Most of the leading, scaled companies in industrial biotech are highly vertically integrated. Those who sell the molecules make the molecules too (DSM, IFF, BASF, to name a few). There are a few reasons this is the case:

• There isn’t room for margin to be taken by a standard contract manufacturing service, especially in commodities markets

• There is no advantage related to specialized manufacturing i.e. manufacturing infrastructure is commoditized

• Contract manufacturing is hard because capex is bespoke to a particular process and switching costs are large

The Foundry Model

This is not the case in all industries. The canonical example is the semiconductor industry’s foundry model, pioneered by TSMC. There are some unique attributes here: Moore’s law, the immense cost of modern fabs, extreme technological innovation embedded in modern chip tech (ASML EUV etc.).

Why does the semiconductor industry separate manufacturing from product development?

• Manufacturing can be highly specialized and certain players have distinct advantages in the manufacturing processes (process power, integration with critical unit operations, focused investment in leading edge processes)

• Economies of scale achieved by aggregating manufacturing demand

• Outsourcing manufacturing allows product companies to dream big about end-user needs, form factors, and avoid costly infrastructure investments: the “product” layer is where companies differentiate themselves

Another example is the modern consumer packaged goods supply chain. If you are launching a new energy drink, protein bar, or cosmetic, you can find hundreds of options of co-manufacturers or co-packers which will support formulation, testing, packaging, and distribution… you just bring your brand and unique recipe. They’ll even let you throw in a new ingredient, for a fee.

In both these examples we’ve seen rapid innovation and growth in novel products coming to market as companies build on top of an accessible manufacturing tech stack. So why is contract manufacturing broken in industrial biotech?

The problem with today’s CMs

While large scale industrial biotech companies are high vertically integrated, many startups and mid-size companies use contract manufacturers. The CMO ecosystem is flawed in various ways: not tailored to new classes of bioproduct, hard to build new infrastructure to support emerging markets, and challenging economics unless you are lucky to have a fully depreciated plant in a place with cheap feedstock and labor.

Today’s CMO business doesn’t scale because the price customers can pay for “fungible” production capacity typically does not allow CMs to build new state of the art infrastructure to meet the needs of today’s product companies. Margins are squeezed as there is little differentiation between CMs.

Most bioproduct companies aspire to build their own dedicated production lines to reach viable unit economics: they are incentivized to do so because there is little differentiation in the tool stack. The tanks BASF run are just as good as anyone else’s so they’re better off running them themselves.

Differentiated biomanufactories

But there are innovations on the horizon that will enable differentiated factories. This differentiation was critical in semiconductors, and will be critical in biotech. What if you could access more performant, lower cost, flexible manufacturing infrastructure, 10x better than the in-house capacity that any company could build? The fabless model starts to work if an external contract manufacturer gives you a differentiated cost and performance advantage over in-house capacity.

Just like in the chemicals and semiconductor industry, manufacturing consolidation has value. There is a reason there aren’t mini-refineries at every gas station, or mini-fabs at every Apple store. Consolidated manufacturing operations have the ability to adjust to market demand, tailoring their infrastructure based on the wider range of products they are asked to produce.

Furthermore, a differentiated CM can invest in specific innovation around manufacturing efficiency, creating a fly-wheel effect: with unique infrastructure you can attract the best products, and the more great products you make, the more you can invest in fortifying your technological advantage. The greater this advantage, the more value a contract manufacturer can capture.

Biotech’s fabless future

With the advent of differentiated, high performance CM infrastructure, you can see industrial biotech’s transition to the foundry model on the horizon. Then comes a blossoming of innovation and new products. In a fabless future, winning bioproduct companies can focus on product innovation - new applications, branding, distribution, and sales, leaving manufacturing up to the experts.

The combination of new bioproduct innovation with differentiated contract manufacturing infrastructure will unleash the industrial biotech industry.

Subtext: this is what we’re building at Biosphere - come join us.