Outsourcing on the up, but contract manufacturing still under pressure

pharmafile | May 11, 2012 | News story | Manufacturing and Production |  CMO, Jim Millar, PharmaSource, Phil Taylor, outsourcing 

The pharmaceutical contract services sector experienced something for a recovery in 2011 after a lean couple of years, although the contract manufacturing segment bucked the growth trend, according to Jim Miller of PharmSource

Presenting his annual keynote lecture at the Interphex exhibition in New York earlier this month, Miller noted that the CMO sector is being pegged back by a number of factors, including a reduction in the willingness of the industry to outsource new molecular entity (NME) production. 

He pointed out that while NME approvals went up in 2011, the proportion of outsourced NMEs declined. For example, one third of injectable NMEs were outsourced in 2011, compared to a 2006-2010 average of a little over 50 per cent. 

Another marked trend in 2011 was an increase in the number of countries granting tax concessions to biopharmaceutical companies which invest in local production, citing initiatives in the UK, Ireland, Hungary, Singapore and Switzerland. 

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This has sparked greater willingness by pharma companies to undertake their own capital investment projects, said Miller. For CMOs this means they have to be able to offer a dramatic reduction in the cost of goods sold (COGS) to match the tax incentives. 

“Manufacturing costs must drop 30% to match tax savings,” he told the meeting. 

Miller also pointed out that the direction the pharmaceutical industry is going, suggests CMOs who fail to adapt their business processes will continue to struggle in the future. Many of the trends in pharma at present – notably niche and orphan products, as well as branded generics – are driving a reduction in unit volumes.

These lower volumes, coupled with technological advancements in the areas of both active ingredient and finished dose manufacturing – which lead to lower capital and operating costs, means smaller CMOs can increasingly compete for commercial-scale contracts. 

As a result the traditional large-scale, large-batch campaign model used by the larger CMOs can ‘become a liability’, said Miller. 

One reaction to the changing environment is a trend towards CMOs offering both API and dosage form manufacturing, in a bid to win contracts by offering a single supplier, reducing supply chain complexity and outsourcing expenses. 

Examples can be seen of this approach among CMOs serving both the small- and large-molecule ends of the market, according to Miller, although he said it remains to be seen if the pharma industry will buy into the concept. 

“New manufacturing requirements and technologies are the greatest threats, not India and China,” he concluded. 

Phil Taylor

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