With a market size of 119.1 billion yuan, the fantasy journey of the 'water seller' in the pharmaceutical industry

Using the idea of service to explore the "new needs" of the industry that has formed a scale may be able to tap the blue ocean projects in the general trend.

From 2017 to 2021, the market size of China's CDMO industry increased from 13.2 billion yuan to 41.1 billion yuan. It is expected that in the next five years, the market size of China's CDMO industry will continue to grow at a compound annual growth rate of 24%, reaching 119.1 billion yuan by 2025.

01

"Water sellers" in the pharmaceutical industry

In the mid-19th century, a storm of "nuggets" blew along the Pacific coast of the western United States, and a large number of gold diggers poured into California eager to get a piece of the pie.

However, as the team of gold prospectors grew, gold became more difficult to extract, and the dry and hot environment of gold digging made the demand for water more and more desperate for gold.

At this time, a young man in the team identified a business opportunity, used the shovel digging for gold to dig a canal, obtained the water source and sold the water to other gold diggers, and the end of the matter was that most of the gold diggers returned empty-handed, while this water seller made a lot of money.

The story of "water seller" has given the world an inspiration: to explore the new needs of the industry that has formed a scale with the idea of service, it may be possible to tap the blue ocean projects in the general trend.

As a gold nugget in the new era, there are many opportunities in the biomedical industry, and CDMO, the "water seller", came into being in response to the situation and achieved rapid growth in the development of the industry.

CDMO (Contract Development Manufacture Organization) business model includes the entire supply chain system from preclinical research, clinical trial to commercial production stage of R&D, procurement, production, etc., to provide pharmaceutical companies with the process flow development and optimization, formula development and trial production services required for the production of innovative drugs. On the basis of development and other services, we further provide customized production services from kilograms to tons.

CDMO enterprises deeply combine their own high-tech value-added process R&D capabilities with large-scale production capacity, and can deeply connect with the entire supply chain system of pharmaceutical companies such as R&D, procurement and production through the supply mode of clinical trial production and commercial production, and replace simple capacity output with higher value-added technology output (CMO [Contract Manufacture Organization]). Promote the comprehensive upgrade of the capital-intensive CMO industry to the CDMO industry that is complex with technology and capital.

02

2017 to 2021

The market size ranges from 13.2 billion yuan to 41.1 billion yuan

In recent years, the state has issued a series of policies to encourage the research and development of new drugs, including the guiding principles for clinical research and development of antitumor drugs oriented by clinical value, the MAH system to separate drug R&D and production, the opening of green review and approval channels for innovative drugs in the field of major diseases, the acceleration of the review and approval of drug registration applications, and the implementation of a tacit consent system for drug INDs.

Among them, the MAH (Marketing Authorization Holder) system unbinds the previous "R&D + production" system, improves the enthusiasm of drug R&D, and promotes the increasing demand for CDMO in China.

At the same time, the Chinese government has also increased the quality control requirements for generic drugs to carry out the consistency evaluation of generic drugs. These policies significantly improve the innovation value and transformation efficiency of drug R&D, which not only helps to improve drug quality and clinical efficacy, accelerate drug incubation, but also help the pharmaceutical industry eliminate low value-added production capacity.

Outsourcing pharmaceutical R&D and production to CDMO is conducive to flexibly shifting capacity pressure to control costs, and can benefit from CDMO's mature technology to optimize the process flow, which promotes the growth of the CDMO market from the demand side.

The MAH system breaks the previous model of binding drug approval numbers and manufacturing enterprises, reduces unnecessary duplication of production lines, and spawns the outsourcing demand of pharmaceutical enterprises, coupled with the driving force of large pharmaceutical companies to reduce production capacity and small and medium-sized pharmaceutical companies to seek transformation, the advantages of the system will promote the continuous growth of China's CDMO industry.

From 2017 to 2021, the market size of China's CDMO industry increased from 13.2 billion yuan to 41.1 billion yuan, with a compound annual growth rate of about 25% during the period, and it is expected that in the next five years, the market size of China's CDMO industry will continue to grow at a compound annual growth rate of 24%, reaching 119.1 billion yuan by 2025, nearly three times the market size in 2021.

03

Opportunities and crises in the CDMO industry

In addition to the advantages of policies and business models, the development of the CDMO industry is subject to the influence of the pharmaceutical market environment, including population structure, industrial structure, geographical environment, supply chain system, R&D investment, etc.

1) Economic growth, aging population, and increasing global investment in pharmaceutical R&D are expanding the market for CDMO development

Under the influence of many factors such as economic development, aging population and increased health awareness, global drug R&D investment is gradually heating up, and it is estimated that global R&D investment will reach 204 billion US dollars in 2024.

With the increase in R&D investment, the number of new drugs approved by the FDA has also been increasing in recent years, with an average of 53 new drugs approved by the FDA per year from 2018 to 2021, and the approval of new biological products is increasing, and the approval of more new drugs has promoted the continuous expansion of the pharmaceutical market.

2) When the patented drug expires, CDMO enterprise business expands to the API side

After the expiration of the patented drug, the price of generic drugs will be greatly reduced after they are marketed, whether for the original manufacturer or the generic drug company, it will be wise to package the entire API business to CDMO production to reduce costs, so CDMO companies will expand their business to the API side.

According to Evaluate Pharma data, the global market size of patented drugs expiring in 2021 is expected to be around $17 billion in 2021 and will reach $67 billion in 2023, which is expected to drive further growth in the CDMO industry.

3) Comprehensive advantages such as domestic costs and systems attract CDMO capacity transfer

CDMO enterprises in Europe and the United States have a long development time and high maturity, but their growth is relatively slow; Although the development time is relatively short, due to the increasingly expensive labor and environmental protection costs in the European and American markets, coupled with the outbreak of demand in the Asian pharmaceutical market represented by China, and the gradual improvement of the construction of the pharmaceutical patent protection system, the global CDMO market has gradually begun to shift from mature Western markets to emerging markets such as Asia.

When choosing a CDMO company, customers not only pay attention to whether they can reduce production costs, but also pay attention to the comprehensive capabilities of enterprises in new technology development, quality system, intellectual property protection and other fields, and then determine the final partner. Compared with most other Asian countries, on the one hand, China has a strong industrial chain supply capacity and relatively low-cost technical talents (engineer dividend); On the other hand, the improvement of soft power such as project management capabilities and intellectual property protection of Chinese CDMO enterprises will also attract more pharmaceutical companies to outsource production operations, and Chinese companies are expected to gain more share in the trend of CDMO industry shifting to Asia in the future.

4) The US supply chain security report has landed, although geopolitical issues have a trend of dilution, but it is still necessary to pay attention to the hidden dangers of geopolitical conflicts

WuXi Biologics was previously included in the Unverified List (UVL) by the U.S. Department of Commerce, raising concerns about overseas supply chain security and manufacturing reshoring, especially the CDMO industry, which is dominated by international trade.

On February 24 this year, the White House released "The Biden-Harris Plan to Revitalize American Manufacturing and Secure Critical Supply Chains in 2022", which only deals with anti-tumor, There is no provision for China's CDMO industry to restrict or require the return of manufacturing to the basic shortage of drugs for anesthesia and analgesia and the long-term improvement of manufacturing level. Although the release of this content has the intention of downplaying geopolitical conflicts, in the international development, the attitude of all parties is unpredictable, and for CDMO companies whose orders mainly come from overseas, crisis awareness and handling ability are necessary qualities.

5) In the post-epidemic era, the restructuring of the global industrial chain has intensified, and the growth of China's CDMO overseas orders is at risk

The impact of the epidemic has demonstrated the fragility of the global industrial chain division of labor system. The existing global division of labor has formed a procurement and transportation logistics system based on the principle of economic efficiency on a global scale, and once the key links are broken, it will face great risks.

Many multinational companies have begun to prefer close regional cooperation and decentralized supply chains[1]. For example, for the United States, although the manufacturing industry in the United States has declined and faces the reality that the entity cannot return, it is completely feasible for production to shift to slightly higher cost but more convenient manufacturers for the United States, such as Mexico and Latin America; East and Southeast Asian supply chains are likely to be decentralized, characterized by "Chinese mainland+", according to data released by the General Administration of Customs of Vietnam, Vietnam's exports of goods reached US$89.1 billion in the first quarter of this year, an increase of 13.4% year-on-year.

The close regional cooperation and decentralized supply chain layout of multinational companies may affect the acquisition of overseas orders of Chinese CDMO enterprises to a certain extent, forcing Chinese CDMO enterprises to innovate and upgrade, and strive for overseas share with more cost advantages and technical advantages.

04

epilogue

On November 8 this year, CDE issued the Technical Guidelines for New Drug Benefit-Risk Assessment (Draft for Comments) (hereinafter referred to as the "Guiding Principles"), aiming to collect opinions and suggestions from all sectors of society for the development of a qualitative and structured "benefit-risk assessment framework".

According to the Guiding Principles, marketing applications for innovative drugs: benefits of drugs – risk assessment is a critical process in regulatory decision-making, which ultimately determines whether they are approved.

This means that future innovative drugs must prove that the benefits outweigh the risks compared to existing therapies/products. The issuance of the "Guiding Principles" seems to have put another "tight curse" on the me-too-type innovative drug companies that have been affected by the "Guiding Principles for Clinical Research and Development of Clinical Value-oriented Anti-tumor Drugs".

Fortunately, the evaluation of benefits, in fact, is not only limited to better efficacy, but also the improvement of adherence in specific cases may also be benefits, and one direction that future followers can consider is to improve treatment experience and convenience.

For CDMO enterprises serving the new drug innovation industry chain, from the release policy and market environment changes to smell the changes in the future market pattern, and make plans in advance, such as process design capability improvement, preparation platform optimization, new technology introduction or development, to meet the new needs that may exist in the future new drug research and development, or will become a winning weapon in the future market competition.

Opportunities are always reserved for those who are prepared, and we will wait and see whether CDMO companies will have a new round of opportunities for rapid development.