Biopharma's capacity crunch
by Ameet Mallik , Gary S. Pinkus , Scott Sheffer A wolf stands at the door of the biopharmaceutical industry. Over the next few years, the industry will be hard pressed to meet demand for promising new protein-based therapeutics that are now emerging from the laboratories. Manufacturing shortfalls in physical capacity and talent could spell lost revenues for companies through the middle of the decade. Among the most promising of the new drugs filling the pipelines of pharmaceutical and biotechnology companies are compounds produced by live, genetically modified microbial or animal cells. Over the next five years, the revenues generated by protein-based therapeutics are set to grow at 15 percent a year, about twice the rate of the rest of the pharmaceutical industry. Much of the demand is driven by monoclonal antibodies, a powerful class of therapeutic proteins that must be administered in extremely high doses and can currently be produced only in mammalian cell-culture facilities. Yet the current worldwide cell-culture capacity of 450,000 liters is almost fully utilized. Meanwhile, more than 200 drugs derived from mammalian cell cultures are in clinical trials, and about 70 of those drugs are expected to come to market by 2006. Producers-biopharmaceutical companies and contract manufacturers alike-are now tripling their production capacity, but new plants take three to five years to design, build, and certify. Demand is likely to outstrip supply during that time (Exhibit 1). Such shortfalls can be costly. We estimate, for example, that a lack of manufacturing capacity for Immunex's highly successful arthritis drug Enbrel cost the company more than $200 million in lost revenue in 2001 (Exhibit 2). A new plant is coming on line this year. But with the high cost of developing a drug, its limited patent life, and the increasing competition in biologics, companies must capture every day of revenue by ensuring an adequate supply of their products. It is thus important that companies develop a boiologics-manufacturing strategy, through commitments either to build capacity or to contract for it, far earlier in the drug-development process. Even at a cost of some $300 million to $500 million a plant, expansion is warranted. Our analysis suggests that for some biologics, facilities would be profitable even if as little as 25 percent of capacity were used (Exhibit 3). The well-documented plant capacity shortfall is understood by industry analysts. What is less well understood is the biologics-manufacturing talent shortfall: the industry faces a looming shortage of the highly trained people needed to design, build, and operate facilities. Experienced process-development scientists and engineers, validation engineers, quality assurance personnel, and plant managers are already in short supply. Furthermore, universities are not producing anywhere near as many qualified manufacturing specialists as the industry needs: the number of students enrolled in master's- and PhD-level biology, cell biology, biochemistry, and chemical engineering programs in the United States remained flat, at around 26,000, from 1992 to 1999, whereas demand increases with the addition of new capacity. In response, US companies are not only expanding overseas to tap the large, educated labor pools of Europe and Asia but also working to bring foreign talent to the United States. Yet the industry must do more. It could, for example, reinforce links between the commercial world of bio-pharma, on the one hand, and academics, on the other. Leading companies could form alliances with local universities and research institutions, sponsor cooperative programs, offer advice about how to make the curriculum more practical, and host forums and presentations for students. A model for this kind of involvement is Bayer's biotechnology unit, which has established internships and postdoctoral programs at the University of Hannover, Bielefeld University, and the Technical University of Braunschweig, all in Germany. In short, companies must act now on many fronts to tackle the coming capacity crisis in biopharmaceuticals. If they don't, they are likely to pay a steep price in the years ahead. | |
EXHIBIT 1
Culture shock
Worldwide mammalian cell-culture capacity and demand, thousands of
liters
Existing capacity (1) 450
Planned capacity, (1) 2006 1,100
Projected demand, 2006 (2) 450 2,000
Capacity gap caused by:
* Large capital requirements
* Long build-out period
* Shortage of talent
* Success of monoclonal antibodies
* Prior regulatory constraints
(1)As of January 2002.
(2)Includes all currently marketed drugs as well as those expected to
come to market through 2006.
Source: Contract Pharma; Lonza; J.P. Morgan; Wall Street Journal;
interviews; McKinsey analysis
Note: Table made from bar graph
EXHIBIT 2
Feelig the pinch
Enbrel revenue, 2001, $ million
Consensus analysts' forecast 1,000
Actual 762
Lost revenue 238
Note: Table made from bar graph
EXHIBIT 3
New capacity: An attractive proposition
Net present value of typical new mammalian cell-culture facility, (1) $
million
100 75 50 25 10
Capacity utilization, percent 870 580 300 10 -160
Total product revenue of facility, 1.52 1.14 0.76 0.38 0.15
$ billion
Assumptions
* Expected revenue per $4 million
kilogram of drug sold
* Expected duration of 10 years
revenue
* Capacity 60,000 liters
* Purified yield 0.5 grams
per liter
* Number of runs per year 15
* Expected percentage of 85%
material captured (2)
* Expected capacity 380 kilograms
of facility per year
* Cost to build facility $400 million
* Time required to build 4 years
new facility
* Depreciation life 39 years
of facility (straight line)
* Cost of capital 15%
* Operating margin 40%
* Effective tax rate 35%
(1)Excludes drug-development costs (treated as sunk costs).
(2)Material loss due to failed runs, yield losses in process of
formulation/filling of vials.
Source: Drugstore.com; interviews; McKinsey analysis
| | Ameet Mallik is a consultant, Gary Pinkus is a principal, and Scott Sheffer is an associate principal in the San Francisco office. | |
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