Global Growth Themes: The Opportunity of Bioprocessing

Global Team Perspectives by Sam Schuette

Part of our global team’s strategy is to search out investment themes that we think will provide tailwinds for sustainable long-term growth and position our portfolios to benefit from them. For example, currently we are seeing exciting opportunities within the bioprocessing industry. We believe this bioprocessing theme is broadly more attractive than the biotechnology industry due to a better risk profile, since these companies have negligible exposure to any single drug clinical trial result, approval, or launch. We have identified three main themes that we believe will drive future growth in the bioprocessing industry: an increase in biologic volume, a preference for outsourcing, and a change in manufacturing processes.

What is bioprocessing?

Bioprocessing is the manufacturing process for large molecule drugs, which are also known as biologics. Large molecule drugs contain living cells and are more expensive and difficult to develop and manufacture than small molecule drugs, which are made from chemicals. A few biologics marketed by large biopharmaceutical companies include popular cancer, psoriasis, and rheumatoid arthritis drugs.

Bioprocessing Growth Theme 1: Volume

There are two main drivers of biologic volume growth. The first is efficacy. Biologics have been more successful than chemical drugs at treating many complex diseases. They are more effective because they use proteins that are better at correcting or neutralizing specified target areas. This improved efficacy is also occurring in clinical development, where companies are becoming better at removing drugs earlier in the development process due to enhanced technologies and strategies. As a result, biologics have been gaining share of biopharmaceutical company pipelines. They now represent about 40% of pipelines, and 70% of these are small volume drugs for things like rare diseases.

The second key driver of biologic volume growth is the development of the biosimilar industry. Biosimilars are simply generic biologics but are called biosimilars because they are not exact copies of the originator drug. Unlike generic chemical drugs, biosimilars cannot be exact replicas of the originator since they are made with living cells. These generic biologics are gaining popularity today because the current generation of large-scale, blockbuster biologics are starting to lose patent protection. That loss permits competitors to manufacture and sell biosimilars at a lower cost, which drives greater volume. This also forces developers of the original biologic to create more effective next generation biologics to offset biosimilar competition. Some examples of these next generation biologics include bispecifics, bispecific T-cell engagers, antibody drug conjugates, gene and cell therapies, and others. The biosimilar market is still early in development (especially in the US), but we believe it will play a significant role going forward. A few factors to watch as the industry develops are 1) how supportive the regulatory environment becomes, 2) how competitive biosimilar manufactures are with each other, and 3) how successful the innovators are at positioning patients on to their next generation biologics before their first generation biologics lose patent protection.

Biosourcing Growth Theme 2: Outsourcing

By 2025, just over half of all mammalian cell biologic production will be manufactured in-house by biopharmaceutical companies, while just a few years ago 75% was manufactured in-house. The rise in production outsourcing and the growth of biologics in pipelines will benefit both CDMOs (contract development manufacturing organizations) and their suppliers. Large biopharmaceutical companies are increasingly using a dual sourcing model where a drug is produced both in-house and with a trusted CDMO, while small biotechs are increasingly outsourcing all production.

Reducing risks and managing costs are the main reasons that companies are outsourcing more. Historically, large biopharmaceutical companies have had difficulty forecasting their own internal capacity requirements due to a number of factors including clinical trial failures, drug sales that often deviate from expectations, and patent expirations. It is costly to build and maintain unused capacity, but not having enough capacity can limit a company’s growth prospect. As a result, outsourcing has been steadily rising in recent years.

In addition, biologics are getting more complex and difficult to manufacture, which benefits CDMOs that specialize in new manufacturing techniques. CDMOs are moving beyond manufacturing to also supporting companies earlier in the drug development process. Biotechnology firms are launching as virtual platforms that use CDMOs to facilitate all research and development, help with clinical trials, and manufacture commercial supply. Some CDMOs work with companies in the preclinical stage and follow the molecule all the way through development to commercialization. These CDMOs that help with drug discovery may receive royalties on drug sales once they reach commercialization.

Biosourcing Growth Theme 3: Manufacturing

The two stages of manufacturing biologics, also known as bioprocessing, are upstream and downstream. Upstream bioprocessing involves growing the cell protein, while downstream involves filtering, purifying and packaging the final product. Throughout the upstream and downstream bioproduction process, there is an ongoing shift to manufacture products with single-use technology. Presently, manufacturers usually repeatedly grow the protein, one large batch at a time, in a process called fed-batch. This process can be run with traditional large stainless steel bioreactors or with single-use technology, which is rapidly gaining share. Single-use fed batch bioreactors are mostly used for both small-scale clinical and commercial biologic batches. It is especially useful as the industry focuses on developing smaller volume biologics for things like rare diseases.

The advantages of using single-use technology are its flexibility, low capex cost, low energy and water cost, quick set up time, and low production risk. Single-use technology currently has a 15% market share, but it is on track to reach 35% market share over the next few years and eventually move up toward 75%, according to a leading supplier.

Conclusion: Investment Opportunities

While there are many ways to gain productive exposure to the bioprocessing theme, we see attractive investment opportunities in the leading CDMOs (contract development manufacturing organizations). These top companies are growing their moats in a consolidating industry, and improving ROICs as they focus on high value-add products like biologics. Biologic demand is on track to outpace capacity for at least the next five years, especially in the small volume setting. Other key players like the suppliers also benefit from this theme, since they sell the “picks and shovels” to biologic manufactures. Suppliers with more exposure to downstream and single-use technology are best positioned to capitalize from the bioprocessing theme. Lastly, another way to gain exposure to this powerful theme is through the companies that are developing the next generation of biologic medicines and those that are developing biosimilars.