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Will BioPharma Firms Find Fewer CMOs In The Near Future?

Sep 26, 2013

Report suggests 30% drop Contract Manufacturing Organizations in the next decade.

CMO (Contract Manufacturing Organizations) have had their share of the BioPharma headlines lately, and not all of it is good news. Industry websites and publications regularly publish not only good news such as announcements about global pharmaceutical firms moving their production to a new CMO, but just as often pieces about recalls or shortages of medications due to quality, regulatory, supply or efficacy issues. Despite the concerns that pop up at times, the industry’s use of CMO to manage both capacity and cost is significant.


A recent Frost & Sullivan Research Service report reported on the Outsourcing-Pharma.com website noted that drug industry outsourcing to CMO is expected to grow from $13.4 billion in 2012 to $18.5 billion by 2017, a respectable CAGR of 6.67%. So when the headline of this piece states, “Up to 30% of CMO to Exit Biz in Next 10 Years, Report Says”, it got my attention.  (Link to Source)

The reasons cited are heavy CMO reliance on one client for more than one-half of their revenue which puts pressure on the CMO during price negotiations and lower tax incentives for low inventories of low volume products in an industry where CMO cost savings are often related to inventory tax savings. 

                  

Catalent Wisconsin, USA Products (Link to Source)     

Catalent Wisconsin Facility (Link to Source)

A look at the current state of the CMO landscape shows several CMOs announcing plans to shift to non-CMO business models including U.S.-based Ben Venue Laboratories as well as Catalent Pharma Solutions' shift to products at the expense of its U.S. packaging unit. The article’s authors point to the 23% global CMO market share held by three suppliers each of which plan to extend their lead “through acquisitions and technology-focused investments.” The authors note that some of these acquisitions are part of the companies’ strategies to enter or expand in emerging markets and niche segments.

This trend may be new to the BioPharmaceutical industry but has played out in the past several decades in other industries as well, particularly in technology companies. One of the most significant consolidations was in the mobile phone market where after the breakup of AT&T the industry has consolidated with two companies, AT&T and Verizon, holding almost two-thirds of the U.S. market. Semiconductor manufacturing has consolidated to three top companies and the rest following. One of these is a pure play foundry; the other two have significant foundry businesses. And the supplier base has likewise consolidated even more severely, the most recent announcement being that Applied Materials is acquiring Tokyo Electron merging two of the largest players in the business. This trend puts tremendous pressure on suppliers who are expected to be innovative and continue their technology lead while lowering prices. And the supplier companies are expected to fund their own research and development projects which can costing millions and may be scrapped before they are commercialized due to delayed completion or competitive offerings that are considered easier to implement and more cost-effective in high volume manufacturing.

              

Former steel mill in Youngstown, Ohio (Link to Source)

Pittsburg MiniMill (Link to Source)

Is there a future for small, innovative companies in the BioPharmaceutical CMO world? Maybe. Look at the U.S. steel industry’s disappearance in the era of the Rust Belt compared to today’s small, innovative steel mills serving markets locally with quality, cost-effective products, on-time deliveries and close collaboration with their customer bases. Both the mills and customers benefit from these arrangements. Of course surviving such a symbiotic strategy is only as good as the mill customer’s ability to maintain and grow their business, and this is not always possible. Small, specialized suppliers will need to keep abreast of their customer’s markets and in some cases work hand-in-glove to maintain their customer/partners’s competitive advantage. But it can work well as is seen in U.S. regions where car manufacturers have set up assembly plants and the supplier base rings the site.

BioPharmaceutical CMO will likely follow well worn business paths of technology suppliers in other markets. CMO executives will be well served to study these examples and glean the lessons for their businesses. The next two decades will show which have learned and adopted and which have not, and also which technological developments were overlooked as small, innovative start-ups pop up from “nowhere” to cherry pick the CMO’s most profitable customers.

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