Industry Insight - Outsourcing in the Healthcare Industry

By: Andrew Duncan

The financial rewards and humanitarian benefits of developing a successful drug can be staggering. For example, healthcare giant AbbVie is expected to generate cumulative revenues of over $200bn between 2006 and 2024 from Humira, the world’s best-selling drug. At the same time, millions of patients suffering from an array of chronic conditions, including arthritis and psoriasis, have seen their quality of life improve substantially.

With this in mind, it is hardly surprising that PwC estimates that research and development (R&D) spending in healthcare is expected to top any other industry in 2020, having consistently outpaced GDP growth over the years. However, success stories like Humira can obscure a simple fact about drug development: it is extremely difficult.

On average, it takes 12 years and roughly a billion dollars to discover, develop and launch a new drug in the US. And the odds of a particular drug getting to market in the first place are strikingly low: roughly one in 1,000 drugs progress from the lab to human trials, and of these, only around 12% make it through trials. All told, the odds of taking a drug from design stage to a paying customer is roughly one in 10,000.

Given the complexity and huge cost burden of developing new treatments, it is no surprise that smaller drug companies have typically outsourced the majority of R&D and manufacturing. However, in recent years, larger companies have embraced outsourcing in order to reduce fixed costs and free up time and money to focus on their core competencies: early-stage drug development and the all-important marketing and sales of drugs to physicians and patients.

This has been a boon for the drug outsourcing industry, including contract research organisations (CROs), which handle clinical trials, and contract development and manufacturing organisations (CDMOs), which chiefly deal with highly technical manufacturing of commercial products.

Thermo Fisher Scientific is a leading supplier to the global life sciences industry, with $26bn in annual revenues across a number of verticals, including Specialty Diagnostics, Analytical Instruments, and products and services that enable Life Sciences research. It also operates the world’s largest CDMO, following two significant acquisitions over the last three years.

PwC expect the global CDMO market to grow at a roughly 7% annual rate to 2025, and penetration is still low: Thermo Fisher estimates that development and manufacturing is a c.$145bn market, of which only c.$45bn is currently outsourced to CDMOs. We believe this market is nearing an inflection point, driven by strong secular demand drivers for drugs (a growing and ageing global population), pharma and biotech customers’ increasing preference to outsource as outlined above, and growing demand for innovative new products such as biologics as well as gene and cell therapies. Thermo Fisher’s end-to-end solution is well-positioned to capitalise on these structural trends.

In addition to this organic growth, there are plenty of opportunities for consolidation in the highly fragmented CDMO market, with the top 10 companies together having less than 30% market share. Individual facilities are just as likely to be acquired as whole companies, as evidenced by Thermo Fisher’s 2019 acquisition of a manufacturing facility in Cork, Ireland, from the healthcare giant GSK. Whereas GSK was unable to make the economics of the manufacturing site work, Thermo Fisher can process volumes for several different companies at a single site, thus ensuring better utilisation and lower costs overall.

Thermo Fisher faces similar structural growth drivers across all of its divisions. This allowed the company to raise its long-term organic growth rates at its Analyst Day last year, to a healthy 5%-7% annually (from 4%-6% previously). In the short term, it is also benefitting from COVID-19 testing demand, leading the company last week to pre-announce Q2 2020 sales growth of around 10%, despite short-term COVID-19 impacts in other parts of its business.


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