To get ready for this year’s Parenteral Drug Association annual meeting, we spoke with a number of parenteral CMOs to gauge the state of the business, the key drivers, and how the increased regulatory burden affects operations. There was plenty of industry optimism, leavened with concerns over quality issues and client perceptions.
Milton Boyer, president of Oso Biopharmaceuticals, said, “From our perspective, we see an increase in outsourcing. That’s measured by leads, opportunities, and business we continue to sign. By those metrics, we see opportunities for CMOs.”
Stuart Hinchen, chief executive officer, president and co-founder of JHP Pharmaceuticals, was sanguine about the state of the market, noting, “The market is solid and growing. We’ve brought on seven new customers’ products over the past year and we’ve added a lot of follow-on products from existing customers. From our perspective, we’ve certainly seen a solid base that’s growing. Is there flux in the customer base? Absolutely. You hear some companies say they’re going to CMOs to save money, and others say they’re bringing projects in-house to save money. There’s clearly a churn in the industry. But in the end, so many parenteral developers need and can benefit from CMOs, and that’s never going to go away. ”
Dianne Sharp, managing director of UK-based SCM Pharma, commented, “With the growth in biological R&D there is an inevitable increase in the demand in parenteral drugs. Coupled with the increasing virtualization of pharma supply chains and large pharma increasingly acquiring new drugs through in-licensing and acquisition rather than internal research, the outlook for the market remains buoyant. Forecasts set growth consistently in double digits for the next five to 10 years.”
Ms. Sharp added, “Growth in those areas has focused regulators more closely on liquid sterile manufacturing sites, and some of these inspections have resulted in an overall reduction in capacity. This is an opportunity for those of us successfully operating in the space, however there is genuine concern that supply chain capacities may have an impact on drug availability. The very large initial capital and regulatory costs in establishing a sterile site means this is not something that can be quickly addressed by new entrants into the market.”
Kristie Zinselmeier, senior director, Global Marketing, at the BioPharma Solutions unit of Baxter Healthcare, remarked, “Generally speaking the CMO market continues to struggle with segments of excess capacity, which is decreasing overall profitability. The consequences of the resulting financial turbulence have been seen in the past 24 months. There are segments that are more attractive; however, they require a substantial investment in infrastructure and capability in order for the manufacturing services provider to be successful. From our perspective, the market is in a transitional period and we expect further consolidation of providers over the next 36 months.”
David Linn, director, Business Intelligence & Business Development at Jubilant HollisterStier Contract Manufacturing & Services, remarked, “Overall we see growth in the CMO space, across all dosage forms, mirroring growth in the biopharma space — on average growth rates in the mid-single digits. Of course, growth rates will be higher in the emerging markets, but the size of the developed markets is much larger. And we think that growth rates will be higher in parenteral dosage forms vs. solid or semi-solid dosage forms. We also have significant biologic injectable business, which allows for greater than average revenue and profitability for both sponsors and CMOs. We will continue to expand our specialty in parenteral and semi-solid dosage forms for the developed markets. Having established ourselves as a sustainable, successful player in these segments, we believe that there is great opportunity for our business in the next three to five years.”
David Powell, director, Business Strategy at Hospira One 2 One , commented, “We’re getting the right volume of business. Where we operate, at commercial scale, is the right space to be in. There are significant barriers to entry, in terms of investment, and difficulties in tech transfer.”
Growth in the market comes from the usual suspects for sterile injectables: biologics, cytotoxins and other difficult compounds. One parenteral CDMO said that the ratio of biologics to traditionals in its pipeline had been around 40/60 four years ago, and was now 70/30. Mr. Boyer at OsoBio remarked, “I think hard-to-handle compounds are the big driver, and that’s not necessarily cyto/high-potency; it may be large molecules, temperature-sensitive compounds, or other specific needs.”
Ms. Sharp at SCM Pharma said, “The key driver is novel, difficult and dangerous drugs! An increasingly flexible approach to developing manufacturing technologies that can be adapted to the specialist drugs needs, rather than traditional, fixed large-scale approaches that require the drug to fit to it. Essentially, our part of the market is about providing designer, made-to-measure, but cost effective solutions.”
Ms. Zinselmeier at Baxter commented, “We see an increase in complex manufacturing requirements in many aspects of the business. Processing requirements have increased in complexity as biologics have matured in the drug development pipeline. This translates, in our experience, into an increased need for development services associated with increasing manufacturing reliability.” She also noted that one growing challenge in the market is the management of decreasing unit volumes per drug and the resulting complexity that is being introduced with manufacturing processing requirements. “As CMOs seek to maintain or grow their manufacturing volume, in a market that faces volume volatility, we are likely to see an increased number of projects necessary to maintain total volume. This will potentially introduce complexity into the manufacturing facility.”
Mr. Linn at Jubilant HollisterStier said, “From a volume standpoint, we know that there is an expected trend toward lower volume, smaller batch size products with targeted indications. We are beginning to see more inquiries for these products, and we plan to make some facility modifications very soon to strengthen our competitive position with these potential customers. Having said that, we have also been fortunate this year to win contracts for some larger volume products, with a few having blockbuster potential.”
He added, “From a parenteral dosage form standpoint, the majority of our inquiries and wins are sterile liquid fills into vials. There is still demand for lyophilized vials, but right now the number of those opportunities that we see seems to be fewer. And oddly enough we are also seeing a spike in demand for our ampoule filling capability.” The company recently expanded its clinical trial manufacturing suite in Spokane, WA, allowing it to offer smaller lot manufacturing for both liquid and lyo presentations, using disposable technologies for biological products.
Several other companies we spoke to are also engaged in expansions, a good sign for at least certain parts of the industry. Mr. Hinchen mentioned that JHP Pharma brought on new lyo capacity and a clinical filler last year, and is breaking ground on a new 40,000-sq.-ft. lab facility in May. “It is critical that you make investments across all areas of the business,” he remarked.
Mr. Boyer said that OsoBio has upgraded its primary filling line and plans to install a prefilled syringe line later this year. “We’re seeing lots of inquiries for PFS,” he said. “Very few players can do small to mid-sized batches in that area.”
Ms. Sharp said that SCM Pharma is scaling up its oral PFS capability, and has also invested in increasing both its ampoule- and vial-filling capacities and capabilities.
At Hospira One 2 One, expansion is tied into the parent company’s investment in new facilities. For example, Hospira’s investment in a 1.1 million-sq.-ft. generic facility in India will free up capacity for One 2 One at the McPherson, KS site, where the company performs fill/finish for biologics and also has an R&D team.
Some of the providers we spoke to have seen business spike because of internal pharma problems and issues at other providers. Said one, “We have one subset of customers: big pharma closes a plant under, say, a consent decree. That results in a huge tech transfer of a number of products in a short time. We throw all our Resources into the project. Meanwhile, the big pharma is remedying its situation by changing its internal infrastructure and framework and, after a year or two, the products go back in-house. Should we develop different types of models for those sorts of short-term products?”
Mr. Linn at Jubilant HollisterStier noted, “Unfortunately for patients, there have been significant supply issues for many parenteral products over the past 18-24 months, mainly due to compliance concerns. This has created opportunity for us, and we have reached out to most of the pharma and CMO companies involved to offer assistance, even if for a limited amount of time until their facilities are deemed compliant by the regulatory agencies.”
The most seismic event in the industry over the past year was Ben Venue Laboratories’ decision to exit the contract services business last August, one of those “significant supply issues” that Mr. Linn referred to. BVL’s withdrawal, following a slew of quality issues that resulted in a massive warning letter from the FDA, has impacted drugmakers, patients, and other CMOs.
Mr. Linn commented, “We have evaluated, and continue to evaluate, a handful of products that were at BVL. We have won a few of those contracts, and we continue to discuss with companies that had products manufactured at BVL on how we may assist to expedite their products to market. This includes both innovator as well as generic parenteral products.”
Mr. Hinchen at JHP Pharma said, “We’ve seen activity from post-BVL companies. It’s not like a mad rush of people showing up at our door. It’s been more paced than that. I think some customers moved out a few years ago and found other sources, while others stuck with BVL perhaps thinking the problems would get resolved.” He added, “We’re certainly seeing a level of activity from those customers, and their starting point is, ‘Give us some comfort on your regulatory position.’”
Mr. Boyer at OsoBio echoed those sentiments, “We got an increase in leads because of their issues, but it wasn’t huge. Their primary customers had probably been making arrangements for a while prior to the announcement last September. It appears they’ve tried as much as possible to spread out notifications, shortages, etc.” Even before the BVL announcement, providers say, the regulatory burden had grown heavier. Said Mr. Boyer, “Probably the biggest trend in the past 18 months has been the regulatory bar going up. Inspections are much more rigorous than what we had three or four years ago. If you look across the landscape, several official actions have occurred: Ben Venue, Bristol-Myers Squibb, Hyaluron/AMRI, Gilead, Hospira [the parent company, not the One 2 One division].”
Jim Mullen, Patheon’s chief executive officer, remarked during a recent earnings call, “The difficulties that major North American players have had in the parenteral space has benefited our business. It’s certainly caused large pharma companies to be much more concerned about supply chain continuity.” He added, “Regulatory scrutiny for GMP compliance in the U.S. and Europe is going up and up. That's going to put more pressure on players that are undercapitalized.”
Ms. Sharp at SCM said that Ben Venue’s withdrawal hasn’t directly affected SCM’s business, “But that move continues to highlight both the opportunities and the risks of operating in this sector of the market. It is complex and highly technical.”
Hans Engel, president of DSM Pharmaceuticals, remarked, “We’ve seen additional business requests for cyto drugs, as well as increased nervousness about the CMO business model. There are increased worries about compliance levels at CMOs.” As in, ‘If Ben Venue, a Boehringer Ingelheim subsidiary, can’t do it, who can be trusted?’
Mr. Powell at Hospira One 2 One discussed those perception issues, how outsourcing is understood by pharma and biopharma firms, and the obstacles that providers face in building strong, long-term partnerships in the sterile injectables area. He said, “To large pharma companies, the decision they make to outsource is comparable to buying insurance to secure product supply. Just like insurance, it has two components: the amount of coverage you get and the premium you’re paying. They’re trying to get the best coverage at the lowest cost.
“The problem is, the perceptions of coverage and premiums may not be correct. For pharma, when they do work in-house, they think they have the ultimate coverage by controlling the process. They know it’s a bit more costly, but they start to compare it to the alternative: outsourcing. They see a huge gap in coverage between doing work in-house and outsourcing it. And they don’t perceive that there’s much of a cost gap between those choices.
“You can only drive the strategic supplier concept by working on both those factors: coverage and cost. You need to convince pharma that their risk, their coverage gap, between in-house and outsourcing is not that big. Similarly, the ‘premium’ gap isn’t as great as they think. But how do you demonstrate to pharma that their internal costs are actually much higher than they believe they are? Only by working closely with them can you really understand their cost structure, and it’s only when you understand their cost that you can articulate to them why those costs are higher than they really think.”
And that’s why the BVL event, despite creating opportunities to gain share, constituted a black eye for the CMO industry overall. “Something like that lets pharma ops staff say, ‘That’s why we do the work ourselves,’” said Mr. Powell.
Mr. Hinchen at JHP Pharma noted the increase in regulatory scrutiny, but felt that it comes with the territory: “It comes down to the stability you have as a CMO. You have to deal with foundational issues: regulatory compliance, stability in supply, and the like. In 2011, we had numerous Agency audits, including a PAI. Inspections are more rigorous. The subjects of audits have become more complex. It never gets simpler. There’s that constant testing, so you have to prove yourself every day and never rest on your laurels. But when you have that foundation, and can assure reliable supply, people come to you. Both large and small companies recognize and appreciate that stability.”
It’s clear the parenterals sector has plenty of opportunities ahead of it, and if CMOs can cope with the regulatory complexities, there’ll be even more room to grow.
Gil Y. Roth has been the editor of Contract Pharma since its debut in 1999. He can be reached at firstname.lastname@example.org.