TREND REPORTPart of PharmSource STRATEGIC ADVANTAGE
Contract Dose Manufacturing Industry by the Numbers: Composition, Size, Market Share, Profitability and Outlook – 2015 Edition
Executive Summary1.1 This report characterizes the contract dose manufacturing industry along
a number of quantitative dimensions, including number and type of participants, market size, market shares of the top CMOs and profitability. We also assess the outlook for the industry.
1.2 The contract dose manufacturing universe, for the purposes of this report, includes companies that actively promote themselves as contract manufacturers (CMOs) that produce a client’s formulation for pharmaceuticals supplied to the highly regulated markets in North America, Europe and Japan.
1.3 The contract dose manufacturing universe includes 219 companies headquartered primarily in North America, Europe, Japan and India. Two thirds (67%) of those companies pursue contract manufacturing as their primary business, while the others contract manu facture in facilities where they produce their own products.
1.4 Of the 219 CMOs, 34 constitute global companies in the sense that they have manufacturing and/or business development activities across multiple regions. The majority of CMOs focus on serving their immediate regional market.
1.5 The size of the dose CMO market in 2014 was $ 16.8 billion, a 6% increase from 2013. Organic growth, i.e., without the impact of acquisitions of facilities from bio/pharmaceu tical companies, was 5.4%.
1.6 Standard dose products, including solid dose, semisolid and non-injectable liquids, accounted for 53% of the market in 2014. Injectables accounted for 27% and specialty dose forms, including softgels, transdermal and blow-fill-seal, accounted for 20%.
1.7 The 32 CMOs with revenues of $100 million or more accounted for 71% of dose CMO industry revenues. By contrast, the 156 CMOs with revenues under $50 million accounted for just 19% of industry revenues.
1.8 The average EBITDA margin for CMOs for which profitability data is available was 19.9%; by contrast, the typical large bio/pharmaceutical company has an EBITDA margin of 35%. Larger CMOs appear to have better margins than smaller CMOs.
1.9 Historically the CMO sector has grown at twice the rate of the mature bio/pharmaceutical sector in mature markets including North America, Europe and Japan, although the rate of growth has been slowing. We expect CMO industry growth to slow relative to overall industry growth as we expect the propensity to outsource to remain constant while unit volume per product shrinks and pressures on drug prices intensify.
1.10 CMOs with more aggressive growth expectations will pursue acquisitions of other CMOs, including the acquisition of API manufacturers to create a full service offering. Expansion to emerging markets may be an opportunity for CMOs as well, but high competence in manufacturing operations will remain the key to long-term CMO success.
Industry Structure and Size2.1 This chapter describes the principal characteristics of the dose CMO universe. We define the
universe, analyze its composition and changes to its structure.
Definition of the Dose CMO Universe 2.2 For the purposes of this analysis, the CMO universe includes companies with the following char-
acteristics:
a. They manufacture a client’s formulation for pharmaceuticals supplied to the highly regulated markets in North America, Europe and Japan.
b. They actively promote themselves as contract manufacturers and seek contract manu-facturing relationships, as evidenced by website, trade magazine ads and participation in trade shows.
c. Their contract manufacturing activities are not primarily part of a product or tech nology licensing agreement or a business relationship other than what is typical of a third-party manufacturing relationship.
2.3 This definition excludes a number of manufacturers that other analysts might include as part of the CMO universe:
a. Companies that engage solely in private label manufacturing, i.e., manufacturers who only develop and manufacture formulations that are sold as another company’s brand. These arrangements are quite common in the OTC and generics markets. It should be noted that many OTC and generics manufacturers participate in both the contract man-ufacturing and private label businesses.
b. Companies that manufacture only nutritional supplements or health and beauty prod-ucts.
c. Manufacturers that serve only emerging markets.
d. Manufacturers whose primary business is manufacturing only products formulated using a technology that is patented by and available solely from that manufacturer.
e. Manufacturers supplying products whose rights they have sold to another company.
2.4 Readers should note that, while we hew as closely as possible to this definition, as a practical matter, we are unable to extract all non-conforming activities from the reported or estimated revenues of individual companies in the CMO universe. We feel confident that any resulting over- or understatement of market size will be well within the margin of error for an undertaking such as this that requires a significant amount of estimation.
Industry Demographics2.5 According to the PharmSource Strategic Advantage Database of Contract Service Providers, 219
dose CMOs meet the criteria described above. Those companies can be characterized along a number of dimensions.
2.6 The first dimension is strategic commitment to the CMO business:
a. 145 (66%) are dedicated CMOs, while 74 (34%) operate as part of companies whose primary business is manufacturing and marketing their own proprietary products.
b. 165 (76%) pursue contract dose manufacturing as a strategic business opportunity rather than just an opportunity to absorb excess manufacturing capacity. Included in this list are 22 companies whose primary business is proprietary products but which devote dedicated resources to the CMO business.
2.7 A second dimension is the geographic scope of the CMO’s business (Fig 2.1).
a. 34 CMOs (16%) are designated as global for one or more of the following reasons:
i. They have manufacturing facilities on multiple continents;
ii. They have business development operations on multiple continents, including sales staff;
iii. They manufacture products for customers outside their home geographic region and/or ship a substantial volume of their output outside of their home geographic region.
b. 185 (84%) CMOs are regionally-focused CMOs, i.e., they service customers and ship product primarily in their home and nearby countries, with the distribution as follows:
iv. 120 in Europe
v. 51 in North America
vi. 12 in Japan
vii. 2 in other regions
Figure 2.1Geographic Reach of Dose DMO Universe
Source: PharmSource Strategic Advantage Database of Contract Service Providers
c. While the CMO universe is global, there is a significant concentration of facilities in Europe. The majority of CMOs are either located in or have facilities in Europe:
viii. 122 (56%) have facilities in Europe.
ix. 72 (33%) have facilities in North America.
x. 14 (6%) have facilities in Japan.
xi. 13 (6%) have facilities in the rest of the world.
d. The large number of facilities in Europe reflects several factors:
i. “Europe” is in fact multiple countries, each of which has its own domestic market, including local bio/pharmaceutical companies that operate primarily in that market. Many CMOs in Europe primarily or exclusively serve their domestic market.
ii. Prior to the formation of the European Union it was common for bio/pharma companies to establish manufacturing facilities in every country, for regulatory, financial and political reasons. With the establishment of the European Union, many of these facilities became redundant. Due to labor relations, regulatory and political considerations, most companies have found it expedient to convert those facilities to CMOs, by selling them for nominal consideration either to established CMOs or to management groups.
iii. Because the US is a large unified market, there has never been the large number of facilities there as there has been in Europe. There were a number of facilities serving the Canadian market, but with the advent of NAFTA many of those facilities have transitioned to CMOs.
2.8 150 (68%) offer services in just one dose category, while 69 (32%) offer services in multiple dose categories.
a. 167 (76%) offer standard dose (solid, semisolid and liquid dose forms);
b. 91 (42%) offer injectables;
c. 35 (16%) offer specialty dose forms including softgel, transdermal, inhalation, and blow-fill-seal.
2.9 There are 32 CMOs with revenues in excess of $100 million; they represent 15% of all the CMOs in our universe. The majority of dose CMOs are small, with revenues less than $25 million (Figure 2.2).
2.13 Of the 12 facility acquisitions, the three by Delpharm and two by Fareva are particularly notable (Table 2.2). Both companies have pushed themselves into the top tier of CMOs (as measured by revenues) by aggressively acquiring facilities from global and mid-size bio/pharma compa-nies. However, France and Belgium already had 51 CMOs and 79 facilities before those acquisi-tions, indicating that the two companies have increased their exposure in two countries that already have a lot of capacity and that can be difficult for labor relations. Fareva’s acquisition of the Pfizer facility in Amboise appears to have brought along a significant amount of revenues, however, which will fully be reflected in its 2015 results.
2.14 One other facility acquisition worth noting is Unither’s acquisition of the UCB facility in Roch-ester, NY, USA. This marks Unither’s first presence in the US market and can be a foothold for expanding its presence there. Most of the largest European CMOs have minimal or no presence in the US despite its superior market opportunities and most seem reluctant or unable to make the move.
Table 2.2 CMO Acquisitions of Bio/Pharmaceutical Company Facilities 2012-2014
2.15 CMOs acquisitions of other dose CMOs. Consolidation is a major theme in the dose manufac-turing industry. There were 18 deals involving CMOs buying other CMOs, including one in which the buyer was actually a contract packager buying its first manufacturing business. While deal valuations were not announced for all of the acquisitions, PharmSource estimates the total value of the deals done at $1.50-2.00 billion.
2.16 Several deals had particular significance for the industry.
a. Aenova made four acquisitions of which two, Temmler and Haupt, added nearly $500 million to its revenues and pushed it into the top three of dose CMOs. The Haupt acqui-sition also gave Aenova injectables and cytotoxics capabilities. The company currently appears focused on consolidating its facility network.
b. Patheon plugged several major holes in its offerings as well as adding $350 million in revenues with its acquisition of Banner Pharmacaps and merger with DSM’s Pharma-ceutical Products business. The DSM deal created a CMO with substantial injectables capabilities in both Europe and the US, and formed the basis for a full service offering including small and large molecule API to complement the dose manufacturing.
c. Siegfried acquired two injectables CMOs to complement its API and solid dose capa-bilities and pushed its contract dose manufacturing revenues to nearly $150 million. Neither acquired company was a significant player in injectables so it may take some years to realize the full strategic potential of the deals.
d. AMRI acquired Oso Biopharmaceuticals, significantly enhancing its injectables capabil-ity but still leaving it below the $100 million threshold in dose manufacturing.
e. Catalent, the largest of the dose CMOs, completed three smaller deals but those were noteworthy because they enhanced its position in solubility enhancement, ADCs and emerging markets.
Kemwell Biopharma 2013 Cirrus Pharmaceuticals, Inc. ND Formulation development for inhalation and injectables
Patheon2012 Banner Life Sciences $ 269 M Softgels with proprietary
products
2014 DSM Pharmaceutical Products US-based solid dose and injectables, APIs in Europe
Recipharm2014 Lusomedicamenta $ 135 M Portuguese CDMO with
proprietary products
2014 Corvette Group Pharmaceutical Services S.p.A. $ 160 M Injectables with prot
Siegfried Holding AG2014 Hameln Pharmaceuticals GmbH $ 61.8 M Injectables
2012 Alliance Medical Products $ 58 M Injectable and non-injectable sterile products
Synerlab Group2012 Lyofal ND Lyophilization development
2012 IDD-Tech ND CMC development
Packaging Coordinators (PCI) 2014 Penn Pharmaceutical Services Ltd. $ 216 M High potency solid dose
2.17 CMO exits. In the 2012-2014 period, a number of CMOs closed, were acquired by their phar-maceutical clients, or changed their focus to internal product development and manufacture (Table 2.4). The overall impact on industry revenues and capacity is minor, but the events reflect broader developments in the bio/pharmaceutical industry, especially the need for in-house capacity to manufacture proprietary products.
2.18 At the time of publication, the fate of Hospira’s One2One business had not been announced pending the closing of Pfizer’s acquisition of Hospira. However, indications are that initially, at least, the One2One CMO business will continue to operate as it has up to this point.
Table 2.4 Exits from the Dose CMO Sector 2012-2014
CMO Target Services Reason
Akorn Injectables
Capacity withdrawn from CMO market to focus on own products
Hitech Pharmacal capacity withdrawnafter acquisition to focus on own
products
Acquired Excelvision from Fareva forown product manufacture
Bayer Contract Manufacturing Multiple dose forms CMO discontinued in favor of internal products
B-I Contract Manufacturing Multiple dose forms CMO discontinued in favor of internal products
Ben Venue Laboratories Injectables Compliance issues; closed
Exemplar Pharmaceuticals Inhalation Compliance issues; acquired by client (Amgen)
Medreich Injectables, solid Acquired by Meiji Seika Pharma for capacity
Montefarmaco Solid dose Out of business
Norwich Pharmaceuticals Solid dose CMO focus diminished in favor of internal products
Par Pharmaceuticals Injectables CMO focus diminished in favor of internal products
Pharmalucence Injectables Acquired by Sun Pharmaceuticals for capacity
SCM Pharma Injectables Compliance issues; acquired by client (Shire)
Weimer Injectables, solid dose Closed after financial losses
Private equity investment activity2.19 Of the more than 200 CMOs in our universe 10% (20) are owned by private equity companies.
Private equity investors continue to be attracted to the CMO space, drawn by the perceived growth opportunities and the ability to saddle these capital-intensive businesses with debt in order to pay dividends to investors.
2.20 There were three private equity deals in 2012 and four deals each in 2013 and 2014 (Table 2.5).
a. Six of the 11 deals involved one private equity investor acquiring the stake of an earlier private equity investor; these were generally large deals where the acquired CMO had revenues of $100 million or more and did not result in a significant change in strategy or investment plans at the acquired company.
b. Four of the deals involved the acquisition of small- to mid-size specialty manufactur-ing operations, all of which offered development and manufacturing services aimed at poorly-soluble drugs.
2.21 The deals that were done in the 2012-2014 period did not directly impact the size of the industry, but in several cases the investors have made additional capital available that will fuel future growth. This was especially true at Patheon, where the private equity investors financed a series of significant acquisitions in the first 12 months of private ownership, adding API manu-facturing capabilities to the company’s dose manufacturing offerings.
Industry Size and Growth2.22 PharmSource estimates the size of the dose CMO market in 2014 to have been $16.8 billion. That
represents a 6.0% growth rate over the $15.9 billion we esti mated for 2013 (Fig 2.3).
2.23 Of the $900 in incremental industry revenues, we estimate that $800 million was organic, i.e., was a result of new products being contract manufactured or higher volumes of existing contract manufactured products. That represents organic growth of 5.4%
2.24 The remaining $100 million came from the facilities acquired from bio/pharmaceutical com-panies by CMOs. The facility acquisitions were meaningful to the overall growth in the industry during the 2012-2014 period, contributing about $300 million to industry growth by our esti-mates.
2.25 Standard dose products, which include conventional solid, semisolid and non-injectable liquid products, account for 55% of CMO revenue, while injectables account for about 26% (Figure 2.4). Specialty products account for 19%; these include softgel, transdermal, and inhalation products, plus products manufactured using the blow-fill-seal process.
2.26 CMO revenues are reflected as Cost of Goods Sold on the books of their clients, so comparing CMO revenues to cost of goods for all bio/pharmaceutical sales is an indicator of contract dose manufacturing’s penetration into the industry. PharmSource estimates that dose CMOs account for about 33% of the bio/pharmaceutical industry’s dosage form cost of goods.
2.27 The foregoing analysis portrays an industry evolving toward maturity. The number of partici-pants is consolidating as some companies get acquired and others exit. The exits are particu-larly noteworthy, in part because they point to a growing demand for capacity at the global and generic bio/ pharmaceutical companies; and in part because they show that contract manufac-turing has matured beyond simply a “capacity game” to a genuine service industry that requires dedicated infrastructure for project management, tech transfer and customer service.
2.28 The analysis is also interesting because of what it tells us about the nature of the bio/phar-maceutical industry. While the global and large generic companies dominate the headlines, the industry also contains hundreds, perhaps thousands, of small companies that serve niche
Figure 2.4 Dose CMO Dosage Form Segments ($ billion)
markets, including individual countries or sub-regions. While we often focus on the big dollar new molecular entities that are typically promoted to a global patient base, most of the products on the market are niche products for which revenues of a few hundred thousand dollars or a few million dollars are attractive opportunities. These are not products on which a Patheon or Catalent is built, but they provide sustenance for many small CMOs.
CMO Market Shares3.1 This chapter describes the distribution of market share within the dose CMO industry and
analyzes the characteristics of the market share leaders.
3.2 At the end of 2014 there were 32 dose CMOs with revenues of $100 million or more. Those 32 CMOs accounted for 71% of dose CMO industry revenues, although they represent just 15% of all CMOs (Figure 3.1). By contrast, CMOs with revenues under $50 million accounted for 71% of all CMOs, but just 19% of industry revenues.
3.3 Our “league tables” of CMOs with revenues of $100 million or more grew from 31 in 2012 to 32 in 2014, and some of the rankings changed as a result of acquisitions and organic growth. In 2014 32 companies exceeded $100m in revenue, compared to 31 in 2012. However as a consequence of both organic and inorganic growth, several companies are now in a higher revenue range (Table 3.1).
a. Four companies were added to the list including Siegfried, Hermes, 3M Drug Delivery and Doppel. Siegfried joined the list after its acquisitions of AMP and Hameln, while the others were added as previously unavailable revenue data became available.
b. DSM and Haupt left the list after being acquired (by Patheon and Aenova, respectively). Takeda was dropped as data from the former Nycomed contract manufacturing busi-ness is no longer available and the business appears to have been de-emphasized by Takeda.
Figure 3.1Dose CMO Industry Market Shares by Company Size
c. Vetter moved up as its revenues now exceed $500 million thanks to organic growth. Delpharm and Bushu moved up in rank thanks to facility acquisitions that pushed them into the next tier.
Characteristics of the largest CMOs3.4 As might be expected, the 32 largest dose CMOs have different characteristics from the
remainder of the CMO universe.
a. All but one approach the CMO business as a strategic opportunity, rather than just an opportunity to absorb unused manufacturing capacity; that judgment is based on the way they promote the business and their infrastructure to support it. By comparison, 72% of the smaller CMOs approach contract manufacturing as a strategic opportunity, while 28% view it as an absorber of excess capacity.
b. Two-thirds of the largest dose CMOs participate in more than one dose form category, while just 26% of smaller CMOs offer more than one dose category.
c. 50% of the largest CMOs compete on a global level versus just 10% of the smaller CMOs. The modest share of CMOs that can be considered global reflects the 12 CMOs with revenues of $100+ million that are focused primarily on the European market, and the three that are focused on the Japanese market. While those CMOs may have a few approvals in North America, their operations and business development efforts are focused in their home regions.
3.5 The 14 very largest CMOs (Figure 3.2), i.e., those with revenues of $250 million or more, exhibit characteristics that one might expect of market share leaders.
a. All approach the contract manufacturing business as a strategic business opportunity even though two are part of organizations with very large proprietary products busi-nesses.
b. Ten offer manufacturing capabilities in at least two dose form categories. The four others focus exclusively on injectables and are the four largest injectables manufactur-ers in that segment of the industry.
c. Nine (64%) can be considered to compete on a global basis. Three compete primarily in Europe, one in Japan and one in North America (DPT).
3.6 Acquisitions have played an important role in the growth of the 14 largest dose CMOs:
a. Five have acquired facilities from bio/pharmaceutical companies in the past three years; and
b. Four have acquired other CMOs in the past three years.
3.7 Most of the 14 largest CMOs have grown at a slightly slower rate than the overall market: 4.7% in 2014, and 6.1% p.a. average for the two years 2013-2014. CMOs with revenues of $100-249 million were more likely to have above-average growth rates.
CMO Profitability4.1 Analysis of CMO profitability faces a number of practical limitations.
a. Most CMOs do not report their financial results publicly, and those that do may only report revenues, and not profitability. Private companies operating in many European countries are required to file financial statements with government registries, but this is not the case for companies in the US and Canada.
b. It may not be possible to gauge the profitability of the CMO business separate from other activities the company engages in.
c. Accounting rules and terminology differ from country to country.
4.2 Accepting these limitations, we have been able to develop profitability measures for 25 of the companies in our CMO universe. We continue to use earnings before interest, tax, depre ciation and amortization (EBITDA) as our measure of profitability.
4.3 Our analysis showed that the average EBITDA margin for the 23 CMOs in 2013 was 16.8%. Three CMOs had margins in excess of 20%, while 15 had margins below 10%. For the 14 companies that have provided 2014 data, EBITDA increased to 18.9% (many smaller companies have not yet reported their 2014 figures). This is a significant improvement on the 2012 average of 12%.
4.4 The correlation between CMO size and profitability (Figure 4.1) which we reported in 2013 still holds. The three CMOs with revenues in excess of $250 million had the highest margin. Mid-size CMOs ($100-250 million) had the lowest margins, while the smaller CMOs were somewhat below the average.
4.5 To provide some context for these CMO margins, it should be noted that the average EBITDA margin for the global bio/pharmaceutical companies (the 25 largest bio/pharma ceutical companies) is 35%, i.e., around twice as much as the CMO average.
Figure 4.1 CMO Profit Margins by Company Size
Source: PharmSource analysis of public filings
Figure 4.1CMO Profit Margins by Company Size
$250+ M 22.4%$100-‐249 M 8.5%$50-‐99 M 19.4%<$50 M 11.3%Overall Average 19.9%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
$250+ M $100-249 M $50-99 M <$50 M Overall Average
The Outlook for the Dose CMO Industry5.1 If and how dose CMOs can grow in the future is a major preoccupation for CMO executives and
investors; many CMOs have aggressive growth targets. CMO growth will depend on the prospects for the industry overall, and on the effectiveness of a CMOs’ strategy and execution. In this chapter, we provide further analysis of the prospects for the dose CMO industry and in the next chapter look at the implications of industry growth for individual CMO strategies.
5.2 Forecasting the outlook for any given CMO is challenged by the fact that CMOs have so little influence over the fate of the products they manufacture: the best they can do is manage the risks inherent in clinical performance, regulatory approval and market acceptance. For the industry as a whole, however, those risks are diversified away and we can identify and assess macro drivers that will determine the ability of the industry to grow, namely:
a. The propensity of bio/pharma companies to outsource approvals;
b. The number of new product approvals and potential volume per approval;
c. Acquisitions of facilities from bio/pharma companies;
d. Efforts to control drug costs.
Propensity to outsource5.3 Dose CMOs can drive growth if they can convince clients to outsource a greater share of their
requirements. CMO executives typically note that in-house manufacturing is their biggest competitor, more so than any other CMO, so understanding propensity to outsource is central to understanding the industry’s outlook.
5.4 Over the past 10 years about 45% of all NDA approvals, both new molecular entities and new formulations of older drugs, have used CMOs to manufacture their dose form. While there has been some year-to-year variation around that 45% figure, it has stayed remarkably consistent over the period. Small commercial bio/pharma companies have been most likely to outsource dose manufacturing, while global and generic bio/pharma companies have the lowest propensity to use CMOs (Figure 5.1).
5.5 Small commercial bio/pharma companies, which have accounted for about 25% of all NDA approvals over the past six years, already outsource about 75% of their dose manufacturing requirements. Small companies are the most capital constrained and the least likely to be able to afford the overheads of running a GMP manufacturing operation, so we would expect their propensity to outsource to be high. Given the already-high penetration of CMOs among small bio/pharma companies, the dose CMO industry is unlikely to get much of a boost from that market segment.
5.6 Global and generic bio/pharmaceutical companies have historically had the lowest propensity to use contract dose manufacturers, using CMOs to manufacture just 25-30% of their newly-approved NDAs. Global bio/pharma companies have accounted for 33% of all NDA approvals in the past five years, while generic companies have accounted for 22% (mostly 505 (b)2 products) so an increased propensity to outsource by those companies would have considerable impact on the dose CMO industry’s fortunes.
5.7 However, recent capital expenditures (capex) by global and generic bio/pharma companies suggest that their preference for in-house manufacture will continue. After declining in the face of uncertainty caused by the patent cliff and global financial crisis, spending on plant and equipment by global bio/pharma companies is growing again. Capex by the 25 largest bio/pharma companies grew 13% in 2013, and 11% more in 2014 to $19 billion (Figure 5.2). The $19 billion represented just 11% of the operating cash flow generated by those companies, meaning that increased level of spending did not crimp their ability to fund acquisitions, partnerships, dividends and share buy-backs. Capital constraints are not an outsourcing driver for global bio/pharma companies.
Figure 5.1 Propensity to Outsource Dose Manufacture 2009-2014
Source: PharmSource Strategic Advantage database
Figure 5.4Propensity to Outsource Dose Manufacture of NDAs
5.8 Expenditures by major generic bio/pharma companies have been relatively flat (Figure 5.3), but merger and acquisition activity among generics companies has created some very large manufacturing networks that will have to be rationalized. The need to utilize those facilities will limit the propensity to outsource by the generics companies.
Figure 5.2 Capital Expenditures by Global Bio/Pharma Companies
Source: PharmSource analysis of public data
Figure 5.5Capital Expenditures by Global Bio/Pharma Companies
5.9 The large amount of capital expenditures have gone into API and R&D facilities as well as dose manufacturing capacity, especially new or expanded facilities to manufacture vaccines and therapeutic biologics. But the level of investment reflects the general and long-held preference to control the supply chain by manufacturing in-house. Global bio/pharma companies are also investing in continuous manufacturing capabilities, a technology that CMOs have not pursued aggressively.
5.10 Mid-size bio/pharma companies have traditionally been CMOs’ best customers but they are also investing more in in-house capability (Figure 5.4). Low capital costs and commercial success have provided greater financial resources to mid-size and small commercial companies for capex. These companies may present the greatest challenges to the CMO business.
5.11 The recent news that Biogen-Idec is acquiring the manufacturing assets of Eisai in Research Triangle Park, NC, is a powerful example of this trend. Biogen-Idec has long pursued a model of manufacturing its API in-house while depending on CMOs for its drug product manufacture. Several years ago the company leased part of the Eisai facility to manufacture its first solid dose products, and it has now taken over the entire facility, including the injectables manufacturing areas. While the Eisai site will manufacture only a small portion of Biogen-Idec’s total requirements, the move represents a momentous change in strategy and one that CMOs must view with concern.
5.12 In addition to their capital investments in capacity, global and generic bio/pharma companies have been withdrawing capacity from the CMO market in order to devote that capacity to in-house requirements (look back to Table 2.4). Bayer and Boehringer-Ingelheim, which were offering their excess capacity for contract manufacturing, have withdrawn from the market (B-I still offers biologics API contract manufacturing). Other companies, including Par
Figure 5.4 Capital Expenditures by Mid-Size Bio/Pharma Companies
Source: PharmSource analysis of public data
Figure 5.6Capital Expenditures by Mid-‐Size Bio/Pharma Companies
Pharmaceutical and Norwich, have demoted contract manufacturing from a strategic business to an excess capacity business. Further, companies that were active in the contract manufacturing space have been acquired and withdrawn from CMO activity including Pharmalucence (acquired by Sun Pharmaceuticals) and Ben Venue facility (acquired by Hikma). While the capacity implications of these withdrawals have been marginal, they reflect the preference to produce products in captive facilities.
5.13 Tech transfers of established products from captive bio/pharma company facilities to CMOs are a part of the mix, but there are no indications that this activity has been increasing. Typically, tech transferred products are declining late-lifecycle products that sponsors move to make room for new products or as part of plant closings. While volumes for these products are highly predictable, those volumes are usually declining. Further, global and mid-size companies are just as likely to transfer manufacture of established products into their facilities from CMOs as they are to outsource established products, so transfers are not necessarily a net gain for CMOs.
New product approvals5.14 Even if the share of products manufactured by CMOs does not grow, an increase in the number of
new products can drive CMO industry growth. This is an area of great optimism across the bio/pharma industry.
5.15 While no one can predict with certainty the number of new drugs likely to be approved in the next five years, there are certainly indicators that suggest a jump in approvals is in the offing:
a. Early stage bio/pharma companies have raised enormous amounts of funding in recent years;
Figure 5.5 Funding by Early Stage Bio/Pharma Companies
Source: PharmSource Lead Sheet
Figure 5.3Funding of Early Stage Bio/Pharma Companies
d. Growing numbers of candidates are being granted orphan drug or some other priority designation. Candidates receiving such designations have a greater chance of approval and PharmSource analysis suggests that they have a greater likelihood of being outsourced to a dose CMO.
5.16 While enthusiasm seems warranted, there are countervailing factors that suggest that the enthusiasm should be tempered:
a. The annual number of NDA and BLA approvals by FDA has averaged 90 approvals for the past 20 years. The number has ranged as low as 79 to a high of 104 but it has been markedly consistent (Figure 5.8). The 104 approvals in 2014 were a recent high point, but was only 1 more than were approved in 2006. So a significant increase in approvals would be historic.
b. The typical product size, measured by number of units (not revenues) has declined dramatically as new products are finely targeted at patients meeting well-defined criteria; and as payers restrict access because of the high prices of the new drugs. This development is commonly cited by CMO executives as an issue of concern.
c. At the same time, the processing requirements for many new candidates are getting more complex. Specialized packaging (e.g., autoinjectors, pumps) and processing requirements (e.g., solubility enhancement, nano formulations) are requiring investments in new technologies and know-how. For CMOs that have, or can afford, the equipment and know-how, these developments promise higher unit prices that partially
offset the lower unit volumes. But most CMOs are unlikely to be able to offer a broad range of these technology offerings.
d. A significant portion of the new product candidates involve technologies that are unknown or not well-suited to traditional CMOs, for instance, autologous cell and gene therapy products and viral vaccines.
5.17 Further, it should be noted that much of the CMO capacity is not well-suited to the new products coming through the pipeline. Most CMO facilities are legacy facilities built in a different generation for simpler products and longer runs. Those facilities often have high costs and long time requirements for product changeovers, and require substantial indirect labor.
5.18 So the outlook is for more products with smaller volumes per product and more sophisticated processing requirements.
Acquisitions of facilities from bio/pharma companies5.19 Acquisition of facilities from bio/pharmaceutical companies has been an important contributor
to CMO industry growth. We calculate that facility acquisitions accounted for as much as 15% of the industry’s growth in the past 3 years.
5.20 Twelve bio/pharma company facilities were acquired by CMOs during 2012-2014 period, but it is notable that the number of such deals declined across the period, from six in 2012 to just two in 2014 (look back to Table 2.1). Further, facility acquisition has largely been a European phenomenon, as eight of the 12 acquired facilities are located in Europe and nine of the 12 acquired facilities were acquired by European CMOs.
5.21 There are likely to be a lot of bio/pharma company manufacturing facilities in the next few years thanks to industry M&A activity, especially among the large generics companies. The merged companies will be rationalizing their manufacturing networks by divesting unneeded facilities, probably at very low valuations. While private investors will be tempted to acquire these facilities and turn them into CMOs, we doubt that CMO industry leaders and experienced CMO investors will be very active in acquiring those facilities. CMOs have become much more selective when acquiring facilities from bio/pharma companies, and the next batch of facilities is likely to be pretty unattractive:
a. Most of the divested facilities will be solid dose or small molecule API manufacturing facilities. There appears to be sufficient capacity for those products in the CMO industry and most CMOs will not be looking for additional capacity unless it comes with contracts for significant volumes.
b. However, most of the divested facilities are unlikely to be sold with long-term supply agreements. Generics companies need to keep costs low and will be anxious to fill capacity at the sites they are retaining.
c. Many of the facilities will be in Europe, where CMO competition and drug pricing pressures are already fierce. A few European CMOs may want to enhance their access to local/regional markets where they currently have no presence (e.g., a company with assets in France willing to acquire a facility in Germany). But most European CMOs already have sufficient capacity, especially in solid and semisolid/liquid dose forms; and US-based firms are unlikely to find the European market attractive.
5.22 There will probably be a number of facilities available in North America, but it is much easier to simply shut down a manufacturing operation there than in Europe. Further, there have been a number of generics facilities on (and off) the market in North America that have not sold, including the Caraco facility in Detroit and Bayer’s St. Joseph, Missouri, facility (actually a veterinary facility), because they are older and/or have a legacy of problems.
5.23 We could see some facility sales to CMOs in Japan, where bio/pharma companies have been slower to address facility rationalization.
5.24 Our conclusion is that facility acquisitions will not be a significant driver for CMO industry growth as it has been in past years.
Efforts to control drug costs5.25 CMOs will not be shielded from the market challenges faced by their customers, especially the
efforts by governments and health insurance companies to control expenditures on drugs. Those efforts have resulted in limits on patient access to new drugs, and draconian measures to keep the lid on prices of older drugs.
5.26 PharmSource estimates that in the period 2010-2013 drug product CMOs had to forego more than $350 million in annual revenue in the UK and Germany alone because of refusals to cover new drugs (PharmSource Trend Report, “Not So Nice: How Market Access Schemes Impact the CMO Sector,” July 2014). In those countries government agencies (NICE in the UK, IQWIG in Germany) make explicit cost/benefit calculations to determine whether a new drug should be covered and at what price. In the US, private pharmacy business management companies like Express Scripts and CVS are now publishing lists of drugs that they will no longer reimburse, and are negotiating exclusive formulary including arrangements in exchange for deeply discounted prices.
5.27 Drug market research firm IMS Health is projecting that governments in the major European countries will hold down the rate of growth on their expenditures on drugs to just 1-2% annually between 2014 and 2018. That low rate of growth means that prices of older drugs will have to be suppressed in order to enable coverage of expensive new drugs. Already, countries are abandoning “branded generics” in favor of commodity generics by expanding the tender process for supplying drugs to government dispensaries. Tendering is a brutal process in which prices are forced down and large blocks of business can move from one supplier to another in a very short time.
5.28 The impact of that tendering process was made clear when, in its 2014 annual report, Siegfried revealed a nearly 20% drop in drug product manufacturing revenues because a key client had lost a government tender.
5.29 The CMO industry has grown at healthy pace over the past five years thanks to the growth in new products and acquisitions of facilities from bio/pharmaceutical companies. That growth rate has been declining in recent years, however, and we expect the growth rate to decline further in the next 2-5 years (look back to figure 2.3).
5.30 As we noted in the preceding analysis, the propensity of bio/pharmaceutical companies to outsource drug product manufacturing is unlikely to increase significantly as the major industry segments with the most room for growth are investing heavily in new in-house facilities. While the number of new products may grow, those products will generally have smaller unit volumes than older therapies due to their underlying science and high price, and may require specialized
capabilities that only a few CMOs will be able to offer. Finally, payer efforts to rein in drug costs will put pressure on bio/pharma companies’ cost of goods and put pressure on the prices they are willing to pay CMOs.
5.31 Given the headwinds the industry is facing, we expect the dose CMO industry’s growth to track more closely to the overall growth of the bio/pharmaceutical industry, i.e., 4-5% annually over the next 3-5 years (blended North America and Europe).
Strategic Responses6.1 The dose CMO industry has had a good run over the past five years. It has grown at twice the rate
of the bio/pharma industry overall, in the process building a network of large robust companies with broad capabilities and adept management. Both private and public investors have recognized the progress and maturity of the dose CMO industry by the substantial valuations they have accorded recent IPOs of dose CMOs.
6.2 As we laid out in the last chapter, we believe that the dose CMO industry will continue to demonstrate organic growth but probably not much faster than the bio/pharmaceutical industry overall. That may satisfy many of the small- to mid-size companies but it won’t be sufficient for executives and investors in large CMOs who have seen the performance of clinical CROs and believe there is a lot more upside in contract manufacturing.
6.3 Size delivers economies of scale, which enhance profitability, and breadth of capability and capacity improves a CMO’s position as a strategic partner to global bio/pharmaceutical companies. Further, growth is as much about defense as it is about offense: because CMOs exercise so little influence over the success of products they manufacture, size provides diversification against the risk of clinical and commercial failure, making CMO success independent of the success of any one or a few products.
Industry consolidation6.4 The drive to higher growth rates will continue to propel industry consolidation, experimentation
with new business models, and new value-adding strategies.
6.5 Acquisitions of dose CMOs by other dose CMOs will continue so long as they offer real promise of strategic growth such as expanding the geographic footprint or adding new dose forms and technologies. We also expect to see more mergers between mid-size CMOs as they seek to get larger and enhance their competitive positions.
6.6 Acquisitions in North America by European CMOs would be a natural development given the relative attractiveness of the US market compared to Europe, but the prospects for such deals are limited by the paucity of meaningfully-sized targets in North America, and the devaluation of the Euro versus the US dollar, which makes US acquisitions by European companies very expensive. North American and global CMOs might be put off from European acquisitions by the difficult business environment there (low reimbursement, lots of CMO competition, greater regulation) except for companies with specialized capabilities. So combinations among European CMOs are the most likely scenario. Acquisitions in non-traditional locations, including Japan and the emerging market countries, might be more attractive.
Full service manufacturing6.7 Acquisition will be the primary tool for building the preeminent new business model in the
industry, the full service CMO, also known as the “one-stop shop.” The full service model offers manufacture of both the API and dose form from a single source and promises a number of strategic advantages to the CMO including:
a. Capturing more value per customerb. Offering customers a less complex procurement modelc. Entry into adjacent businessesd. Synergies and cost savings in sales and marketing.
6.8 A growing number of CMOs are positioned to become full service providers (Table 6.1), although many have yet to truly integrate their business development and project management activities.
Table 6.1 CMOs Pursuing the Full Service Model
CMO Inject Solid Dose Other Dose Chemical API Biologic API
6.9 Most CMOs that are pursuing the strategy don’t expect full service stop customers to comprise a high share of their customer base. For that reason, the acquired businesses must be able to stand alone in terms of capabilities, performance and reputation. Full service CMOs run the risk that a bad experience in the API area could have a negative impact on the dose part of the business. The expression “a chain is only as strong as its weakest link” applies directly to the full service model.
Value-added offerings6.10 Another business model that more CMOs are following is that of adding value by offering
knowhow and technologies that enhance drug delivery or improve the manufacturing process. The rationale for this model is that by offering bio/pharmaceutical companies the ability to differentiate their products, enhance product performance, or reduce costs, CMOs can generate superior growth and margins by charging fees that capture some of that improved performance. Catalent has been the primary proponent of this strategy, but technology is becoming a component of the offering of more top-tier CMOs.
6.11 The value-enhancement model has the potential to offer significant benefits, but it is not without risks. Acquiring a portfolio of proprietary technologies requires significant investment for development and/or acquisition, and runs the risk of offering “solutions in search of problems.” An offering based on knowhow can be applied to a wider array of product opportunities, but requires a critical mass of experience to be credible.
New markets6.12 Most of the major CMOs have not ventured from the mature markets of North America and
Europe, but emerging markets may represent a better long-term opportunity. According to IMS Health, bio/pharma company revenues in the major European countries are expected to grow about 2.5% annually over the 2014 -2018 period, while the US is projected to grow at a rate of 5-8% during that period. By contrast IMS Health expects emerging markets to grow 8-11% over the same period.
6.13 The emerging market opportunity derives not just from the higher growth rates, but also from local content laws and regulations that in many countries compel bio/pharma companies to undertake at least some manufacturing steps in-country. Prominent examples include Turkey, Indonesia, Vietnam and Saudi Arabia. Sales levels make it uneconomic for most bio/pharma companies to have dedicated facilities in each of the countries, so companies are looking for local manufacturing and packaging options. However, there is not an established CMO industry in most of those countries, so global companies without local facilities must look for companies willing to offer their excess capacity for contract work. Those companies usually lack the infrastructure (contract, project management, customer service) to support a contract services offering.
6.14 A limited number of companies with strategic commitment to the dose CMO business have operations in emerging market countries, mostly in Latin America. While establishing an operation in a country like Indonesia or Vietnam entails business and political risks, CMOs with strong relationships to global bio/pharma companies might be able to leverage those relationships to establish a presence in some of those markets.
6.15 The emerging markets opportunity is highly speculative and we do not believe it will be a driver of dose CMO industry growth in the foreseeable future.
Proprietary products6.16 One strategy that we had expected to take hold but has not is the development of proprietary
products. Several years ago it seemed that dose CMOs would embrace developing proprietary products as a means of gaining greater control over their business prospects. That “trend” was exemplified by Patheon, which in 2012 acquired softgel manufacturer Banner PharmaCaps whose line of proprietary OTC products generated more revenues than its contract manufacturing business. Patheon justified the deal in part on the opportunity to build its own product line, and set about building up a product licensing and sales organization. However, as noted in the prospectus for its initial public offering, the company has elected to divest its proprietary products business.
6.17 A few dose CMOs, notably Recipharm, continue to pursue proprietary product acquisitions, usually in the context of acquiring other CMOs with small product lines of their own or by investing in client products. But most CMOs that are not just selling excess capacity have eschewed the proprietary product business.
6.18 It would appear that CMOs have found that there is much more to the products business than developing and manufacturing formulations. That business requires considerable investment for product development and acquisition, and developing a sales capability. Further, gaining market share in established product categories is a lengthy and expensive process. Most CMOs appear to have decided that whatever the challenges of the CMO business, “the devil you know is better than the devil you don’t know.”
Manufacturing effectiveness6.19 While acquisitions and new markets are important strategy components, the most important
strategic initiative for CMOs continues to be “manufacturing effectiveness,” i.e., being very good at running manufacturing operations. Ultimately, the benefits that customers value most – low cost, on-time delivery, flexible scheduling, quality and compliance – depend on how well CMOs run their manufacturing operations. Manufacturing effectiveness is the key to repeat business, company reputation and accommodating growth without major capital expenditures.
6.20 CMOs have implemented initiatives like Lean Six Sigma they have made significant progress in improving manufacturing effectiveness, and customers have come to expect those programs when deciding whether to engage a CMO. However, flexible scheduling continues to be a challenge, and is one of the biggest reasons why a small or mid-size bio/pharmaceutical company might just to build its own facility rather than engaging a CMO.
Methodology for Market Size and Growth Estimates A.1 PharmSource’s estimates of the dose CMO market size and market shares are generated by our
proprietary contract dose manufacturing model, which determines the market size based on the revenues of CMOs listed in our PharmSource Strategic Advantage database.
A.2 PharmSource Strategic Advantage database is a comprehensive database of contract manu-facturers and CMC development services providers.
a. It includes detailed profiles on more than 340 dose CMOs and 550 dose manufacturing sites in North and South America, Europe, Asia, Africa and Australia.
b. Each profile includes:
i. Detailed capability information;
ii. Products manufactured by the CMO;
iii. Known clients;
iv. Mergers, acquisitions and alliances;
v. Financial information (where available); and
vi. Key executives and contacts.
A.3 To determine a company’s contract manufacturing revenues we use publicly available records wherever possible.
a. For public companies, we use regulatory filings, investor presentations and disclosures on company websites.
b. Many privately owned companies reveal their revenues on their websites or in media interviews. For privately owned CMOs based in the UK, Ireland, Germany, France and Italy, we have used financial data that private companies must report to official corporate registries. While these reports are publicly available, usually for a fee, we cannot republish the individual company information.
A.4 When publicly reported revenues are not available, we use various estimation techniques.
a. Where the number of employees is reported, we estimate revenues by multiplying the number of employees by an estimated revenue per employee (usually $150,000- 200,000 per employee).
b. Where there are historical numbers, we extrapolate from those numbers based on other reports regarding such factors as growth and new capabilities and capacity.
c. We talk regularly with industry participants and have a sense of their size and growth from those conversations.
d. Where other data are not available, we have categorized companies into size ranges and use the midpoint of those ranges to estimate the revenue for companies in that category.
A.5 All revenues are converted to US dollars. We keep the exchange rate value constant from year to year in order in order to capture real changes in company revenue and reduce the effects of currency fluctuations. For this report we have used the average exchange rate for the period 2009-2014.
A.6 In preparing this edition we faced a special problem because the Euro suffered a steep decline relative to the dollar in the second half of 2014, dropping 11% in six months. Had we used the yearend 2014 USD/EUR exchange rate ($1.21 /€1.00) rather than the 5-year average exchange rate ($1.34/€1.00), revenues for European CMOs in our model would have been 10% lower in US dollar terms, even though many experienced growth in local currency terms. The average for 2009-2014 is appropriate because we are tracking performance over that period, but readers should be aware that in future years we may calculate a smaller industry size solely as a result of the depreciating Euro.
A.7 For companies that manufacture multiple dose forms, we have had to use estimates to allocate revenues across dose forms when that breakdown is not available.
A.8 While there is a likelihood of error in any estimate for any single company, we are confident that estimation errors will largely cancel each other out and our reported numbers are a reasonable representation of the dose manufacturing market. The greatest chance of error is with the smaller companies (less than $50 million), but as these companies represent less than a quarter of total industry revenues, any net error resulting from estimates for these companies will be small.
CMO ClassificationsA.9 To provide further insight on the nature and structure of the dose CMO industry, we have
characterized the participants along several strategic and operational dimensions in addi tion to revenues.
a. Principal business:
i. “Dedicated CMOs” are companies whose manufacturing assets are used primarily for manufacturing of client products.
ii. “Proprietary products CMOs” are companies that manufacture and market proprietary products and/or technologies that comprise the bulk of their revenues. At proprietary products CMOs, client products share capacity used to manufac ture proprietary products.
iii. Note: For a company whose primary business is manufacturing proprietary prod ucts, the CMO business can still be considered strategic e.g., Hospira One2One or Baxter Biopharma Solutions.
b. Degree of focus on contract manufacturing:
i. “Strategic CMOs” are companies for which contract manufacturing is a core busi ness activity, as evidenced by:
1. Contract manufacturing represents a significant share of company’s revenue and profit.
2. The company maintains dedicated sales and marketing and project manage ment infrastructure to support the contract manufacturing business.
3. The company will make capital investments specifically to support the
ii. “Multiple dose form CMOs” manufacture products in two or more of these categories.
d. Geographic reach:
i. “Global CMOs” have manufacturing assets and/or a substantial business develop ment presence across multiple geographic regions. They have regulatory approvals from all of the major western regulatory agencies (FDA, EMA, MHRA, etc.).
ii. “Regional CMOs” have all of their manufacturing assets in a single geographic region, confine most of their business development efforts to that region, and ship most of their production to clients within that region. They may have a few approvals outside of their home region, but their focus is regional.
Industry Cost of Goods A.10 To measure the contract dose CMO industry’s penetration of the total market opportunity, in
paragraph 2.26 we stated that the dose CMO industry revenues accounted for 33% of the bio/pharmaceutical industry’s total dosage form cost of goods. We calculated industry dose cost of goods as follows:
b. We started with IMS Health’s estimate of bio/pharmaceutical industry revenues in North America, Europe and Japan of $765 billion.
c. We assume a dose cost of goods of about 8% of revenues. Total cost of goods in the industry, including API, dose and logistics, generally runs 15-20% for branded products and 40% for generic products; the 8% is a blended estimate of the share of cost of goods going to the dosage form.
This Trend Report reflects the research and judgments of PharmSource. Every reasonable effort has been made to ensure the accuracy of the information contained herein. It is not intended to replace government regulations, agency guidance, expert legal or business counsel, or the reader’s professional business judgment.We are careful to abide by all confidential disclosure agreements in place between PharmSource and subject companies when preparing Trend Report. This Trend Report is intended only for PharmSource clients and is not to be reproduced or circulated outside the client’s organization.
PharmSource Director of Market Intelligence Saul Richmond, PhD, and PharmSource president Jim Miller authored this Trend Report.
