Crippled by Cost? CMO Quo Vadis

Introduction:

The global CMO market is said to reach USD 40.7 billion by 2015. Patent expiry of drugs, stringent price regulations (especially in Europe, US) to purchase drugs from pharma companies, Government budget cuts for pharma R&D – these are the forces which are expected to reshape the future of pharma and the CMO industry. At least 100 manufacturing facilities owned by pharma companies were shut down in the US alone in 2013 due to reduced profits. Global biopharma companies are looking out ways to reduce costs. Efforts to reduce fixed costs have forced the pharma companies’ march towards the alternative ‘Outsourcing’, thus promising increasing opportunities for CMOs and CDMOs in future as well. Emerging markets like India, China and Latam are turning out to be the favored destinations for outsourcing in the future.

Synopsis:

This whitepaper showcases how CMO market is expected to shape up across different dosage forms, best practices among the CMOs to meet the demand of pharma companies and strategies that can be adopted by CMOs to stand out in the market.

Recommendation:

Industry consolidation in the CMO/CDMO market in the form of mergers and acquisitions, implementing lean management principles in manufacturing process and innovating technologies across dosage forms would help CMOs sustain in the markets.

Market overview

1. Solid Dosage CMO Market

The solid dosage CMO market is expected to grow at a CAGR 10 to 11% by 2017, with emerging market players driving the market. Some of the reasons why solid dosage would still dominate the non-sterile market are.

Lack of manufacturing challenges when compared to other dosage forms

Inventions of new technologies (e.g. OptiMelt, OptiDose) to improve the bioavailability of the drug by Catalent and other leading CMOs is expected to drive the solid dosage market

Delayed/Sustained Release, Multiple control release tablets are expected to gain momentum in the solid dosage market

2. Injectable CMO Market

Injectable has been on the forefront of sterile manufacturing. The injectable CMO market is expected to grow at a CAGR of 11 to 12 % by 2017.

There is an increase in demand for parenteral drugs. This is driven by the growth in biologics which has in-turn created great demands for capacity. Unlike solid dosage, the preferred destinations for injectable would be developed markets. Major CMOs have expanded their capabilities in the past and are still doing so, to cater to client’s requirement.

Increasing Competition From Emerging Market Players

As illustrated below, pharma companies are looking to outsource solid dosage manufacturing to emerging markets like India and China and sterile manufacturing to developed markets.

Road ahead for CMO industry

Having spoken about the trends in outsourcing and the CMOs’ initiatives to sustain in the market; adoption of cross industry practices and cost effective manufacturing processes would also benefit CMOs.

1. CMO Consolidation

CMO consolidation is progressing in the form of strategic alliances, acquisitions and divestures. Some of the significant strategic acquisitions are Patheon & DSM, Haupt Pharma & Aenova in 2012 and Par Pharmaceuticals & JHP Pharmaceuticals in 2014. Companies like Catalent & Recipharm are expected to be public and this showcases their financial stability. This would also enable them to acquire other companies using their stock and add new capabilities. With CMOs consolidating and moving into the era of end to end service, it would potentially benefit pharma companies’ outsourcing. The illustration below shows the consolidation of top CMOs globally.

2. Manufacturing Optimisation (Case Study: Pharma Company 2010)

The objective of the company was to reduce cost and improve productivity from the existing sites. The case explains how continuous production process was implemented in place of batch process so as to achieve productivity and reduce costs

The case involves two Chemical synthesis plant and a warehouse which were integrated to a single manufacturing site where API synthesis and drug formulation (coated tablets) was performed.

Total capital investment involved in continuous production was 40% less compared to the capital investment made on the batch production process. Depreciation is considered during the calculation.

Thus considering continuous production, savings on total product cost per kg of coated tablets involving 14 steps of chemical synthesis and drug product formulation was calculated to be 28 to 30%

Case Study - Lean management: CMO (Fabbrica Italiana Sintetici) (2013)

CMO adopted lean management principles and achieved results with increase in productivity and reduction in set-up time, process time and loading time. This practice was calculated for a specific product. Below are the results after implementation

Implementation results

Catalent has been implementing lean management principles during manufacturing from 2011

• Some of the concepts used by Catalent:
• DRM (Daily Routine Management)
• Visual Management (Control Boards, 5S, Metrics)
• Kaizen

Thus implementing Lean management principles in manufacturing, provides significant results and the CMOs could immensely benefit from the same.

3. CMO Innovations

With demand for drugs growing at a faster rate, CMOs have to upgrade themselves with advanced technologies and innovations to sustain in the competitive market. Quality and cost management being major concerns, the contract manufacturers should adopt best practices like continuous manufacturing process and lean management to achieve improved productivity and reduced cost. For example, tablets are one of the conventional manufacturing techniques and profit margins of the CMOs are being squeezed. In addition to it, there is an increasing competition from India and China.

Therefore, major CMOs are looking to retain their customer base through a series of technological innovations. Major technological developments have aimed at improving the bioavailability and efficacy of drug, thereby attracting pharma companies for outsourcing.

Illustrated below are some of the technological advancements by top CMOs in solid and sterile dosage categories

Pharma-CMO business model evolution

In the early stages pharma companies engaged with the CMO only for commercial manufacturing on FFS (Fee For Service) basis. In the next five years the pharma-CMO business model would shift to a phase where the pharma company would look for full end to end contract services (from formulation development to commercial manufacturing) from the CMO. Illustration below shows the evolution of engagement models. Medium and emerging pharma companies are engaging with major CMOs such as Patheon, Catalent, Recipharm etc. across drug value chain. In future, big pharma would also engage in end to end partnerships. Below are some of the business models cases

CDMO Models – The Future

Pharma Companies have started engaging with CMOs, where the CMO provided end to end service starting from formulation development to commercial manufacturing of drugs

For e.g. In 2013, Followed by a successful multi-year development and clinical manufacturing partnership for oncology drug Imbruvica, Catalent signed an agreement with Pharmacyclics for formulation development, clinical and commercial manufacturing of drugs

In 2014, Alkermes develops and commercially manufactures drugs for J&J (Drug: Invega Sustenna – to treat schizophrenia), Alkermes also has similar partnerships with King Pharmaceuticals, Novartis, Abbott, Par Pharmaceuticals etc.

Milestone based model

This model aids the client to monitor the progress on a regular basis and make payment based on achieved milestones

Almac’s technology and IP to develop validate and commercialize a multi-gene test to predict the benefit from DNA damage-based chemotherapy drugs. As per the agreement, Almac received an upfront payment of USD 9 million and further additional milestones based on clinical and commercial goals

CollaborativeCapacity Management

As per this model the CMO expands or builds a dedicated a facility for the pharma client to meet the demand of the pharma company

E.g. In 2013, Aesica built a dedicated facility worth USD 48 billion as a production hub for oral type 2 diabetes, for one of its strategic partners. The site also includes complex device assembly and specialty packaging and manufacture of high-potent products

Collaborative Cost Reduction model

Pharma Company and the CMO work together on cost reduction and the cost savings is shared between the parties

E.g. In 2014, Patheon and Sepracor signed an agreement to develop cost reduction initiatives as part of the overall cost improvement program. As per the agreement, all net cost savings (net of implementation costs) realized from the cost Improvement program shall be shared equally between the parties

Future of outsourcing

The key future trends in CMO industry are

CMOs with conventional dosage forms will become a low profit generating avenue. Integrated CMOs and CMOs with unique capabilities will eventually be the market drivers

CMOs in developed market will focus on sterile manufacturing. Ability to handle high cytotoxic compound will be added potential advantage

In solids, CMOs need to innovate new delivery technologies and adopt an improved manufacturing process in order to drive their business. Potent tablet manufacturing will also gain importance

CMOs will look to expand their existing relationships by offering an end to end service from development to manufacturing

Emerging market CMOs will become the preferred sourcing destination for tablets and capsules in next 3-5 years.

Industry speak/acknowledgement

CEO of a pharma company

Solid and Sterile categories are expected to drive the CMO market through 2017

Business Development Manager of a pharma company

Technological Innovations and best manufacturing practices are key trends in the CMO market and the CMOs have to upgrade themselves to stand out in the market

Head of CRAMS division in a pharma company

There will be a stiff competition from emerging markets. India, China and LATAM are expected to be the drivers in emerging markets for solid dosage outsourcing and developed markets would still lead sterile outsourcing with their technological expertise

Disclaimer: Strictly no photocopying or redistribution is allowed without prior written consent from Beroe Inc. The information contained in this publication was derived from carefully selected sources. Any opinions expressed reflect the current judgment of the author and are subject to change without notice. BeroeInc accepts no responsibility for any liability arising from use of this document or its contents.

Author Bio

Arun Ramesh is a Senior Research Analyst with Beroe Inc., a global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations.

Arun Ramesh specializes in tracking the pharmaceutical contract manufacturing market in the formulations vertical, analyzing the engagement models therein, and assisting big Pharmaceutical clients with their procurement intelligence. He has worked on multiple projects for Fortune 500 clients on categories such as sterile and non-sterile formulations in the animal and human health categories.

Arun Ramesh earned his degree in MBA (Operations & Marketing) from the SSN School of Management in Chennai.