In our earlier blogs about the state of the pharmaceutical industry and the growth of generics manufacturers, you read about the challenges facing the pharmaceutical industry due to the patent cliff, diminished R&D output, and the rapidly growing generics industry.
Big pharma has always understood the need to optimize profitability prior to the expiration of patents. However, manufacturing costs have not been a target historically for two main reasons: manufacturing represented a relatively small element of total costs (as low as 10%); and a failure in regulatory compliance could interrupt the cash flow from highly profitable products while the patent clock kept ticking. Naturally this combination led to a degree of conservatism in managing manufacturing costs.
With prices and profits coming under relentless pressure, however, manufacturing costs have come under the spotlight. Cost and quality initiatives including lean and Six Sigma have become mainstream in big pharma. In addition, many corporations have reviewed their supply-chains and have developed outsourcing and insourcing strategies.
Contract manufacturers have benefited from this movement. Contract Manufacturing Organizations (CMOs), which were once low-volume specialists, have emerged as a significant and fast growing industry sector. In 2011 the global contract manufacturing market reached $31.9B and is expected to almost double by 2016. Although the industry has its big players, in general the market is fractured. For example, in 2011 over 300 CMOs were operating in Europe with over 150 operating in the U.S.
On the other hand, the generics industry has been a highly competitive one and unsurprisingly, the streamlining of costs has always been a high priority. Whereas big pharma has turned to CMOs principally to get better control of costs, the generics industry has turned to CMOs to help meet their rapidly growing need for manufacturing capacity.
Outsourcing to contract manufacturers (whether by branded or generics manufacturers) is not without its drawbacks. Quality becomes harder to control when some or all manufacturing is not done in house.