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Contract Dose Manufacturing Industry by the Numbers

Composition, Size, Market Shares, Profitability and Outlook

2013 edition

Related Market Intelligence Briefings and In-depth Analyses from PharmSource

2012 NDA Review: CMOs Tread Water (April 2013)

Are CMOs Losing the Make-versus-Buy Battle? (June 2012)

Demand and Supply for Contract Manufacturing

of Injectable Drugs - 2013 Edition (Coming Q4 2013)

©PharmSource 2013

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©2013 PharmSource • Client Confidential

Letter from the President

PharmSource is pleased to present the 2013 edition of our report Contract Dose Manufacturing

Industry by the Numbers: Composition, Size, Market Shares, Profitability and Outlook.

This is the third year we have published the report, and as in past years we put our emphasis on

presenting a quantitative portrait of the dose manufacturing industry that provides unique strategic

insight.

PharmSource is the acknowledged authority on the contract dose manufacturing industry. Thanks

to our ongoing program of industry research and analysis, we are confident that Contract Dose

Manufacturing Industry by the Numbers is the most authoritative and reliable portrait of the

contract dose manufacturing industry available to the bio/pharmaceutical industry.

■■ It is founded on the industry’s most comprehensive and detailed database of the dose CMO

industry, the PharmSource Strategic Advantage Database of Contract Services.

■■ It is driven by our unique model of the dose manufacturing industry which we continuously

update and refine.

■■ The model and assumptions are fully explained so readers can understand how the analysis

and conclusions were arrived at.

CMOs will find this report an indispensable resource for understanding their industry and a

critical input in their strategic planning efforts.

Sourcing professionals in bio/pharmaceutical companies will find the report a valuable resource

for understanding a critical component of their supply base that will provide insights for supplier

selection and management.

I would like to acknowledge the contributions of several colleagues to this report;

■■ Saul Richmond, PhD, Director of Market Intelligence, PharmSource

■■ Lisa Hinkle, Managing Editor, PharmSource

■■ Judy Ludwin Miller, Vice President, PharmSource

■■ Andrew Badrot, CEO, CMS Pharma

■■ Sue Gift, SG Graphics

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If you have comments or questions regarding the report, please contact me directly.

Thank you for your purchase of this report and your interest in PharmSource.

Sincerely,

Jim Miller, President

[email protected]

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Table of Contents

Letter from the President .................................................................................................. 1

Table of Contents ..............................................................................................................i

Chapter 1: Executive Summary ...................................................................................... 2

Chapter 2: Industry Composition and Size ..................................................................... 4

Chapter 3: CMO Market Shares .................................................................................... 9

Chapter 4: CMO Profitability ...................................................................................... 14

Chapter 5: What it Means ............................................................................................ 16

Appendix 1: Methodology for Market Size and Growth Estimates ................................... 20

Appendix 2: Companies included in the CMO Universe .................................................. 25

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Executive Summary

1.1 This report characterizes the contract dose manufacturing industry along a number of

quantitative dimensions, including number and type of participants, market size, market

shares of the top CMOs and profitability. We also assess the outlook for the industry.

1.2 The contract dose manufacturing universe, for purposes of this report, includes companies

that actively promote themselves as contract manufacturers (CMOs) that produce a client’s

formulation for pharmaceuticals supplied to the highly regulated markets in North America,

Europe and Japan.

1.3 The contract dose manufacturing universe includes 195 companies headquartered

primarily in North America, Europe, Japan and India. Nearly 70% of those companies

pursue contract manufacturing as their primary business, while the others contract manu-

facture in facilities where they produce their own products.

1.4 Of the 195 CMOs, only 37 can be considered global companies in the sense that they have

manufacturing and/or business development activities across multiple regions. Most CMOs

focus on serving their immediate regional market.

1.5 The size of the dose CMO market in 2012 was $14.7 billion, a 7.0% increase from 2011.

Organic growth, i.e., without the impact of acquisitions of facilities from bio/pharmaceu-

tical companies, was 6.6%.

1.6 Standard dose products, including solid dose, semisolid and non-injectable liquids,

accounted for 52% of the market in 2012. Injectables accounted for 31% and specialty dose

forms, including softgels, transdermal and blow-fill-seal, accounted for 17%.

1.7 The 32 CMOs with revenues of $100 million or more accounted for 68% of dose CMO

industry revenues. By contrast, the 140 CMOs with revenues under $50 million accounted

for just 19% of industry revenues.

1.8 The average EBITDA margin for CMOs for which profitability data is available was 12%;

by contrast, the typical large bio/pharmaceutical company has an EBITDA margin of 35%.

Larger CMOs appear to have better margins than smaller CMOs.

Chapter 1

3



1.9 The prospects for organic growth for dose CMOs are limited by intense competition, inability

to control product volumes and declining prices for their clients’ products. Major CMOs will

seek growth by acquiring other CMOs and by diversification into their own generic and OTC

products.

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Industry Composition and Size

2.1 This chapter describes the principal characteristics of the dose CMO universe. We define

the universe, analyze its composition and estimate the market size and growth.

DEFINITION OF THE DOSE CMO UNIVERSE

2.2 For purposes of this analysis, the CMO universe includes companies with the following

characteristics:

a. They manufacture a client’s formulation for pharmaceuticals supplied to the highly

regulated markets in North America, Europe and Japan.

b. They actively promote themselves as contract manufacturers and seek contract manu-

facturing relationships, as evidenced by website, trade magazine ads and participation

in trade shows.

c. Their contract manufacturing activities are not primarily part of a product or tech-

nology licensing agreement or a business relationship other than what is typical of a

third-party manufacturing relationship.

2.3 This definition excludes a number of manufacturers that other analysts might include as

part of the CMO universe:

a. Companies that engage solely in private label manufacturing, i.e., manufacturers who

only develop and manufacture formulations that are sold as another company’s brand.

These arrangements are quite common in the OTC and generics markets. Note: Many

OTC and generics manufacturers participate in both the contract manufacturing and

private label businesses.

b. Companies that manufacture only nutritional supplements or health and beauty

products.

c. Manufacturers that serve only emerging markets.

d. Manufacturers supplying only products formulated using a technology that is patented

by and available solely to the manufacturer. For instance, Alkermes generates most of

Chapter 2

5



its revenues from manufacturing out-licensed products that incorporate its proprietary

drug delivery technology (although it does have some conventional CMO business, as

well).

e. Manufacturers supplying products whose rights they have sold to another company.

For instance, UCB reported contract manufacturing revenues of nearly $100 million

for 2012, but most of that revenue came from manufacture of products that UCB sold to

GlaxoSmithKline in 2009.

f. Manufacturers supplying products to former corporate parents or affiliates following a

divestiture or spin-off. Examples include Abbvie and Abbott’s manufacturing relation-

ships with each other, and Pfizer’s manufacturing relationship with Zoetis.

2.4 Readers should note that, while we try to hew as closely as possible to this definition, as a

practical matter, we are unable to extract all non-conforming activities from the reported

or estimated revenues of individual companies in the CMO universe. We feel confident that

any resulting over- or understatement of market size will be well within the margin of error

for an undertaking such as this that requires a significant amount of estimation.

INDUSTRY DEMOGRAPHICS

2.5 According to the PharmSource Strategic Advantage Database of Contract Service

Providers, 195 dose CMOs meet the criteria described above. Those 195 companies can be

characterized along a number of dimensions.

2.6 The first dimension is what role contract manufacturing plays in a company’s overall busi-

ness portfolio.

a. 135 (69%) are dedicated CMOs, while 60 (31%) operate within companies whose

primary business is manufacturing and marketing proprietary products.

b. 154 (79%) pursue contract dose manufacturing as a strategic business opportunity,

rather than just an opportunity to absorb excess manufacturing capacity. This includes

19 of the companies whose primary business is proprietary products. Those 19 devote

considerable business development and project management resources to their CMO

business.

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2.7 A second dimension is the stage

that the company plays on.

a. 37 CMOs (19%) are consid-

ered to be global because

they have manufacturing

facilities across multiple

regions or have significant

business development

operations outside their

home territory. The 158

(81%) regionally focused

CMOs include:

i. 94 in Europe;

ii. 50 In North America;

iii. 12 in Japan; and

iv. Two in other regions.

b. A substantial majority of CMOs have facilities in Europe.

i. 122 (63%) have facilities in Europe.

ii. 72 (37%) have facilities in North America.

iii. 14 (7%) have facilities in Japan.

iv. 13 (7%) have facilities in the rest of the world.

2.8 139 (71%) offer services in just one dose category, while 56 (29%) offer services in multiple

dose categories.

i. 144 (74%) offer standard dose (solid, semisolid and liquid dose forms);

ii. 82 (42%) offer injectables; and

iii. 33 (17%) offer specialty dose forms (softgel, transdermal, inhalation,

blow-fill-seal).

Figure 2.1 Geographic Reach of Dose CMO Universe

Regional-NA;50

Regional-Japan;12

Regional-EU;94

Regional-ROW; 2

Global; 37

Source: PharmSource Dose CMO model

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2.9 There are 32 CMOs with

revenues in excess of $ 100

million; they represent 16% of

all the CMOs in our universe.

The majority of dose CMOs are

small, with revenues less than

$25 million (Figure 2.2).

INDUSTRY SIZE AND GROWTH

2.10 PharmSource estimates the size

of the dose CMO market in 2012

to have been $14.7 billion. That

represents a 7.0% growth rate

over the $13.7 billion we esti-

mated for 2011.

2.11 Of the $1 billion in incremental industry revenue, PharmSource estimates that about $100

million was inorganic, i.e., it arose from acquisitions of facilities from bio/pharmaceutical

companies during the 2011-2012 period. The major acquisition events impacting the growth

estimate are listed in Table 3.2.

Figure 2.3 Dose CMO Market Size

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

$-

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

2009 2010 2011 2012

Grow

th Rate M

arke

t Siz

e -$

bill

ion

Market Size Growth Rate


Fig. 2.2 Distribution of Dose CMOs by Revenues (Number of CMOs)

$500+ M; 5 $250-499 M; 8

$100-249 M; 20

$50-99 M;27

$25-50 M;42

$<25 M; 92


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2.12 The $900 million in organic growth translates to a growth rate of 6.6%. This is the net

incremental CMO revenue resulting from new products or higher volumes of existing

products.

2.13 Standard dose products, which include conventional solid, semisolid and non-injectable

liquid products, account for 52% of the CMO market, while injectables account for about

31% (Figure 2.4). Specialty products account for 17%; these include softgel, transdermal, and

inhalation products, plus products manufactured using the blow-fill-seal process.

2.14 CMO revenues are reflected as Cost of Goods Sold on the books of their clients, so

comparing CMO revenues to cost of goods for all bio/pharmaceutical sales is an indicator

of contract dose manufacturing’s penetration into the industry. PharmSource estimates that

dose CMOs account for about 22% of the bio/pharmaceutical industry’s dosage form cost of

goods.

Figure 2.4 Dose CMO Dosage Form Segments ($ billion)

Specialty;$2.5

Injectable;$4.5

Solid/Liquid/

Semisolid;$7.7

Source: PharmSource dose CMO model

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CMO Market Shares

3.1 This chapter describes the distribution of

market share within the dose CMO industry

and analyzes the characteristics of the market

share leaders.

LARGEST CMOS

3.2 There are 32 CMOs with revenues of $100

million or more. Those 32 CMOs account for

68% of dose CMO industry revenues, though

they represent just 16% of all CMOs (Figure

3.1). By contrast, CMOs with revenues under

$50 million account for 70% of all CMOs, but

just 19% of industry revenues.

3.3 Our list of CMOs with revenues of $100 million or more has changed somewhat from last

year’s (Table 3.1):

a. Aenova moved into the $500+ million category following its acquisition of Temmler.

That acquisition did not take full effect until January 2013, but we are showing them as

a single entity.

b. Patheon’s revenue now includes the contract manufacturing revenues of Banner

PharmaCaps, even though that deal was not fully consummated until January 2013.

Patheon was already in the $500+ million category.

c. DPT Laboratories moved into the $250-499 million category.

d. Fertin Pharma, a Denmark-based manufacturer of pharmaceutical chewing gum prod-

ucts, and Rottendorf Pharma, a Germany-based CMO of solid dose products, were added

to the list.

e. Taiyo Pharma, a Japanese generics company that had been active in contract manufac-

turing, was removed from the list. Teva has acquired this company, and we believe it

no longer actively seeks contract manufacturing projects.

Chapter 3

Figure 3.1 Dose CMO Industry Market Shares by Company Size

$500+ M

$250-499 M

$100-249 M

$50-99 M

$25-49 M

$<25 M


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Table 3.1 Dose CMOs with Contract Manufacturing Revenues of $100 million or More

Revenue Range

($ million)Company

Solid/Semisolid/

LiquidInjectable Specialty

CommercialManufacturing

Locations

$500 + Aenova w/Temmler X Softgel NA, EU

Baxter X NA, EU

Catalent X X Softgel, Blow-Fill-Seal

NA, EU, SA, AUS, Japan

Famar X X EU

Fareva X X NA, EU

Patheon w/Banner X X Softgel NA, EU

$250-499 Corden X X EU

DPT X NA

Haupt X X EU

Hospira X NA, EU, AUS

LTS Lohmann Transdermal, Oral Films NA, EU

Nipro Pharma X X Japan

Recipharm X X EU

Vetter X EU

$100-249 Abbvie X NA, EU, SA, Asia, Japan

Aesica X X EU

Boehringer-Ingelheim X X NA, EU, SA, Asia

Bushu X Japan

Cenexi X X EU

CMIC X NA, Japan

Delpharm X X EU

DSM X X NA

Fertin Pharma X EU

Jubilant HollisterStier X X NA

Kemwell X X EU, India

Klocke X EU

Nextpharma X EU

Rottendorf X EU

Sanofi X EU

Synerlab X EU

Takeda X X NA, EU, SA

Unither Blow-Fill-Seal EU


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3.4 Aside from the two major acquisitions of one CMO by another, facility acquisitions

re-shaped the industry to some degree in 2012 (Table 3.2).

a. There were three facility acquisitions by CMOs. Two of these involved a CMO

acquiring a facility from a biopharma company, resulting in a net increase in CMO

industry capacity.

b. The other deal in 2012 involved a CMO, Cenexi, acquiring an injectables facility in

Belgium that another CMO, Nextpharma, had placed into bankruptcy proceedings.

That was the second time Cenexi had acquired a CMO facility out of bankruptcy; in

2011 it acquired Osny Pharma (Osny, France). Osny was once a Catalent facility.

Table 3.2 Significant CMO Facility Acquisitions in 2012

Company Date Facility Impact

Fareva December 2011 Sigmar (Italy) $21 million, but includes cosmetics and nutritional products. 2012 is first full year.

August 2011 Richmond, VA Acquired from Pfizer in 2011. 2012 is first full year.

Delpharm May 2012 Gaillard, France Acquired from Bayer, revenue unknown.

January 2012 Drogenbos, Belgium

Acquired from Laboratoire Besins, revenue unknown. 2012 is first full year.

June 2011 Huninge, France

Acquired from Novartis, revenue impact unknown. 2012 is first full year.

Cenexi January 2012 Braine d’Alleud, Belgium

Acquired out of bankruptcy from Nextpharma; revenues were $30 million in 2011. 2012 is first full year.

July 2011 Osny, France Acquired out of bankruptcy; revenues of $15 million in 2010, $30 million in 2009. 2012 is first full year.

Aenova August 2011 Lyon, France Leasing site from Skyepharma and continuing to make products manufactured there. 2012 is first full year.

Source: PharmSource Strategic Advantage Database

CHARACTERISTICS OF LARGEST CMOS

3.5 As might be expected, the 32 largest dose CMOs have different characteristics from the rest

of the CMO universe.

a. All but one approach the CMO business as a strategic opportunity, rather than just an

opportunity to absorb unused manufacturing capacity; that judgment is based on the

way they promote the business and their infrastructure to support it. By comparison,

76% of the smaller CMOs approach contract manufacturing as a strategic opportunity,

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while 24% view it as an absorber

of excess capacity.

b. 48% of the largest dose CMOs

participate in more than one

dose form category, while just

29% of smaller CMOs offer

more than one dose category.

c. 52% of the largest CMOs

compete on a global level versus

just 12% of the smaller CMOs.

The modest share of CMOs that

can be considered global reflects

the 12 CMOs with revenues of

$100+ million that are focused

primarily on the European

market, and the three that are focused on the Japanese market. While those CMOs

may have a few approvals in North America, their operations and business develop-

ment efforts are focused in their home regions.

3.6 The 13 very largest CMOs (Figure 3.2), i.e., those with revenues of $250 million or more,

exhibit characteristics that one might expect of market share leaders.

a. All approach the contract manufacturing business as a strategic business opportunity

even though two are part of organizations with very large proprietary products

businesses.

b. Nine offer manufacturing capabilities in at least two dose form categories. Four focus

on a single dosage form.

c. Nine (69%) can be considered to compete on a global basis. Three compete primarily in

Europe and one in Japan.

d. Acquisitions have played an important role in the growth of the 13 largest dose CMOs:

Figure 3.2 Market Shares of Largest Dose CMOs


Baxter

Catalent Famar

Fareva

Patheon

Aenova

Corden Pharma

Haupt Hospira

LTS Lohmann

Nipro Pharma Recipharm

Vetter

180 others

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i. Six have acquired facilities from bio/pharmaceutical companies in the past five

years; and

ii. Three have acquired other CMOs in the past five years.

e. Most of the 13 largest CMOs have enjoyed modest growth: just 3.3% in 2012, 5.5% p.a.

average for the two years 2011-2012, and 6% p.a. for 2009-2012. These are slightly

below the overall industry growth rates for the period. CMOs with revenues of $100-

249 million were more likely to have above-average growth rates.

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CMO Profitability

4.1 Analysis of CMO profitability faces a number of practical limitations.

a. Most CMOs do not report their financial results publicly, and those that do may only

report revenues, and not profitability. Private companies operating in many European

countries are required to file financial statements with government registries, but this

is not the case for companies in the US and Canada.

b. It may not be possible to gauge the profitability of the CMO business separate from

other activities the company engages in.

c. Accounting rules and terminology differ from country to country.

4.2 Accepting these limitations, we have been able to develop profitability measures for 23 of

the companies in our CMO universe. We are using as earnings before interest, tax, depre-

ciation and amortization (EBITDA) as our measure of profitability.

4.3 Our analysis showed that the average EBITDA margin for the 23 CMOs in 2011 was 12%.

Four CMOs had margins in excess of 20%, while 11 had margins below 10%.

4.4 There is definitely some correlation between CMO size and profitability (Figure 4.1). The

five CMOs with revenues in excess of $250 million had the highest margin. Mid-size CMOs

($100-250 million)

had the lowest

margins, while the

smaller CMOs were

somewhat below the

average.

4.5 CMOs manufac-

turing specialty

dose forms, such as

transdermal products

and cytotoxics, also

tend to have higher

margins.

Chapter 4

Figure 4.1 CMO Profit Margins by Company Size

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

$250+ M $100-249 M $50-100 M $<50 M

EBIT

DA

Mar

gin

CMO Revenues

Source: PharmSource research in public sources

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4.6 To provide some context for these CMO margins, it should be noted that the average

EBITDA margin for the global bio/pharmaceutical companies (the 25 largest bio/pharma-

ceutical companies) is 35%, i.e., almost three times greater than the CMO margins.

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What it Means

5.1 In this chapter, we provide further analysis of the preceding characterization of the dose

CMO industry and assess the implications.

THE CMO INDUSTRY ISN’T SO FRAGMENTED AFTER ALL.

5.2 Because of the large number of mostly undifferentiated participants, the dose CMO

industry gives the impression of being highly fragmented. Our analysis, however, indicates

that the industry is, in fact, significantly consolidated. The 15 largest CMOs (8% of the 195

dose CMOs) together claim nearly 50% of the market, and the 32 largest (16%) 68%.

5.3 The degree of consolidation varies among dose forms. For injectables, the five largest CMOs

have a 44% market share, but for the standard dose forms, the top five account for just 29%.

Market share among the specialty dose manufacturers has to be further broken down by the

specific dose; there, we see clear domination by individual CMOs, including Catalent for

softgels and LTS Lohmann Therapie Systems for transdermal patches.

5.4 Industry organic growth and taking market share from rivals don’t appear to have been

major factors in consolidating the industry. Only eight of the 32 largest CMOs had growth

rates in excess of 10% in 2012, and only two of those achieved that growth organically.

Rather, the main factors in consolidation have been:

a. Acquisitions of one CMO by another CMO. These include Aenova’s acquisition of

Temmler, Patheon’s acquisition of Banner PharmaCaps and Cenexi’s acquisition of

Nextpharma’s sterile operations in Belgium, all in 2012.

b. Acquisitions of redundant facilities from global bio/pharma companies. Fareva,

Recipharm, Aesica, Delpharm and Corden have all built themselves up in recent

years by acquiring facilities from bio/pharma companies. These deals simultaneously

increase the size of the industry and the acquirer’s market share.

5.5 The difficulty of achieving substantial organic growth is not surprising, given the nature of the

CMO industry. Once a CMO has won a contract to manufacture a product, the future is out of

its hands; it can’t determine the regulatory or commercial prospects of the product. A business

strategy geared to driving organic growth would seem to require one of two elements:

Chapter 5

17



a. Signing a large enough share of available contracts to build a large and diversified

portfolio that can drive growth. Given the mostly commodity nature of dose manufac-

turing, this would probably be a price-driven strategy that would sacrifice margin for

volume. Most CMOs cannot afford to compete on a price basis for a sustained period

and still be able to make the necessary investments and return on investment.

b. Create a well-differentiated offering that allows it to command a premium price in an

otherwise-commoditized market, either by offering a niche dose form or truly superior

performance. This has been done successfully in a few cases, e.g., Vetter in injectables

manufacturing and Lohmann for transdermal patches. However, it is not clear that

the market will pay a significant premium for performance on a broad-enough basis to

make this a broadly applicable strategy.

5.6 To the degree that there is a fragmentation problem in the dose CMO industry, it is centered

primarily in Europe, which is overpopulated with CMOs. According to IMS Health, bio/

pharmaceutical industry revenues in Europe are only two-thirds the size of industry

revenues in North America, yet 63% of CMOs in our universe have facilities there. Europe

is especially overloaded with small CMOs: 50 with revenues under $25 million versus 30 in

North America.

5.7 The CMO overpopulation problem in Europe reflects two major factors. For one, since

Europe is not one country, but many, with different governments, languages and cultures, it

offers opportunities for small, indigenous companies serving local markets. That is unlikely

to change in the foreseeable future. Further, labor and other regulations make it expensive

to close manufacturing operations in Europe and encourage companies to offload redun-

dant facilities to CMOs.

5.8 The European financial crisis has resulted in significant cuts to drug prices, compounding

the price pressures on CMOs caused by too much manufacturing capacity. Despite the

obvious need for structural economic reforms, few seem to be forthcoming, and the road-

blocks to closing facilities remain. Continued low margins will mean that companies cannot

invest to maintain capacity, and may be forced to find operating savings in ways that make

them vulnerable to quality problems. European CMOs could find a backdoor out of the

business due to compliance problems or bankruptcy filings.

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WHAT ARE THE GROWTH PROSPECTS FOR DOSE CMOS?

5.9 The dose CMO industry has achieved modest growth in recent years (6-7% organic growth

in the past two years), but most of the largest CMOs have been only in the 4-5% range. That

kind of growth, coupled with the marginal profitability of the CMO business, isn’t likely to

satisfy the owners of the largest CMOs, most of which are private equity firms with aggres-

sive financial targets and defined holding periods. Looking for more rapid and profitable

growth is a primary strategic challenge for most CMOs.

5.10 As we noted above, organic growth is not likely to be a growth avenue for most CMOs; it’s

just too difficult. While the low penetration (22% on a cost of goods basis) for contract dose

manufacturing would suggest that there is considerable room for expansion, there is not

much evidence to suggest that bio/pharmaceutical companies are inclined to give CMOs a

greater share of their dose manufacturing in the near term.

a. Dose CMOs’ share of new drug approvals has been stagnant for the past five years or

more. As PharmSource has demonstrated in our Market Intelligence Briefing, 2012

NDA Review: CMOs Tread Water, the share of new NDA approvals being manufac-

tured by dose CMOs has averaged 40% since 2005, with little variance around that

average. The two areas of greatest anticipated industry growth, biologics and generics,

show the lowest levels of outsourcing.

b. In fact, most global bio/pharmaceutical companies continue to invest in new plants

and equipment, especially API and dose facilities for manufacturing biologics (see

PharmSource Market Intelligence Briefing, Are CMOs Losing the Make-versus-Buy

Battle?).

5.11 Organic growth will also be hampered by the difficult pricing environment for CMOs.

Pricing faces difficult headwinds from two factors: the downward pressure on drug prices

resulting from government budget cutting and generic competition; and the overcapacity

problem throughout much of the CMO industry, but especially in Europe.

5.12 With organic growth not likely to be a major growth driver, CMOs are left with two other

options: acquisitions and diversification.

a. Facility acquisitions, which fueled industry growth for much of the last decade, are

less likely to be a significant growth vehicle. CMOs have learned that whatever

19



their short-term attraction, many of those facilities ended up being albatrosses of

under-utilization, high operating costs and under-investment. Where these deals will

continue, it will most likely be where they allow the acquiring CMO to enter a new

market or significant dose form. A prime example is Fareva’s acquisition of the Pfizer

OTC facility in Richmond, VA, that allowed Fareva to get a foothold in the US market.

b. Acquisitions of one CMO by another CMO could increase, driven by the objective

of gaining economies of scale or adding attractive new dosage forms to a portfolio.

Aenova’s acquisition of Temmler would seem to be a play for economies of scale, while

Patheon’s acquisition of Banner PharmaCaps was, in part, an opportunity to acquire

significant softgel capability. We may also see contract API manufacturers acquire

dose CMOs in order to build a one-stop manufacturing offering; that appears to be the

rationale behind Siegfried’s acquisition of Alliance Medical Products (AMP) in 2012.

5.13 For diversification, more CMOs are turning to proprietary products, especially generic and

OTC products. Proprietary products generally have higher margins than contract manufac-

tured products, and give the CMO greater control over its volumes and capacity planning.

OTC and generic products are attractive because they carry little or no R&D risk, and offer

private label opportunities that require little sales and marketing expense.

5.14 Recent examples of CMOs moving into proprietary products abound. Patheon’s acquisition

of Banner PharmaCaps was driven, in part, by the opportunity to leverage Banner’s propri-

etary products portfolio and know-how. Haupt Pharma recently got its first ANDA approval

in the US. DPT Laboratories will act as the captive manufacturer for its new parent

Renaissance Pharma, a private equity-backed specialty pharmaceutical company. Other

large CMOs, like Baxter and Hospira, have built large and successful CMO businesses by

sharing capacity between proprietary products and contract manufacturing.

20



Methodology for Market Size and Growth Estimates

A.1 PharmSource’s estimates of the dose CMO market size and market shares are generated

by our proprietary contract dose manufacturing model, which determines the market size

based on the revenues of CMOs listed in our PharmSource Strategic Advantage database.

A.2 PharmSource Strategic Advantage database is a comprehensive database of contract manu-

facturers and CMC development services providers.

a. It includes detailed profiles on more than 340 dose CMOs and 550 dose manufacturing

sites in North and South America, Europe, Asia, Africa and Australia.

b. Each profile includes:

i. Detailed capability information;

ii. Products manufactured by the CMO;

iii. Known clients;

iv. Mergers, acquisitions and alliances;

v. Financial information (where available); and

vi. Key executives and contacts.

A.3 To determine a company’s contract manufacturing revenues we use publicly available

records wherever possible.

a. For public companies, we use regulatory filings, investor presentations and disclosures

on company websites.

b. Many privately owned companies reveal their revenues on their websites or in media

interviews. For privately owned CMOs based in the UK, Ireland, Germany, France

and Italy, we have used financial data that private companies must report to official

corporate registries. While these reports are publicly available, usually for a fee, we

cannot republish the individual company information.

Appendix 1

21



A.4 When publicly reported revenues are not available, we use various estimation techniques.

a. Where the number of employees is reported, we estimate revenues by multiplying the

number of employees by an estimated revenue per employee (usually $150,000- 200,000

per employee).

b. Where there are historical numbers, we extrapolate from those numbers based on other

reports regarding such factors as growth and new capabilities and capacity.

c. We talk regularly with industry participants and have a sense of their size and growth

from those conversations.

d. Where other data are not available, we have categorized companies into size ranges

and use the midpoint of those ranges to estimate the revenue for companies in that

category.

A.5 All revenues are converted to US dollars. We keep the exchange rate value constant from

year to year in order in order to capture real changes in company revenue and reduce the

effects of currency fluctuations.

A.6 For a few companies that are known to have a significant level of Phase1/2 development

offerings in their service mix, we have reduced the reported revenue number based on our

informed estimate of the share of total revenues that are from development activities. We

count manufacture of Phase 3 clinical trial supplies as part of commercial manufacturing

revenues.

A.7 We have had to use estimates for a number of companies that manufacture multiple dose

forms but do not report revenues separately by each dose form.

A.8 While there is a likelihood of error in any estimate for any single company, we are confident

that estimation errors will largely cancel each other out and our reported numbers are a

reasonable representation of the dose manufacturing market. The greatest chance of error

is with the smaller companies (less than $50 million), but as these companies represent less

than a quarter of total industry revenues, any net error resulting from estimates for these

companies will be small.

22



CMO CLASSIFICATIONS.

A.9 To provide further insight on the nature and structure of the dose CMO industry, we have

characterized the participants along several strategic and operational dimensions in addi-

tion to revenues.

a. Principal business:

i. “Dedicated CMOs” are companies whose manufacturing assets are used

primarily for manufacturing of client products.

ii. “Proprietary products CMOs” are companies that manufacture and market

proprietary products and/or technologies that comprise the bulk of their revenues.

At proprietary products CMOs, client products share capacity used to manufac-

ture proprietary products.

iii. Note: For a company whose primary business is manufacturing proprietary prod-

ucts, the CMO business can still be considered strategic e.g., Hospira One2One or

Baxter Biopharma Solutions.

b. Degree of focus on contract manufacturing:

i. “Strategic CMOs” are companies for which contract manufacturing is a core busi-

ness activity, as evidenced by:

1. Contract manufacturing represents a significant share of company’s revenue

and profit.

2. The company maintains dedicated sales and marketing and project manage-

ment infrastructure to support the contract manufacturing business.

3. The company will make capital investments specifically to support the

contract manufacturing business.

4. The company will entertain a broad range of projects, including those that

might require special capital investment.

5. Note: “Strategic” can include dedicated CMOs and companies that share

capacity used for proprietary products to support contract manufacturing.

23



ii. “Opportunistic CMOs” pursue contract manufacturing primarily as a means of

absorbing unused manufacturing capacity.

6. Contract manufacturing represents a small amount of company’s total

revenue.

iii. The company is highly selective in accepting contract manufacturing projects, and

will only accept projects that fit into available capacity.

7. Opportunistic CMOs usually favor tech transfer projects over NDA projects.

c. Dose form offering:

i. “Single dose form CMOs” manufacture products in only one of the three major

dose categories we have identified:

8. Standard (solid, semisolid, oral and topical liquids);

9. Injectable; or

10. Specialty (softgel, blow-fill-seal, transdermal, inhalation).

ii. “Multiple dose form CMOs” manufacture products in two or more of these

categories.

d. Geographic reach:

i. “Global CMOs” have manufacturing assets and/or a substantial business develop-

ment presence across multiple geographic regions. They have regulatory approvals

from all of the major western regulatory agencies (FDA, EMA, MHRA, etc.).

ii. “Regional CMOs” have all of their manufacturing assets in a single geographic

region, confine most of their business development efforts to that region, and

ship most of their production to clients within that region. They may have a few

approvals outside of their home region, but their focus is regional.

INDUSTRY COST OF GOODS.

A.10 To measure the contract dose CMO industry’s penetration of the total market opportunity,

in paragraph 2.14 we stated that the dose CMO industry revnues accounted for 22% of the

24



bio/pharmaceutical industry’s total dosage form cost of goods. We calculated industry dose

cost of goods as follows:

a. We started with IMSHealth’s estimate of bio/pharmaceutical industry revenues in

North America, Europe and Japan of $765 billion.

b. We assume a dose cost of goods of about 8% of revenues. Total cost of goods in the

industry, including API, dose and logistics, generally runs 15-20% for branded products

and 40% for generic products; the 8% is a blended estimate of the share of cost of goods

going to the dosage form.

25



Companies included in the CMO Universe

Appendix 2

3M Drug Delivery Systems

Abbott Contract Manufacturing

Abbvie Contract Manufacturing

Accucaps

Accupac

Aenova

Aesica

Akiyama Jyozai

Akorn

AMRI

Alcala Farma

Alfa Wasserman

Alkermes

Allergy Laboratories

Alliance Medical Products

Almac

Althea Technologies

Applied Laboratories

Aseptic Technologies

ASM Aerosol-Service AG

Aspen Bad Oldesloe

Ayanda

B Braun

BAG Healthcare

Bankyo Pharmaceuticals

Banner

Bausch & Lomb

Baxter Biopharma Solutions

Bayer Contract Manufacturing

Bell-More

Best Formulations

BI Bioexcellence

BI Contract Manufacturing

Bioluz

BlisFarma

Bluepharma

BMP, bulk medicines & pharmaceuticals production gmbh

BOLDER Arzneimittel GmbH

Boots Contract Manufacturing

Bristol Myers Contract Manufacturing

BSP Pharmaceuticals

Bushu Pharmaceuticals

Cangene bioPharma

Catalent Pharma Solutions

Cenexi

Chanelle Medical

Chartwell

CMIC

Coating Place

Conforma

Cook Pharmica

Corden Pharma

Cosmo Pharmaceuticals

CPL Contract Pharmaceuticals

Custom Pharmaceuticals

Daito

Dechra Pharmaceuticals

Delpharm

Diamond Animal Health

DPT Laboratories

Dr. R. Pfleger

Dr. Reddy’s

DSM Pharmaceuticals

Ei Inc.

E-Pharma Trento

Erfa

Europhartech

Exemplar

Famar

FAREVA Holdings

Fertin Pharma

Fine Foods NTM Spa

Fresenius Kabi

G&W Laboratories, Inc.

GI Pharma

Glatt Pharmaceutical Services

Glaxomithkline

GP Pharmaceutical

Groupe Panpharma

Grunenthal

Halo Pharmaceuticals

Hameln

Hanford

Hasco Lek

Haupt

Helsinn

Hermes Arzneimittel GmbH

Holopack

Hospira

Italfarmaco

Jelfa Pharmaceutical

JHP Pharmaceuticals

Jubilant HollisterStier

26



Kemwell

Klocke Group (inc. IDT)

Kokando

Labiana

Laboratoire AJC

Laboratoire Confab

Laboratoire Elaiapharm

Laboratoires Chemineau

Laboratoires Galéniques Vernin (LGV)

Laboratoires Lavoiser Chaix

Laboratoires Macors/Opodex

Laboratoires Renaudin

Laboratoria Smeets

Laboratoria Wolfs

Lamp San Prospero SPA

Laphal Industrie

Lichtenheldt

Lindopharm

Lomapharm

LTS Lohmann Therapie-Systeme GmbH

Lyophilization Services of New Engalnd

Mayne Pharma

MEDA Manufacturing

Medicofarma SA

Medinsa

Mikart

MIPHARM

Montefarmaco

Nagase Medicals

Neos Therapeutics

Nexgen Pharma

NextPharma

Nipro Pharma

Nitto Medic

Norwich Pharmaceuticals

Nycomed/Takeda

Oakwood Laboratories

Oncotec

Orion Pharma

Orofino Pharmaceuticals Group

Oso Biopharmaceutical

Patheon

Pegasus Labs

Penn Pharmaceutical Services

Pernix Manufacturing

Perrigo/Wrafton

Pfizer CentreSource

Pharma Tech Industries

Pharmaceutics International

Pharmalucence

Pharmapack

Pharmasol/Pharmaserve

Pharmatis

Pierre Fabre

Pierrel

Pillar5 Pharma

Piramal Pharma Solutions

PMRS

Polpharma

Procaps

Purna Pharma

Pyramid Laboratories

Rechon Life Sciences

Recipharm

Reig Jofre

Rentschler

Rottendorf

Rovi Contract Manufacturing

Sandoz

Sanico NV.

Sanochemia

Sanofi CEPIA

Sciarra Laboratories

Siegfried

Sirton

Solupharm

Sovereign Pharmaceuticals

Stason

Sterop Laboratories

Surepharm

Synerlab

Tapemark

Temmler Pharma

Teva Pharmachemie

Thepenier Pharma Industrie S.A.

Toa Pharmaceuticals Co. Ltd

Toll Pharma

Tolmar

“Tower Laboratories, Ltd”

Trillium Health Care Products Inc.

Uman Pharma Inc.

Unicep

Unither

Ursapharm

Valpharma

Vetter Pharma

Vifor Pharma

Wagener & Co. GmbH

Weimer Pharma

WellSpring Pharmaceutical

Wiewelhove

Wockhardt Contract Manufacturing

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