Consolidation wave expected in contract manufacturing
pharmafile | April 6, 2009 | News story | Research and Development | CRO
The mergers and acquisitions that have become a feature of the contract research organisation (CRO) sector in recent years look likely to gain momentum in contract manufacturing as well.
That was the view of Jim Miller, president of outsourcing consultancy PharmSource, in a presentation given at the recent Interphex exhibition in New York.
"We think the CMC services sector is ripe for consolidation," said Miller. "There are an awful lot of companies with revenues below $25 million out there, particularly among formulation, analytical services and small-scale manufacturing, and probably more than can be supported long-term."
He cited a PharmSource analysis of capacity for manufacturing clinical trial materials (CTM) for injectables in phase I/II studies, completed a couple of years ago, which indicated even then that there was around twice as much production capacity as was needed.
"A lot of companies jumped into the injectable CTM business in late 2007 and 2008 because of the strength of the biologics pipeline," continued Miller. "That's going to put a lot of pressure on the CTM part of the industry going forward."
That overcapacity in some sectors is exacerbating the effects of the economic downturn.
Contract manufacturing and CMC (chemistry, manufacturing and controls) companies enjoyed fairly robust growth in 2007 and through the beginning of 2008, said Miller, but year-on-year performances deteriorated throughout 2008 and by the last quarter some companies had started to move backwards with revenue declines.
Hardest hit were the manufacturers of active pharmaceutical ingredients (APIs) and firms providing process development services, he said.
Asian companies – which have enjoyed spectacular growth in recent years – were also pegged back, but did not see the same level of slowdown as their North American and European counterparts, according to Miller.
Looking ahead, the prospects for the sector are a little hard to call, as most major CMOs have a book of business that comes from core, established contracts. However, a slowdown in New Drug Application (NDA) approvals as regulators get more risk-averse – which is already being felt among CROs, will likely peg growth back among contract manufacturers to "low single-digit growth" in the coming years, he said.
This in turn will drive consolidation among CMOs, which are starting to embark on the type of preferred vendor agreements – such as Eli Lilly's 10-year, $1.6 billion deal with Covance – that have been an increasing feature of the contract research sector in the last five years.
The CROs that have emerged stronger from the consolidation turmoil are those which have established deep relationships and a track record with customers over many years, as well as financial strength, global scale and large-capacity facilities.
For CMC companies many of the same principles will apply, and a globalising approach has already been seen in some sectors such as clinical packaging.
"We don't know yet whether it is necessary to have solid, semi-solid and injectable capabilities to be a preferred provider in contract manufacturing, or whether the market will segment out around individual dosage forms," said Miller.
The manufacturing industries in the west have been slow to build capacity in emerging markets, he added. In Europe a lot of CMOs have grown in recent years by buying redundant pharmaceutical manufacturing facilities in their own territories, and some seem to be under stress already.
That suggests further large-scale consolidation between western CMOs may be limited, he said, with deals that extend capability or geographic reach much more likely. And that will work in reverse too, with Asian companies trying to expand into Europe and North America.
One exception is Lonza, he noted, which on the API side has built capacity in Europe and North America and is already "fairly well established" in China. That company is also notable in that it has been able to sign some of the innovative, large-scale deals that have featured recently in the CRO sector.
Last year, for example, Lonza signed an agreement with Novartis that will see it carry out all the process development and CTM manufacturing for Novartis' biologics pipeline.
In closing, Miller said: "The tide is going out, after a decade in which the tide has been coming in."
It seems that at least for a few years, conditions will be much tougher for outsourcing providers.
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