CMOs are finding ways to survive and thrive in a rapidly changing landscape
Why is the CMO industry in such flux, and why does the rate of change seem to be accelerating?
There are a great many factors, but the most prominent is cost. Pharmaceutical companies worldwide are under enormous pressure to contain costs, and in response have reduced their internal manufacturing, R&D and marketing functions. New efficiencies in communications, development, production, and distribution have allowed smaller, more nimble CMOs to step into the areas that larger companies are now outsourcing.
For years, CMOs quietly went about their business, delivering APIs and excipients, providing supplies for clinical trials and augmenting in-house capabilities to meet demand as production was ramped up to meet launch demands or increasing sales. They flew under the radar, quietly servicing their more vertically-integrated customers.
And then it all changed. Introductions of blockbuster drugs, which had driven so much of the growth of Big Pharma, slowed to a virtual halt. Important new drugs were—and are—being brought to market constantly, but compared to the products introduced during the 1990s and 2000s, don’t offer the potential sales volume of their category-creating predecessors.
The great fragmentation is underway
In an effort to cut costs, many pharmaceutical companies have returned to their core competencies such as R&D and marketing, while outsourcing many other resource-intensive functions. While this has led to leaner, more focused organizations, it has also created a new set of realities: CMOs now have to be brought into the product development process far earlier than previously, working protocols have to be established to insure efficient use of resources and personnel, and communications systems have to be enhanced to assure clear communications throughout the development process, especially at critical touch points and handoffs. CMOs have adapted to this new reality and ramped up equipment and services to meet the demand. Many have merged with other companies to bring greater capabilities and cost-savings in-house, or to provide profitable niche services, such as small production runs for clinical trials.
At the same time, biopharmaceuticals and biosimilars, with their challenging development, manufacturing and distribution profiles, have continued to experience tremendous growth. Sales of biologics now top $200 billion, while sales of biosimilars have increased to $20 billion, a figure that is expected to more than double by 2020. The increasing applicability of large-molecule agents to a variety of disease states and conditions has further served to boost demand and stretch capacities. CMOs are meeting these challenges with technologies that address key issues such as targeted delivery, abuse-deterrent formulations, and new administration modalities.
As the trend toward outsourcing has continued, pharmaceutical companies have come to expect greater and greater involvement and capabilities from their CMOs. CMOs have had to look beyond their traditional roles and to consider expanding into areas that just a few years ago would have been considered beyond their core competencies. If the past is any indication, the wider the range of capabilities and the more expertise the CMOs can bring to the table, the more likely it is that large pharmaceutical manufacturers will have the confidence to establish long-term strategic relationships with them.
This is not to say that smaller biopharmaceutical companies have been sidelined. They have been playing important roles in the research and development of new drugs and have helped to keep open the pipeline of new products under development. Many have developed unique niche capabilities that their clients value but can’t perform economically in house and must therefore outsource.
The downsizing and consolidations of the larger pharmaceutical companies have created opportunities for forward-looking CMOs, which have been expanding into plants that the larger companies have vacated. The French CMO Fareva is expanding their existing plants in France and has been investing in new facilities in the United States and Latin America as well. With many of its plants in France reaching the saturation point, expansion has become increasingly necessary. “We are facing pressing demand for some forms and types of product that we produce at the plants concerned,” explains Bernard Fraisse, chairman of the family-owned business. The company, which has experienced rapid growth, largely from new acquisitions, is now “prioritizing organic growth,” according to Fraisse.
Like Fareva, other CMOs are taking advantage of consolidation to buy up facilities and equipment to meet the burgeoning demand. The trend shows no sign of abating thus far. For CMOs that can provide the service, capabilities and capacity that major manufacturers need, the future seems bright indeed.