CMOs are facing a " challenging environment ," especially those that do small molecule active pharmaceutical ingredient (API), intermediate and dose form manufacturing, said Jim Miller, President of Pharmsource, speaking at this year´s Interphex trade show in Philadelphia.
" We believe that the business models and strategies of many CMOs are built on a perception of what the pharmaceutical industry was 5 or 10 years ago ," said Miller.
" They do not reflect the new realities of the business, especially the downward pressure on drug prices, the emergence of new markets in Asia, Eastern Europe and Latin America, and changing supply chain management practices…
Clearly there is a need for a new CMO business model. "
Miller elaborated that the combination of fewer new drug approvals, low entry barriers to the CMO space, big pharma investments and Asian competition have created an overcapacity situation.
Indeed, in 1996 nearly 65 per cent of new drug applications (NDAs) were approved by the US Food and Drug Administration (FDA), compared with just under 25 per cent ten years later in 2006.
The problem of few approvals reflects the FDA's reluctance to grant new approvals, explained Miller, whereby the number and rate of rejected applications has not dramatically risen, but the number of " approvable " designations has risen sharply.
" Approvable NDAs usually require additional clinical research, and companies are often not willing to fund the additional work, especially if the commercial prospects are marginal ," Miller said.
Meanwhile, Miller spoke of the " apparent ease " with which companies can enter the CMO space, which is creating a situation where few CMOs have differentiated themselves effectively among potential clients - a situation which can result in price competition.
" Sales of redundant facilities by major pharmaceutical companies is a primary way for new companies to enter the market.
We've seen four examples in recent months ," said Miller.
Meanwhile, Miller also warned CMOs to avoid being "overconfident" by the recent moves being made by the majority of big pharma firms to reduce the number of in-house manufacturing sites, with the stated intention of relying more on outsourcing.
" While big pharma is getting rid of old small molecule capacity, it is investing heavily in biologics capacity, including cell culture, vaccine production and parenteral fill/finish ," said Miller.
" Big pharma capital expenditures have grown in the past three years, even while they have been making announcements about more outsourcing ," he said, adding that while biologics and parenteral manufacturing are the most common investments being made, companies are investing in solid dose capacity as well.
And this is at a time when the industry is already facing " a real overcapacity problem ."
Miller said that his company recently completed a major assessment of supply and demand for contract parenteral manufacturing capacity in which it was concluded that industry capacity is " more than sufficient " to meet demand through the next decade.
The story is similar for lyophilisation and prefilled siringes, as well as small molecule API manufacturing, Miller added. "
This overcapacity is already leading to pricing pressure on CMOs, and this is before serious Asian competition has entered the market."
In response to these looming market challenges, Miller outlined some of the dimensions across which CMO business models will have to change in order to remain in the game.
The way CMOs utilice their facilities will need to be optimised and instead of operating as a dedicated CMO, companies may need to look at conducting their contract manufacturing operations alongside the production of their own in-house products.
In addition, CMOs may have to move towards " just-in-time " production, link directly into enterprise resourse planning (ERP) systems and begin managing the entire supply chain to create more value, as well as the establishment of a more global network that spans into emerging markets, and the development of a more country-specific approach to compliance.
Moreover, Miller urged that price may have to emerge as the dominant factor when signing contracts.