Growth of the overall contract manufacturing market appears to remain healthy as we head into the last quarter of 2016. However, there are interesting trends that could impact some segments. Nigel Walker, Managing Director at That’s Nice LLC & Nice Insight, reports.
The value of the global pharmaceutical contract manufacturing market, currently valued at $58 billion, is predicted to reach approximately $84 billion by 2020/21.1,2 Mordor intelligence estimates the market is growing at a CAGR of 6.4%.1 The research firm also estimates that contract manufacturing of solid dosage formulations accounted for greater than 40% of sales in 2014, while the injectable segment will grow at the fastest rate (CAGR of 12.37%) over the next five years. With respect to geography, the United States was the largest market in 2014, but India is the fastest growing.1
Trends driving this growth include a high level of investment in innovation, which is leading to a very healthy pipeline of novel medications. The heightened level of growth also correlates with pressures to reduce the cost and time of development and commercialization of new drugs; even leading to consolidation among biopharma companies. The need, in many cases, for specialized manufacturing and/or development capabilities is another important driver, particularly with respect to the production, final formulation, as well as packaging of highly potent APIs and the delivery of drug substances with challenging properties (i.e., poor solubility and bioavailability).2 The growing number of emerging/small and medium- sized pharma companies that lack development and manufacturing infrastructure is also contributing to the healthy state of the pharmaceutical contract manufacturing market.2 There are some negative drivers impacting the overall market as well, such as the push by many (bio)pharmaceutical companies to simplify their supply chains by reducing their number of outsourcing partners.1
The increase in anticipated spending of participants in Nice Insight’s 2016 CDMO Outsourcing Survey, of nearly 600 professionals in the pharmaceutical and biopharmaceutical industries, supports the growth estimates discussed above: 75% predict that their companies will increase expenditures on contract services over the next five years. A large percentage (69%) also expect to increase the number of CDMOs they work for in the coming years.3
It is worth noting that the percentage of respondents whose companies spent more than $50 million annually on outsourcing, which remained fairly stable at 23% to 24% from 2012 to 20143, nearly tripled to 71% in 2015.4 This rise was accompanied by a significant decline in the percentages of respondents whose companies spent less than $10 million and $10 to $50 million on outsourcing (16% and 62% down to 3% and 23% from 2014 to 2015, respectively).3,5
Consolidation and Internal Investments are Headwinds
While these numbers indicate a promising near-term future for the CDMO market, recent M&A activity amongst (bio)pharma companies, the acquisition of contract service providers by sponsor firms to achieve vertical integration and significant investment, particularly by biologic drug manufacturers in internal production capabilities, could have negative consequences for CDMOs further down the road. Companies that have only invested in internal development programs have not been as profitable as those that have expanded their pipelines by acquiring companies with promising candidates.4 Consolidation means fewer potential customers and a more competitive environment for CDMOs.
(Bio)pharma companies that have grown through acquisition are also focusing on simplifying their supply chains by using fewer partners. They are especially seeking those that can support their projects from the development phase through clinical trials, on to commercial API production and drug product formulation. Acquisitions of CDMOs by (bio)pharma companies, such as Pfizer’s purchase of Hospira (including its contract parenteral drug manufacturing operations, now Pfizer CentreOne) is also affecting the CDMO market.
In 2015, approximately one-third of the pharmaceutical industry’s cost of goods for drug product manufacturing was attributed to outsourced manufacturing.6 That number isn’t expected to increase, either. While outsourcing by small and medium-sized pharma companies remains strong, spending by big pharma on contract services has actually declined from 60% of new NME approvals in 2006, to 20% in 2015.7
At the same time, internal investment in manufacturing capabilities has increased. The 25 largest (bio)pharmaceutical companies increased their spending on facilities and equipment by 13% in 2013 and 11% in 2014.6 PharmSource also reports that overall, big pharma has spent close to $100 billion on biologics manufacturing capabilities (cell-culture, microbial fermentation production and final filling of parenteral formulations) over the last five years.7 With this level of investment, it appears that biopharmaceutical companies that have established sufficient internal capacity may not have to rely on CDMOs for manufacturing.7
Achieving Preferred Status Makes A Difference
CDMOs are responding to these changing market conditions in a number of ways. Perhaps most noticeable has been the M&A activity in this sector8 CMOs have been transforming themselves into CDMOs through the acquisition of competitors with complementary capabilities (specialized technologies, larger/smaller volume equipment, development or final filling, etc.) or geographic footprints. The goal in many cases is to establish a suite of capabilities similar to that which their customers have internally, but with technical, cost and efficiency advantages.
As mentioned above, there are fewer very large (bio)pharmaceutical companies; those that remain are consolidating their supplier bases. Therefore, offering integrated services is becoming imperative for CDMOs. This trend is also reflected in the results of the 2016 Nice Insight CDMO Outsourcing Survey; 43% of respondents seek “preferred suppliers”, up from 35% the previous year. In addition, the preference for “tactical suppliers,” the more traditional type of relationship, dropped from 35% to 31%3,5 CDMOs that have integrated offerings, are willing to work under creative cost- sharing or other contractual conditions and provide a combination of unique technical solutions will have real competitive advantage.
Gaining preferred partnership status is not a guarantee of ongoing business. However, CDMOs, whether they are in preferred/strategic partnerships or involved in simpler tactical relationships, must maintain a high level of performance or customers will look elsewhere. For instance, 50% of survey respondents indicated that they would switch CDMOs if they do not continually meet quality expectations.3
2016 Nice Insight CDMO Survey Respondent Profile
In 2016, That’s Nice separated its annual outsourcing survey into two separate questionnaires for the contract manufacturing and research markets. These sectors were divided in order to gain more tailored insight into specific trends and issues. The manufacturing survey was also expanded to include CDMOs in recognition of the growing number of CMOs that have, through acquisition and internal investments, transformed themselves into service providers that offer integrated services from development through commercial manufacturing.
A total of 587 respondents, including professionals at all levels of (bio) pharmaceutical companies participated in the 2016 Nice Insight CDMO Outsourcing Survey. The largest percentage (39%) are key decision-makers (executive/management positions) in their organizations. Another 18%, 13% and 10% of the survey respondents hold positions in R&D, formulation and analytical; development, production and manufacturing; and operations and engineering functions, respectively.3
In addition, the respondents come from companies of all sizes. Large (>$5 billion in annual sales), medium ($500 million to $5 billion), small ($100 to $500 million) and emerging (<$100 million) firms are represented by 36%, 43%, 12% and 9% of participants, respectively. The survey also covers all major geographic pharmaceutical markets: 56% of respondents are from North America, 28% from Asia and 16% from Europe.3
Based on this respondent profile, it can be confidently concluded that the results of the 2016 Nice Insight CDMO Outsourcing Survey reflect the conditions in the global pharmaceutical contract development and manufacturing sector.
Mordor Intelligence Press Release, August 2016, www.mordorintelligence.com/industry-reports/global-pharmaceutical-contract-manufacturing-market-industry.
Visiongain Press Release, August 2016, https://www.visiongain.com/Report/1596/Pharmaceutical-Contract-Manufacturing-Market-2016-2026.
The 2016 Nice Insight Contract Development & Manufacturing Survey.
M Jewell, “M&A to enter ‘pharmerging’ markets,” The Pharma Letter, July 2016.
Nice Insight’s Annual Pharmaceutical and Biotechnology Outsourcing Survey 2015.
J Miller. Pharm Tech 2015:39;26-211.
J Miller. Pharm Tech 2016:40 (Outsourcing Resources Supplement).
N Walker. Pharm Manuf, Jan. 2016.