The CMO business model is still based on selling capacity, but manufacturing capacity is really an undifferentiated commodity. The industry is facing an overcapacity problem. CMOs are building new capacity, Indian and Chinese companies are entering the market, and new companies are coming into the industry by buying Big Pharma's old facilities. In the absence of other differentiating elements, overcapacity drives down prices.
One emerging model likely to predominate in the industry will be the integrated-service offering provider, or the so-called contract development and manufacturing organization (CDMO). These organizations are especially suited to small and mid-size bio/pharmaceutical companies, which have more willingly embraced outsourcing of their value chain than the major companies. CDMOs provide a complete suite of services related to the physical product, from early process development to commercial manufacture. In addition to offering first-class technical expertise, these companies claim the ability to move products through development and commercialization quickly and cost-effectively. We are already seeing a number of companies emerge that are explicitly pursuing this strategy.
For CMOs targeting major pharmaceutical companies, manufacturing and supply-chain management excellence will be the hallmark of the emerging strategies. Those CMOs will seek to bring manufacturing practice to a level still unknown in pharmaceuticals but common in most of the industrial economy. They will focus on reducing manufacturing costs through continuous-improvement activities and optimizing plant utilization.
"Manufacturing excellence" CMOs will also learn how to manufacture in a "just-in-time" environment, rather than insisting that clients lock in schedules three to six months in advance. Major pharmaceutical companies no longer want to carry large inventories of raw materials and finished products.
Operating global plant networks will also be characteristic of these CMOs. The ability to run efficient operations in countries such as India and China will be critical if they are to support the efforts of major pharmaceutical companies to expand their sales in those countries. That's partly a matter of cost—they need to produce at a lower cost to be competitive in those markets, which don't necessarily require expensive regulatory standards. It's also a matter of access—many of those countries have de facto barriers to imports that make market access difficult unless you are located there.
In the end, relatively few CMOs may be able to attain this level of manufacturing excellence. Even as I write, there are several major CMOs operating under warning letters and others that publicly admit to being unable to meet delivery schedules. Further, only a handful of CMOs may be able to make this global shift. Some Indian and Chinese companies are already well along this path, but only a few Western companies have established assets in the emerging markets.
However, the "manufacturing excellence" business model will be the real game changer for the CMO industry. Its strategy offers major pharmaceutical companies the ability to revamp their business models by addressing costs and globalization without sacrificing supply security. CMOs that can deliver it will be the big winners in the contract-manufacturing stakes.
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, [email protected]