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Mid-size regional players have little chance for success in an industry increasingly dominated by large global players.
The CPhI and ICSE trade shows, held this year October 2–4 in Paris, provided the opportunity to take a comprehensive look inside the global pharmaceutical chemical manufacturing industry as well as the European dose-manufacturing sector. This year's meetings provided signs that several trends are continuing to drive the industry, including pharmaceutical company consolidation, the growing importance of Asian producers, and the overcrowded European dose-manufacturing market.
The weeks immediately preceding this year's meetings saw a rash of major acquisition announcements in Europe. Three major transactions were announced: the acquisition of Schwarz Pharma (Monheim, Germany) by UCB (Brussels, Belgium), Nycomed's (Roskilde, Denmark) acquisition of Altana Pharma AG (Konstanz, Germany), and Merck KGaA's (Darmstadt, Germany) acquisition of Serono (Geneva, Switzerland). These deals follow by several months the acquisition of Schering AG by Bayer. All four transactions reflect the realization by both buyers and sellers that mid-size regional players have little chance for success in an industry increasingly dominated by large global players.
The consolidations will have some interesting implications for the contract manufacturing industry. Although UCB and Schwarz Pharma are already major outsourcers, the other companies have extensive captive manufacturing networks with substantial excess capacity. The integration of the companies could result in more contract manufacturing opportunities if facilities are closed as a cost-saving move, or it could result in even more capacity being thrown onto a market that is already swimming in capacity.
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In fact, two of the acquiring companies—Nycomed and Bayer—were at CPhI/ICSE flogging excess dose manufacturing capacity. Nycomed was there to offer the parenteral manufacturing capabilities of its Linz, Austria, site and the blow–fill–seal capacity available at its Elverum, Norway, site. Bayer, aggressively promoting its dose-manufacturing capabilities, had a very large presence in the ICSE hall. Its offerings included parenteral, solid dose, and nonsterile liquid manufacturing and packaging services at sites in Leverkusen and Grenzach-Wyhlen, Germany. The Bayer facilities are FDA-compliant, which gives them a leg up over most of the competitors in Europe.
The efforts by Nycomed and Bayer only threaten to exacerbate the oversupply situation in the European market, where dedicated global CMOs (defined as those with FDA compliance), regional CMOs (including those spun off from pharmaceutical companies), and branded and generic-pharmaceutical companies are all competing for business. Competition is intensifying as the Western European CMOs and generics houses lose more business to manufacturers in Eastern Europe and Asia. Major dedicated CMOs such as Nextpharma (Gottingen, Germany), Haupt (Berlin, Germany), and Vetter (Ravensburg, Germany) are increasingly looking to the North American market for future growth.
A shake-out is badly needed in European contract manufacturing business, but labor laws and the regional nature of much of the buying behavior make this seem unlikely. Efforts by major pharmaceutical companies to consolidate their supply bases may provide an impetus for supplier consolidation, but the process promises to be painful.
If you can't beat them . . .
Two major pharmaceutical manufacturers announced new ventures that seek to leverage the cost advantages of Asian suppliers.
Nextpharma (Gottingen, Germany) announced a joint venture with Indian manufacturer Centaur Pharmaceuticals (Mumbai, India) to offer solid-dose manufacturing. The companies are jointly building a new facility in Pune, India. NextPharma is providing the facility design and equipment specifications and will be responsible for quality systems and assurance. It will provide sales and marketing efforts to reach clients in the Western countries and is putting in a small amount of capital. Centaur will provide most of the investment capital and will handle day-to-day operations. Operations are expected to begin in April 2007.
In addition, Pfizer CentreSource (PCS, Kalamazoo, MI), the API and contract manufacturing unit of Pfizer, Inc., announced a joint venture with two Asian suppliers for the manufacture of generic steroid APIs currently manufactured by Pfizer. PCS will transfer the manufacture of 18 steroid products over the next three years to its partners ScinoPharm Taiwan, Ltd. (Tainan, Taiwan) and Shanghai Pharmaceutical Group (Shanghai, China). PCS will continue to handle the early stage, technology-intensive bioconversion manufacturing step at its Kalamazoo facility but send the intermediate for late-stage processing to its partners, whose operations are in more cost-favored locations. The venture is seen as a step to make Pfizer's steroid APIs more competitive in the global market.
Sign of things to come?
In a symbolic gesture that could nonetheless set a pattern for other global corporations, IBM (Armonk, NY) has moved its global procurement headquarters to China. The shift includes moving the office of Chief Procurement Officer (CPO) John Paterson from the New York City suburbs to IBM's China Procurement Center in Shenzhen. According to the company's announcement, the Shenzhen center is one of IBM's largest procurement operations outside the United States.
The shift is symbolic in the sense that the global nature of IBM's procurement operations makes the location of its CPO's office almost irrelevant: IBM has procurement operations in 60 countries, according to its press release. The size of its annual procurement spend—$40 billion—is more than the annual revenues of all but three major pharmaceutical companies.
At the same time, the move to Asia is meaningful because it is being made in anticipation of changes in the way IBM does business. The company noted in its announcement that Asia already accounts for 30% of its $40-billion procurement spend, distributed among 3000 suppliers, but most of that spending is to support its hardware business. However, in the future, the company expects to tap into Asian suppliers to support its software and services businesses, which now account for over two-thirds of its $100 billion in revenues. "To meet the demand, it will require developing relationships with new partners and suppliers and working with existing ones to help them build skills, processes, and management practices to compete globally in the services market," the company said in its statement.
Though it's unlikely that any major pharmaceutical companies will move their sourcing headquarters to Asia in the foreseeable future, the IBM move is instructive for the pharmaceutical industry on several levels. A growing share of pharma's procurement spend is flowing to Asia, so much so that most major companies now have major procurement operations located there (mostly in Singapore). Furthermore, like IBM, the mix of what pharma is buying in Asia includes more and more "human capital," (e.g., R&D services) along with physical goods such as raw materials. These trends are likely to accelerate as major pharmaceutical companies establish R&D and manufacturing operations in Asia and as they seek to increase their sales in those countries.
Contract research and manufacturing organizations must take note as well. As pharmaceutical company sourcing becomes more global, they will have to develop their own strategies to service these global procurement operations, lest they cede that business to local suppliers.
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, firstname.lastname@example.org.