Why the Pharmaceutical Industry Will Continue to Rely On Contract Manufacturing

Widely used in the pharmaceutical and biotechnology industries, contract manufacturing involves outsourcing manufacturing products to organizations, which helps them offer the same services at a relatively lower cost. Having emerged as a major industry, analysts at Technavio expect the global pharmaceutical contract manufacturing market to grow at a CAGR of around 7% by 2020. This brings into question why the pharma industry has become so hugely dependent on contract manufacturing and why this trend will continue in the upcoming years as well.

To begin with, by outsourcing manufacturing activities, pharmaceutical companies can increase their focus on core areas of competence. For any pharma company, research and development (R&D), innovation and brand building make up the majority of their core activities. Focusing on these areas allows them to emerge as major brands and edge out their competitors. Thus it is only logical for them to outsource manufacturing work and invest in better resource deployment and infrastructure building. Companies like Pfizer, Merck and Roche have deliberately reduced their in-house production capacity in order to aggressively fuel their R&D pipelines and meet the growing demand for new drugs.

Secondly, while selecting a partner for outsourcing, pharma companies look for US FDA-approved plants along with skilled workers and low operating costs. This has resulted in a rapid increase in the number of US FDA-approved manufacturing facilities in emerging economies. A good example is India, which has become one of the most preferred locations for outsourcing manufacturing services. According to a study, in 2015, Indian suppliers accounted for around 25%-30% of the total drug master files (DMFs) filed with the US FDA. The implementation of the WTO TRIPS-mandated product patents (January 2005) has led to a rise in outsourcing in developed markets, which has in turn encouraged pharma companies to outsource their manufacturing activities.

Impact of trends on the global pharmaceutical contract manufacturing market

Impact of trends on global pharmaceutical contract manufacturing market; image

Source: Technavio

Reduced time-to-market is another major advantage of hiring contract manufacturers. With increased urbanization, rise in per capita income and increased health awareness, more and more individuals are readily spending on healthcare drugs. Additionally, the pharma industry is witnessing a transformation from traditional manufacturing methods to an intensive technology setup furnished with high-tech equipment and major investment. Due to these technological enhancements, the entire production process has become incredibly efficient and can easily meet the high demands for drugs without compromising on quality standards. Thus, by engaging with contract manufacturers, pharma companies can easily focus on intensive R&D along with determining the shortest possible route for drugs to reach people.

Most of all, the pharma industry is undergoing major consolidation with vertical integration, alliances and acquisitions. Strategic partnerships between pharmaceutical companies and contract manufacturing organizations (CMOs) have led to the reduction of government spending on manufacturing. Today, as the consolidation trend continues, about 30 CMOs contribute over half of the industry revenue in a highly fragmented industry. CMOs are also looking for ways in which they can expand their geographical footprint and enlarge their client base. For example: Biocon partnered with BMS, Mylan (for biosimilars in oncology), Amylin (for novel peptides for diabetes treatment), and Vaccinex (for mAbs and oncology products).


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