“We’re absolutely expecting to see more consolidation,” Mullen said, just weeks after his company acquired difficult-to-make API specialist Irix Pharmaceuticals, as well as Oregon-based CDMO (contract development and manufacturing organization) Agere Pharmaceuticals, and almost exactly a year since DSM and Patheon merged to create DPx.
“This is going to be similar to what happened to the CROs (contract research organizations) in the ‘90s and ‘00s, where you’ll see consolidation and a handful of global players will emerge that really bring some strategic capabilities and are in more of a partnership with their customers. And you can already see that starting with Catalent and us,” Mullen said.
The consolidation comes as Mullen says the biggest trend for CMOs right now is that “all of the customers by segment say we want to do more outsourcing,” though their reasons vary. For Big Pharma, they’re “typically looking to access some new expertise or capacity that they don’t have,” while mid-size and emerging companies, Mullen said, are increasingly looking to be more virtual as they’d like to spend the bulk of their cash on clinical development.
“What goes with that trend is clients are looking to simplify their life. I talked to a client the other day who said they were using 500 different suppliers and they can’t manage it anymore,” Mullen said.
As these trends take shape, it’s the smaller CMOs that will suffer if they can’t find new capabilities.
“So many of the players out there are relatively small and quite exposed to a single product or a single customer,” Mullen said. “And that’s a tough place to be because there’s not enough margin and profitability here to go through a dry spell for more than a short period of time if you’re a small guy.”
But as DPx, which is privately held, has grown with its new acquisitions, the company now has the problem of not really being well understood by its clients.
“We have changed our set of capabilities so quickly over the last 12 months that most of our customers don’t actually understand everything we can do for them,” Mullen added. “They think about what we were two years ago and not what we’ve become, so we have some work to do to help them understand our breadth of services.”
Shifting Back West
As quality problems continue to plague manufacturers in India and China, which the FDA is intent on cracking down on, a lot of companies have shifted their CMO work back West, especially for the smaller outsourcers.
“On the API side, we’ve seen some shift back to Western Europe and North America, [but] it’s been a little slow coming back to North America because a lot of the capacity got hollowed out over the last 20 years, so it remains to be seen how much of that will come back,” Mullen said, noting that it’s coming back mostly because companies are looking to shorten their supply chains and quality issues have created “a long and hard experience for a lot of companies.”
“On the drug product side, we really never saw anything of substance coming out of China, it was really in India, but so many of those guys piled up warning letters, and a number of those guys are now customers of ours because if they were generic suppliers, they need access to the US market and we’re a logical candidate,” Mullen added. “We make product for some of those guys who don’t have the regulatory status to reliably supply out of India.”
Emerging companies, which Mullen said control 75-80% of the NCEs (new chemical entities), also “want to be closer physically to who they’re doing business with,” while larger companies launching a new product “don’t want to introduce risk into their supply chain to try to arbitrage 100 basis points of margin on the cost.”
Regulatory Environment
The shift in geography also comes as regulators worldwide seem to be “cranking up their requirements and standards all the time,” Mullen added, noting that the more rigorous regulatory environment, especially with added customer audits, has helped to keep DPx free of FDA warning letters.
“We get audited and inspected at our factories across North America and Europe, so we get quite a bit of extra scrutiny from regulators, which is to the advantage of CMOs,” Mullen said. “The guys who don’t have the warning letters are all CMOs, and if you look at the Big Pharma guys, they don’t have this external pressure, so it’s easy for them to be caught five to ten years behind the curve.”
The US FDA also seems to be increasingly enforcing draft guidelines, Mullen said.
“What you really have to pay attention to, particularly from the FDA, is when they talk about the draft guidelines, which technically aren’t enforceable, but they’re enforceable,” Mullen added. “They always enforce draft guidelines even though they don’t theoretically have the legal authority. When the inspector is in there, you can have an interesting intellectual debate about whether it’s a guideline or not, but since that’s where they’re going, you might as well try to figure out how to get there.”