The Shrinking CMO Industry

Exits from the CMO industry are a more recent development that seems to be picking up momentum. Examples of CMOs leaving the industry in the past year include the contract manufacturing units of Bayer and Boehringer-Ingelheim; Pharmalucence; and SCM Pharma. There have been two principal drivers of these developments: growing demand for captive manufacturing capacity and regulatory compliance difficulties.

Need for captive capacity
The demand for captive or in-house capacity stems directly from the acceleration of new product development. Global bio/pharmaceutical companies have rebuilt their pipelines in the past five years, largely through acquisitions and in-licensing, and need capacity to launch new products. Older facilities are being retooled to handle some of the new products, even as new facilities are being built, especially for biologics.

The demand for injectables capacity, in particular, is strong. It is being driven by the development of innovator biopharmaceuticals and biosimilars, but demand from generic-drug manufacturers is also high, thanks to rising prices and shortages of important drugs. This trend is underscored by Sun Pharmaceutical’s decision to take Pharmalucence out of the contract manufacturing business immediately after its acquisition in August. Ten years ago, many injectables manufacturers in India promoted themselves as contract manufacturers; today most of them are using their capacity to support their own generic injectable product lines and hardly mention contract manufacturing.

Exits resulting from quality problems are another important factor. The compliance problems at Ben Venue Laboratories, which resulted in the decision by Boehringer-Ingelheim to withdraw from the CMO business and ultimately close the facility, are well known. In two recent cases, quality problems resulted in a major client taking over the CMO to safeguard its interests. Allergan took over Exemplar Pharmaceuticals, a manufacturer of inhalation products, when Exemplar had problems with a new product Allergan was planning to launch from its site. More recently, Shire Pharmaceuticals took over SCM Pharma to maintain production of a commercial product after SCM lost its GMP license from the Medicines and Healthcare products Regulatory Agency (MHRA).

Another important factor in the shrinkage of the industry is the lack of readily available capacity to replace it. The bio/pharmaceutical contract manufacturing industry emerged at a time when global bio/pharmaceutical companies were shedding manufacturing facilities as their blockbuster products neared the patent cliff. Large bio/pharma companies welcomed the opportunity to offload assets onto CMOs, often start-ups formed by site management teams, and avoid costly severance and site cleanup costs. CMO investors welcomed the chance to get productive assets for a nominal amount, with their risk further reduced by contracts to manufacture legacy products.

Critical due diligence
For CMOs, the reduction of the number of competitors and capacity, even at the margin, is a good thing. The tighter capacity can mean better pricing and margins, as buyers have less opportunity to play suppliers off against each other.

The possibility that a CMO might exit the business, however, can have serious implications for bio/pharma companies that depend on CMOs. Generally speaking, unless the CMO goes out of business altogether, product supply should continue through the term of the contract. The client could then be faced with a costly supplier search process and re-qualification at a new CMO.

Exits are part of the consolidation process that comes with industry maturity. The CMO industry should welcome the exits of weaker or less committed participants, because it strengthens the industry overall.  But clients need to stay aware, especially during the selection process, that their CMO may be forced or choose to leave the business, and should practice careful due diligence to protect themselves.

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About the AuthorJim Miller is president of PharmSource Information Services, Inc.