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Following the Wafer Foundry Model: What Piece is Still Missing in the Biotech CDMO Industry Puzzle?

Where is the next TSMC? In recent years, Taiwan's biotech industry has been aggressively entering the Contract Development and Manufacturing Organization (CDMO) market, sparking a wave of contract manufacturing and being seen as the next "guardian mountain" of the nation.

In the past, outsourcing carried somewhat of a negative connotation. However, as TSMC has become a crucial partner in the global semiconductor industry, it has once again proven the value of the contract manufacturing business model. So why is production and manufacturing also viable in the biotech industry?

In fact, Taiwan has demonstrated through its semiconductor and IT industries how optimizing processes can accelerate development. By the same logic, smart manufacturing might also work well in the biotech industry.

CDMO stands for Contract Development and Manufacturing Organization. Simply put, it refers to the outsourcing of production services for various pharmaceuticals, including drugs, vaccines, and medical devices. Since developing new drugs can take up to ten years, large companies, although capable of building their own factories, often opt to outsource production. This allows them to focus their funds on drug research and development, control costs, and speed up time to market, making the CDMO business model increasingly popular.

An Illustrated Guide to Understanding CDMO

The most notable recent event in the biotech industry is the passage of the dual laws on regenerative medicine, which will help establish Taiwan's regenerative medicine industry.

Regenerative medicine is considered an emerging medical treatment that mainly uses a large number of active cells or gene-edited immune cells as drugs to treat difficult diseases. However, meeting the demands of regenerative medicine is challenging due to the current insufficiency of cell preparation and production capacity.

"Cell therapy is a rigid demand. If we develop a CDMO manufacturing center, it can bring stable mass production and quality standards to cell therapy and may help overcome industry bottlenecks," said semiconductor giant Xu Jin-rong. It is understood that he once suffered from nasopharyngeal cancer, which is why he is optimistic about cell preparation CDMO. He believes that just like wafer foundries in the semiconductor industry, CDMO will create greater value. Therefore, he has quietly invested in biotech companies within the industry, hoping to use his experience in semiconductor equipment to domestically produce medical equipment and bring hope to cancer patients.

Industry insiders point out that while CDMO is not an emerging industry, the urgent need for vaccines during the pandemic highlighted the vulnerability of supply chains, making everyone aware of this issue. Supply chain restructuring is happening not just in the tech industry but also in biotech. Various countries aim to achieve supply chain autonomy, making this the perfect time for CDMO companies to shine.

Why does the biotech industry need CDMO? The main reason is that new drug development is time-consuming and risky, with a success rate of only about 10%. It usually takes 10 years from clinical trials to obtaining drug approval. To focus resources on new drug development, pharmaceutical companies outsource the middle and later stages of development, manufacturing, clinical trials, and packaging to reduce costs. This model is quite similar to the familiar semiconductor industry in Taiwan.

Simply put, companies like MediaTek, Qualcomm, NVIDIA, and AMD contract TSMC for wafer foundry services, while biotech companies or pharmaceutical firms, similar to these fabless semiconductor companies, mainly focus on R&D. CDMO, in short, operates similarly to TSMC's business. If a new drug is favored by a pharmaceutical company and deemed to have market potential, the company contracts a CRO (Contract Research Organization) to provide clinical trial services and help obtain drug approval.

In the semiconductor analogy, the role of CRO is similar to packaging and testing companies like ASE Group and Siliconware Precision Industries.

The difference lies in the fact that the most direct profit for biotech pharmaceutical companies is obtaining drug approvals from authorities like Taiwan's TFDA and various international FDAs as soon as possible. This gives them the right to manufacture and sell drugs, enabling large-scale production and sales. For biotech pharmaceutical companies, securing drug approval is the most critical hurdle for new drug commercialization. Drug approvals must be granted by health authorities in each country, and CROs play a crucial role as key intermediaries. In contrast, regulations and standards in the semiconductor industry are dictated by industry leaders.

What Piece is Still Missing in the CDMO Supply Chain?

Industry insiders in regenerative medicine point out that once the "dual laws on regenerative medicine" are passed, and both public and private insurance cover the treatments, the number of patients receiving these therapies could increase by more than tenfold, potentially making cell therapy more widespread. However, there are two existing barriers: first, the traditional reliance on manual production, which prevents price reduction, and second, the lack of clear division of labor within the industry.

Typically, the more mature an industry, the higher its division of labor. CDMO is often compared to wafer foundries, but a closer look reveals that one reason Taiwan's semiconductor industry holds such influence is due to its highly specialized supply chain. In contrast, the division of labor and positioning in the CDMO of regenerative medicine and the broader biotech industry are far less clear.

Industry insiders acknowledge that many biotech companies in Taiwan currently handle everything from new drug development and clinical trials to manufacturing and end-market sales. However, one should ask, is there any semiconductor company that simultaneously manages design, production, and packaging? Even though South Korea's Samsung Electronics can be considered a comprehensive semiconductor company, it faces awkward competition in AI semiconductors.

The most serious issue is that biotech companies should not attempt to recoup their initial investments by venturing into branding and the end market to make quick profits, akin to MediaTek selling smartphones to push their chips directly to consumers.

Additionally, insiders note that Taiwan's biotech research and development are impressive. However, at this stage, both government and private resources and funding are often not concentrated. Talent is dispersed across different small companies, often working in the same field, resulting in unclear division of labor. For Taiwan's biotech industry to advance, medium-sized biotech companies need to merge and integrate, or funds should be used to consolidate several small companies into globally competitive mid-to-large companies, thereby attracting more international investment. Resources are limited and must be allocated correcly.

Moreover, while Taiwan is actively developing CDMO, it is primarily responsible for mass production. The key remains in the early-stage R&D; otherwise, the volume of orders will not support mass production demand. Industry experts believe that instead of a scattergun approach, resources should be concentrated, such as focusing on new drug development, allowing both R&D and manufacturing to thrive in tandem, achieving a supply-demand balance and stimulating healthy industry development.

Yang Yu-min, former Global Head of Technical Operations at Roche and chairman of Yourgene Health, often referred to as the Morris Chang of the biotech industry, also urges that Taiwan should focus on R&D innovation-based biotech and CDMO to seize the golden opportunity in the post-pandemic capital market.

 Reasons and Impacts of the Biotech Industry Adopting the CDMO Model

CDMO Must Follow the Market

Compared to OEM and ODM commonly seen in manufacturing, the terms more frequently used in biotech and pharmaceuticals are Contract Manufacturing Organization (CMO) and Contract Development and Manufacturing Organization (CDMO). The key difference is that CDMOs focus more on product development. They work closely with clients during the development phase, sometimes even co-developing or designing products, thus aiding more research-focused companies in technology transfer.

Former director of ITRI's Biomedical Technology and Device Research Laboratories, Lin Qi-wan, has publicly stated that CDMOs have patents, understand processes, and possess expertise in their respective fields, knowing how to add value and innovate products. With the example of TSMC in front, the industry is optimistic about the future, believing that "those who master the process will rule the world."

As AI enters a new wave of arms race, Taiwan is undoubtedly the world's most important chip production base. The recent global chip shortage has highlighted Taiwan's status and unexpectedly boosted the performance of China Airlines and EVA Air. However, the logic of building a cell preparation CDMO must be market-oriented. Industry insiders state that since cell therapy requires patient-derived samples and cells are living organisms with transport limitations, production must occur near the patient's location.

Thus, the ideal business model is to collaborate with large local medical institutions, leveraging their patient absorption capacity to solve transportation issues. For CDMO companies, their ability to export entire factories will be key to securing orders and business development.

Furthermore, although cell therapy is an emerging treatment, rapid development is challenging if relying solely on manually cultured cells. Therefore, process automation and intelligence are necessary. It is understood that combining AI, AR, and automation can increase cell production tenfold compared to traditional laboratories, and the cost per hundred million cells prepared is only one-tenth of traditional manual culturing.

Earlier, NVIDIA CEO Jensen Huang remarked that life sciences would be the next big thing and that the future lies in bioengineering. It's not hard to understand why Huang, standing at the peak of the AI wave, would say this. Generative AI benefits various industries, possibly reducing the need for extensive talent, but the biotech industry, with its high economic value, is still in its infancy in AI development. Biotech industry insiders agree with Huang's perspective.

Historically, Taiwan has only been able to follow international giants in the development of small and large molecule drugs. For currently incurable diseases, regenerative medicine offers patients a glimmer of hope and is an emerging industry. Asian countries, including Japan and China, view the development of regenerative medicine as an opportunity to leapfrog ahead.

Now that the dual laws on regenerative medicine have finally passed, the industry has a new opportunity to advance. Taiwan's advantage lies in its smart manufacturing capabilities, proven in the semiconductor and IT industries. How to replicate this success perfectly in the biotech industry and foster rapid development in regenerative medicine is something Taiwan is confident about.

Chen Qi-hong, chairman of Qisda, who has been involved in the medical industry for 20 years after transitioning from an electronics manufacturing giant, has stated that the business strategies of electronics and medical industries are fundamentally opposite. Developing pharmaceuticals is difficult, but successfully bringing them to market is even harder. Unlike electronics, where specifications are relatively uniform and regulatory approval takes only a few months and is globally applicable, the medical industry has high entry barriers.

Regulations such as the US FDA, Taiwan TFDA, and EU CE each have their systems, which are not universally applicable and are relatively strict and time-consuming. Often, even after successfully obtaining approval, the specifications may become outdated due to the lengthy process, potentially requiring resubmission. The long pre-market journey, with its high costs and resources, is daunting. If downstream sales are poor and later returns are not guaranteed, the pressure can be immense.

Source：DIGITIMES