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
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
Catalent Wisconsin, USA Products (Link
Catalent Wisconsin Facility (Link
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
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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