July 1, 2011 (Vol. 31, No. 13)
Downtick Incurred as a Result of Economic Slowdown Looks Like It Will Be Reversed Soon
The contract manufacturing outsourcing market is one of the fastest growing segments in the pharmaceutical and biotechnology industry. Despite the recent economic downturn, the market continues to grow at a rapid pace of about 10% to 12% year-on-year (YoY) in comparison to growth projections of 14% to 15% in 2007–2008 before the slowdown. In the mid- to long term, the growth rates are expected to pick up pace, although a higher base effect combined with greater penetration is likely to have an impact on the overall scale of growth.
The downturn has had a significant impact on small- to mid-size sponsors, which have been outsourcing a greater percentage of their manufacturing compared to larger companies. Smaller companies have had issues with funding, especially early-stage projects, which have, in some cases, resulted in payment delays and even defaults.
Larger sponsors, however, are looking to lower their costs as well as improve productivity by spinning off or selling their noncore activities such as manufacturing, which favors the service providers by enabling them to garner a greater share of the business and also potentially expand their services by acquiring these business segments. As a result of these restructuring exercises, we are likely to see a larger number of long-term strategic deals between sponsors and service providers.
The U.S. pharmaceutical contract manufacturing market, which includes solid dosage and sterile and nonsterile semi-solids, is forecasted to grow from $9.3 billion in 2009 to $15.1 billion by 2014 at a compound annual growth rate of 10.1%.
In the short term, it is expected that the slowdown will affect the expansion activities of small to medium contract manufacturing organizations (CMOs) due to tight credits and recessionary effects. However, given the growth prospects for this segment, combined with the flurry of generic versions of major blockbuster drugs, the prospects for CMO growth continue to remain bullish. Additionally, the average manufacturing plant utilization rates at pharmaceutical companies are less than 50%, resulting in several plant closures or sells-offs and increased outsourcing penetration.
Analysis & Insight: CMOs Seek Growth Beyond Traditional Contract Manufacturing
To check out examples of how both biotech industry consolidation and the recession have impacted CMOs, read on here.
YoY growth rates are expected to remain fairly consistent without any major fluctuations. However, the sterile contract manufacturing market is expected to outpace the nonsterile market in growth rates due to greater outsourcing penetration and growth potential in this segment.
Conclusions
The U.S. pharmaceutical contract manufacturing market is continuing to witness strong growth driven by a variety of factors that include improving cost structure, focusing on core competencies, reducing manpower, and improving overall productivity.
Sterile contract manufacturing markets are leading the overall growth of the market, driven by the research in new products and technologies, reformulation of existing products, and major announcements by big pharma companies regarding plant closures, which could result in greater outsourcing.
There is also an increasing need for streamlining internal manufacturing capacity with pharmaceutical companies looking to supplement in-house manufacturing with outsourcing to maximize efficiency. Value-added services like formulation development, consulting services, and proprietary technology platforms could further increase penetration and help CMOs garner a greater share of the outsourcing pie.
Mergers and acquisitions in the biopharmaceutical industry are expected to have a major impact on the outsourcing services market. The impact of the ongoing recession and economic slowdown is also expected to have a major short-term impact on the growth of CMOs mainly due to the drying-up of capital markets and credit.
In the mid-to-long term, the slowdown is expected to propel outsourcing growth as a result of a variety of cost-cutting measures being implemented by sponsor companies. New and emerging business models are expected to drive the penetration of outsourcing services. CMOs are likely to engage more strategically with sponsors by taking over and operating their manufacturing services in addition to building new capacity.
Jennifer Brice ([email protected]) is the industry manager for the pharmaceuticals/biotechnology group, and Barath Shankar Subramanian is senior industry analyst at Frost & Sullivan.
