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As pharma models changed during the past 40 years, contract manufacturing capacity and services evolved to meet demand.
The past 40 years have seen many changes and trends within the pharmaceutical contract manufacturing arena, from small-scale boutique operations, specializing in individual technologies or chemical processes, to the rise of one-stop shops, and the low-cost providers in India and China. Through interviews with industry veterans who have witnessed--and helped shape--these evolutions first-hand, the author explored the history of pharmaceutical manufacturing outsourcing and future trends.
The discussions revealed four distinct periods in API manufacturing during the past 40 years where contract manufacturing organizations (CMOs) and strategies by pharma companies changed as business needs evolved.
Prior to 1975, pharma companies handled manufacturing in house with internal capacity; however, during this time, they began to look for partners to undertake individual steps that involved hazardous or dangerous chemistries, so that risks did not need to be taken with their own facilities.
At the same time, the blockbuster drug era began; the growth of high-volume manufacturing to meet the needs of the market led to a shortfall of in-house capacity. Although companies did not outsource entire processes, Big Pharma began to outsource early chemical steps before bringing the intermediates back in-house for the final manufacturing steps.
With the advent of new technologies such as computational and combinatorial chemistry, high-throughput screening, and biotechnology, the pipeline of novel small-molecule therapeutics increased, as did the investment Big Pharma companies put into R&D. Blockbuster drugs filled capacity, which led to a shortage of GMP facilities. Alongside increased investment in new facilities by Big Pharma came a wave of CMO companies across the United States and Western Europe.
Multi-step outsourcing took off, but initially a lack of investment and expertise limited the number of CMOs that could undertake the challenges of multi-step chemical API manufacturing. Some investors in CMOs saw an opportunity to get rich quick in the industry, somewhat naïve to the slow timeframes in the pharmaceutical industry. When the reality of the timeframes became apparent, investors withdrew from the marketplace leading to a reduction of new entrants at the turn of the millennium, particularly in the United States.
The rapid entry of low-cost competition from India and China led to a decade-long period of volatility and uncertainty in the CMO market. At the same time, Big Pharma was grappling with the end of the blockbuster era, patents expiries, more complex drugs, and fewer FDA approvals.
Drug companies embraced low-cost manufacturing opportunities to balance soaring R&D costs, and an influx of CMOs offering services predictably led to over-capacity around the globe, matched by a race to the bottom on price. Risks associated with quality, supply, and experience were put to one side with the aim of saving money, and historic relationships with established partners were severed. Western companies were left fighting to promote their value above and beyond the bottom line of cost, and many were left to wonder what would happen to the industry that had boomed only a few years before.
A number of factors have combined to bring about a stabilization and resurgence in the CMO industry, most notably a steady increase in FDA approvals of new chemical entities, particularly in high-value disease targets such as oncology and orphan indications.
An increase in wages in China has reduced the competitiveness of China-based CMOs compared to Western CMOs. FDA warning letters to manufacturers based in India and China jeopardized the reputation of companies within the region as a whole. The risk/reward balance--overlooked previously when prices were dropping--is now being reassessed by Western pharmaceutical companies.
While quality is a driver, the focus for pharma companies is identifying partners with specific capabilities and assets; merely having spare capacity is not a sufficient selling point.
In response, the Chinese Food and Drug Administration has pro-actively and aggressively tightened up on drug product approvals, as well as CMO quality and compliance levels. As a result, a significant number of Chinese CMOs failed to meet the new levels and exited the market. Many drug master files have been deregistered, contributing to the reshoring of pharmaceutical companies’ supply chains back to Western CMOs.
Continued evolution of the CMO market is inevitable, and while looking back is easier than looking forward, there are opportunities for CMOs that wish to grow and capitalize on the resurgence currently in progress. History does teach that staying static it is not a viable business model or strategy; adapting to the changing needs of the industry is essential.
Ensuring that the CMO’s assets matches demand is vital. After the blockbuster era, demand for very high volumes has dropped, and Cambrex research indicates that the average annual US demand for a small-molecule API has dropped from around a hundred metric tons to tens of metric tons.
Investing in the “right” facilities, along with offering differentiator technologies, will go some way to ensuring a CMO has a place in the industry. Many CMOs are looking at how to get into projects sooner in the developmental stages, with a view to maximizing the potential should a project be a commercial success. Although the low-cost competition has been diminished, competition for these projects remains high.
How history will define the next era of the CMO industry will become apparent in time. Client relationships are perhaps as crucial now as they have ever been. CMOs--as always--must meet the demands of the customer, delivering products on time, in full, and to the specification required. Trends will continue to be transitional; the much vaunted one-stop-shop strategy does not seem to have completely gone away, but pharma clients continue to show preference to pick and choose expertise where it is necessary. Fulfilling demand and being recognized as experts in areas within the industry seems to be the strategy that will stand companies on the most solid ground.
Vol. 41, No. 7
When referring to this article, please cite it as M. Moorcroft, “History Guides Future CMO Strategies,” Pharmaceutical Technology 41 (7) 2017.