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You can’t have it all: being a CXO and developing innovative drugs.

Release Date:

2023-02-02 10:57

China’s previous wave of innovative-drug development was marked by the approval and launch of several large-molecule biosimilars, but it quickly cooled and subsided once these products were included in the national medical insurance scheme. The interim outcome of that wave was: Approximately 20 innovative-drug companies have listed on the Hong Kong stock exchange, nearly all of them with PD-1 products. In this highly “me-too” market, regardless of whether a product is covered by national medical insurance, as long as it demonstrates sufficient efficacy, price becomes the sole metric for evaluation. During that wave of enthusiasm, innovative drug startups such as Innovent, Junshi Biosciences, and BeiGene, along with the established pharmaceutical giant Hengrui, all saw their core products included in the national medical insurance reimbursement list. Yet in 2021, the combined sales of these four companies’ PD-1 products—approximately RMB 9 billion—still amounted to little more than a fraction of Merck’s PD-1 blockbuster Keytruda, which generated $17.1 billion in revenue. Despite this, the aggregate market capitalization of these firms at one point surpassed Merck’s, clearly indicating a significant valuation bubble.

The most recent wave of innovation-drug enthusiasm reached a milestone with the approval and launch of CAR-T products from Fosun Kite, WuXi AppTec’s Jiantao, and Legend Biotech. Although these products have not yet been included in national medical insurance, the fervor appears to be already cooling off. A key interim outcome of this boom is that a significant number of innovative pharmaceutical companies, even before their own pipeline candidates are on the market, have begun leveraging existing manufacturing capacity to spin off into standalone CDMO firms—with the CGT sector experiencing the most pronounced concentration of such moves. In 2021, China secured IND approvals for a total of 28 innovative cell and gene therapy (CGT) drugs, yet more than 20 CGT CDMOs were providing outsourcing services for these innovative products. With such a ratio, it’s hard to imagine the operating environment these CDMOs face.

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The booming CXO sector in China over the past two years is likely a key driver behind the surge of CGT companies entering the CDMO space. On this type of venture that appears “easy to make money” from, Toshifumi Suzuki, the founder of Japan’s iconic convenience-store chain 7-Eleven, once offered a particularly insightful observation: For “profit-generating” projects, customer interest tends to decline rapidly as the number of competitors surges—especially given the fickle nature of human preferences. Once needs are overly satisfied, interest wanes almost immediately. Therefore, companies must leverage their own ingenuity to build sustainable, long-term businesses. Simultaneously pursuing innovative drug development and CDMO services gives rise to numerous irreconcilable conflicts at the operational and strategic positioning levels. In the following sections, the author will summarize several core factors:

 

Operational Level

  1. Release schedule. The ideal operating model for a CDMO is year-round plant utilization with seamless project handoffs. While this may be attainable for traditional small-molecule CDMOs in the chemical-pharmaceutical space, it remains entirely unfeasible—at least for now—in the innovative biopharmaceutical sector, such as CGT, given that a large proportion of these projects are still in preclinical or early clinical stages and exhibit extremely high levels of uncertainty. For CDMOs, setbacks and forced delays are almost routine; a single project delay can easily cascade and impact the timelines of all others. Companies that both develop innovative drugs and provide CDMO services typically rely on the same technical teams and infrastructure. When their own internal programs overlap with client projects, they must prioritize profitability—and if profit margins are not exceptionally high, they often end up sacrificing client projects. Yet which client project, in practice, generates sufficiently high margins to justify such trade-offs for a company that simultaneously pursues both drug development and CDMO services?

  2. Craftsmanship. The manufacturing processes for innovative drugs are complex and highly diverse. While the processes for large-molecule antibody therapeutics have largely stabilized and become standardized, CGT manufacturing remains characterized by a wide array of approaches; even the preparation of viral vectors alone involves more than ten distinct upstream processes. Companies developing CGT innovators typically opt for the most robust and reliable processes to enhance product certainty and mitigate risk; in contrast, firms that outsource often expect CDMOs to explore cutting-edge technologies to boost yield and achieve greater cost-effectiveness. When a company simultaneously pursues both innovative drug development and CDMO services, it inevitably encounters operational challenges arising from these conflicting strategic priorities. The department that first feels the pressure—and may even suffer the most—is often the most valuable within any innovative pharmaceutical company: the process development team.

  3. Supply chain. With the exception of a few industry leaders, China’s innovative-drug CDMOs have virtually no bargaining power at the supply-chain level. Moreover, since a significant portion of production materials has not yet been localized, managing inventory turnover remains a major challenge for CDMOs. Companies developing innovative drugs are already tasked with optimizing inventory levels for their own products; when they also take on external projects, changes or additions to process types can lead to a sharp increase in both the variety and volume of inventory, inevitably driving up costs. If these external projects are not executed effectively, there is a high likelihood that not only will profits be elusive, but substantial additional expenses will also be incurred.

     

     

Positioning Level

1. Positioning for innovative pharmaceutical companies: For common diseases, the focus should be on developing innovative drugs that are affordable for the general public—taking PD-1 as an example, the goal is to create “innovative medicines that ordinary people can afford.” In plain terms, this means prioritizing cost-effectiveness while maintaining basic therapeutic efficacy—a positioning dictated by China’s current market and regulatory landscape. By contrast, when developing innovative drugs for rare diseases, the emphasis should be on “bringing benefits to more patients at an earlier stage.” Given that the United States, Europe, Japan, and China all grant market exclusivity for rare-disease drugs, pursuing a diversified pipeline of products and expediting regulatory approval and market launch—whether through in-house commercial operations or by licensing regional rights—will ensure a competitive edge for at least a certain period.

 

2. Positioning for innovative-drug CDMOs: With the exception of a handful of industry leaders, the current landscape—where more than 20 CDMOs vie for just over 20 IND projects—demands that CDMOs pursue highly granular differentiation in order to sustainably create value. Such differentiators include delivery speed, core product categories, regulatory compliance, cost-effectiveness (high throughput), and safety (low residual levels), among others. Crucially, these differentiated positions must be supported by corresponding resource allocations—and they are inherently mutually exclusive. For example, speed and regulatory compliance, or high throughput and low residuals, are logically and operationally at odds with one another. Therefore, CDMOs must carefully calibrate their positioning based on their own capabilities and relentlessly reinforce that positioning; blindly striving to “do everything” will inevitably dilute corporate resources and ultimately risk delivering subpar results across the board.

 

All of the positioning strategies discussed above require companies to align their resource allocation and team-building efforts with their core capabilities in order to sustain long-term competitiveness in an intensely competitive environment. Looking back, during the industrial era, sellers held the upper hand, with production capacity and distribution channels reigning supreme; as long as firms focused intently on these two factors and invested heavily in them, they could secure a foothold in the market—companies that rose to prominence in the second half of the 20th century in industries such as home appliances, automobiles, and personal computers are prime examples. Today, however, in the era of market-driven innovation and technology, customer demand, operational efficiency, and distinctive value positioning have become the linchpin; relying solely on production capacity and distribution channels is no longer sufficient for modern firms to establish a solid presence in the marketplace. As illustrated in Table 2, every innovative pharmaceutical company listed has invested heavily in expanding production capacity, with some even assembling sales teams numbering in the thousands—but the pace at which they generate revenue lags far behind the rate at which they burn cash. Once such companies see their revenues falter and begin venturing into CDMO services, their strategic positioning must be completely rethought, necessitating a reallocation of the firm’s entire operational and support resources; this inevitably gives rise to sharp internal conflicts.

Ultimately, oversupply of products and services, severe product homogenization, and excessive satisfaction of demand have become pervasive features of China’s innovative pharmaceutical market. The only way to break this pattern is to strengthen internal capabilities and build a clear value proposition centered on one’s own unique strengths. Just as Apple would never outsource manufacturing to Huawei, and TSMC would never produce its own smartphones, the CXO model and the development of innovative drugs are mutually exclusive—these two paths cannot be pursued simultaneously.

 

 

(Reposted from E-Pharmacy Barometer )

 

 

 

 

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