Shake Your Money Maker

Trending up, readers say their capital spending remains focused on manufacturing excellence

By Steven E. Kuehn, Editor in Chief

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If, by any chance someone out there is still not clear on the concept, the pharmaceutical industry is a manufacturing industry. At the end of the day, the most successful of Pharma’s many players have to do two things really well to be competitive and remain commercially relevant: R&D and manufacturing. Those leading mid-cap biopharmaceutical companies know it to be especially true lately, as do most other players across the Pharma universe striving to go to market in current times with their medicines and therapeutic products.

Making drugs has traditionally been a capital-intensive endeavor, requiring highly specialized, highly regulated manufacturing and processing assets to get the job done. Pharma’s leaders continue to pursue market and financial success through a strategy of careful capital expenditure (CapEx) investment and attention to operational excellence, in an effort to shake the most out of their manufacturing assets.

According to PharmSource analyst Jim Miller, capital expenditure in new plant and equipment by the bio/pharmaceutical industry increased sharply in 2014. “Total spend exceeded $21.4 billion, a 13 percent increase over 2013,” Miller says, “and more than the 11 percent annual increase observed from 2010 through 2013.” Pretty impressive if one agrees capital spending trends reflect the financial health of a given industry.

Accelerating CapEx spending is being fueled by the Bio Pharma sector. According to Miller, investment in captive manufacturing capacity by bio/pharma companies is an indicator of the industry’s intentions with respect to outsourcing. “Based on recent capital expenditure trends, it’s clear that bio/pharma companies would rather “make than buy.” day-to-day operational goals

According to the PharmSource Trend Report, “Bio/Pharma CapEx Trends: Sponsor Spending on In-House Capacity Trounces Outsourcing,” bio/pharma companies invested $118 billion in facilities and equipment during the 2010-2013 period, an amount at least 10 times greater than what CMOs have invested in themselves. Global and generic bio/pharma companies, in particular, have invested heavily in new capacity, especially for biopharmaceuticals and in emerging markets.

Miller says spending by the 25 largest global biopharma companies increased by 10.5 percent to $19.2 billion, while CapEx by the mid-size sector rose 46 percent to $2.2 billion in 2014. “It’s especially notable,” comments Miller, “that a number of mid-size companies that had enthusiastically championed outsourcing are now building captive manufacturing capacity. For instance, Gilead, Alexion, Regeneron and Allergan more than doubled their capital expenditures in the past year, and Regeneron intends to hike spending to $650 million in 2015, up from $333 million in 2014.”

ARC Advisory Group explains a company incurs CapEx — the capital utilized to buy fixed assets or to add to the value of existing fixed assets — to acquire or upgrade physical assets on plant and machinery, land and buildings, property. Most sources agree it is often used to undertake new projects or investments, and these outlays are used to maintain or increase the scope of operations. These expenditures can include everything from energy efficiency retrofits to a building, purchasing new equipment and upgrading or replacing old equipment, adding entirely new processing lines for a new product or building an entirely new factory to meet global or regional demand.

Most all acknowledge that there have been dramatic changes in the pharmaceutical and biopharmaceutical manufacturing landscape over the past decade. Guy Tiene, director of Strategic Research at Nice Insight, notes these changes “have reshaped manufacturers’ equipment and technology needs and purchasing patterns.” The leading trends driving the transformation, he says, include the changing pharmaceutical pipeline, the shift to overseas manufacturing sites, new regulatory guidelines calling for use of the latest technologies to improve quality and efficiency, and a significant increase in outsourcing. Together, says Tiene, these trends have had a significant impact on equipment and technology acquisition strategies.

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