End of the Dedicated CMO? - Is the contract-only CMO an endangered species? - BioPharm International


End of the Dedicated CMO?
Is the contract-only CMO an endangered species?

BioPharm International
Volume 26, Issue 2, pp. 14-15


For CMOs entering the proprietary products game for the first time, the rationale seems rather clear:

  • Better margins. Proprietary products typically promise better profitability than contract manufacturing. CMOs can capture the higher unit price of the finished product and the 40+% gross margin that drug companies can command.
  • Better utilization. Proprietary products can absorb some of the unutilized capacity in CMO facilities. This utilization is especially valuable for solid-dose CMOs, among which there is significant excess capacity.
  • Greater control and predictability. In the contract-only CMO model, manufacturers are totally at the mercy of their clients' marketing prowess and product success. With proprietary products, CDMOs can gain some predictability over revenues and utilization.

A move into proprietary products can be particularly attractive to smaller CDMOs that cannot gain traction in the contract manufacturing business and need an extra boost to drive growth. Global bio/pharma vendor-consolidation strategies favor larger CMOs with broader capabilities, which could leave smaller CMOs out of the mix and searching for new growth avenues.


CDMOs have real advantages for developing or acquiring proprietary products, because of their development and manufacturing infrastructure and know-how. The frequency and apparent ease with which they can enter the products business, however, highlights one of the great contradictions of the bio/pharmaceutical industry. While much attention is placed on the high cost of R&D and the high probability of failure, the industry has remarkably low barriers to entry. Cheap generic APIs, low-regulatory barriers for OTC products and products with previously approved APIs (505(b) 2 products), and the ability to scale manufacturing operations to niche markets enable all sorts of companies to be successful with proprietary products.

Efforts to clamp down on healthcare costs, however, could hamper that model going forward. In Europe and the US, governments and insurers are making it more difficult for new products to gain access to approved formularies and more difficult for physicians to prescribe off-formulary drugs. Market power is moving to larger generic-drug companies and to distributors that can offer a broad product list at competitive prices. That market power could make it harder for smaller products companies to break into the market.

PharmSource expects that a lot of CMO proprietary product-development efforts will be channeled to the OTC and nutritional segments of the market, especially private label. OTC and nutritional products are benefiting from growing consumer acceptance and are not subject to insurance limitations. Further, marketing of private label products is in the hands of the labeler rather than the bio/pharmaceutical company, which means that CMOs won't have to build sophisticated sales and marketing infrastructure. Finally, the know-how of CMOs to develop and manufacture products with differentiating features and benefits will be a plus in dealing with the retailers.

The CMO model was meant to be relatively low-risk because it avoided the inherent riskiness of new drug development while offering bio/pharmaceutical companies the benefits of lower manufacturing costs and no investment in manufacturing capacity. The model hasn't worked out that way, partly because of the low entry barriers to contract manufacturing, and partly because global bio/pharmaceutical companies have been able to greatly improve their internal manufacturing performance. As a result, the industry will increasingly see CMOs mimic the business model they were meant to replace.

Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, Twitter@JimPharmSource,
, http://www.pharmsource.com/.

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