Business strategies and consolidation

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.

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.

Mark Quick Executive vice president corporate development at Recipharm AB.