Strong Growth Ahead for Contract Manufacturing

The market was robust in 2015, but for how much longer can it be sustained?

By Nigel Walker, Managing Director, That’s Nice LLC / Nice Insight

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Contract manufacturing organizations (CMOs) of small- and large-molecule drug substances and formulated drug products have had profitable businesses in recent years, including 2015. Growth rates for contract manufacturing have been much higher than that of the market for the pharmaceutical/biopharmaceutical industry due to several factors:

• Increasing consumption of medicines around the world, both in emerging markets as incomes rise and mature markets due to aging of the population;
• A more robust pipeline of drug candidates and an increasing rate of FDA NDA/BLA approvals;
• The growing number of biologic drugs in development, many by traditional pharma companies that lack biotech expertise;
• The entrance of numerous small, virtual startups into the market that have no manufacturing capacity; 
• The rise in patent expiries and increasing generics competition, which is driving a greater need for cost efficiencies and access to novel, proprietary technologies for achieving product differentiation; 
• And the increasing complexity of both small- and large-molecule drugs, such as antibody-drug conjugates (ADCs) and highly potent compounds that require specialized skills and capabilities.

There are questions, however, as to how long such strong growth can continue. Merger and acquisition activity has been rampant among both sponsor companies and contract service providers, leading to real consolidation within both sectors. Several pharma firms have also acquired contract service providers to achieve vertical integration. Others have elected to invest in their own in-house capabilities — often smaller, flexible, multiproduct facilities designed to meet the dynamic needs of today’s marketplace.

Both strategies are designed to limit the need for outsourcing. As a result, contract service providers that wish to attain a similar level of growth going forward will need to find a way to provide measurable added value that sponsor organizations cannot realize on their own. Emerging markets, value-added generics (so-called supergenerics), and biosimilars provide other potential opportunities for growth if contract manufacturers have the global reach and technical capabilities necessary to capitalize on them.

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The global contract (bio) pharmaceutical manufacturing market is predicted by Visiongain (February 2015) to reach $79.24 billion in 2019, increasing at an average annual rate of 7.5% from $54.54 billion in 2013 (1). The market research firm also expects strong revenue expansion to continue through 2025. Key drivers identified by Visiongain include growth of biologic drugs and biosimilars, including the growing demand for novel therapies such as antibody-drug conjugates, treatments based on highly potent active pharmaceutical ingredients (HPAPIs) and regenerative medicines.

The healthy growth of the contract services market isn’t surprising in light of the trends identified by Nice Insight’s annual Pharmaceutical and Biotechnology Outsourcing survey of more than 2,300 outsourcing-facing pharmaceutical and biotechnology executives (2). While the percentage of survey participants whose companies spend more than $50 million on outsourcing has remained fairly stable over the last three years (23 to 24 percent), the percentage of respondents whose companies spend $10 million to $50 million on outsourcing has increased dramatically from 38 percent to 62 percent, while the percentage of participants whose companies spend less than $10 million has decreased by slightly more than half (43 to 16 percent). In addition, the average number of services outsourced by survey participant companies increased from 2014 to 2015, regardless of the buyer group or budget size. See Figure 1.

A continued high level of M&A activity is expected by Visiongain over the next five years, leading to further consolidation of the contract services market (1). The key driver: the desire of contract manufacturers to provide integrated service offerings across the entire pharmaceutical development cycle from discovery to commercialization (APIs and formulated drug products) and lifecycle management. The number of contract manufacturing organizations (CMOs) transforming themselves into contract development and manufacturing organizations (CDMOs) reflects this trend, as does the rise in the number of primary contract manufacturers that have expanded into secondary (finished dose) manufacturing (and vice versa) through mergers or acquisitions.

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