Mark Quick is executive vice president of corporate development at Recipharm.

Mark Quick

	The CDMO space is extremely fragmented, with a complex web of small-scale providers emerging over the years, supplemented by new players entering the market to support the buoyant biologics sector and serve particular niches, such as the growing need for orphan drugs. Yet, consolidation is prominent, with larger players focused on strategic growth through acquisition.

	The need for scale, breadth, and depth will always be drivers for outsourcing, and CDMOs that can offer a wide range of services, technologies, and expertise are well positioned to serve the evolving and complex needs of drug developers. This so-called one-stop-shop model brings clear benefits; not only does it reduce the number of providers a sponsor company needs to work with, but it also provides a more robust supply chain.

	However, there needs to be some strategy behind the merger and acquisition (M&A) activity. It must fulfill a need; whether that be expanding capabilities, capacity, or geographical reach. Rather than being about sheer size, the CDMO’s offering must make sense to the customer. The value is in how a CDMO can differentiate its service offering. For example, by acquiring a company which specializes in niche technology such as advanced pellet coating, a CDMO can fulfil client needs for a range of technologies, while working as one full service partner.

	Integration of acquired companies is also a crucial factor in success. People underestimate the experience and benefits that combining resources and capabilities can bring to the industry. While it is a legitimate strategy, M&A based purely on cost synergies is unlikely to deliver these benefits. The focus must be on allowing entrepreneurship and innovation to thrive to the benefit of the customer. It is doubtful that these qualities will ever emerge if people are concerned about their jobs. The driver for M&A must, therefore, have clear commercial synergies over and above cost.

	It’s no secret that in a highly-regulated market such as pharma, change can be frequent and potentially disruptive. Bigger means having the resources to adapt to market changes, with serialization being a good example. Those companies without the ability to invest in new technologies and infrastructure risk damaging the security of their supply, which is a crucial factor in any outsourcing decision.

	In short, sustainable businesses need scale, portfolio size, and geographic spread. The value of M&A is not just to boost profit, unless that is a strategic decision.  Consolidation in the industry provides the opportunity to simplify complex supply chains and achieve the ultimate goal of bringing vital medicines to market in the fastest possible time. And if economies of scale can be passed on to the customer, that is, of course, a bonus.  

 is executive vice president of corporate development at Recipharm.

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The industry is becoming more consolidated, but there needs to be some strategy behind the mergers and acquisitions.

Can Bigger be Better?

The 2011 Pharmaceutical Technology's Outsourcing Survey revealed that pharmaceutical companies were expecting to increase their contract-services spending in 2011 and we have certainly seen an increase in outsourcing requirements during this period. Both the number of Requests for Proposals (RFPs) and volumes have increased across all dosage forms. The very buoyant areas however tend to be in sterile forms, for example lyophilised, rather than solid dose—perhaps in part a reflection of supply and demand. 

We have also seen an increase in potent drug enquiries and, certainly within our development services business, for more novel presentations such as microdosing and melts.  

Another trend we have identified is that companies are being more careful and 'smarter' about the way they award contracts. They are carefully checking that a company has a good track record, as well as ensuring that it is financially robust with the ability to develop and resolve any issues, such as formulation problems, that may occur during a project. Therefore, they utilise a lot more resources and effort in the beginning but, in the long run, dividends are often paid. 

Recipharm is operating in quite a crowded market and to be successful it is important to differentiate yourself. We have managed to this in a number of ways. For example, we try to partner with development and platform companies early on to industrialise or often optimise a difficult technique or process. This approach gives us a good position to work on the same process or platform with other molecules. It really helps us to win other contracts too, particularly when you get a reputation for doing this kind of work!

One of the main challenges for service providers, however, is regulations. These are undoubtedly increasing for all parts of the pharma industry. For example, where it was once acceptable for a contract manufacturer to accept an assurance from the marketing-authorisation holder that all testing was in compliance with the licence before commencing manufacturing, this has changed. We now need to ensure that we verify and check each licence in detail ourselves to ensure it is fully compliant. This has created several challenges including the need to put in additional checks and balances before the contract is accepted as well as during manufacturing. It certainly adds costs but ultimately from a compliance perspective this has got to be a good thing. Because we have manufacturing facilities in a number of territories, we are very lucky because we receive many audits each year from both regulators and customers. This means we see the latest thinking, which allows us to stay ahead of the game. In addition, we can share knowledge across our multiple sites.  

Fundamentally, the pharma industry is under immense pressure to both maintain shareholder returns and respond to the increase in development costs and reduced reimbursement rates. Contract development and manufacturing organisations (CDMOs) like ourselves are an excellent solution to this problem and pharma companies have realised this. Because the good CDMO’s are dealing with many different projects and customers they tend to be very agile and can respond in a more flexible way compared with the average pharma company plant. They are usually able to gain better unit costs as they can work their assets harder by winning new projects, which increases utilisation. This option is seldom open to a traditional pharma company.

The other important factor we see is that tying capital up in expensive stainless steel is not the best return on investment for pharma companies, particularly when there is a good range of CDMOs available. These days, there really has to be a very strategic reason for a pharma company to invest in its own capacity.  

When it comes to relationships with pharma companies, we are seeing a definite move to preferred partnerships. Managing multiple suppliers is expensive and complicated, and anything to ease this is good. This also leads to cost reduction and reducing overall supply chain complexity where possible. However, it is very important that pharma companies partner with a robust CDMO; there are a lot of CDMOs that are overstretched financially at the moment. Over the next few years I think we will see some significant shakeout and consolidation occurring. Overall, I see the strong providers getting stronger while the less robust ones will start to be consumed. We are already seeing this in the clinical development companies where the trend seems to be more advanced. 

In response to current market trends and competition, we look at the situation in two dimensions; first in a vertical way. Although many companies claim to offer developmental scale through to commercial manufacture, not all can actually achieve this. On a horizontal dimension, our aim is to provide the majority of dose forms required by a company. We’re not quite there at the moment though, for example, it would be good to offer cytotoxic capability and prefilled syringes. 

Emerging markets are also intensifying competition, but I don’t think the impact has been as great as was predicted say five or even 10 years ago. I am not saying we can ignore the threat; we are looking to have some capability to produce in lower-cost countries. We also want to establish a base to support our customers who typically sit in Western markets but want to enter into an emerging market. One of the barriers they face is having a reliable local supplier. What is very clear is that these markets are growing at an incredible rate and, particularly in China, where they are struggling to keep up with domestic demand without even thinking of exporting contract services to the West. I have also recently heard reports of companies pulling back from manufacturing in places like India and returning to Europe because of problems in the supply chain. There are, of course, some really good companies in India, but there have been a number of examples where the supply chain has been interrupted by problems that have completely eroded any price benefit achieved by manufacturing there. An interesting phenomenon we have observed is that growth in the emerging markets has led to significant increases in some of the very mature (and in some cases, once declining) products. In these markets the brand is very important and consumers often aspire to Western brands. In summary though, where there is a complicated supply chain, I believe that those products will be better made locally—regardless of whether it is in Asia or the West. However, simpler products will end up being made in lower cost locations. Contract manufacturers will differentiate themselves on this point and Western operators will build up capabilities in emerging markets and offer a manufacturing solution for companies that wish to grow business in these areas. 

So what does this all mean for the CDMO market? One thing is for certain, it will continue to grow and this means it will probably attract new players who want to take advantage of this growth. However, it is never going to be an easy option as there will always be surprises caused by the constantly changing regulatory scene and inherent difficulties of developing and manufacturing pharmaceuticals. I think we are going to see some more failures and more consolidation of companies in what is a highly fragmented market.

	Executive vice president corporate development at Recipharm AB. 

The contract services industry is a crowded market and it's important for companies to differentiate themselves to stand out.