The EU Debt Crisis and CMOs - Pharmaceutical Technology

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The EU Debt Crisis and CMOs
The EU debt crisis portends of possible negative repercussions for the dose CMO industry.


PTSM: Pharmaceutical Technology Sourcing and Management
Volume 7, Issue 10

Consolidating CMO industry?

The financial crisis is hitting the European CMO sector at a time when it is already weak. According to the PharmSource ADVANTAGE database, Europe has nearly twice as many contract dose manufacturers as North America, including 100 solid dose CMOs and 70 injectables CMOs. Only about one-third of these CMOs are FDA-registered, meaning most of them are limited to competing for business to supply European or emerging markets. As a result, competition for the available business already is intense, thereby pushing pricing and operating margins to barely sustainable levels.

The overcapacity problem has come about because it is so difficult to close redundant manufacturing facilities in Europe. Faced with huge severance costs and negative publicity if they close a facility, global bio/pharmaceutical companies have preferred to give away facilities to management teams and private-equity firms that are willing to run them as CMOs. That approach gets rid of the headache for the pharmaceutical company, but it has created an unsustainable situation for the CMO industry.

Under these dire circumstances, we believe that a number of CMOs face significant risk of insolvency in the near term. While most of them are privately held companies that don't publish their financial statements, the situations where we can see the financial results show very poor operating margins and minimal debt capacity. The precarious state of the European financial system and the implications of that weakness may be enough to push some of those companies over the edge.

Challenges ahead

Bio/pharmaceutical companies that depend on European CMOs face a major due-diligence challenge. They need to monitor their European CMOs closely, gain a thorough understanding of their balance sheets and cash flows, and be aware of their exposure to negative developments in the credit environment. For CMOs owned by larger entities, the oversight should extend to the corporate parents as well. There are some major CMOs whose corporate parents have extensive interests in sectors outside pharmaceuticals that are heavily exposed to the financial crisis, such as retailing and property development. Bio/pharmaceutical companies also will need to have alternate sourcing plans in place in the event that financial developments interrupt product supply.

Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905,
, http://www.pharmsource.com/.


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