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Jul 1, 2011

CMOs Seek Growth Beyond Traditional Contract Manufacturing

Providers are seeking out strategic partnerships and developing niche expertise.

CMOs Seek Growth Beyond Traditional Contract Manufacturing

Between 2005 and 2010, 200 of the 487 products receiving FDA approval involved a contract manufacturer, according to PharmSource. [© Andrei Merkulov - Fotolia.com]

  • CMOs may be short for “contract manufacturing organizations,” but increasingly such businesses are partnering with biotechnology customers in ways that go beyond simply mass producing their pills or vaccines.

    “Most of our partnerships are manufacturing. However, we do have a few collaborations with companies that can help extend our capabilities,” Dave Cunningham, Goodwin Biotechnology’s (GBI) director of business development, told GEN. GBI announced one such partnership last month. The CMO will work with Rafagen to carry out cell-line engineering.

    Biotechs of all sizes have long farmed out their manufacturing operations to CMOs. Demand for CMO services has swelled even more over the past decade. Between January 1, 2005, and June 30, 2010, 200 of the 487 products receiving FDA approval involved a contract manufacturer, according to PharmSource. Big pharma, desperate to cut costs as blockbuster drugs come to the end of patent protection, has increasingly shut down manufacturing plants or sold them off to CMOs.

    Contract service providers (CSPs) “should continue to grow as the pharmaceutical industry disaggregates and moves towards a more flexible business model,” concluded a 2010 report by BioCrossroads, a nonprofit organization that promotes growth of the life science industry across Indiana. The report is titled “Industry Developments in U.S. Biopharmaceutical Contract Services.”

    “Biomarker services and the need for larger clinical trials will provide opportunities for additional growth moving forward. However, with the consolidation of the pharmaceutical industry and the continued trend of strategic partnerships between CSPs and their clients, many companies in the sector will be faced with finding new revenue sources or merging with other providers in the sector,” the report noted.

  • Pharma Selling Operations

    Indiana, for example, has grown its segment of CMOs and other third-party service providers to more than 8,000 workers and 40 companies as of last year. Those numbers are expected to increase in coming years, according to the BioCrossroads report.

    Since 2008, Eli Lilly has shed about 1,000 jobs by selling off three Indiana plants. Lilly did sign long-term service contracts with their buyers to ensure that it still has access to the expertise and skill of plant employees. Covance bought Lilly’s Greenfield, IN, site for $50 million in 2008 and signed a 10-year deal to assume responsibility for Lilly’s toxicology testing and other R&D support activities there. The Greenfield facility has doubled employment to 500 jobs since the Eli Lilly sell-off.

    Lilly’s Tippecanoe Laboratories plant in West Lafayette, IN, is now run by Evonik Industries and refocused on making APIs and specialty chemical and animal health products. Finally, an Indianapolis plant was sold off last year and is now used by Fisher Clinical Services for outsourced clinical trial material management. Fisher Clinical, which expanded into Indiana with the deal, now handles the distribution of clinical trial materials for Lilly throughout North America.

    “A lot of the infrastructure was built up around Lilly, and then it has continued to grow a little bit faster,” Brian A. Stemme, project director for BioCrossroads, explained to GEN.

    Besides Lilly divesting production plants, another reason why CMOs have grown in Indiana, according to Stemme, is the presence of strong academic research institutions like Purdue University, which has an industrial pharmaceutical program.

    The potential for growth has made CMOs attractive to professionals looking to build up biotech clusters without the advantages the nation’s largest bioclusters enjoy, such as a big community of venture capitalists or dozens of universities and independent research institutions.

  • Challenges Give Way to Opportunities

    Stemme added that the recession and the sluggish recovery that has followed have continued to pose numerous challenges for CMOs and other providers of outsourced services for biotechs. “One of those challenges includes a smaller set of customers who are now bigger and needing more services globally. So, smaller companies will need to have specific niches, expertise, and excellent client service,” added Stemme. Other challenges include uncertainty over healthcare reform and tighter spending controls.

    In disclosing financial results on June 10, publicly traded CMO Patheon cited another challenge. The firm said that the 2011 fiscal year saw “an unusual level of contract cancellations and delays in the PDS (pharmaceutical development services) business during the first half of 2011.” Patheon, however, said that it expects its second-half underlying operating performance to improve “significantly” from second quarter levels.

    “Our PDS business experienced an unusual level of contract cancellations and delays during the first half related to customer regulatory approval and clinical trial outcome issues as well as industry M&A activity. This created short-term weakness in demand at some of our PDS sites, which had staff for a higher level of activity,” Patheon CEO James C. Mullen remarked. “Contract cancellations are not typically a major PDS issue, and we have not seen further material issues over the last few months.”

    It is believed that CMOs can achieve success by focusing on niche manufacturing strengths. No matter what, there will be production contracts to be had, since biopharma is expected to continue cost-cutting over the next few years. More manufacturing operations across the country will likely get dropped while adding some capacity in lower-wage Asian countries.

    That growth should spur opportunities for CMOs to differentiate themselves short-term. Longer-term, it’s still early to say whether smaller biopharma companies will generate enough new therapies to make up for the contraction in the pipelines of corporate giants, and thus whether CMOs can expect the same level of growth that the last few years have brought.


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