Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report.

Jim Miller

	Size has proven to be a major competitive advantage in the clinical contract research organization (CRO) industry, and if that experience is any guide, it presages how the dose CMO industry will evolve as well. 

	The seven largest clinical CROs, six of which are public companies today, accounted for 52% of bio/pharmaceutical industry spending on CRO services in 2014, up from 45% in 2010 (

) (1). Over that period, the market for clinical CRO services grew almost 40%, to $23 billion, but the top seven CROs collectively grew nearly 60%. They occupy an increasingly dominant position in a rapidly growing market.

	The big CROs have extended their market share lead thanks in large part to their ability to secure preferred provider status with the 25 largest bio/pharmaceutical companies. Those global bio/pharma companies account for 60% of the industry’s R&D spending, and an even larger share of spending on complex, expensive Phase 2B and Phase 3 clinical trials. Most large bio/pharma companies have embraced strategic relationships that involve transferring substantial portions of their clinical research operations to just two clinical CROs. These relationships typically incorporate trial monitoring and data management activities, of which are both labor- and information technology-intensive; and may extend to other activities such as medical writing and medical affairs. 

	The global bio/pharma companies entrust the largest CROs with those critical operations primarily because of the CROs’ relatively large size and scope of capabilities:

	They operate global networks that enable them to run multinational clinical trials with sites in dozens of countries

	They have the financial strength and infrastructure to absorb hundreds of staff transferred to their payrolls from the bio/pharmaceutical companies, and to take over a large number of ongoing studies in an orderly fashion.

	Further, once they have secured these relationships, the large CROs have proven adept at maintaining them, using their operating skills to reduce the costs and time needed to execute complex clinical trials. In particular, they use their operating experience to ensure the trial protocols can be readily implemented; and they are making key investments in information technology to enable rapid data collection and analysis and use that data for critical activities like site selection and patient recruitment.

	The scale of these strategic relationships can be massive: Parexel generated more than $300 million in 2014 from its relationship with Pfizer, and several other CROs receive nearly 50% of their billions in revenues from just five strategic clients. Such dependence on a few clients can be risky of course, but the tight integration with the client means that the switching costs for the client can be high.

	The preference for working with a small number of strategic suppliers appears to extend into the contract dose manufacturing market as well. Research by PharmSource indicates that while global bio/pharma companies seldom outsource the drug product manufacture for their new molecular entities (NMEs), when they do there are only a few select CMOs they appear willing to work with (2). 

	During the 2010–2014 period, global bio/pharma companies received 88 NME approvals, of which just 20 (22%) were outsourced to CMOs, including CMOs used as second sources of supply. Eighty percent of those outsourced NMEs went to only five CMOs. The same five CMOs also got the lion’s share of opportunities for all global bio/pharma new drug application (NDA) approvals for which drug product manufacture was outsourced. 

	The concentration of CMOs serving global bio/pharma companies stands in contrast to the industry overall, as our analysis shows that at least 146 CMOs have benefitted from at least one NDA approval in the past 10 years. The 

CMO Scorecard: Outsourcing of NDA Approvals and CMO Performance

 shows, however, that the CMO industry is actually more consolidated than it may appear from the outside (see 

	Like their counterparts in the clinical CRO space, the five CMOs receiving the bulk of global biopharma NME manufacturing opportunities are among the largest in the industry in terms of revenues, are financially strong, and have good compliance records, so they represent secure sources of supply. Further, those companies continue to invest in their capabilities and capacity to grow their business and gain even more market share.

	Global bio/pharma companies have shown themselves willing to embrace strategic supplier relationships with service organizations that have the scale and scope to meet a broad range of their requirements. Only a few CMOs and CDMOs, however, have demonstrated the willingness to invest in the vision of a world-class development and manufacturing services provider.  The evidence suggests that the opportunities may be out there if the industry is willing to step up to them.

	1. William Blair & Company, L.L.C.
	2. PharmSource, 

Trend Report, CMO Scorecard: Outsourcing of NDA Approvals and CMO Performance

: When referring to this article, please cite it as J. Miller, "More Evidence that Size Matters," 

Articles

Big service providers get bigger faster thanks to Big Pharma.

Big Pharma Feeds Big CMO Growth

More Evidence that Size Matters

 	The establishment of a regulatory pathway for approval of biosimilars in the United States has generated a great deal of excitement within the CMO industry. The passage of the Biologics Price Competition and Innovation Act (BPCI Act) in 2010 and issuance of related FDA guidance unleashed a flurry of biosimilar development activity: 40 biosimilar investigational new drug applications (INDs) had been filed through September 2014. In July 2014, Novartis’s Sandoz unit became the first company to file for a biosimilar in the US when FDA accepted its submission for a biosimilar version of Amgen’s filgastrim (Neupogen) via the 351(k) pathway; an FDA advisory committee recently recommended that product for approval. 	 	For the CMO sector, participation in this burgeoning market could prove highly lucrative given the magnitude of the opportunity, but there are significant hurdles to CMO success in biosimilars. Whether CMOs benefit in a big way will depend on where they are in the value chain, and how successful their clients are in the end market, but a new analysis by PharmSource suggests that expectations should be modest (1).	 	

	 	Some insight into what the CMO industry might expect can be gained from studying the European experience. The European Medicines Agency (EMA) first approved a biosimilar product in 2005, and there are currently 20 products available in European markets. The approved biosimilars are mostly first wave biologics including growth hormones (e.g., Somatropin) or recombinant proteins to treat side effects of chemotherapy such as Epoetin. In 2013, the first biosimilar monoclonal antibody (mAb) was approved, a version of Johnson & Johnson’s Remicade developed and manufactured by Hospira and Celltrion.	 	According to IMS, market penetration of biosimilars has varied considerably across the European Union (2). Biosimilar penetration for drugs given in clinical settings, like the biosimilar epoiten and filgrastim, has been significant. By contrast, for human growth hormones, a treatment for a chronic condition in which physician preference plays a considerable role in the prescribing decision, the biosimilars penetration is barely above 10%.	 	Global and large regional generic-drug companies dominate the roster of first-wave biosimilars approved in Europe, including Teva, Sandoz, Stada, and Hospira. Those companies account for more than 70% of the biosimilars approvals, while small commercial companies account for only 25%. That dominance of the large firms reflects the high cost of developing biosimilars as well as the need for established sales infrastructure and experience to generate sales.	 	CMOs are participating in varying degrees in the emergence of biosimilars with significant differences between drug substance and drug product supply. Among the first wave of biosimilar approvals in Europe, only two products (10%) are using a CMO for manufacture of the API, but six (30%) are using a CMO for fill/finish including Novartis/Sandoz for multiple products.
	 	The API for two-thirds of the 20 approved biosimilars in Europe is manufactured in-house, while 45% of the fill/finish is also performed in-house.	 	Partnering arrangements, including joint ventures and licensing deals, have become an important element of biosimilar development and marketing. The licensor or joint venture partner is responsible for manufacture of the API and/or the finished drug product for a quarter of biosimilars approved in Europe. 	 	

	 	A second wave of products loses patent protection in the period 2015-2019 and will start coming to market this year. These are products of increasing technical complexity including mAbs and fusion proteins, and include high profile products for the treatment of cancer and chronic conditions including autoimmune diseases and diabetes. Most of these are big products including well-known brands like Humira, Herceptin, and Remicade.	 	At least 70 of these second-wave candidates are in clinical development, led by Adalimumab (Humira) with 15 candidates, and 40% are in Phase II or beyond. The candidates are equally divided among global biopharma, generics, mid-size, and emerging biopharma companies. 	 	For the second wave of biosimilars, manufacturing arrangements are still somewhat speculative because manufacturing arrangements are often not revealed until the candidate receives regulatory approval. Still, for second-wave biosimilar candidates identified, the sponsors for more than half (55%) possess large molecule API capability, while nearly one-third involve a joint venture partner or licensor that has manufacturing capability. Notably, many of the announced joint ventures involve partners with manufacturing assets in Asia, including Mylan with Biocon (India), Hospira with Celltrion (South Korea), Biogen/Idec with Samsung Bioepsis (South Korea), and Oncobiologics with Strides Arcolab (Malaysia).	 	The PharmSource analysis of the biosimilars opportunity for CMOs suggests that industry executives should have modest expectations of their prospects. Biosimilars are adding a nice increment to the available pipeline opportunities, especially for injectables CMOs, but they are unlikely to be a bonanza for the industry. 	 	Analysis of the approvals-to-date and the pipeline suggests that developers of biosimilars have substantial in-house manufacturing assets they can employ to produce their products. Those are the same large, vertically integrated companies with deep enough pockets to fund the high cost of developing biosimilars and, even more importantly, the sales and marketing experience and infrastructure to promote acceptance of biosimilars to prescribers and formularies. Those companies have traditionally preferred in-house manufacturing over outsourcing, especially for biologics: their propensity to outsource dose manufacture has always been markedly less for biologics than for small-molecule products.  	 	The European experience has demonstrated that the emerging biopharma companies that are most dependent on CMOs will face an uphill battle trying to gain market share from their larger competitors. Further, it may already be too late for CMOs to meaningfully participate further in the second wave of biosimilars because new entrants may be discouraged by the large number of candidates already in the field. The biggest opportunities, including biosimilar versions of Humira, Avastin, and Herceptin, already have nine or more identified biosimilar candidates.	 	

	 	The challenge for CMOs today is to develop a strategy that enables them to participate more meaningfully in the third wave of the biosimilar opportunity that will begin in 2020. That strategy could be built around proprietary cell line and expression technologies, which help them deliver biosimilar APIs more quickly and cheaply than in the past, as well as their strengthened analytical capabilities. 	 	Still, participating as a partner in a biosimilar venture will require CMOs to assume some level of financial risk. In the current industry environment, which has made unprecedented amounts of money available for novel drug development, that may not be a risk that CMOs feel a need to take.	 	

	 	1. PharmSource, Catching a Wave: How much will CMOs benefit from biosimilars? (January 2015).	2. IMS Institute for Healthcare Informatics, Assessing Biosimilar Uptake and Competition in European Markets (October 2014).	 	

 When referring to this article, please cite it as J. Miller, “Gauging the CMO Biosimilar Opportunity,” 

Biosimilars may add a nice increment to the pipeline opportunities, for CMOs, but they are unlikely to be a bonanza for the industry.

Modest Expectations for CMOs and Biosimilars

Market forces may limit the success of CMOs.

Gauging the CMO Biosimilar Opportunity

	At the 2014 CPhI trade show, held Oct. 7–9 in Paris, executives from CDMOs and contract labs whose operations are solely in Europe expressed their desire to expand their operations into North America. These executives, however, were stymied about how to do it.

	Their interest in North America is not surprising: opportunities there are much greater than in Europe. There is far more venture capital financing in North America than in Europe and the level of drug development activity is significantly greater. Many European economies are contracting, and government budgets to pay for drugs are under stress. Further, with its large number of former bio/pharma facilities converted to contract services businesses, Europe experiences price competition in the drug-development market that seems more aggressive than in North America.


	European companies are challenged on several levels to enter North America. For one thing, European contractors don’t have a good understanding of the North American market. While some may have had an FDA inspection, many haven’t and don’t understand FDA requirements and how they differ from European requirements.

	Further, they have minimal experience in trying to sell their services in North America; some may have one sales representative based in the US, but many have none. Sales and marketing in particular can be different in North America versus Europe. For instance, tradeshow marketing is important in Europe and cold calling is uncommon, but in North America it is the other way around. Even if they have sales representation in North America, European CDMOs suffer from low brand recognition and can have a hard time getting clients to travel overseas for services that are readily available domestically.

	Another challenge for European contractors is that there is a higher barrier to market entry in North America than they are used to. Most European CDMOs were founded as buyouts of facilities that global bio/pharmaceutical companies wanted to get rid of. Facility closures are difficult in Europe because of labor laws and because of fears that mass layoffs could hurt companies tendering for government drug supply contracts. As a result, pharma companies have been willing to offload unneeded facilities to management teams or private equity investors at a fraction of their replacement value and with contracts to continue to manufacture legacy products for some period. This has made it relatively easy to enter the contract services business in Europe, although the resulting overcapacity has hurt pricing for contract manufacturing and development.

	Opportunities to acquire facilities on such favorable terms are fewer and farther between in North America. Because North America consists of just two large markets, versus the 20-plus small to mid-size markets in Europe, there weren’t so many facilities built in the first place, so there have been fewer facilities to divest. As result, European companies looking to enter North America may have to “pay retail” to acquire a facility or services business. Acquisition valuations of CDMOs in recent years have been especially high.

	European CDMOs are also hindered by a lack of capital necessary to acquire their way into North America. They are often poorly capitalized, given that their initial buy-in to the industry didn’t require a lot of investment. Further, their low profit margins mean they haven’t been able to accumulate a significant amount of equity through retained earnings. Also, some European CDMOs are employee-owned and may have particular challenges raising additional capital without threatening their ownership structure.


	The barriers to European entry into the US CDMO market are high but not insurmountable. Examples of European contractors that have successfully established themselves in North America in the past 10 years include CDMOs Vetter and Almac as well as contract labs like SGS and Eurofins. Those companies, however, had favorable ownership structures (family trusts or publicly-traded) that gave them access to adequate capital.

	Further, it is occasionally possible to acquire facilities in North America under favorable terms. In 2013, European CMO Unither acquired a dose manufacturing facility with contracts in Rochester, New York, from UCB Pharma; and Fareva was able to acquire a manufacturing and packaging facility with contracts in Richmond, Virginia, from Pfizer in 2011.

	It’s also worth noting that North American companies have challenges similar to the Europeans’ when considering entry into Europe. A common problem has been the failure to realize that Europe is not a single market--not even the European Union--but rather a collection of more than 20 countries with different languages and cultures, and a wholly different concept of distance. So, for instance, North American companies have established facilities in Ireland intended to serve all of Europe, only to learn that continental companies view the Irish facilities as far away and foreign.

	As the bio/pharmaceutical and contract services industries consolidate, having a global network of facilities, at least in North America and Europe, has become increasingly important for competitive success. Mid-size European CDMOs and contract labs must figure out how to overcome the barriers to their entry into North America if they intend to succeed over the long term.


	Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, Twitter@JimPharmSource, 

European CDMOs want into the US market, but limited options leave them on the outside, looking in.

European CDMOs Venture Into US Market

The number of CMOs is shrinking due to acquisitions, exits, and compliance problems. Additional capacity is being lost as more CMOs pursue proprietary products to gain a better return on their assets. And unlike 15 years ago, when the industry first took off, there isn’t a lot of available capacity to bring into the industry.

Industry consolidation by way of acquisitions is a long-term trend that will run for at least several more years. The emergence of larger CMOs that can achieve economies of scale and offer serious alternatives to in-house networks is a positive development for the industry, and a clear sign of maturity.

Exits from the CMO industry are a more recent development that seems to be picking up momentum. Examples of CMOs leaving the industry in the past year include the contract manufacturing units of Bayer and Boehringer-Ingelheim; Pharmalucence; and SCM Pharma (see  

). There have been two principal drivers of these developments: growing demand for captive manufacturing capacity, and regulatory compliance difficulties.

Boehringer-Ingelheim   Contract Manufacturing*

The demand for captive or in-house capacity stems directly from the acceleration of new product development. Global bio/pharmaceutical companies have rebuilt their pipelines in the past five years, largely through acquisitions and in-licensing, and need capacity to launch new products. Older facilities are being retooled to handle some of the new products, even as new facilities are being built, especially for biologics.

The demand for injectables capacity, in particular, is strong. It is being driven by the development of innovator biopharmaceuticals and biosimilars, but demand from generic-drug manufacturers is also high, thanks to rising prices and shortages of important drugs. This trend is underscored by Sun Pharmaceutical’s decision to take Pharmalucence out of the contract manufacturing business immediately after its acquisition in August. Ten years ago, many injectables manufacturers in India promoted themselves as contract manufacturers; today most of them are using their capacity to support their own generic injectable product lines and hardly mention contract manufacturing.

Exits resulting from quality problems are another important factor. The compliance problems at Ben Venue Laboratories, which resulted in the decision by Boehringer-Ingelheim to withdraw from the CMO business and ultimately close the facility, are well known. In two recent cases, quality problems resulted in a major client taking over the CMO to safeguard its interests. Allergan took over Exemplar Pharmaceuticals, a manufacturer of inhalation products, when Exemplar had problems with a new product Allergan was planning to launch from its site. More recently, Shire Pharmaceuticals took over SCM Pharma to maintain production of a commercial product after SCM lost its GMP license from the Medicines and Healthcare products Regulatory Agency (MHRA).

An important factor in the shrinkage of the industry is the lack of readily available capacity to replace it. The bio/pharmaceutical contract manufacturing industry emerged at a time when global bio/pharmaceutical companies were shedding manufacturing facilities as their blockbuster products neared the patent cliff. Large bio/pharma companies welcomed the opportunity to offload assets onto CMOs, often start-ups formed by site management teams, and avoid costly severance and site cleanup costs. CMO investors welcomed the chance to get productive assets for a nominal amount, with their risk further reduced by contracts to manufacture legacy products.
  Today, the global bio/pharma companies have shed or shuttered most of their unneeded facilities, and there simply isn’t much capacity available on the sidelines. Even if facilities were available, most CMOs wouldn’t want them (unless they were for injectable or bio/pharmaceutical products) because they already have substantial underutilized capacity.

For CMOs, the reduction of the number of competitors and capacity, even at the margin, is a good thing. The tighter capacity can mean better pricing and margins, as buyers have less opportunity to play suppliers off against each other.

The possibility that a CMO might exit the business, however, can have serious implications for bio/pharma companies that depend on CMOs. Generally speaking, unless the CMO goes out of business altogether, product supply should continue through the term of the contract. The client could then be faced with a costly supplier search process and re-qualification at a new CMO.

That eventuality underscores the need for thorough due diligence beyond just a GMP compliance audit. Bio/pharma companies need to understand their CMOs’ corporate strategies and financial condition as well as on GMP. Is the parent company or investors committed to the CMO business for the long term? Does the CMO have the financial resources to sustain itself through difficult times? The due-diligence process may require conversations with the CEO and CFO as well as business development and quality assurance staff.

Risk management plans should incorporate the possibility of a CMO choosing or being forced to exit the business. Sound companies will continue to honor supply contracts, and may even pay for tech transfer if they really want the client products out of the facility However, if a bio/pharma company has concerns about the CMO’s near-term ability to supply its product, it should have a viable second-source strategy or a large buffer stock to protect itself.
  Exits are part of the consolidation process that comes with industry maturity. The CMO industry should welcome the exits of weaker or less committed participants, because it strengthens the industry overall.  But clients need to stay aware, especially during the selection process, that their CMO may be forced or choose to leave the business, and should practice careful due diligence to protect themselves.


Jim Miller is president of PharmSource Information Services, Inc., and publisher of 

, tel. 703.383.4903, Twitter@JimPharmSource, 

As the number of CMOs shrinks due to acquisitions, exits, compliance problems and a switch to proprietary products, the capacity available to industry is reduced.