Contract Manufacturing Organization – Pros and Cons of Contract Manufacturing Organizations, and Some Top Examples

Many industries are outsourcing their manufacturing processes to external organizations for a variety of reasons. Explicitly known in the pharmaceutical industry as CMO’s (Contract Manufacturing Organizations), these businesses provide a broad range of advantages to a pharmaceutical company’s value chain. However, they also come with significant disadvantages if the pharmaceutical company’s managers do not pick suitable contract partners. Today, we go over the pros and cons of using contract manufacturing organizations and mention some prime examples of CMO’s within the pharmaceutical industry.

We’ll begin with a brief primer on pharmaceutical contract manufacturing in general. CMO’s serve specific portions of what is known as the pharmaceutical company value chain. This sequential list consists of 5 distinct stages: drug discovery, drug development, drug manufacturing, drug distribution, and drug marketing/sales. CMO’s originally solely serviced the third stage, drug manufacturing, but significantly evolved after that. As private equity began consolidating the outsourced contract organization market after the 2007-2008 Financial Crisis as more qualified management became available, CMO’s soon started to offer services related to the second stage, drug development. Henceforth, CMO’s became known as CDMO’s (Contract Development and Manufacturing Organizations), some of which also handle drug discovery aspects. Drug distribution and drug marketing/sales are often handled in-house by pharmaceutical companies, as at this point, the most financially risky stages have already been handled.

With these things said, what are these benefits and risks to using contract manufacturing organizations in general then? Why outsource at all? The answer specifically in the pharmaceutical industry is that the landscape is so competitive that pharmaceutical companies need to squeeze out every upper hand they can get over other players.

Let’s start with the advantages: hedging financial risk, increasing technical insight, maintaining company flexibility, and leveraging outside scalability. The primary benefit to using contract manufacturing organizations is to hedge financial risk – to increase profitability while saving on costs. In the pharmaceutical industry specifically, this is mainly accomplished using outside manufacturing capabilities offered by CMO’s rather than dedicating in-house resources to a project only to see it potentially fail during drug development. Furthermore, utilizing a contract manufacturing organization that already specializes in producing a particular niche of medications increases the technical knowledge available to the production process itself. This increases the robustness of capabilities available to the pharmaceutical client company and its project. CMO’s also help maintain company flexibility by allowing in-house employees to maintain versatility in their job functions rather than double-down on a too-specific task. This allows the company’s employees to focus on the more general, high-yield functions instead of waste resources on minutiae. Lastly, these organizations enable companies to take advantage of scalable processes that are not available within their businesses. The clients can then scale up (or even down) their production as demand requires.

Now let’s discuss the disadvantages: locating quality providers, losing control, gaps in communication, and intellectual property risk. The primary threat to using contract manufacturing organizations stems from the difficulty in finding quality partners themselves. Specifically, this can actually easily mean the difference between additional billions in revenue and loss of just as much in overhead in the pharmaceutical industry. Companies also often lose significant control over essential factors in drug production, including scheduling, cost, quality, and accountability. With this comes potentially imprecise deadlines, changing overhead, fluctuating consistency, and neglected standards. Communication gaps can further lead to many issues relating to not being able to collaborate efficiently.

A prominent example of this is when incompliance with governmental agency regulations causes interruptions in production, resulting in significant delays in distribution. Also important, there is the ever-increasing risk of losing proprietary data to others when sharing intellectual property. This can result in the leak of valuable information that may even yield competitors to the particular company.

Despite these disadvantages, the pharmaceutical industry continues to take into account the advantages, so there is a well-observed upward trend in the usage of contract manufacturing organizations globally. Some presently significant CMO’s/CDMO’s include:

–          Cambrex

o   Headquarters location: East Rutherford, New Jersey, USA

o   Current market capitalization: N/A (private company)

–          Recipharm

o   Headquarters location: Stockholm, Sweden

o   Current market capitalization: 12.53 billion SEK

–          Thermo Fisher Scientific

o   Headquarters location: Waltham, Massachusetts, USA

o   Current market capitalization: $172.10 billion

–          Samsung Biologics

o   Headquarters location: Incheon, South Korea

o   Current market capitalization: 45.65 trillion KRW

–          Fujifilm Diosynth Biotechnologies

o   Headquarters location: Morrisville, North Carolina, USA

o   Current market capitalization: $25.25 billion (Fujifilm Holdings Corporation)

–          WuXi Biologics

o   Headquarters location: WuXi, China

o   Current market capitalization: 256.10 billion HKD

–          Lonza

o   Headquarters location: Basel, Switzerland

o   Current market capitalization: 42.19 billion CHF

–          Catalent

o   Headquarters location: Somerset, New Jersey, USA

o   Current market capitalization: $14.10 billion

–          Center for Breakthrough Medicines

o   Headquarters location: King of Prussia, Pennsylvania, USA

o   Current market capitalization: $99.12 million (Discovery Laboratories, aka Windtree Therapeutics)

–          Siegfried

o   Headquarters location: Zofingen, Switzerland

o   Current market capitalization: 2.73 billion CHF

Altogether – the decision to go with a contract manufacturing organization in a company’s production process is a significant one, and the pharmaceutical industry demonstrates substantial trends in that direction. These CMO’s (Contract Manufacturing Organizations), often known as CDMO’s (Contract Development and Manufacturing Organization), play an essential role in pharmaceutical companies’ value chain. Advantages include hedging financial risk, increasing technical insight, maintaining company flexibility, and leveraging outside scalability. Conversely, disadvantages consist of locating quality providers, losing control, gaps in communication, and intellectual property risk. Currently, important-to-know CMO’s/CDMO’s are Cambrex, Recipharm, Thermo Fisher Scientific, Samsung Biologics, Fujifilm Diosynth Biotechnologies, WuXi Biologics, Lonza, Catalent, Center for Breakthrough Medicines, and Siegfried, amongst many others.