Is Consolidation Good for Pharma?

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The bio/pharmaceutical outsourcing market has experienced a turn toward consolidation in the past
year or so, but will this trend continue for 2016?

“There is little doubt that further consolidation and the formation of close partnerships will occur throughout 2016 in the contract service market,” says Mark Rogers, senior vice-president, Life Science Services at SGS North America.  

Will this market consolidation include branching into new and underserved pharmaceutical areas for some contract manufacturers? Ropack Pharma Solution’s Paul Dupont states that while “much has been reported on the rising demand for biologics development and manufacturing capacity,” his company is remaining focused on solid oral-dosage development, manufacturing, and packaging. Other companies are taking stock of industry needs and assessing where they may adjust their service offerings.

To find out what the outsourcing industry may look like in 2016, Pharmaceutical Technology spoke with Elliott Berger, vice-president of global marketing and strategy at Catalent Pharma Solutions; Saharsh Rao Davuluri, president of contract research, Neuland Labs; Michael Lehmann, president, global PDS and executive vice-president global sales & marketing, Patheon; Paul Dupont, vice-president marketing and business development, Ropack Pharma Solutions; Marcus Spreen, head of strategic planning, Rottendorf Pharma; Mark Rogers, senior vice-president, Life Science Services, SGS North America; and Peter Soelkner, managing director Vetter Pharma International GmbH.

Market consolidationPharmTech: The contract services and manufacturing market has experienced consolidation in the past year. What are the implications of consolidation for drug owners in terms of services available and the cost of those services?

Berger (Catalent): Ongoing consolidation enables major pharmaceutical companies to optimize their supply networks and source a greater range of services and technologies from fewer partners. With a more rationalized approach to sourcing, it is easier for buyers to work with long-term strategic partners to create joint quality and operational scorecards against which to measure suppliers, and this gives flexibility to monitor and improve global supply chains.

Consolidation of allied services into larger organizations creates partners that are, on the whole, more flexible to clients’ demands and have an attitude of expansion and investment in new technologies, global capacity, and world-class quality systems to match the future demands of sponsors. This may include co-creating large custom manufacturing suites that can accommodate new launches or tech transfers with specific complex requirements from pharmaceutical clients who look to free-up internal capacity; or the placement of products which have been launched or acquired into the company’s portfolio and where no in-house capacity currently exists.

As ever in the pharma industry, new medicines are becoming increasingly more complex, and the ability of contract service companies to create customized solutions is key to ongoing success. Products are becoming more ‘global’, and the ability of service providers to offer a global supply, with the oversight of multiple regulatory agencies, has never been more prescient.

Lehmann (Patheon): It’s true that the contract development and manufacturing industry has experienced significant consolidation in recent years. The good news is that there are solid benefits for pharmaceutical companies that come from outsourcing partners who have achieved strategic consolidations. The increased bandwidth, capacity, and capabilities, together with an expanded regional and/or global presence, are valuable to biopharma companies. Improved economies of scale and a simplified supply chain are also important benefits.

Soelkner (Vetter): Consolidation has a variety of implications for drug owners. It reduces the number of different supplier options for individual services. Also drug owners want to simplify their service provider network and reduce the number of providers, essentially creating a one-stop-shop-approach whenever possible. As a consequence, they expect their partners to be strategic, not tactical. In practice, this means that drug companies would rather look at outsourcing opportunities for a pipeline of several products, not just one drug. This includes looking for attractive cost models, which the provider can offer to successfully contribute to developing, commercializing and supplying this drug pipeline.

Davuluri (Neuland Labs): As a result of consolidation, vertically integrated [contract manufacturing organizations] CMOs offer a ‘one-stop’ solution to drug owners. Although this idea has been promoted for quite some time, consolidation could potentially increase this focus. These integrated CMOs are pitching their services rather carefully to drug owners. As a pure play API CMO, we tend to focus on the advantages of being API specialists with a lot of depth in handling API-specific [chemistry, manufacturing, and controls] CMC issues. Integrated CMOs are also separating their proposals for APIs and drug products in order to avoid coming across as a company who insists that they do everything (or nothing) and demonstrate skills that are comparable to a standalone specialist who focuses purely on APIs or finished products. Integrated CMOs offer a potential cost savings that drug owners can realize if they choose the one-stop solution.

Dupont (Ropack): As consolidation continues, benefits of long-term partnership between sponsors and [contract research organizations] CROs/CMOs become more apparent. Drug development is becoming more complex, and more venture capital funding and Big Pharma acquisition of smaller and mid-size pharmaceutical companies continues to fuel new product development. Both sponsors and venture capitalists require that candidates identify the drug candidate’s value point as quickly as possible. Yes, consolidation effectively reduces the individual options available to sponsors. However, consolidation provides sponsors with more single-source options [and] helps CROs and CMOs keep up with technology and develop more comprehensive service offerings.

Rogers (SGS): Like M&A activities in any market, the consequential reduction in competition is not generally an advantage to the consumer, and the contract services and manufacturing market is no different. However, such consolidation may also make it easier for the drug owners to find a ‘one-stop shop’, which alleviates the need for the coordination and management of several different providers but may also increase the compliance and operational risks associated with a single-source supplier.

Spreen (Rottendorf): Done well, consolidation can help to lower costs as companies leverage economies of scale. But from a customer perspective, it adds uncertainty. If I partner well with a CMO that is then acquired, will the new management shift focus or somehow change the relationship? Will I need to look for a new contract provider? Consolidation presents both risks and opportunities. It puts the onus on customers to vet contract partners for quality and cost as well as the ability to deliver. Because of our business model, Rottendorf cannot be acquired, so this is not a concern for our customers.

PharmTech: Do you expect additional consolidation or other changes in the contract services market in 2016?

Soelkner (Vetter): We expect consolidation to continue in 2016 and beyond. Regularly, there is news within the industry regarding a merger or acquisition between large and small companies, or at times the consolidation of two equal large-market participants. We believe this will continue. But we do not see large changes that can disrupt the industry, but rather, the continuation of existing challenges such as the ever-increasing complexity of development projects, greater expectations for a high degree of flexibility at the service providers pertaining to timing and batch size, as well as ever-increasing regulatory demands.

Spreen (Rottendorf): Certainly we expect that consolidation will continue, as Big Pharma turns more and more to outsourcing, and capital investment looks for opportunities in this sector. Though it does appear there are fewer--or perhaps we should say worthwhile--opportunities for potential investors. As for other changes, we see continuous manufacturing making more in-roads, and we’re keeping a watchful eye on its impact.

Berger (Catalent): On a global level, the pharma industry is still very fragmented and continues to consolidate, so we would expect the pharma services sector to do the same. There is increased demand for specialized outsourced services, including global solutions as well as customized and full service options. At Catalent, we have seen a marked increase in the demand for complex products requiring drug delivery expertise as well as specialty handling services including scheduled storage, cold chain logistics and handling of DEA-licensed drugs and potent and cytotoxic compounds.

Davuluri (Neuland Labs): API CMOs will look at further modernizing technology. New drug applications are now required to include [quality-by-design] QbD data for any processes where there could be control or quality issues. Techniques such as QbD can be effectively implemented into development only if certain infrastructure for lab scale, pilot, analytical, safety, and computer software is in place. In addition, CMOs will have to look at using modern techniques in R&D and manufacturing such as usage of parallel chemistry, new chromatographic technologies, flow chemistry, etc. This requires an investment not just in infrastructure, but also in technologists with the appropriate training and, most importantly, a commitment from management to make these technologies commercially viable long term.

Lehmann (Patheon): We know that our clients are looking for partners who can work differently with them to deliver in a rapidly changing pharmaceutical landscape .... The expanding demand for sterile development and manufacturing, biologics capacity, and solutions for poorly soluble compounds drive some of the consolidation efforts in the industry.  

Dupont (Ropack): Consolidation within the drug-development market continues to heat up.  Ideally, drug owners prefer to develop their candidates under one roof and benefit from a continuum of quality throughout the development process. This places greater pressure on CMOs to offer additional services supported by capital investments in infrastructure, in equipment, and in the recruitment of qualified personnel, while maintaining costing models acceptable to sponsors and clients. I believe that for these reasons, CROs and CMOs will require additional resources and revenue to support the growing demand for drug development and clinical materials. Meeting demand for comprehensive development capabilities can be attained in the near-term only through the M&A process.

Underserved marketsPharmTech: What segments of the bio/pharma development and manufacturing market are underserved? How does your company plan to address these areas?

Spreen (Rottendorf): As a solid-oral-dose CDMO, our perspective is that spray-drying processing is underserved, as is high-potency development and manufacturing. It can be hard to find a quality outsourcing partner for developing high-potency products, and harder still to find a reliable manufacturer. Rottendorf is exploring high-potency development, which is a capital-intensive investment. But we’re listening to our customers’ needs and evaluating our options.

Soelkner (Vetter): Let me illustrate one of our experiences through an example. Several years ago, we lacked a US manufacturing presence for early drug-development support for injectable drugs. Since more than half of our customer base was headquartered in the US at that time, and approximately 30% of all injectable development projects were taking place there, we established a US operation. Since that time, company-wide, we can now offer customers a one-stop-shop service for injectable drug products from Phase I and II, on through late-development phases and subsequent commercialization, which includes lifecycle management options at a later stage of the commercialized drug. This approach has been eagerly embraced by our US and international customers.

Davuluri (Neuland Labs): Looking at drugs under development from an API perspective, two current trends are the emergence of deuterated versions of drugs and an increase in peptide-based therapies. Deuterated molecules have to be synthesized under certain regulations with a focus on efficient use of deuterated starting materials. Neuland had identified this as an area of growth in 2009 and developed these capabilities. As a result, we have produced multiple deuterated versions of previously developed drugs as new chemical entities--some of which are in advanced clinical development. With regards to peptides, there is a dearth of experience in making short-chain peptides at larger scales. Conventional peptide CMOs tend to offer solid-phase techniques for all peptide APIs at any scale, which doesn’t necessarily help achieve lower costs, especially at larger volumes. There is a strong pipeline of short-chain peptides being developed for diverse therapeutic areas, like GI, respiratory, cardiovascular, and even orphan diseases. Neuland has developed several short-chain peptides using solution phase techniques for both clinical and commercial use. We have also recently developed a proprietary purification technique that enables a multifold increase in purification yields. This technology is applicable to both small molecules and peptides.

Dupont (Ropack): At Ropack Pharma Solutions, we have decided to expand our commercial manufacturing and packaging capabilities to include early-stage development, formulation, process development, and the manufacturing and packaging of clinical supplies. We now can support our customers from formulation through Phase III clinical manufacturing, packaging, and distribution followed by commercial manufacturing, packaging, and distribution under one seamless service offering.

Rogers (SGS): As a contract testing company, SGS has clearly seen difficulties in the early phase of drug development; specifically in biopharma, deficiencies in the level of expertise, not only in the technical aspects of analytical development, but also in the regulatory knowledge. Our company is addressing these issues through strategic acquisition with a focus on expertise and the maintenance of a strong, multi-level, [quality assurance] QA system,

Berger (Catalent): Drug molecules are becoming ever more complex. One problem that the industry needs to address is the solubility and bioavailability of new therapies coming through to the market. Catalent has invested over the past years to draw together services and technologies … to address these issues, to ensure that the bioavailability challenges that affect over half of all new drugs can progress through clinical development towards the market place. Speed of development remains a challenge to all drug research.

Addressing the need to serve global clinical trials with specialized services, Catalent continues to expand its clinical supply services network. By providing localized options and logistics capabilities in cold chain distribution, complex comparator procurement, and a variety of specialized handling and packaging solutions such as blinding and labeling, we can continue to serve the growing demands of the industry as biologics and biosimilars clinical trials increase.