Trends Affecting CROs & CMOs in 2016 Look Positive

Posted: February 15, 2016

API Manufacturing and Pharmaceutical Manufacturing

While CRISPR (Clustered Regularly Interspaced Short Palindromic Repeats) is getting a lot of attention as this year’s potential wonder therapy, the generics industry continues to undergo change. Positive change.

And that’s despite higher fees generated by GDUFA that will hurt smaller generics companies.

On the plus side, GDUFA is bringing about a speedier approval process and more but-not-enough inspections of foreign facilities, which is good news for U.S.-based CROs and CMOs.

At the same time, the private investment and public markets will continue to drive for capital efficiency. That pressure will result in more outsourcing, especially as investors and board members tell smaller firms to not build labs and plants, and to find alternatives to more costeffectively complete projects.

Here are the list of trends likely to affect the outsourcing sector this year:

  • CROs/CMOs will continue to see robust activity in 2016. With pharma companies looking at ways to be more capital efficient, many have turned to CROs/CMOs to reduce overall costs. The industry saw a lot of new drug development programs initiated in 2015, and that momentum will carry over into 2016. This is good news for CMOs/CROs and allied industries.

A challenge to the CRO/CMO base, however, is that there will be a continued shortage of employees with highly technical skills. While big pharma continues the trend of downsizing its lab facilities and the people who staff them, CROs and CMOs need to find innovative ways to recruit and find people with the right set of skills. Developing training programs for junior staffers will become more important because, otherwise, it can be difficult finding seniorlevel, experienced managers and technical people. The lack of experienced senior people has a limiting effect on growth because it takes time to bring junior staff up to speed.

  • U.S. CMOs become more competitive as Chinese wages increase. Chinese wages have been rising an average of 12 percent per year since 2001, according to The Economist. This may drive renewed interest in the U.S. for drug manufacturing because as the gap between wages in China and the U.S. decreases, the other advantages – in language, time zone, culture, logistics, etc. – become more significant.
  • FDA will make progress on its backlog, but approval for generics still takes too long. With GDUFA, the FDA committed to clearing its backlog by Oct. 2017. The agency has made significant progress, thanks to new hires (funded by GDUFA fees) and new processes that have streamlined the submission-to-approval timeline to approximately two years, down from five years in 2010. But the backlog won’t be cleaned up in time – and some feel there will always be a backlog. While it takes time to review and assess each application, the main problem with even a two-year review process is it adds a significant level of risk to smaller one-product generic drug companies that can’t generate revenues until they get approval.
  • Drugs costs will continue to climb. Rising drug costs became a frequently covered news story in 2015, blamed on over-regulation by some and not enough regulation by others. One thing for sure: costs will continue to rise in 2016, driven by the time and investment necessary to bring ever-more complex drugs to market, increased oversight, and rising fees mandated by GDUFA.

GDUFA has either kept fees high or has raised them for applications and Drug Master Files (DMFs). For example, the Abbreviated New Drug Applications (ANDA) fee went up from $58,730 in FY2015 to $76,030 in FY2016 and DMF fees climbed from $26,720 in FY2015 to $42,170 in FY2016. (By contrast, the API Domestic fees and FDF Domestic fees each declined $1,059.)

Ultimately drug companies have to pass along to patients the cost of those higher fees, which hurts patients. And even before those drugs get approved, the high fees represent another significant risk to smaller companies since manufacturers must pay a facility fee even if they haven’t yet received approval. Higher fees and increased risk are two factors that have pushed out smaller companies, thereby reducing competition, which can lead to greater scarcity and higher prices.

  • More international inspections still won’t cover the world. While 100 percent of U.S. facilities are inspected by the FDA, that’s not the case for international facilities manufacturing drugs for the U.S. Thanks to new hires, however, the FDA now conducts more inspections of facilities in India and China than ever before – which is good news for patients because it maintains the safety and quality of generics imported into the U.S. There are still a scarcity of new inspections among many international facilities, especially in China, where the government continues to block inspection requests.

Strangely, while the number of international inspections has increased, the percentage of problems identified has remained relatively stable; over a three-year period, 51-52% of firms passed the inspection while 41-43% of firms were asked to take voluntary action to resolve minor problems. One would have expected to see a correlation between the increase in inspections and an increase in the number of issues to be addressed. The lack of an increase in foreign enforcement recommendations is problematic at best.

Looking beyond this year, GDUFA is set to expire in 2017. We think that Congress will renew it because, while there have been some negative unintended consequences, the faster approval process and increase in international inspections represent a significant achievement.

That said, GDUFA favors larger, multi-product companies, and to spur innovation, a new version of GDUFA is really what’s needed – one that mitigates the pressure placed on small companies. The FDA needs to find a way to speed the approval process for small, one-product companies even as it must find a way for big companies to spin off each drug into a single entity that could then take advantage of the speedier approval process. The FDA also needs to allow small firms to defer paying a facility fee before it has an approved drug. After all, even with a two-year approval process, an annual facility charge of approximately $250,000 adds up to half a million before you include any of the actual development costs. And the FDA must continue to increase the number of foreign inspections and ensure those inspections are on par with those conducted inside the U.S. to ensure quality control of the ingredients and drugs that reach our shores.

About the Author

Ed Price CEO of PCI Synthesis
Ed is the President and CEO of PCI Synthesis (PCI), he serves as a co-chair of the New England CRO/CMO Council and sits on the Industrial Advisory Board for the Department of Chemical Engineering at UMass, Amherst. Ed is also a long standing member of the American Chemical Society and advises the Bulk Pharmaceutical Task Force of the Society of Chemical Manufacturer’s and Affiliates (SOCMA).

Do you have questions? Talk to Ed.