By James M. Hamby, Ph.D.

The CMO business is being impacted by the rapidly changing global pharmaceutical market. Western CMOs located in North America and Europe are feeling the pricing pressure of lower cost Asian CMOs, but remain competitive with an edge on quality, reliability, proximity and familiarity with western markets.

For CMOs whose primary business is the development of innovator small molecule APIs (Active Pharmaceutical Ingredients), small to large biotech companies have traditionally been their primary target clientele. Biotech companies by design focus on value added-activities. Consequently, biotech companies outsource their drug development and manufacturing activities to save on infrastructure costs and leverage outside development expertise.

Since these companies predominately target more lucrative western pharmaceutical markets for their first approvals, experienced CMOs with successful track records of developing and registering innovator APIs in these markets have a competitive advantage with sponsor companies. However, the lure of low-cost offshore development and manufacturing is an attractive alternative to western CMOs, for small cash-strapped biotech companies that need to save on development costs.

Offshore drug development, however, is not for the faint of heart.

Sponsor companies must fully assess the “true cost” of offshore drug development before committing to this approach and take into account a multitude of factors, such as travel, time difference, communication, quality, reliability, customs clearance, and regulatory compliance. Sponsoring biotech companies contemplating offshore drug development need to have a development team that is seasoned in offshore drug development to ensure the successful and timely delivery of quality API. For this reason, many sponsor companies are not willing to take on the added risk of offshore drug development and manufacturing and choose to work with onshore CMOs to development their innovator APIs.

Some western CMOs have tried to bridge the labor gap by acquiring or constructing offshore GMP manufacturing facilities. It is not clear at this point how effective this strategy is for CMOs in terms of providing significant cost savings for their sponsor clients while in return reliably delivering high quality APIs.

Another market for innovator drug development and manufacturing that is opening up to CMOs is Large pharma. To adapt to a changing global pharmaceutical market, large pharmaceutical companies are adopting a more “biotech Like” business model.

Large pharma is becoming increasingly open to outsourcing more of its drug development and manufacturing work to CMOs to improve efficiencies, cut costs and scale to production demands. These large companies, like their biotech counterparts, are looking foremost for quality and on-time delivery of APIs from their CMO partners. But they also have narrowly targeted cost expectations for their projects.

Large pharma companies typically use CMOs for early stage drug development and manufacturing projects such as for process development work and Phase I and II clinical trial material. When a drug starts to look promising and advances in development, the pharmaceutical company will likely transfer the process in-house or offshore, where labor costs are cheaper, or to a location where the company can benefit from tax advantages. Many pharmaceutical companies have their own facilities in Asia where they can take advantage of the “labor arbitrage” as well as control the quality in their own facilities.

In the innovator space, both biotech and large pharma sponsors are primarily concerned with identifying and working with CMOs that can consistently provide high quality drug development and manufacturing services, are fully regulatory compliant, and have the ability to reliably deliver APIs on schedule.

For innovator APIs, experienced CMOs that can provide quality manufacturing services and deliver API on schedule and on budget are the CMOs most likely to be cost effective for sponsor companies. The reason for this is that even small delays in the development and/or API delivery schedule of an innovator drug can rapidly wipe out any cost savings garnered from using offshore CMOs that have lower cost structures.

However, in the current pharmaceutical economic environment, quality and delivery alone are not enough sustain the competitiveness of a CMO. The mere presence of Asian competition is placing significant pricing pressure on western CMOs, whether or not offshore development is a consideration. Going forward, competition in the global CMO market is likely to increase, with fewer startups being funded in the current economic climate and increased competitiveness from offshore CMOs as they gain experience, quality and regulatory compliance approach western standards, and as sponsor companies become more comfortable working with offshore CMOs. The CMOs that prevail will be the ones that can provide cost effective quality drug development and manufacturing services with the ability to deliver API on schedule.

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James M. Hamby, Ph.D., is vice president of Quality Assurance and Regulatory Affairs at Ash Stevens, Inc. He can be reached at jhamby@ashstevens.com.