August 4, 2022 PAO-07-022-CL-05
LSIs include everything from production equipment, such as single-use technologies, to cell lines and cell culture media, to artificial intelligence (AI) and machine learning (ML) algorithms — indeed, anything that facilitates drug discovery, process development, and commercial-scale manufacturing. As such, innovations provided by LSI firms enable biopharmaceutical companies to bring new drugs to market and to optimize existing processes to reduce cost of goods (COGs).
Not surprisingly, the growth experienced in the biopharmaceutical industry in recent years in response to the aging of the worldwide population and the general increase in global wealth, combined with the introduction of new modalities and most recently the COVID-19 pandemic, has resulted in dramatic growth in the LSI sector.
In particular, the potential for growth of new disease modalities, such as targeted antibody-based drugs, cell and gene therapies, mRNA vaccines and therapeutics, and others, is creating significant demand for LSI solutions. For instance, there is a growing need for off-the-shelf mRNA service providers, innovative manufacturing solutions to effectively industrialize gene therapies, solutions for intensified and continuous processing, new protein expression systems, induced pluripotent stem cells as raw materials for many types of cell therapies, and AI and ML solutions to accelerate drug development and increase the probability of success.
Investment in the LSI sector is largely focused on startups, which are typically the original source of most of the innovative tools and technologies leveraged by the biopharma industry. Indeed, the largest LSI companies — Danaher, Sartorius, and Thermo Fisher Scientific — grew to their current positions largely via acquisition. Today’s investors, however, include not only private companies with strategic interests but also venture capitalists and private equity funds looking for shorter-term exits.
It is also noteworthy that, while most startups int the LSI sector originated in the United States, with a few coming from Europe, that is changing. A growing number of LSI startups with interesting new technologies are arising from Asia, particularly China and South Korea.
An important driver of LSI development is the significant need to improve the efficiency of biopharmaceutical manufacturing. Compared with other industries, pharmaceutical processes are highly inefficient, with only limited use of automation and advanced algorithms. There is potential for dynamic growth of the LIS sector as biopharma manufacturers seek innovative technologies that can reduce drug development failures while also minimizing development times and maximizing manufacturing productivity.
Every biopharma company continuously looks for ways to increase efficiency. Although the cost of medicines accounts for only a small portion of overall healthcare costs, drug prices are high and result in limited access in many parts of the world. The challenges in achieving global equity with COVID-19 vaccines illustrate one such example.
Poor yields and product recoveries must be overcome if viral vector production is to be sufficiently cost-effective to enable the production of gene therapies that treat hundreds of thousands of patients rather than a few hundred or fewer. For adoptive cell therapies, problems with storage and shipment must be solved. Downstream purification solutions are needed for more efficient processing of crude, high-titer antibody and protein harvests. Alternative expression systems may be another approach. Additionally, solutions leveraging AI and ML may allow drug developers to select candidates with the highest likelihood of success and thus avoid costly late-stage failures, which could have dramatic effects on timelines and costs.
LSI companies tend to be more resilient than biopharmaceutical firms, because drug development is fundamentally driven by a binary outcome — either the drug candidate is safe and effective and gets approval or it fails. Such uncertainty and risk structures are not in play for LSIs. LSI companies make money by selling millions of copies of their new technologies, focusing on supplying products during drug discovery, process development, and early-phase clinical testing. If a drug candidate produced using their technology advances to late-stage development and commercial production, that is an added bonus.
Resilience in the LSI sector is also attributable to the fact that these companies typically face less competition than exists in the biopharmaceutical development and manufacturing space, which face competition from both branded and biosimilar developers on a continual basis. All of those competing players require the tools, technologies, and services offered by LSI suppliers. The constant introduction of new modalities also creates an ongoing demand for innovative, enabling solutions.
The biopharmaceutical industry continues to experience growth. The drivers that have existed for the past decade remain, and new modalities and platforms continue to be introduced. It is unlikely that this sector will experience recession like other industries might, but costs are rising, and there are short-term headwinds that must be weathered.
First, the COVID-19 pandemic — and more recently the war in Ukraine — have impacted supply chains, leading to extended delivery times for many products. They have also exacerbated global tendencies toward nationalism and protectionism. Many countries wish to be self-sufficient with respect to pharmaceutical manufacturing, which directly impacts production strategies for LSI companies. Another significant headwind is the current shortage of skilled personnel, which is a critical issue worldwide.
Single-use (SU) equipment presents yet another challenge. Supply shortages existed before the Russian invasion of Ukraine, although most producers were already expanding capacity. The skyrocketing price of oil and its limited availability as a result of the conflict in Ukraine is further compounding the problem. SU assemblies typically comprise 15–20 components, and even if just one component is unavailable, the product cannot be supplied. With access to SU solutions becoming increasingly difficult, some biopharma manufacturers may be seeking reusable technologies — not traditional stainless-steel, but something new — that could be leveraged if SU equipment is unavailable.
All of these issues must be addressed quickly, because the situation will never return to the way it was before the pandemic. The future will be quite different. Biopharma companies must get global supply chain management under control, significantly reduce COGs despite facing rising raw material costs, reduce the time to market by measurably increasing clinical-phase efficiencies, manage the macro political environment with respect to nationalism and protectionism by developing solutions for different geographical markets, and find ways to benefit from Big Data and AI/ML by eliminating data silos, enabling data sharing across platforms, and leveraging patient/real-world data.
Owing to these needs within the biopharmaceutical sector — despite the current adjustment period that the industry in undergoing — the demand for LSI products will remain strong. As a result, the LSI market will continue to outperform the biotech sector, and investor confidence remains high with respect to long-term performance.
Often, LSI startups are companies that are formed by experts in the biopharmaceutical industry that have found a solution to overcome daily challenges or problems and recognize the potential of the technology to benefit other manufacturers. Some startups originate from academia, but the solutions they bring to the market must still address a critical practical problem. Successful LSI suppliers offer technologies or services with value propositions that can be readily evaluated by biopharma manufacturers with respect to their impact on margins.
Given that most innovative LSI technologies are brought to the market by startup companies, there is room for consolidation in the sector. Much of this consolidation will initially be achieved by PE firms that build LSI portfolios, support their growth, and then exit through merger and acquisition (M&A) deals or initial public offerings (IPOs). LSI companies benefit from this approach, because they gain access to global sales forces and other resources that they would be challenged to finance on their own.
LSI companies must also be aware of changing dynamics with respect to funding. There is a race for money by startups of all kinds in the life science sector, and LSI firms should expect things to be more difficult than in the past. Cash flow management is essential; an additional financing round may not be an easy way to generate more funds.
Dynamk Capital is uniquely focused on LSIs and the support of technical founders in this underserved market. We have an extensive network that enables effective sourcing, partnering, and scaling, as well as access to talent and the ability to facilitate M&A deals. Examples of Dynamk Capital’s 12 current portfolio companies include Lucid Scientific, RoosterBio, Envisagenics, Vectron Biosolutions, Virica, and Vernal Biosciences.
To attract the attention of investors like Dynamk Capital, LSI developers must have a new solution that addresses existing problems in the biopharmaceutical industry. That could be an advanced technology for use in early drug discovery that improves therapeutic success rates or solutions for streamlined AI and data management. It could also be a means for industrializing manufacturing processes earlier in the clinical pipeline or an approach for enabling local production.
Reinhard Vogt was most recently the Executive VP and Member of the Board of Sartorius Stedim Biotech S.A., he brings a wealth of industry knowledge, technology deal-side expertise and numerous technology licenses, acquisitions and integrations derived from one of the industry’s largest players. What this means to investors and portfolio companies is a winning combination of commercial and operational support. Reinhard plays a critical role in Dynamk Capital in assessing the commercial viability of potential portfolio companies and which commercial model is best and sits on the board of several of these portfolios.