Leading European CMOs Consolidate Market Positions

The CPhI tradeshow, held this year in Frankfurt provides an annual opportunity to view the full scope of the European contract manufacturing industry. PharmSource estimates the size of the European dose-contract manufaturing market to be $5.75 billion, representing about 55% of global contract dose manufacturing. The PharmSource Advantage contractor database counts more than 160 dose manufacturers in Europe. Most impressively, 10 of the largest dose-contract manufacturing organizations (CMOs) operate almost entirely from a European network (see Table I). The success of major European CMOs is notable because it is being achieved despite a difficult industry environment. Some major hurdles include the following:

Jim Miller

• Retail environment: Drug prices and consumer access to new drugs are tightly controlled by European governments. This situation puts a lot of pressure on manufacturers to keep costs as low as possible, which gets reflected in CMO margins.

• Exchange rate: The low value of the US dollar relative to the Euro has made it increasingly difficult for European CMOs to compete for US contracts.

• Overcapacity: The high cost of closing redundant facilities (due largely to labor laws) makes it likely that pharmaceutical companies will sell excess capacity. As an alternative, they may sell facilities to a management group at a bargain price.

• Regional biases: Despite the growth and success of the European Union, the CMO market remains subject to regional biases. French pharmaceutical companies, for example, tend to prefer French contract manufacturers, and Spanish companies lean toward CMOs in Spain.

Table I: Major European dose manufacturers.

Success factors

The largest European CMOs have succeeded despite these impediments. Several factors have contributed to success.

Big Pharma relationships. The largest European CMOs have secured long-term relationships with global pharmaceutical companies, which are less subject to country bias. Many of these relationships were established as a result of the CMO acquiring a redundant facility from a major pharmaceutical company, and obtaining a multiyear contract to manufacture legacy products.

Regional networks. Most major CMOs with facilities in multiple countries are viewed as local companies in the eyes of potential clients inside those countries. One CMO, for instance, told us that since acquiring a parenteral facility in France last year, French pharmaceutical companies have been more willing to talk with them, even for business more suitable for their facilities elsewhere in Europe.

Specialty capabilities. Many major players have specialized capabilities beyond standard dosage-form manufacturing, including the ability to handle compounds that require segregation.

Import barriers. Many European CMOs benefit from the barriers to importing product from outside the EU, including differences in GMP regulations and favorable treatment of products made locally.

Efficiency. There is a general sense in industry that many European manufacturing facilities get more output from a given level of investment and staffing than competing operations elsewhere. This efficiency enables them to overcome other cost disadvantages.

Fluid supply base

One distinguishing characteristic of the European CMO industry is its level of merger and acquisition activity. Major players have been adding facilities or combining operations at a rapid pace, propelled by private financing with a long-term commitment to the CMO business. Major developments of the past year include:

• Fareva's (Paris) recent acquisition of the Farmaclair semisolid and liquid manufacturing facility in Herouville, France, from GlaxoSmithKline (London), and the Feucht, Germany, operations of Pfizer (New York). Fareva has increased its manufacturing revenues from almost zero three years ago to nearly $300 million today.

• Aenova's (Tittmoning, Germany) recent creation through the merger of Switzerland's SwissCaps, a softgel manufacturer, and Germany's Dragenopharm, which produces solid-dose forms. The merger was driven by Bridgepoint, the private equity firm that owns both companies.

• Haupt Pharma's (Berlin) recent growth to a $250-million company after merging with two other German CMOs, Amareg and Wulfing.

• Recipharm's (Haninge, Sweden) acquisition of injectables facilities in France, England, and Switzerland to complement its solid dose operations in Sweden.

As these companies grow, they seek to become more global. Several are anticipating their first FDA approvals. Vetter (Ravensburg, Germany) and Haupt have established a sales presence in the US. Nextpharma (Send, England) made its first US acquisition last year (Bioserv, San Diego), and European CMOs are expected to be among the bidders for Catalent's parental facility in North Carolina.

Japan is another target. Haupt acquired a parenteral facility in the city of Toride. Catalent has operated a softgel facility there for some time, and others, including Vetter and Patheon (Mississaugua, ON), have a sales presence there.

The European dose CMO sector overall appears to be vibrant. The big question is whether it can stay on this path. Some companies will be challenged to replace the legacy businesses they have acquired. And competition from Eastern Europe and Asia—as well as from those companies selling excess capacity—isn't abating. Market leaders will have to work hard to consolidate recent gains.

Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, info@pharmsource.com, www.pharmsource.com