Within the past 15 years, the pharmaceutical/biopharmaceutical industry has undergone a significant evolution. Rather than directly produce their drugs, these mainstream companies are often outsourcing their production to third-party vendors, known as CMO’s (which stands for Contract Manufacturing Organization), which takes care of a lot of the value chain once mostly taken care of in-house. In particular, manufacturing (on top of the two previous steps – discovery and development) is now outsourced. In this article, we explore the significance of Contract Manufacturing Organization especially from a business perspective, while also sharing some top-performing examples.
A biopharmaceutical firm typically first approaches multiple Contract Manufacturing Organizations with a design/formula for a specific medication. These CMO’s then demonstrate quotes to the hiring biopharma company based on processes, labor, tools, and materials costs. Once various bids are taken into consideration, a hiring partner will select one (or sometimes a few, depending on the particular nature of this job) manufacturing partner whom performs as the hirer’s production facilities, producing units of the design/formula on their behalf.
Once a biopharmaceutical company identifies their core competencies within a market, they should consider several benefits of using a Contract Manufacturing Organization that may strengthen their position:
– Cost savings – companies save on cost of capital upfront that’s typically spent on facilities and equipment, as well as labor costs consisting of wages, training, and benefits
– Mutual benefit of the contract site – these contracts typically last years, so the manufacturer also knows that it will have a steady flow of business until the contract expires
– Advanced skills – hiring firms can capitalize on skills that they themselves may not have but can get from their manufacturing partner, in addition to relationships with raw materials suppliers and/or methods of efficiency in their processes
– Quality – contracted firms likely have quality control measures in place that can detect counterfeit, poor quality, and/or damaged materials earlier on in production
– Focus – biopharma companies can better specialize in core competencies while handing off baseline production to their partners
– Economies of scale – contract manufacturers often serve multiple clients, so they are able to offer reduced prices for raw materials as units become less expensive the more there are in a shipment
On the other hand, numerous risks should also be considered such that their competitive advantages are not weakened by using a Contract Manufacturing Organization:
– Lack of control – strategic control is reduced, because hiring companies can only suggest measures to be implemented rather than force them to be used as in an in-house operation
– Relationships – often numerous agreements must be balanced by the contract manufacturer, so the hiring partner’s specific relationship must be specifically maintained by working cohesively and rewarding performance both through additional business as an example
– Quality concerns – the contracted company’s standards may not be on par with the hiring firm’s expectations so must be precisely evaluated for internal testing methods and external good suppliers
– Intellectual property loss – a biopharma company’s technologies are exposed to other personnel when contracting with a manufacturing partner, so core competencies that function as competitive advantages are at risk to be stolen
– Outsourcing risks – language barriers, cultural differences, and long timelines may result in more difficult, expensive, and time-consuming production
– Capacity constraints – biopharma companies may find their product’s production de-prioritized during overwhelming times should their business not constitute large portions of the manufacturer’s overall revenue
– Loss of flexibility and responsiveness – only having indirect control over production operations may result in slowdowns should there be supply chain disruptions, and it may be more difficult to respond to customers’ demand fluctuations
– Pricing – using third-party vendors adds another profit margin to be reached, yielding added costs to the product, resulting in either a higher end-user sale price and/or reduced profit to the main company
Once benefits and risks are weighed against each other, several top CMO’s should be considered to ensure a proper fit between the two companies. Some noteworthy candidates include:
– BioVectra
o Headquarters location: Charlottetown, Canada
o Current market capitalization: N/A (private company)
– Cambrex
o Headquarters location: East Rutherford, New Jersey, USA
o Current market capitalization: N/A (private company)
– Catalent
o Headquarters location: Somerset, New Jersey, USA
o Current market capitalization: $14.41 billion
– CordenPharma
o Headquarters location: Boulder, Colorado, USA
o Current market capitalization: N/A (private company)
– Fujifilm Diosynth Biotechnologies
o Headquarters location: Morrisville, North Carolina, USA
o Current market capitalization: $26.28 billion (Fujifilm Holdings Corporation)
– GSK Contract Manufacturing
o Headquarters location: Brentford, United Kingdom
o Current market capitalization: $83.84 (GlaxoSmithKline)
– Lonza Bioscience
o Headquarters location: Basel, Switzerland
o Current market capitalization: 41.35 billion CHF
– Pfizer CentreOne
o Headquarters location: New York, New York, USA
o Current market capitalization: $197.16 billion (Pfizer)
– Samsung Biologics
o Headquarters location: Incheon, South Korea
o Current market capitalization: 45.12 trillion KRW
– Thermo Fisher Scientific
o Headquarters location: Waltham, Massachusetts, USA
o Current market capitalization: $187.16 billion
In conclusion, partnering with a Contract Manufacturing Organization is a process that many mainstream biopharmaceutical companies are turning to in order to excel in the hypercompetitive pharmaceutical industry marketplace. The business approach consists of a hiring firm soliciting quotes from multiple CMO’s, which, if selected, function as its third-party manufacturing partner.
Several benefits exist to this approach, including cost savings, mutual benefit of the contract site, advanced skills, quality, focus, and economies of scale; whereas there are also numerous risks, such as lack of control, relationships, quality concerns, intellectual property loss, outsourcing risks, capacity constraints, loss of flexibility and responsiveness, and pricing. Some top candidate that can be looked into once benefits and risks are both considered are BioVectra, Cambrex, Catalent, CordenPharma, Fujifilm Diosynth Biotechnologies, GSK Contract Manufacturing, Lonza Bioscience, Pfizer CentreOne, Samsung Biologics, and Thermo Fisher Scientific.