Low entry barriers
CDMOs have real advantages for developing or acquiring proprietary products, because of their development and manufacturing
infrastructure and know-how. The frequency and apparent ease with which they can enter the products business, however, highlights
one of the great contradictions of the bio/pharmaceutical industry. While much attention is placed on the high cost of R&D
and the high probability of failure, the industry has remarkably low barriers to entry. Cheap generic APIs, low-regulatory
barriers for OTC products and products with previously approved APIs (505(b) 2 products), and the ability to scale manufacturing
operations to niche markets enable all sorts of companies to be successful with proprietary products.
Efforts to clamp down on healthcare costs, however, could hamper that model going forward. In Europe and the US, governments
and insurers are making it more difficult for new products to gain access to approved formularies and more difficult for physicians
to prescribe off-formulary drugs. Market power is moving to larger generic-drug companies and to distributors that can offer
a broad product list at competitive prices. That market power could make it harder for smaller products companies to break
into the market.
PharmSource expects that a lot of CMO proprietary product-development efforts will be channeled to the OTC and nutritional
segments of the market, especially private label. OTC and nutritional products are benefiting from growing consumer acceptance
and are not subject to insurance limitations. Further, marketing of private label products is in the hands of the labeler
rather than the bio/pharmaceutical company, which means that CMOs won't have to build sophisticated sales and marketing infrastructure.
Finally, the know-how of CMOs to develop and manufacture products with differentiating features and benefits will be a plus
in dealing with the retailers.
The CMO model was meant to be relatively low-risk because it avoided the inherent riskiness of new drug development while
offering bio/pharmaceutical companies the benefits of lower manufacturing costs and no investment in manufacturing capacity.
The model hasn't worked out that way, partly because of the low entry barriers to contract manufacturing, and partly because
global bio/pharmaceutical companies have been able to greatly improve their internal manufacturing performance. As a result,
the industry will increasingly see CMOs mimic the business model they were meant to replace.
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, Twitter@JimPharmSource, firstname.lastname@example.org