CDMOs have met the operational challenges presented by the novel coronavirus (COVID-19) pandemic to date, but what is the near-term and long-term impact as biopharma companies re-access drug-development projects?

The novel coronavirus pandemic has been a jolt to the global economy. Most segments of the economy have experienced shutdowns of millions of businesses and entire industries, but for the biopharma contract manufacturing and development (CDMO) industry, the pandemic crisis has created great opportunities. Whether the positive impact is sustainable is an important question for industry executives and investors. Predicting the future is especially perilous in this uncertain economic and epidemiologic environment, but a closer look at events and the lessons from the global financial crisis (GFC) may provide some insights on whether and to what degree the CDMO industry will enjoy long-term benefits from its role in tackling the current crisis.

The CDMO industry in the wake of COVID-19

Jim Miller Consultant and Content Advisor, DCAT

The CDMO industry has managed its way through the early months of the crisis with agility and adaptability. It has had to overcome staffing shortages and has instituted measures such as added shifts to increase social distancing. Manufacturers, including those in hard-hit areas, such as northern Italy, have kept operating but have had to overcome significant logistics challenges created by the reduction of scheduled airline flights. The measures taken have added to costs and will hurt bottom lines, but the CDMO industry has shown resilience and effective operating skills to keep churning out commercial and clinical trial supplies.

The CDMO industry has also managed to support efforts to develop vaccines and therapeutics for COVID-19 despite already being at a high level of utilization. In general, it does not appear that non-COVID projects are being bumped or delayed because of COVID projects. A number of CDMOs are benefitting from large, government-backed contracts to supply large quantities of an eventual approved vaccine; those contracts often include government funding for substantial investments in large-scale manufacturing capacity.

CDMOs report that new business development remains strong despite the inability to hold face-to-face meetings with prospective clients and conduct client visits to sites. Industry participants say that request for proposal (RFP) volume has increased, but client decision-making has been slow; clinical CROs have reported the same conditions. It’s likely that the slowness is because the RFPs are meant to generate information the biopharma companies need to make decisions about which programs to progress and which to shelve in the event of reduced funding. This was behavior the industry saw during the GFC in 2008.

Near-term outlook

The next 6–12 months will likely be positive for CDMOs. Commercial production should continue so long as supplies of drug substance and other ingredients and materials are available. Contracted clinical trial material (CTM) projects will get completed, again so long as inputs are available. Very few customers have cancelled CTM projects as biopharma companies don’t want to lose production slots that have been booked many months in advance, and contracts often call for significant penalties in the event of cancellation.

The expectation is that the near term will play out in a similar manner to what happened in 2008–2010. Emerging biopharma companies are anxious to get their most promising candidates to the next development and financing milestone and will spend their cash-on-hand in that pursuit with their focus on candidates in the latest phases of development. They need to be ready to start trials as clinical trial sites re-open over the next six months. Most clinical CROs expect most sites to have re-opened by the end of 2020, but patient recruitment will likely be slow.

CDMOs will still have to overcome significant headwinds during the period; however, CDMO executives see potential disruptions from shortages of certain materials and inputs, including glass primary packaging, personal protection equipment (PPE), alcohol and other excipients. Diversions of other materials and equipment are possible as large-scale production of COVID-19 vaccines and therapeutics ramps up.

Medium-term could be challenging

The outlook for 12–24 months from now is murkier, but the experience from the GFC is that it is then the CDMO industry will really begin to feel the impact of the economic and epidemiologic disruptions to the global economy. Among the developments the industry will need to be monitoring and plan for are the following:

• Delays in launches of new drugs because of delays in US Food and Drug Administration (FDA) consideration of new drug applications, and delays in completing clinical trials. The FDA has been cancelling new-product-review meetings in the face of travel restrictions and its focus on COVID-related approvals. Further, according to tracking by Global Data, at least 1,300 trials have been disrupted, 30% in Phase III or later, and it will take time for biopharma companies to complete those trials. As one industry participant told me: “Companies haven’t figured out the challenges of getting trials started around the world; access to sites and patients will be difficult.”
• Companies will feel the impact of slowed business development due to the lockdown. As noted, CDMOs and CROs are generating RFPs, but decisions are slow in coming. That probably reflects uncertainties surrounding when clinical trials can be scheduled and the availability of funding.
• Money will run out for some companies, and a general funding slowdown will hit development, especially the industry’s early-phase pipeline.

The availability of financing to emerging biopharma is the greatest concern for CDMOs. According to a survey of 106 biotech companies published in BioCentury last month (1) and subsequently reported by The Boston Globe (2), 40% of emerging biopharma companies had less than one year’s cash requirements on hand and would need additional funding before the end of the year. Just 22% had more than two years’ required cash on hand. Most tellingly, over 90% said they would be scaling back their new funding plans, including delaying new funding quests or reducing their valuations.

The BioCentury survey also found that many companies that were planning initial public offerings (IPOs) in the next year are deferring their plans. In fact, through the first five months of 2020, emerging biopharma IPOs are down about two-thirds from 2019 (1,2). New IPO filings have picked up in recent weeks, and the biopharma IPOs that have launched have been very well-received, so activity could pick up considerably, but the reduced number of IPOs is a concern. Funds raised in IPOs and secondary public offerings are vital for companies with candidates in later phase trials.

Very early-stage companies are likely to be hurt the most. Commentary in the venture-capital (VC) industry indicates that VCs are somewhat more conservative and that the “frenzied pace” of deal-making seen in 2018 and 2019 will slow down. VCs are concerned that they may have trouble raising new investment funds given the current global economic uncertainty, so they are looking more critically at companies than they might have before. The result will be fewer new candidates requiring quantities of drug substance and drug product for clinical trials a few years down the road. Again, this is a pattern we saw during the GFC.

Some global biopharma companies may step up to make more funding available, but this isn’t likely to be channeled toward start-ups. Pfizer, for instance, recently announced it would make available another $500 million for investing in emerging biopharma companies, but that is targeted at companies that are already public and focusing on therapeutic areas in Pfizer’s portfolio.

Longer-term implications

One of the interesting questions coming out of recent pandemic-related developments is whether CDMOs are building lasting goodwill with global biopharma companies that will carry over into new business opportunities. Global biopharma companies have always been important customers for CDMOs just by dint of their size, but they have tended to use them for special needs while preferring to use their ample cash-generating capacity to build captive facilities.

In recent months, we have seen global biopharma companies lean heavily on CDMOs for the additional capacity needed for the COVID response. Pfizer announced it was moving products to CDMOs to clear internal capacity for its vaccines, and Johnson and Johnson is partnering with Catalent, among others, for its needed vaccine capacity. There are multiple other unannounced examples. CDMOs have responded rapidly and effectively to the challenge thus far, but the real test will be when a vaccine is approved and production has to be scaled up in facilities that didn’t exist three months ago.

Much will depend on global biopharmas’ rationale for using CDMOs in the first place. Is it because they are valued as being more capable, flexible, and responsive than internal bureaucracies? Or is it because they see the COVID response as a one-off event that will only complicate and threaten their normal internal manufacturing and supply arrangements? The latter is most consistent with their traditional use of CDMOs, and if that is the principal rationale, it suggests that any ongoing halo effect from CDMOs’ response will be short-lived.

For the CDMOs that have been selected to manufacture COVID-19 vaccines, there will be other questions. What do they do with the capacity being built with government money, especially if the candidate they are building for is unsuccessful? Much of that capacity is at inappropriately large scale for most of the products in the pipeline. Do CDMOs want to be government contractors long-term? Emergent BioSolutions specializes in that market, but it could be onerous for most CDMOs because of government procurement regulations and unique business development requirements.

In the coming months, CDMOs will demonstrate their value and importance to the bio/pharmaceutical supply chain. But industry executives will need to be prepared for major operational and strategic challenges along the way.

References

1. E Koch and M. Durkin Wolfe, “Small Biotechs Tighten Belts, Seek Alternative Funding to Avoid Low-Valuation Deals,” BioCentury, April 24, 2020.

2. E. Silverman, “Small Biotechs Face a Cash Crunch as Pandemic Drags,” The Boston Globe, May 11, 2020.