The contract packaging market is active and continues to be a steady growth industry. With the customer base expanding, more and more of the pharma industry is putting its faith in contract manufacturers and packagers.

Justin Schroeder, executive director of marketing, business development and design at Packaging Coordinators, Inc. (PCI), said pharmaceutical and biotech companies are rationalizing their supply chain, looking to outsource what is not core to their business and looking for select capable partners to support their business. At the same time, he said, they are streamlining their supply base to designated providers who are best in class. “The market has consolidated, both with merger and acquisition (M&A) activity in the pharma sector as well as consolidation from the supply side,” Mr. Schroeder said.

Tee Noland, chairman and COP of Pharma Tech Industries concurred. “Customers are merging with each other and trying to rationalize their supplier base, which is putting pressure on our industry to also consolidate,” he said. “We have seen some of the larger CMOs get even larger through M&A and I expect that will continue as scale becomes more desired by our customers.”

With new virtual companies starting up every day and larger manufacturing companies trying to find additional capacity as new products are being approved, the outsourcing business will undoubtedly continue to grow.

However, Eric Allen, vice president of sales and marketing, Aphena Pharma Solutions, Inc., noted the contract packaging business is at a critical pivot point. “With the GDUFA fees slowly increasing and the high cost of implementing serialization in the next 12 to 16 months, we will start to see several small packaging companies venture into non pharma marketplaces, move away from generics, or simply close their doors,” he said. “Even though serialization and the Drug Supply Chain Security Act (DSCSA) is a positive concept for manufacturers to protect against counterfeit products, it will be a high implementation cost across the whole supply chain, which ultimately will be passed down to the end customer level. This will quickly increase product costs and potentially insurance rates even with low cost generic products. Some manufacturers will move their products in-house based on concerns with the DSCSA requirements and other manufacturers will rely deeply on packaging companies to support their initial implementation phases until they can justify their own high internal setup cost for DSCSA. The next few years will be exciting for the contract packaging business, where the stronger packaging companies will grow, smaller companies will phase out of the pharma business, and a large shift of packaging will be taking place with newly approved injectable or harder to handle biopharmaceutical products.”

While always competitive, unique package designs have allowed the contract packager and its customers to work closely and develop a strong partnership to deliver cost conscience and consumer friendly packages, according to Joe Luke, vice president of sales and marketing for Reed-Lane. “Customers are looking more to their contract packagers for cost savings ideas,” he said. “They are more open to suggestions and changes, like material changes, where even just a few years ago they were not as receptive. Customers are more open to alternatives to realize savings.”

For Reid Lederer, president of Pharma Packaging Solutions, a global marketplace means global challenges. “The supply chain of today’s pharmaceutical company is complex and has multiple opportunities for significant cost savings, but also for costly logistics failures,” he said. “A company’s core competence is critical. Pharmaceutical companies focus on developing drug formulations along with their product sales and marketing efforts. We like to focus on getting their product packaged correctly and in compliance, and then delivered efficiently to the marketplace. With a time-sensitive supply chain, agility is critical.”

Market Trends & Drivers
The key trends that drive the majority of customer packaging requests are based primarily on demographics, according to Mr. Lederer. “Twenty-six percent of North America’s population is aging baby boomers, or roughly 79 million people. This aging population is increasing the demand for drugs in the U.S. marketplace, which already consumes 41% of global drug sales,” he said. “This translates to packaging trends such as larger print, easier-to-open, more ergonomic packaging, as well as private labeling and generic branding for seniors on a budget.”

The second key trend driving contract packaging is increased regulation worldwide, added Mr. Lederer. “Serialization changes traceability requirements ten-fold,” he said. “Adding these layers of complexity to a marketplace challenged with time-sensitive products means that everyone has to improve their operations.”

Serialization is certainly a hot topic lately, agreed Mr. Schroeder. “While the U.S. and European regulatory groups have pushed serialization requirements out to 2017, other emerging markets have been more forceful in bringing requirements in 2015, keeping the pressure on pharmaceutical companies to develop and implement their Track & Trace strategies. The industry is taking steps to be prepared, but significant activity is really starting to take hold,” he said.

Today’s drivers in the contract packaging business start at the federal regulations and large wholesale drug distributors, according to Mr. Allen. “Some drivers are positive, pushing business to our industry, as is the case with new stricter regulations on dietary supplements in a cGMP environment,” he said. “This is a positive push in the contract pharma business opening additional markets and increasing the end customer’s assurance levels around safer products. Other drivers like GDUFA or DSCSA have major effects on this industry, not only from a direct cost standpoint, but also from planning the whole supply chain.” These drivers will effect turnaround times, product launches and handling requirements for all contract service providers.

“The packaging industry trends are still moving toward convenience and child safety concerns,” Mr. Allen continued. “We are still seeing customers more focused on child resistant package designs and patient compliance. We are also being asked regularly about new and inventive ways to deliver unit of use products both in solids and liquid-based products.”

Expanded service offerings, in addition to regulatory requirements are the key drivers for Mr. Noland. “What was once more of a simple business is now more complex because of expanded regulatory requirements on CMOs, like supplier quality audits,” he said. “At the same time our customers are demanding more services from CMOs to make their lives easier, especially with all of the M&A they are experiencing.”

Moving forward, as more Rx products make the transition to over-the-counter (OTC), there is a definitive need to develop unique secondary packaging that sets these new products apart to drive consumer take-away. “These unique package designs in cartons or blister cards place demands on the capabilities of a contract packager to produce each customer’s vision within a finite timeframe at a competitive cost,” said Mr. Luke. “Customers are depending more on their contract packagers to provide more services and to be truly turnkey.”

Growth Opportunities
Contract packagers in today’s market are looking to expand the scope of their services as customers desire turnkey solutions and consolidate their vendor base. “We see significant desire by customers to consolidate work with select outstanding vendors with a broad range of services,” said Mr. Schroeder. “This is true both in packaging and manufacturing of commercial medicines, but also in clinical trial services. Customers are under tremendous pressure to simplify the supply chain and identify key partners that can assist in the drug development and really deliver competitive advantage.”

“One area of the market where we have made significant investment recently is in the development of potent compounds, therapies such as oncology treatments,” Mr. Schroeder added. “As new breakthroughs are being developed, we are helping drive the appropriate development and handling of these specialized products both in drug development and manufacturing, as well as packaging and supply chain logistics. It takes tremendous investment in both infrastructure and expertise, but we believe this is an attractive growth segment.”

In addition, Mr. Schroeder said for those service providers that can support the capital requirements, there is tremendous opportunity for serialization services in the commercial space. “With the significant investment associated with this effort, some providers simply may not be able to fund the requirements,” he said.

Mr. Allen agreed. “We are still seeing a strong growth pattern in the biopharmaceutical industry, however there is a large capital investment to be made by any contractors preparing for these new product approvals by the FDA.”

Serialization of Rx packages at the level of sale to the pharmacist present an opportunity for increased volumes for contact packagers willing and able to invest in this area, commented Mr. Luke. “The cost of investment in the equipment required to develop serialization capabilities that will not produce a return on investment for several years has deterred some contract packagers from moving on this requirement. As the deadline approaches, the contract packaging industry, as a whole, may be strained to produce at the levels pharmaceutical companies will need as they are starting up their own serialized lines,” he said.

The major opportunities for growth are in continuing to provide a high level of quality and service to customers, according to Mr. Noland. “We believe that our customers want to do business with a CMO that is very reliable and takes a long-term approach,” he said. “This allows them to spend their intellectual capital elsewhere on things like new products and marketing. Major challenges moving forward include the presence of private equity and the effect that is having on valuations as we look to acquire other CMOs.”

An efficient supply chain demands expertise, according to Mr. Lederer. “By maintaining focus on core competency, companies can remove excess time-to-market, inventory and compliance headaches. The supply chain has the most potential to increase or decrease profitability,” he said.

Meeting Customer Expectations
More and more, customers are looking for a partnership model in today’s marketplace. They want vendors that provide real value, not just competitive cost, according to Mr. Schroeder. “Customers come to us for expertise and it is really more of a consultative relationship and true partnership. I think this is a direct result of the ongoing M&A activity and reconciliation of what is core to pharmaceutical companies. Many of the activities traditionally supported in-house are now expected to be supplied from the vendor side. It really increases the role of the supplier in the mutual success of both parties and drives a more strategic, rather than tactical, relationship,” he said.

Expectations among customers are growing every day and meeting them is a challenge. Regardless of size, Mr. Allen said all customers expect and deserve the same level of customer service. “Some contractors have been taken advantage of because of their size or the cost barrier to move products between competitors. This mindset has worked over the past several years for some contractors but is no longer the case.”

“Customers are not concerned about cost barriers if products are late and communication is lacking. Over communicating, delivery dates met and inventory levels available in real time are becoming standards for our industry and will determine which contracts continue to grow,” Mr. Allen explained. “We are constantly seeing more scorecard evaluations being implemented regardless of the company size. Even small manufacturers or virtual companies are spending more money around startup evaluation and supply chain assurance of their contractors like a big pharma company.”

Mr. Noland concurred with the general consensus that customers seem to be expecting more and more from CMOs. “This tends to make our relationship more valuable to our customers,” he said. “At the same time these services do not come free, so we have to always think creatively about our business model and make changes accordingly to support customer needs. I see this trend of the customer expecting more from CMOs to continue until they realize that the COGS cannot support it.”

Customers are ultimately looking for contract packagers to work closely with component suppliers to help develop unique package designs while finding cost reduction opportunities, according to Mr. Luke. “Customers are also asking for contract packagers to provide more services as previously noted,” he said. “Some customers are willing to make longer term commitments in return for cost concessions and asking the contractor to assume more risk.”

In the end, Mr. Lederer noted, “Once you earn the customer’s trust, they have more and more custom and unique product requirements. By continuously delivering the solutions they are requesting, business will continue to grow as a result.”