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.
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.
Mark Quick Executive vice president corporate development at Recipharm AB.