The market for contract manufacturing outsourcing (CMO) is on the rise with the pharmaceutical companies targeting their resources towards marketing rather than production and drug discovery, in the highly competitive markets. The shift in focus towards contract manufacturing is for cost efficiency, lack of in-house expertise with the changing technology and to have advantage of the time-to-market.

In the next few years, competition in most markets will be among multinationals. Falling research productivity, increasing pressure from governments to cut prices and expiry of patent on blockbuster drugs have all led to unprecedented consolidation in the industry. Now the top ten firms account for as much as 42 per cent of the market. Most multinationals too are focusing on outsourcing for gaining a competitive edge in the market place. The focus is on slicing business into core and non-core areas-and hiving off non-core activities to third parties.

OTC & nutritional products to drive CMO market

According to BCC, Inc, the contract manufacturing outsourcing (CMO) market is valued at US$86 billion in 2004 is growing at a CAGR of 10 percent in the last three years. In the contract manufacturing outsourcing market, contract manufacturing of the OTC and nutritional products is the largest segment and is the fastest growing segment with market size of US$59.8 billion in 2004. The market for contract manufacturing (CMO) of bulk drugs and prescription drugs touched US$26.2 billion in 2004 and has been growing at a CAGR of 10.64 percent in the last three years.

Outsourcing is higher in Europe

Europe is ahead of other regions in outsourcing production owing to a greater need for cutting health care expenditure. Health care budgets in most European countries are spiralling out of control. European governments, looking to prune health care budgets, are putting pressure on companies to lower their drug prices. US though a major market for production outsourcing, will offer more opportunities as pressure from government and managed care organizations to lower drug costs are increasing.

The contract manufacturers in Europe dominate the bulk drug outsourcing business, but recently, contract manufacturers from India and China have made inroads owing to their cost competitiveness. The going for the new entrants may not be smooth with pharmaceutical companies reluctant to change suppliers for reasons of quality and reliability.

Typically, large pharmaceutical companies outsource intermediaries from contract manufacturers and complete the final production stages themselves. The key issues in contract manufacturing include quality, cost, secrecy and reliability. More importantly, the contract manufacturers build close relationships with the pharmaceutical companies.

Indeed, outsourcing is leading to an unbundling of pharmaceutical value chain. The number of specialist companies in the traditional value chain has been rising over the last 5-10 years while the number of integrated companies is declining. Global pharmaceutical industry is moving to structure where a handful of multinationals supported by an army of contract researchers and contract manufacturers will control most of global pharmaceutical market. Indeed, outsourcing can no longer be written off as a management fad. Nor can public backlash or government sanctions keep it down. The economic logic behind outsourcing is far too compelling to ignore and moreover outsourcing at its heart is no rocket science, but embodiment of the simple management principle-right man for the right job.

Outlook

The outsourcing market is expected to increase from the levels of US$86 billion in 2004 to US$146 billion in 2009 with a CAGR of 11 percent. This trend is quite evident from Pfizer's expected cost cutting worth US$4 billion in the next 4 years with the withdrawal of Bextra and increased safety issues with Celebrex. The company has already planned to cut down the number of operating plants to 63 from 93 two years ago. This trend is expected to be followed by other major companies to sustain the profit margins.u

-- Compiled by Cygnus Business Consulting & Research Pharma team