The CPhI tradeshow, held this year in Frankfurt provides an annual opportunity to view the full scope of the European contract manufacturing industry. PharmSource estimates the size of the European dose-contract manufaturing market to be $5.75 billion, representing about 55% of global contract dose manufacturing. The PharmSource Advantage contractor database counts more than 160 dose manufacturers in Europe. Most impressively, 10 of the largest dose-contract manufacturing organizations (CMOs) operate almost entirely from a European network (see Table I). The success of major European CMOs is notable because it is being achieved despite a difficult industry environment. Some major hurdles include the following:  

Retail environment: Drug prices and consumer access to new drugs are tightly controlled by European governments. This situation puts a lot of pressure on manufacturers to keep costs as low as possible, which gets reflected in CMO margins.

Exchange rate: The low value of the US dollar relative to the Euro has made it increasingly difficult for European CMOs to compete for US contracts.

Overcapacity: The high cost of closing redundant facilities (due largely to labor laws) makes it likely that pharmaceutical companies will sell excess capacity. As an alternative, they may sell facilities to a management group at a bargain price. 

Regional biases: Despite the growth and success of the European Union, the CMO market remains subject to regional biases. French pharmaceutical companies, for example, tend to prefer French contract manufacturers, and Spanish companies lean toward CMOs in Spain.

Table I: Major European dose manufacturers.  

The largest European CMOs have succeeded despite these impediments. Several factors have contributed to success. 

 The largest European CMOs have secured long-term relationships with global pharmaceutical companies, which are less subject to country bias. Many of these relationships were established as a result of the CMO acquiring a redundant facility from a major pharmaceutical company, and obtaining a multiyear contract to manufacture legacy products. 

 Most major CMOs with facilities in multiple countries are viewed as local companies in the eyes of potential clients inside those countries. One CMO, for instance, told us that since acquiring a parenteral facility in France last year, French pharmaceutical companies have  been more willing to talk with them, even for business more suitable for their facilities elsewhere in Europe. 

 Many major players have specialized capabilities beyond standard dosage-form manufacturing, including the ability to handle compounds that require segregation. 

 Many European CMOs benefit from the barriers to importing product from outside the EU, including differences in GMP regulations and favorable treatment of products made locally. 

 There is a general sense in industry that many European manufacturing facilities get more output from a given level of investment and staffing than competing operations elsewhere. This efficiency enables them to overcome other cost disadvantages. 

One distinguishing characteristic of the European CMO industry is its level of merger and acquisition activity. Major players have been adding facilities or combining operations at a rapid pace, propelled by private financing with a long-term commitment to the CMO business. Major developments of the past year include:  

Fareva's (Paris) recent acquisition of the Farmaclair semisolid and liquid manufacturing facility in Herouville, France, from GlaxoSmithKline (London), and the Feucht, Germany, operations of Pfizer (New York). Fareva has increased its manufacturing revenues from almost zero three years ago to nearly $300 million today.

Aenova's (Tittmoning, Germany) recent creation through the merger of Switzerland's SwissCaps, a softgel manufacturer, and Germany's Dragenopharm, which produces solid-dose forms. The merger was driven by Bridgepoint, the private equity firm that owns both companies.

Haupt Pharma's (Berlin) recent growth to a $250-million company after merging with two other German CMOs, Amareg and Wulfing.

Recipharm's (Haninge, Sweden) acquisition of injectables facilities in France, England, and Switzerland to complement its solid dose operations in Sweden. 

As these companies grow, they seek to become more global. Several are anticipating their first FDA approvals. Vetter (Ravensburg, Germany) and Haupt have established a sales presence in the US. Nextpharma (Send, England) made its first US acquisition last year (Bioserv, San Diego), and European CMOs are expected to be among the bidders for Catalent's parental facility in North Carolina.  

Japan is another target. Haupt acquired a parenteral facility in the city of Toride. Catalent has operated a softgel facility there for some time, and others, including Vetter and Patheon (Mississaugua, ON), have a sales presence there. 

The European dose CMO sector overall appears to be vibrant. The big question is whether it can stay on this path. Some companies will be challenged to replace the legacy businesses they have acquired. And competition from Eastern Europe and Asia—as well as from those companies selling excess capacity—isn't abating. Market leaders will have to work hard to consolidate recent gains. 

 is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, 

Articles

Outsourcing Outlook

Despite challenges, contract manufacturers in Europe are enjoying considerable success.

Leading European CMOs Consolidate Market Positions

Effectively  managing product- and process-engineering change is important to life-science companies, but formal structures for managing that change are not widely used.  A recent study by BearingPoint and AMR benchmarked management practices of 120 life-science companies, including pharmaceutical, biotechnology, and medical-device companies as well as contract manufacturers to evaluate how their organizations deal with engineering changes.

The survey found that companies that take an integrated approach to managing change can innovate more quickly, promote compliance with global regulations and  better support a profitable, enterprise-wide response to customer demand. Among some of the key findings: 

• Only 55% of in-line life science product enhancements launched in 2007 were rated a success. For purposes of the survey, in-line operations refer to operational activities post technology transfer through commercial manufacturing and sales. 

•  Roughly 40% of regulatory issues, including warning letters, regulatory  inspection observations or compliance observations were attributed to  engineering changes. 

•  Significant gaps exist in performance, financial-planning, regulatory-assessment and documentation-management processes between life-science companies and their third-party manufacturers.

The study showed that life-science companies managed an average of 22 in-line products in 2007, and more than three-fourths of the products were less than six years old. The study suggested a correlation between the ability to manage change, particularly in light of limited resources, and the success of in-line introductions. Biotechnology companies reported that 70% of new or in-line extensions were successful. Pharmaceutical companies reported that 64% of new and 51% of in-line extensions had successful launches. 

The study also provided insight into contract-manufacturing activities. Twenty-three percent of survey respondents said that their current focus is to better manage strategic suppliers and contract manufacturers. Twenty percent said their current focus was to improve transfer from new-product development to commercial manufacture. 

 This focus, however, is expected to change. By 2011, companies said that their top priorities would be to invest in technology to better support engineering change management for improving the handoff from new product development to commercial product support and to develop specific engineering change-management functions. To meet these demands, companies may invest in technologies such as product life-cycle management and product data-management systems. 

Each industry segment had different priorities. For example, 30% of biotechnology companies said improving the handoff from new product development to commercial product support was their top priority. Another 30% of biotechnology firms said reducing the risk of noncompliance with product-quality standards or regulatory filings as their top priority. Twenty-five percent of pharmaceutical companies said outsourcing engineering change management or execution to offshore service providers was their top priority, according to the study. 

The  study suggests that life-science companies are shifting to an enterprise-wide  approach to managing product- and process-engineering change to cope with increasing rates of change. By 2011, 46% of the companies surveyed expect to  manage change globally and manage the execution processes centrally.
 

 The  study also showed that even though life-science companies recognize the value  in planning and are prepared to spend more to better manage product-manufacturing change during the coming years (i.e., 38% growth by 2011), significant  barriers remain. Fifty percent of the companies surveyed that have change-management  practices said their teams meet just once a quarter or less frequently, and  these teams do not always use an appropriate set of metrics to track changes  and drive process improvements.


“In  so many organizations today, no single group has the authority or resources to  respond to changing market demands. Change is tackled on a project-by-project  basis, a resource-intensive and impractical approach,” said Ellen Reilly, a  managing director in BearingPoint’s life-science practice, in a company press release.  “To effectively deal with change and increasingly complex compliance and  regulatory pressures, life-science companies need to be more agile and have an  organized, enterprise-wide response to change. Effective management of product-  and process-engineering change can lead to reduced cycle times, swifter  responses to changing market conditions, and increased rates of product innovation.”

Global Feature

A recent study shows life-science companies have difficulty in planning and executing change-management practices.

Change Management for Life Science Companies

Large pharmaceutical companies rank China as the best location for outsourcing in  Asia, followed by India, Korea and Taiwan, respectively, according to  a  recent PricewaterhouseCoopers index.  The index evaluates Asian countries according to cost, risk, and market  opportunity for the pharmaceutical industry. The report suggests  outsourcing to Asia is moving up the value chain, as low-cost production is eclipsed by  a broad range of factors, including market potential and research and development (R&D) capacity as  the drivers of growth.

"Within five to ten years, we will be moving  from 'made in China' to  'discovered in China,'"  said one pharmaceutical industry executive interviewed for the report.  "Pharmaceutical companies need to make sure they are refining their  strategies to make the most of the opportunities presented in Asian  countries," said Michael Keech, director of the global  pharmaceutical and life-sciences industry group at PricewaterhouseCoopers. "China and India  will continue to spearhead growth in the Asian pharmaceutical sector, but,  alongside those countries, Singapore  will maintain its position as a center for research and innovation. While the  trio of India, China, and Singapore  are proving to be the 'hotspots' of the Asian pharmaceutical sector, other  countries, notably Korea and  Taiwan,  are also going to be increasingly significant. The companies that will be most  successful at making pharma outsourcing and location decisions will be those  that are most adept at managing and mixing a range of contractual relationships  and partnerships across a number of different locations."

According to the report, pharmaceutical companies  in the United States  and other developed countries are facing challenges that are constraining revenue growth and have a resulting need to look for new ways to  boost drug-discovery potential, reduce time to market, and minimize costs. For  example, only nine of the 18 new treatments launched in the US  in 2006 came from the laboratories of the 13 companies that comprise Big Pharma. 

 The report highlights three significant  developments that are shaping Asian pharmaceutical outsourcing:
 

•The trend toward high-end innovation. Intellectual property (IP) concerns have previously inhibited this trend in the pharmaceutical industry, but increasingly such concerns are being overcome and major moves are being made by large pharmaceutical companies to increase their drug-discovery  investment in Asia.


 • Rapid expansion of clinical trials in Asia. The  volume of clinical trials being conducted in countries outside of Europe, North  America, and Japan  has been growing rapidly in recent years with Asian countries leading much of  the growth. China has overtaken  India  as one of the fastest-growing locations. By June 2008, China had 428 clinical trials underway and registered on the  website Clinicaltrials.gov and a cumulative total of 870 completed or ongoing trials compared with 737 clinical trials in India. Cost has been a critical  factor in this expansion. For example, clinical trials are estimated to be up to 50% cheaper in India  compared with the US.


 • A scaling up of pharmaceutical manufacturing in Asia. An increased commitment to international  standards, Asian contract manufacturing organizations (CMOs) are securing more  outsourcing orders from large pharmaceutical companies. In India, for example, there are more than 100  US Food and Drug Administration-approved pharmaceutical facilities,  the largest number in any country  outside the US, according to the report.


 The report shows that China  and India, followed by Korea and Taiwan,  provide several benefits for the pharmaceutical industry, including a pool of educated and  qualified scientists, IP law reform, and market growth.  These trends are outweighing factors that had previously inhibited development,  principally uncertain regulatory frameworks and enforcement.


 Although significant  risks remain, there is growing convergence with international  regulatory standards. However, the report's authors point out that such  convergence is also being felt in labor markets, with the result that  traditionally wide wage differentials, compared with developed-country locations,  are narrowing. Such convergence will continue to shrink the cost gap, prompted  in part by the need for Asian countries to compete for high-end skills in an  international labor market.  India, for example, is already finding it difficult to recruit in certain areas such  as clinical research personnel.

For  PharmTech’s recent Vidcast from AAPS on Outsourcing to India and China, click here

http://pharmtech.findpharma.com/pharmtech/cathome/catHome15.jsp?pid=vjzjgal8jwBXq2gs7xaEOpbaeH49PfIC

Outsourcing

Asian countries are moving up the value chain for pharmaceutical outsourcing.

China Ranks High in Pharmaceutical Outsourcing

The biotechnology sector, like other industry segments, has been hit hard with the recent volatility in global financial markets. This situation is particularly true for smaller companies, which are  facing cash-flow pressures and lower stock valuations.

“We know that finance has been the industry’s umbilical cord for  the past 40 years…the implosion of financial institutions has served to  sever the cord and now the biotech ‘infant’ is left to fend for itself,” said G. Steven Burrill, CEO, Burrill & Company, a San  Francisco based private merchant bank, in a Nov. 3, 2008 press release. “The  more mature and blue-chip biotech companies will do just fine since they have  plenty of cash, product revenue streams, strong pipelines and Big Pharma  partners. It is the large universe of small public companies and private  companies looking for venture capital who will feel the most pain.” 

Many publicly traded smaller biotechnology companies face  cash-flow pressures. “The prognosis for the almost 200 publicly-listed  biotechnology companies that have seen their market cap drop to less than $100  million will find the next 12 months challenging since they are often  trading at almost no multiple to their cash,” said Burrill, in the Nov. 3 release. “These companies  will need to find ways to extend their runway and stretch out the funds that they have remaining.”

A review of recent financial data shows the recent difficult times for the biotechnology industry. The collective market capitalization of the biotechnology industry was $375 billion at the close of November 2008,  down 10% for the month, down 20% since the end of September, and 16% year-to-date, according to Burrill & Company. November’ decline  followed a decrease in October, in which the collective market capitalization of the biotechnology industry closed at $417 billion, a drop of 10% for October. At the end of November, Genentech’s (South San Francisco, CA) market capitalization  was $79 billion compared with $87.5 billion at the end of October, according to Burrill & Company. Amgen’s (Thousand Oaks, CA) market capitalization was $59 billion at the end of November compared with $63.4 billion at the end of October. Gilead Science’s (Foster City, CA) market capitalization closed at $41 billion at the end of November, also down from $42.2 billion at the October close. 

 Relative to other industries, however, the devaluation of the biotechnology industry has been less severe. In the first half of 2008, the biotechnology industry's market capitalization reached a record $521 billion, according to Burrill & Company. “In the subsequent five months, the industry lost 18% of its value, better than the Dow and NASDAQ, which shed 22% and 33% of their value, respectively, in the same five month period,“ said Burrill in a Dec. 1, 2008 press release.

Analyzing  biotech’s monthly performance, the Burrill Biotech  Select Index, a price-weighted index tracking 20 biotech blue-chip  companies, finished October down 10% and November down a further 7.6%.  In comparison, at the end of October, the Dow Jones Industrial Average fell 14% and NASDAQ market declined 17%. 

The large biotechnology companies have not been immune to a devaluation in their stock prices, but analysts are optimistic on these companies' underlying fundamentals. “Although the past two months have been ugly, with biotech’s blue-chip companies shedding 17% of their value, their fundamentals of strong sales and robust pipelines will see them recover, but it will take some time,” said Burrill in the Dec. 1 release.

For small-cap biotechnology companies, the outlook is more sobering as certain indices show. The Burrill Small Cap Biotech Index dropped 13%  in November 2008 and 34% since the end of September 2008. Among the 370 publicly-listed biotechnology companies tracked by the monthly Burrill Biotechnology Report, 54% have a market capitalization well below $100 million. 

“We are starting to see a clear pattern evolving for these companies,” said Burril in the Dec. 1 press release. “Companies are shrinking to conserve cash and extend their runway. Unfortunately, headcount is their biggest expenditure, and as a result of the negative capital markets, many programs have been put ‘in the refrigerator’ until better times prevail.” The Burrill Biotechnology Report identified 15 North American biotech companies that announced  restructuring in November.

Mergers and acquisitions are expected to increase for those companies with cash as well as for companies facing low stock valuations that may become attractive acquisition targets at low prices. 

“There will also be reverse mergers, many of these will be into public shells or ‘burnout’ companies that have seen their product fail, but still with cash in which the mergee believes that this vehicle will increase their funding options and provide a pathway to liquidity for their venture capital/private equity investors,&ldquo said Burrill, in the Dec. 1 release. “If not restructuring, biotech companies will be acquired at bargain basement prices,” Burrill noted.

As of the end of October, 30% of  the public biotechnology companies tracked by  the monthly Burrill Biotechnology Report were facing the prospect of NASDAQ  delisting notices until NASDAQ announced that it had suspended its  minimum bid price and market-value requirements for continued listing for three  months in response to the continuing market meltdown. Even  this extension,  however, may not be long enough as the consensus appears to be that the  industry is facing a long downturn.

 On Nov. 24, 2008, the semi-annual ranking of the NASDAQ Biotechnology Index took effect. The re-ranking resulted in three securities being added to the index. All securities are classified according to the Industry Classification Benchmark as either biotechnology or pharmaceutical. The securities that meet the classification criteria then must meet other index eligibility criteria including listing on the NASDAQ Global Market or the NASDAQ Global Select Market and meeting minimum requirements for market value, average daily share volume, and seasoning as a public company. The index is ranked on a semi-annual basis in May and November.As a result of the reranking, several companies were removed from the NASDAQ Biotechnology Index. These were: Cell Therapeutics (Seattle)deCODE genetics (Reykjavik, Iceland), Dynavax Technologie (Berkeley, CA) EPIX Pharmaceuticals (Lexington, MA), ISTA Pharmaceuticals (Irvine, CA), MDRNA (Bothell, WA), Nuvelo (San Carlos, CA), Orchid Cellmark (Dayton, OH), and Penwest Pharmaceuticals (Danbury, CT).

Three companies were added to the NASDAQ Biotechnology Index. These included Celera (Alameda, CA), a diagnostics company that delivers personalized disease management through a combination of products and services. The company operates a clinical laboratory that provides testing services and develops, manufactures, and oversees the commercialization of molecular diagnostic products. Also added were Micromet (Munich, Germany), which develops  antibody-based drugs for treating cancer, inflammation, and autoimmune diseases, and Optimer Pharmaceuticals (San Diego, CA), a company that discovers, develops, and commercializes anti-infective products. 

“When the markets do return in late 2009/early 2010 we are  likely to see a very different industry than exists today,” said Burrill. “Already we  are seeing that companies with limited cash are starting to cut their work  forces and even eliminate research and drug development projects in a desperate  effort to extend their runway. Some might have to sell themselves at less than  favorable prices since it is a buyer’s market.”

“We are not writing biotech’s obituary,“ he said. “In fact, these stressful  times will force companies into looking at what they have and how those assets  can be monetized. They will also have to look further afield for financing and  potential partners such as the BRIC countries-Brazil,  Russia, China and India.”

Biotech

2009 will likely be a difficult period for emerging biopharmaceutical companies.

PTSM: Pharmaceutical Technology Sourcing and Management-12-03-2008

Leading European CMOs Consolidate Market Positions

Change Management for Life Science Companies

China Ranks High in Pharmaceutical Outsourcing

Small-Cap Biotech Faces Financial Woes