meaning even more R&D dollars are spent on external services.
Plus, there is the re-shoring phenomenon, which we’ve heard a lot about anecdotally. I’m starting to see some evidence, with actual numbers, that it is real.
CKH: Is there a partnership model these companies might take? Is that an option?
Brian: It is and some companies are already doing just that. Personally, I have seen mixed results with the partnership model. Companies will market the development, but if they have a small-scale API development shop and a small-scale GMP, and they partner with a large shop, like a Lonza, Catalent or Sterling, I think you’re going to find mixed results on the fruitfulness of that partnership. It’s either one side is getting all the benefit or neither side. In my personal experience, it’s rare that both sides are benefiting, but the idea is interesting.
CKH: What’s your perspective on cell and gene bio versus API, in regard to these types of companies? Are the prospects better in one space than the other?
Brian: There’s definitely more players in the traditional therapeutics realm today and I will cover this in my presentation, I have just got some more data to crunch through on specific demographics within the 1500-2000 companies in the US that fall under the 50-person category. Obviously, there’s a growing number in the protein and antibody space and this is being repeated in the cell and gene arena, but, if they’re decent, a lot of them are getting gobbled up very quickly into the larger players as CAGR’s in CGT therapeutic pipelines are exceptionally high.
CKH: What advice would you give for the biotechs about working with some of these companies?
Brian: I would say small does not mean less capable. They have to figure out what’s best for them as a company. If the biotech feels that in order for them to get the maximum value for their asset or whatever they’re planning on doing with that asset, the IP, the compound, the therapeutic – I say, “do what you feel you need to do”.
For example, if they feel that their investors will need to feel comfortable with the continuity from preclinical through to commercial, then they’ll make that decision. However, if their goal is just to get to Phase 2 as a proof of concept or they need to get to IND-enabling studies as fast as possible, with a minimum amount of other ancillary things, then maybe their answer will involve engaging with these smaller players.
Then, of course, as we talked about earlier, backlogs remain a challenge. I’m not suggesting that small is the only way to go, what I’m suggesting is that, and again this is the thesis for the whole of my presentation, there is a big divide between the small and the large. The mid-sized players had a good balance of all the benefits, but they’re not there anymore or at least not in the numbers they were. The good news for the ambitious and innovative contract service organisations is that there is tremendous scope to grow.
So, for any smart entrepreneurs with the right plans and partners, there is the possibility to fill that gap, which as I see it is a win for them, a win for the biotechs and a win for patients.
*Operating Partner – Life Sciences at Edgewater Capital.