Proposed US BIOSECURE Act - Do Lonza, Other CDMOs Gain And How Soon?

The progress this month of a bill proposing the BIOSECURE Act in the US didn’t just spook shareholders of Chinese contract research organizations (CROs) and contract development and manufacturing organizations (CDMOs), it seems to have also caused a “scramble” among the clients of such companies.

At DCAT Week, an annual global event for bio-pharmaceutical manufacturers that took place 18-21 March in New York City, an eagerness to shift business, at least partially if not completely, to non-Chinese producers was visible, accelerating the “China plus-one” model that has seen measured success so far.

“People are scrambling for alternatives,” Himanshu Gadgil, CEO of Alkem Laboratories Ltd subsidiary Enzene Biosciences, told Scrip. He was at DCAT to scout for business as the company is setting up a continuous manufacturing unit at Hopewell in New Jersey. Spread across 54,000 square feet, the plant is expected to be operational in June this year.

Notably, among the pure play CDMOs, executives from Lonza Group AG, which now has the largest installed mammalian manufacturing capacity globally after acquiring Roche’s mammalian facility in California - announced last week – were also present.

Second in line Samsung BioLogics, which is adding significant new capacity in South Korea, and FUJIFILM Diosynth Biotechnologies, the third-largest in global mammalian capacity (leaving aside WuXi Biologics), also participated in the event.

Before the Biotechnology Innovation Organization (BIO) lent support to the bill and WuXi AppTec quit the industry group, BIO chair Ted Love warned of unintended consequences for biotech as WuXi has enormous manufacturing capabilities in the US, apart from employing and making products for Americans. (Also see "WuXi AppTec Quits BIO As Group Endorses BIOSECURE Act" - Scrip, 14 March, 2024.)

So, while the winds of change are blowing, it remains to be seen if these will turn into a hurricane for the WuXi group of companies.

Meanwhile, Scrip gleaned information from analyst reports and spoke to Indian C-suite executives to gauge which global companies could gain, what could determine the shift of clients from Chinese CRDMOs and how imminent the expected fallout of the BIOSECURE Act is.

In January, Republican Congressman Mike Gallagher introduced the bill, for himself and three others, to block companies/groups like WuXi from federal contracts and it has since made progress, with The Committee on Homeland Security and Government Affairs voting 6 March to advance it in the Senate.

WuXi AppTec, WuXi Biologics, BGI Genomics Co Ltd., MGI Tech and its subsidiary Complete Genomics Inc. are claimed to pose a risk to US national security.

BGI, MGI, Complete Genomics and Wuxi AppTech have been named as biotech companies of concern as also any of their subsidiaries, parent affiliates or successors.

In addition, any entity that poses a risk to US national security by “engaging in joint research with, being supported by, or being affiliated with a foreign adversary’s military, internal security forces, or intelligence agencies” would also be of concern.

Among findings of the Congress stated in the bill was one which said WuXi Bio’s CEO, Chris Chen, was previously an adjunct professor at the PLA (People Liberation Army)’s Academy of Military Medical Sciences. WuXi Bio, sister company of WuXi Apptec, has denied any ties to China’s military, but could find itself subject to restrictions.

The spotlight is on China given the US biopharma industry’s large reliance on the country and continued bilateral geopolitical tensions.

While Gallagher sparked a political debate with his recent statement that he intends to leave Congress in April before his term expires, his departure seems unlikely to change perceptions of a Chinese threat to the US as senators seem aligned on this issue.

On 4 March, the administration of President Joe Biden, a Democrat, issued an executive order asking federal agencies to craft rules to restrict companies from “countries of concern” from accessing and using US data, including genomic, personal health and financial data.

Which Companies Lose?

The proposed legislation is seen potentially affecting biopharma companies, including those doing clinical trials in the US and with US employees, despite the addition of a clause stating that only US government-funded contracts after the bill date will be subject to restrictions.

The most significant and obvious impact would be on WuXi companies and accordingly their share prices have declined substantially.

In a 11 March report, Goldman Sachs kept its earnings estimates unchanged for three WuXi firms (WuXi AppTec, WuXi Biologics, WuXi XDC), but lowered price targets for them by 44% on average.

“If only federal funded projects are affected, our analysis shows manageable impact” with capacity utilization rates dropping by 3-5 percentage points, it said. However, if they lose contracts from US clients (37-68% of revenue), the companies could suspend capacity expansion and optimize operating costs in the following one to two years.

In an “extreme case scenario of broader restrictions” where all ex-China orders are affected (64-81%), utilization rates could drop to 20-29% and EBIT (earnings before interest and tax) margins could drop to a negative 12% to 60% as the WuXi companies would likely realign to focus on the China-only market, it predicted.

Which Clients Could Shift?

Emerging biopharma and small companies have been driving growth in the CRO and CDMO space over the past few years and the clientele of Chinese CROs and CDMOs is likely to include a host of them, particularly since WuXi Biologics offers strengths in early discovery.

According to Bernstein, emerging biopharma-sponsored pipelines increased their overall CDMO industry share to 64% in 2022, compared to 50% five years back in 2017.

Akhil Ravi, CEO at Aurigene Pharmaceutical Services, a subsidiary of Indian major Dr. Reddy’s Laboratories Ltd.’s, told Scrip the development “puts a lot of potential stress especially on smaller biotechs which may be under pressure to find alternate solutions with limited resources and capital.”

Given that setting up a single large-scale facility can cost billions of dollars and take three to four years, fixed costs of manufacturing can account for up to 50-60% of total cost of goods sold and most emerging biopharma firms have just a couple of drug candidates in their pipelines, the economics favor outsourcing manufacturing.

Global pharma majors have also been increasingly outsourcing production in a bid to cut costs, with drug prices facing pressure from legislative action like the US Inflation Reduction Act and the proposed Biosimilars Red Tape Elimination Act. (Also see "Stelara Biosimilars In Wings, Will Proposed Red Tape Elimination Act Aid Biosimilars Push?" - Scrip, 26 July, 2023.)

Where Does The Business Move?

Lonza, Samsung Biologics, Catalent, Inc (acquired by Novo Nordisk A/S parent Novo Nordisk Holdings in February) and Fujifilm Diosynth dominate the CDMO field globally, apart from the WuXi group.

Big pharma’s CDMO arms like Boehringer Ingelheim GmbH’s BioXcellence and Novartis AG’s Novartis Global Biotech Cooperations also offer capacities and expertise to other companies.

Given that Wuxi AppTech is focused on small molecules, cell and gene therapies, Wuxi Biologics on early-stage development of biologics, vaccines and small molecule parenterals and WuXi XDC on antibody-drug conjugates (ADCs), companies offering strengths in these areas will be sought after.

Most large players offer services across phases of development, though the strength of offering and track record differs.

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Well-integrated Lonza has the most mature offering across the value chain, with moderate capability in drug discovery and a good mix of pre-commercial and commercial manufacturing services, according to Bernstein.

Samsung Biologics' strength lies in large-scale commercial production, while Catalent’s is in the fill-finish or drug product stage.

Technological expertise, cost competitiveness and quality assurance play a much larger role in selecting outsourcing partners, but location matters too. CROs/CDMOs with facilities in the US or European Union are likely to benefit more from the likely shift in the US, Aurigene’s Ravi feels.

Lonza has an upper hand here, with over 30 product sites, including 15 In the US - at Wayne, Walkersville, Tampa, Rockville, Rockland, Portsmouth, Salisbury, Morristown, Lexington, Greenwood, Houston, Durham, Cohasset, Cambridge and Bend.

In addition, an acquisition of compatriot Roche Holding AG’s Genentech factory in Vacaville, California, has given it access to one of the world’s biggest manufacturing facilities. Interestingly, Lonza also has multiple manufacturing sites in China at Guangzhou, Suzhou, Nansha and Shanghai, and one in India too.

BofA Global Research said in a 15 March report that it expects the BIOSECURE bill (if adopted into law) to be a short-term benefit in early-stage asset utilization for Lonza and a long-term positive on sector capacity.

Meanwhile, Samsung Biologics has an installed capacity of 604 kilolitres (kL) at its Bio Campus 1 in South Korea, will add 720 kL at Bio Campus 2 by 2032 and is readying a separate ADC facility, expected to be ready within 2024.

UBS said in a 12 March report the company is focused on large-scale commercial manufacturing with “limited exposure to early-stage R&D (less than 10% of CDMO revenue).” If customers’ supply chain evolves outside of China, Samsung Biologics will initially benefit from increased demand for late stage (Phase III) development or commercial production activities, though it could expand early discovery and development capacity in the mid- to long-term.

Given that Catalent is a large player in fill-finish, it could also be a contender in this space though substantial capacity is likely to be used by Novo Nordisk after current contracts with other clients are fulfilled. (Also see "Novo Splashes Out Again To Solve Semaglutide Supply Problem" - Scrip, 5 February, 2024.) (Also see "Novo Reaches Winning Post With Gamechanger Once-Weekly Insulin" - Scrip, 26 March, 2024.)

Do Indian Players Stand A Chance?

The report from UBS said “Our channel checks suggest customer inquiries to non-China CDMOs have increased because of the BIOSECURE Act” adding that a few China CDMOs not listed in the bill have also received capacity inquiries.

“It does seem like the proposed BIOSECURE Act will accentuate the general trend of global innovator companies looking to mitigate risks of geographic overdependence,” Sai Life Sciences CEO and managing director Krishna Kanumuri told Scrip,adding that the trend has reflected in the company’s growth over the last two years.

While installed capacities at Indian firms are dwarfed by the scale at bigger global firms, the former don’t lack technical expertise and have gained an advanced understanding of small molecule development. (Also see "Late To The Antibody-Drug Conjugate Party, But Will 2024 Be A Turning Point For India?" - Scrip, 4 January, 2024.)

Fujifilm Diosynth’s ADC partner Piramal Pharma Solutions leads in the Indian ADC space given timely investments in acquiring the right assets and expansion of capacities. Towards the end of 2023, it upped ADC production capacity at its Grangemouth facility in Scotland, UK by 70-80%.

Similarly, Biocon, Ltd.’s Syngene has enabled next-generation ADCs for clients by modifying classical ADCs. It offers drug development and manufacturing services for oligonucleotides and peptides, among others and Alkem subsidiary Enzene has ADC ambitions. (Also see "Will The $86m Stelis-Syngene Deal Change India’s Biologics Landscape?" - Scrip, 5 July, 2023.)

Aurigene’s CEO Ravi said “Our technical expertise is comparable in many areas such as chemistry and chemical manufacturing. Emerging areas where technical expertise is quickly catching up are in areas of pre-clinical biology services, biologics discovery and biologics CDMO services.”

At the BioAsia conference in Hyderabad in February, Sai’s chief operating officer Sauri Gudlavalleti had pointed out that each major Indian CRDMO has worked with a variety of innovators and technologies, “so we probably are at the cutting edge by learning from all the other customers and partners that we work with.”

How Imminent Is The Shift?

The US bill will impact contracts that are entered only after it becomes an Act. Given this, a shift of business to is likely to be gradual.

Usually, the stage and duration of clinical asset development determine the length of a contract. For example, preclinical contracts could be for one to two years, while commercial contracts are five to seven years long.

Besides, modalities being used to develop drugs by clients and how quickly rival CRDMOs can ramp up capacity in those areas will make a difference.

Bernstein expects bio-manufacturing demand in volumes to grow at 9-10% until 2026 and supply at about 8.5% in the same period, with demand outstripping supply until 2028 based on Phase III and commercial assets. It’s possible that there is more supply than required for early-stage assets, it added.

Consultancy firm Frost & Sullivan found that the global ADC discovery, development and manufacturing outsourcing rate has reached about 70%, compared with biologics as a whole at 34%.

According to a Morgan Stanley report, WuXi XDC is the second-largest CDMO globally in the XDC category - which encompasses ADCs and other (X) bioconjugates beyond ADCs - with a 9.8% revenue market share in 2022.

Aurigene’s Akhil Ravi expects overall increased business for Indian firms over 12-24 months. “The CRO/CDMO selection process is quite rigorous and can take 6-12 months based on the complexity of operations.”

“So, I don’t expect significant short-term increase, but see this as a structural driver of potential improvement in demand for the Indian CRO/CDMO industry. The industry will need to step up operations and capabilities to meet the increase in demand,” he observed.

[Ed: This article was updated on 8 August to add language from the original draft bill introduced by Mike Gallagher in the House of Representatives]