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Biologics Outsourcing + Butterscotch Cookies

4 minute read

Imagine you have some great recipes for butterscotch cookies, and you want to start a cookie business. Yet, there are some issues. First, the price people are willing to pay for cookies is going down due to intense competition as well as scrutiny from regulators after a few greedy companies ("cookie monsters," if you will) charged exorbitantly high prices. Second, because of the competition, you'll have to spend more on research to keep your cookie line fresh (pun intended). Finally, building a cookie factory is expensive, takes years to build, and requires following many stringent regulatory standards. The thing is, cookies are still in demand and could even get more popular as better cookie recipes are developed! So what do you do?

You have a passion for recipes and you would rather spend your days fine-tuning your cookies than overseeing the onerous task of building a factory. So you consider outsourcing the baking of your cookies to someone that already owns a manufacturing plant that complies with all the required regulatory standards and has optimized the baking process to perfection. You then learn that all your competitors are already outsourcing their baking, which means they can deliver their cookies fast and at a lower cost. Now to just keep up, you have no choice but to outsource.

Instead of a cookie business, let's say you have a biotechnology business. What's the difference? Well, the cost of building a biotechnology manufacturing plant is estimated to be hundreds of millions of dollars (and can even reach a few billion dollars) and can take 4-5 years to build. This is no average cookie factory! But why so expensive? Fancy drugs (especially large-molecule therapies called "biologics") are very hard to make, extremely sensitive to their environment, and have much higher regulatory standards than cookies. The other difference is in the price you can charge for your products. The average price of a cookie in the U.S. is $2.36, while the average price of some biologics per patient for 1 year is around $25,000. Some specialty drugs cost as much as a whopping $250,000 per patient.

What does all of this mean? (Besides the regret of not pursuing a PhD in biochemistry to design the next big drug). We are seeing the beginning stages of a move towards outsourcing biologics manufacturing to Contract Manufacturing Organizations ("CMOs"). The trends in the cookie market we mentioned earlier are also happening in the biologics market, and we should also mention that recent patent expirations on big-name drugs have started a wave of cheaper copies called "biosimilars." The outsourcing of biologics manufacturing is expected to grow 11.4% per year through 2020 (see the chart below), with Asia seeing the most growth - reaching about 24.5% of biologics CMO market share by 2020 from 19.4% in 2015. Furthermore, the CMO market for biologics in 2016 saw only 15.8% penetration of the potential market. From an investor perspective, these trends could present attractive opportunities as the biotechnology landscape continues to evolve.

biologics blog chart

 

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As international equity investors, the team at R Squared Capital Management (former team at Julius Baer / Artio Global) utilizes fundamental and macro analysis in our quest to correctly identify structural tailwinds and headwinds at the geographic, sector and company levels.   

Daeil_Cha_RSQ.pngFROM THE DESK OF DAEIL CHA

Daeil Cha is a Partner and Analyst at R Squared Capital Management. 

Prior to joining R Squared, Daeil was an Analyst at Suffolk Capital Management.

Daeil received an MBA from Columbia University and a Bachelor of Arts in Psychology, with a focus on Neuroscience, from Princeton University.

To view other RSQ team member bios, click here.  

Posted by Daeil Cha on Apr 19, 2018 3:48:12 PM

Topics: From the Desk of Daeil Cha, Biotechnology

 

 

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