U.S. CMO Market Report

By Jesse Sullivan and Jennifer Brice, Frost & Sullivan | May 30, 2012

A growth industry in transition

Contract manufacturing organizations (CMOs) provide independent manufacturing services for pharmaceutical and biotechnological markets. CMOs have evolved from initially providing basic manufacturing services to providing a wide range of services that suit the demand of the market and the outsourcers. CMOs are equipped with the required expertise, resources, technologies and tools as a viable option to save cost and time.

The U.S. CMO market is the largest market for pharmaceutical contract manufacturing, having generated approximately $10.7 billion in revenues in 2011. Frost & Sullivan expects the market to grow at 7% to 9% until 2016.

The expansion of the CMO market is being driven by the steady growth of the U.S. pharmaceutical industry, as well as increased outsourcing of large pharma companies that are focusing on core competencies to improve profit margins. The U.S. will continue to face a challenging economic environment in the near future. Accordingly, pharma companies will reduce capital expenditures and continue outsourcing manufacturing activities.

Total U.S. CMO Market
Frost & Sullivan segments the U.S. CMO market into three broad segments: solid manufacturing, sterile manufacturing, and semisolid and liquid manufacturing. The sterile segment can be divided into two subsegments: parenterals and semisolid and liquid. Within the parenteral subsegment are small volume and large volume pharmaceuticals. Small volume pharmaceuticals consist of cytotoxic and noncytotoxic agents. Within the semisolid and liquid subsegment are nasal, nebulized, ophthalmic, otic and topical/wound care pharmaceuticals.

The solid segment is the largest segment within the U.S. CMO market making up approximately 45.1% of this market.

The solid dose CMO segment is expected to grow from $4.8 billion in 2011 to $5.9 billion by 2016 at a 4.1% compound annual growth rate (CAGR). However, expansion will slow in the later years of the forecast period. Generics are expected to be a growth driver for this segment, with patents expiring for several drugs and companies looking to manage their portfolios and manufacturing capacity. However, big pharma is repositioning its manufacturing capacity away from small-molecule products and toward biologics, including cell culture, vaccine production, and parenteral fill and finish. As a result, growth for the solid manufacturing segment in the forecast period is estimated to be the slowest of the three, among solid manufacturing, sterile manufacturing, and semisolid and liquid manufacturing. Little increase in traditional small-molecule prescription revenue will limit growth opportunities, and innovation to create differentiation in this segment will also be limited.

Competition from Indian CMO providers is greater in solid dose contract manufacturing, according to industry insiders, and will put downward pressure on prices in this sector of the CMO market. Asian CMOs’ impact will be reduced for small and large patenteral manufacturing services due to the weight of liquids in shipping and the focus on quality that is demanded for that type of a product. These countries, especially China, are expected to invest heavily in this industry. However, pharmaceutical companies report there is still some concern over quality with Asian-based CMOs.

The sterile services segment is expected to grow nearly 9.0%, whereas the market share for solid and nonsterile services is expected to decline. As a result, the sterile CMO segment is expected to outpace the nonsterile and solid segments due to its greater outsourcing and growth potential. Contract service providers view sterile capabilities as value added. The sterile segment consists of two subsegments: sterile parenteral and sterile semisolid and liquid.

The sterile segment is expected to experience large growth due to the following factors:
  • Increasing pharma and biopharma focus on complex disease areas
  • Trends in disease control
  • Growth in emerging markets
  • The pharmaceutical patent cliff
  • The reformulation of existing products

Sterile Parenterals
Sterile parenteral contract services make up about 82.8% of the total sterile CMO market. This includes small-volume parenterals (e.g., vials, ampoules and syringes) and large-volume parenterals (e.g., bags and bottles). The majority of large-molecule pharmaceuticals have to be administered parenterally, except for the oral polio vaccine, the nasal flu vaccine, and, most recently, pulmonary insulin.

The sterile parenteral manufacturing subsegment is expected to have a 13.5% CAGR, and is expected to reach a market size of $6.5 billion by the end of the forecast period of 2016. Injectables, both branded and generic, are driving growth for this segment.

The sterile parenteral subsegment is comprised of small- and large-volume sectors. Small-volume parenterals make up the majority of sterile CMO services with 88.9% of market share. The small-volume sector is comprised of cytotoxics and noncytotoxics. Cytotoxics are expected to be the key driver of growth for the small-volume dosages as a result of the robust demand for oncology and other high-potency drugs. The focus areas in sterile parenterals include vaccines, cancer therapies, antibodies, gene therapies, specialized antibiotic treatments, and proteins.

Small Volume Parenterals
The growth rate for the small-volume parenterals CMO sector, including prefilled syringes, vials, ampoules and small bags, is expected to outpace large-volume parenterals due to their application in significant growth areas, such as vaccines, cytotoxic, and lyophilized products. In 2011, the small-volume parenterals sector was the largest, with 88.9% of revenue share, in the sterile parenteral subsegment. Revenue share is expected to increase to 90.4% by 2016.
Prefilled syringes (PFS) are one of the top growth areas for the CMO market, as pharma companies are looking to PFS for existing and new products. The use of PFS also eliminates issues with the overfilling of expensive drugs and could result in significant cost savings — a major driver for outsourcing.

Cytotoxics are expected to be the key driver of growth of small-volume parenterals because of the demand for oncology and other high-potency drugs. However, non-cytotoxic products will remain the largest sector of small-volume parenteral CMO services in the U.S. despite declining market share between 2011 and 2016.

Semisolid and Liquids
At 41.9%, the nasal sector is the largest of the semisolid and liquid CMO services subsegment. Drug developers are researching nasal-delivery systems for common disorders and diseases, such as sexual dysfunction, osteoporosis, pain and headache. Some of the many advantages that nasal drug delivery has over other modes of administration include:
  • Viable alternative for drugs that are difficult to formulate
  • Better patient compliance than injectable delivery
  • Mucosal surface is vascular, providing rapid drug absorption and effect
  • Brain proximity makes it the ideal candidate for central nervous system (CNS) drug delivery
  • A smaller quantity of the active drug is required for nasal delivery due to rapid absorption.

The ophthalmic sector is the second largest, making up 36.6% of total sterile semisolid and liquid CMO services. Retinal diseases, such as age-related macular degeneration (AMD) and diabetic macular edema (DME), occur in the back of the eye or in vitreous fluid where conventional formulations cannot reach. Drug developers are researching ophthalmic treatments primarily because of poor compliance with current treatments, as most patients with these conditions are elderly.

The ophthalmic sector will have the second-fastest growth over the forecast period in the semisolid and liquid segment. Main participants in the ophthalmic sector include Pfizer, Alcon Laboratories (owned by Novartis), Allergan, Santen Pharmaceuticals and Merck & Co. The patent expiration for key ophthalmic drugs manufactured by these players could potentially spur the growth of manufacturing services for generics. Emerging companies, such as pSivida, are also key to innovation and market growth, as they bring new and better products to the market.
The semisolid and liquid subsegment is not poised to grow as rapidly as CMO parenterals; however, it is a key part that has growth potential. Over the counter (OTC) products are also a large focus in semisolid and liquid contract services, and this trend will continue due to anti-aging treatments remaining an important part of the semisolid segment.

The nonsterile segment is the smallest of the CMO industry, making up approximately 16.2% of the total market. The manufacturing of nonsterile dosages requires less operations and capital expenditures than sterile dosages; however, nonsterile dosages offer lower returns.

Challenges, Trends and Conclusions
The main points of competition for CMOs are price, turnaround time, service and quality, and proprietary platforms. The priority of these points of competition will shift slightly depending on segment of the industry. Price will be a significant factor in determining contracting for solids, but quality and proprietary platforms become more important in sterile manufacturing services.

The fragmented nature of the U.S. CMO market remains a challenge. Prices are driven down by over-competition in the market. Frost & Sullivan expects the market to begin to consolidate in the next three to five years. The consolidation will be mainly driven by competitors leaving the industry, CMOs abandoning a certain area within the market, or CMOs going out of business. As a result, we expect 30% of the market to exit over the next five years. Consolidation will continue to improve the pricing power of value-added CMOs.

Jesse Sullivan is a Healthcare Consultant at Frost & Sullivan. Jennifer Brice is Global Life Sciences Program Manager at Frost & Sullivan. For more information on Frost & Sullivan’s European Pharmaceutical and Biotech Contract Manufacturing Markets, its Analysis of the United States Contract Manufacturing Outsourcing Market research, and its CMO research, please contact britni.myers@frost.com.

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