CMO Industry Thins Out

The number of CMOs is shrinking due to acquisitions, exits, and compliance problems. Additional capacity is being lost as more CMOs pursue proprietary products to gain a better return on their assets. And unlike 15 years ago, when the industry first took off, there isn’t a lot of available capacity to bring into the industry.

Industry consolidation by way of acquisitions is a long-term trend that will run for at least several more years. The emergence of larger CMOs that can achieve economies of scale and offer serious alternatives to in-house networks is a positive development for the industry, and a clear sign of maturity.

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 (see Table I). There have been two principal drivers of these developments: growing demand for captive manufacturing capacity, and regulatory compliance difficulties.

Exemplar Pharmaceuticals

Inhalation

QA/Regulatory

Ben Venue Laboratories

Injectable

QA/Regulatory

SCM Pharma

Injectable

QA/Regulatory

Pharmalucence

Injectable

Capacity for own products

Boehringer-Ingelheim Contract Manufacturing*

Multiple

Capacity for own products

Bayer Pharma Manufacturing Services

Multiple

Capacity for own products

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).

An 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.
Today, the global bio/pharma companies have shed or shuttered most of their unneeded facilities, and there simply isn’t much capacity available on the sidelines. Even if facilities were available, most CMOs wouldn’t want them (unless they were for injectable or bio/pharmaceutical products) because they already have substantial underutilized capacity.

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.

That eventuality underscores the need for thorough due diligence beyond just a GMP compliance audit. Bio/pharma companies need to understand their CMOs’ corporate strategies and financial condition as well as on GMP. Is the parent company or investors committed to the CMO business for the long term? Does the CMO have the financial resources to sustain itself through difficult times? The due-diligence process may require conversations with the CEO and CFO as well as business development and quality assurance staff.

Risk management plans should incorporate the possibility of a CMO choosing or being forced to exit the business. Sound companies will continue to honor supply contracts, and may even pay for tech transfer if they really want the client products out of the facility However, if a bio/pharma company has concerns about the CMO’s near-term ability to supply its product, it should have a viable second-source strategy or a large buffer stock to protect itself.
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.

About the Author
Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, Twitter@JimPharmSource, info@pharmsource.com, www.pharmsource.com.