End of the Dedicated CMO?

Is the contract-only CMO an endangered species?
Mar 06, 2013
Volume 9, Issue 3

Jim Miller
Several formerly contract-only CMOs have converted, after recent acquisitions, to a more mixed model that combines contract manufacturing with proprietary products. The most prominent examples include Patheon's late 2012 acquisition of Banner Pharmacaps, a softgel manufacturer with its own lines of over-the-counter (OTC) and nutritional softgel products.

The trend was further highlighted in 2012 with the acquisition of Metrics by Mayne Pharma, an Australian generic pharmaceutical company. Metrics has been known primarily for its analytical, formulation, and clinical manufacturing services, but the acquisition revealed that more than half of its $52 million in revenues came from sales of proprietary products it had developed internally. Conversations with other CDMOs indicate that a number of CDMOs have quietly pursued similar strategies in recent years.

The effort to build a proprietary revenue stream is not limited to dose CMOs. Contract manufacturers of APIs have also been pursuing these opportunities. For instance, the development of proprietary generic APIs has been a major initiative for DSM Pharmaceutical Products in the business strategy it rolled out in 2012; up to that point the company had focused primarily on custom manufacturing.

Companies that manufacture both their own products and client products have long been part of the CMO landscape. Most manufacturers of generic APIs have long offered custom manufacturing of advanced intermediates and proprietary APIs.

Many bio/pharmaceutical companies have been offering contract manufacturing as a means of boosting manufacturing-capacity utilization. Although most companies are satisfied to pick up the odd product, some share manufacturing capacity between proprietary products and a strategically important contract manufacturing business that has a substantial sales and project management infrastructure. This shared capacity model is especially common in the injectables segment of the CMO market.

There are other variants of the mixed proprietary–pluscontract model as well. Private-label manufacturers develop and manufacture products under their own application but package the product under the name of a contract client, usually a retailer. In a variation of that model, a generics drug company will out-license its products to other pharmaceutical companies and supply the manufactured product. A further variation of the model is a drug-delivery company that develops a product for a client using its proprietary drug-delivery technologies or know-how, and then manufactures the product for commercial supply.

Clear rationale

For CMOs entering the proprietary products game for the first time, the rationale seems rather clear:

  • Better margins. Proprietary products typically promise better profitability than contract manufacturing. CMOs can capture the higher unit price of the finished product and the 40+% gross margin that drug companies can command.
  • Better utilization. Proprietary products can absorb some of the unutilized capacity in CMO facilities. This utilization is especially valuable for solid-dose CMOs, among which there is significant excess capacity.
  • Greater control and predictability. In the contract-only CMO model, manufacturers are totally at the mercy of their clients' marketing prowess and product success. With proprietary products, CDMOs can gain some predictability over revenues and utilization.

A move into proprietary products can be particularly attractive to smaller CDMOs that cannot gain traction in the contract manufacturing business and need an extra boost to drive growth. Global bio/pharma vendor-consolidation strategies favor larger CMOs with broader capabilities, which could leave smaller CMOs out of the mix and searching for new growth avenues.

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