By Peter Bigelow, xCell Strategic Consulting
In the 1980s and 1990s, contract manufacturing organizations (CMOs) were utilized by the pharmaceutical industry in an opportunistic way to increase manufacturing capability quickly and efficiently. This type of outsourcing was not necessarily a long-term strategy, but rather a short-term tactic to drive incremental growth.
Many products had been developed locally and, although they may have had a common API, these products could not be supplied in a common format around the globe. Federal and international regulations often mandated that pharmaceutical companies have either country-specific factories or use country-specific CMOs. Since companies could not have factories everywhere, many looked to CMOs to provide manufacturing capability particular to selected regions.
As a result of this regional approach and increased reliance on CMOs, companies began a shift to regional or affiliate commercial organizations with autonomous offices in all major countries. Therefore, decision making became decentralized and local managers were incentivized to manage their business with local suppliers. Pharmaceutical companies made significant investments to establish regional/local presences. As the industry matured, capital-intensive technologies were developed that represented barriers to market entry and created a “make vs. buy” mentality that advanced the growth of CDMOs (contract development and manufacturing organizations). As a result, technologies such as sophisticated coating systems for extended release products, high potency operations, soft gelatin capsules, and prefilled syringes emerged.
In addition, mergers and acquisitions created a network of suppliers for pharmaceutical companies. As products were acquired, their existing supply chains had to be utilized. Quite often, this involved engaging a CMO. Or, sometimes the manufacturing plant was spun off as a CMO. Companies wanted to reduce their asset base but still needed the facilities to manufacture their products that were well along their life cycles. These life cycle products were very profitable, but the volumes were predictable, and risk was minimized by manufacturing through a CMO. It was also important to drive costs down for these life cycle products. Using CMOs provided an opportunity for a positive effect on costs because they could fill their capacity with other products and absorb overhead more effectively.
Pharmaceutical companies began to push CMOs very hard to reduce prices, employing competitive bidding processes. Reverse auctions and extensive bid lists were in vogue. Competitive pressure began to cause CMOs to reevaluate their business model and focus on value-added services. They began to shift from merely renting manufacturing capacity to offering development support and integrated services. This paradigm shift resulted in the birth of the CDMO business.
The past decades have seen a maturation of the CDMO business and an increased level of collaboration between pharmaceutical companies and CDMOs. There are a number of reasons for this.
Reason #1: Spending Containment
Big Pharma continues to actively spin off underutilized factories to CDMOs and then employ those companies for medium- and long-term supply contracts for the remaining products. Companies want to “variabilize” their spend as much as possible and reduce fixed costs. If a product is profitable and growing, it can justify a reasonable cost of goods. If a product is at the end of its life cycle or has inherent risks, companies don’t want to dedicate internal capital.
Reason #2: External Manufacturing Utilization
The pharma industry profile has changed with the immergence of specialty pharma and the importance of the generic industry. Examples of this change include the rise of specialty companies such as Gilead, Regeneron, and Celgene, none of which had a significant installed manufacturing base to start with. They are much more prone to turn to external manufacturing solutions and do not have preconceived expectations that CDMOs cannot produce their products as well as they could.
Reason #3: Industry Consolidation
After many years of fragmentation, we have seen very healthy consolidation in the CDMO business, creating players with significant resources and world-class capabilities. These players can afford to invest the necessary capital in their business, have strong quality systems, and are seen by the FDA (and other ministries of health) as high-quality players.
In conclusion, the maturation of the CDMO industry, in parallel with the changing dynamics of the traditional pharma industry, has resulted in a scenario where there is a strong argument to outsource. Many more companies can build the case that using CDMOs is a preferred business case. As companies build their case internally, I urge them to consider the following points:
- The CDMO consolidations and the focus on quality and capabilities have brought about the emergence of a network of suppliers that are stronger and much more reliable than in the past. CDMOs have developed excellent processes to develop and commercialize products because that is their bread and butter, and they do it every day.
- Because of the “lean” thinking at CDMOs and the focus on profits, methods to use capital efficiently and drive for low cycle times is a key incentive.
- Research-based pharmaceutical companies will always consider manufacturing a necessary capability rather than a strategic weapon.
- CDMOs are involved in tech transfer, process validation, and scale-up every day for a multitude of customers. Practice makes perfect.
The CDMO industry is the future and is stronger than ever. Big players are well resourced. Companies with special capabilities, from spray drying to soft gelatin capsule to nanoparticles, exist and have great expertise waiting to be employed. CDMOs have embraced quality and reliability because they can’t exist without them. The era of strategic partnering with very capable CDMOs, incentivized to perform at a very high level, is upon us.
About The Author:
Peter Bigelow is president of xCell Strategic Consulting, a consulting firm to the pharmaceutical industry, and chairman of the board of trustees of the Pharma & Biopharma Outsourcing Association (PBOA). He has held executive leadership roles and provided management consultation within the biopharmaceutical, healthcare, and consumer goods industries for over 28 years. His expertise includes global pharmaceutical manufacturing and supply chain operations, outsourcing strategies, quality systems, compliance excellence, building high performance teams, organizational restructuring, and driving operational efficiencies with lean processes.
He recently served as interim president of the Qualitest Pharma division of Endo Health Solutions, Inc. Prior to founding xCell, he served as president of North America Commercial Operations at Patheon and also held the role of CEO. He previously spent 14 years with Wyeth and 14 years at SmithKline Beecham (now GlaxoSmithKline). Peter can be reached at firstname.lastname@example.org or 919-339-3731.