“A big issue for the industry has been the lack of regulatory enforcement, which has allowed substandard operators to still exist,” said Jared Leishman, CEO of Capstone Nutrition. “For example, there is a significant difference in the testing methodologies used by industry members. The regulation is not leveling the playing field, which was part of the original intent, rather it is giving some sub-standard operators a competitive advantage over manufacturers who are paying the price of compliance.
“Many manufacturers have offset the compliance costs through production efficiencies and sourcing lower raw material prices; the latter sometimes coming at the expense of product quality.”
Michael Finamore, CEO of Gemini Pharmaceuticals Inc., said that brand owners are often reluctant to increase their costs, but they are becoming more accepting of the value of a quality contract manufacturing organization (CMO) when compared with the incremental expenses and challenges of compliance when working with lesser companies.
Gemini started off as a pharmaceutical manufacturer, and harmonizing its procedures with those of the dietary supplements industry (21CFR Part 111) was accomplished without much issue, said Finamore.
“In our case, our core customers have always recognized the ‘value’ proposition Gemini offers, and our new customers are able to take advantage of our quality heritage to help with their compliance efforts.”
Collaboration between brand owners and contract manufacturers
Another significant development in the sector has been increased collaboration between the brand owner and the contract manufacturer.
“Effective communication is a big factor in developing a successful working relationship with our customers,” noted Steve Holtby, President & CEO of Soft Gel Technologies, Inc.. “More specifically, clearly articulated requests are important to a successful partnership.”
Holtby added that, while many customers discuss product integrity, such as effective quantities of safe, clinically proven, and ethically obtained ingredients, other factors, such as product price, delivery timelines, and batch sizes, are sometimes more critical.
“We can assist companies with new product development from start to finish, although many customers come in with a formulation already in mind,” he said. “Our product list often serves as a springboard for ideas in creating products or line extensions of existing brands.
“Soft Gel Technologies is unique in that we have several exclusive branded products that can be used in formulas and customers add synergistic ingredients to make it a custom formula,” added Holtby. “These branded products usually have scientifically-researched ingredients or intellectual property surrounding the ingredients found in the formulas. Most of these products are clinically studied and have educational tools available for our customers to use in their marketing platforms.”
But it’s not just about innovative new product development. Working more closely together also allows for better regulatory compliance, said Gemini’s Finamore, and the brand owner and CMO have to become “joined at the hip”.
“Both GMP compliance issues and the integration required between companies to succeed in this environment make this more important today than it ever was in the past. It is imperative that they form a true partnership,” he said.
“While the brand owner is held accountable by the FDA for product quality more than ever, having the right CMO is paramount to the brand owner’s regulatory compliance and business success. A close working relationship allows each party to openly discuss the issues each one is facing and work toward mutually acceptable solutions.”
The competitive landscape
Despite growth in the contract manufacturing sector continues as consumer demand for natural health and dietary supplements increases, the competitive environment hasn’t changed significantly, said Capstone’s Leishman.
“With factors such as social media it has never been more important for brand owners to protect their reputation and the integrity of their products”
- Jared Leishman, CEO, Capstone Nutrition
“Brands owners are looking for a higher level of service and quality from their contract manufacturers and are shifting their business accordingly,” he said. “However, in our experience few contract manufacturers are really equipped to deliver at the standard demanded. We take tremendous pride in the quality of our product and work hard to make our partnerships with each brand owner a success.”
Gemini’s Finamore agreed that the sector has always been competitive. “Brand owners are always looking to provide the newest product but also want to improve their margins, but cGMP regulations are imposing additional costs across the board,” he said. “There is a lot of pressure on CMOs to find more efficient ways of producing these products- which has led Gemini to invest in efficiencies, such as an integrated ERP system, automation, and vertical integration of manufacturing processes, to improve our ability to remain responsive to customer demands”
Foreign manufacturers could shift the competitive environment, however, said Soft Gel’s Holtby, with contract manufacturers in countries like India and China starting to provide low cost products that meet cGMPs, and he expects companies to relocate their operations to these regions.
“For the future, it will become more difficult to compete on unit cost with contract manufacturers based in countries where operating costs are a fraction of those faced by contract manufacturers based in North America,” he said. “This new business model will hinder the generation of acceptable profits for those contractors located in developed countries; therefore these companies will undergo a paradigm shift to remain competitive in the marketplace.”
Consolidation or proliferation in the contract manufacturing sector?
"The Brand Owner and CMO have to become joined at the hip so to speak"
- Michael Finamore, CEO of Gemini Pharmaceuticals Inc
So are we seeing consolidation and proliferation in the supplement contract manufacturing sector? Both, according to Leishman. An active pool of investors who recognize the strong growth potential in contract manufacturing is driving consolidations, and achieving scale has also provided some participants with greater leverage when negotiating purchasing or production agreements, he said.
“However, on the flipside, low barriers to entry from a manufacturing capability and asset standpoint, have opened the door for new entrants, creating some proliferation in the sector,” he said.
There has also been some vertical integration by some brand owners, with the acquisition of captive manufacturing allowing them to have greater control over their supply chain and quality, said Finamore.
“In general, the number of CMO’s has been fairly stable over the past 5 years, although we are seeing more separation between those CMO’s invested in quality and those CMO’s which are neglecting their responsibilities,” he said.
“Unlike in years past where versatility or capacity was a limiting factor, cGMP compliance is the main cost driver in every aspect of contract manufacturing today. As the cost of compliance is not going down, we may very well see some necessary consolidation in the contract manufacturing sector in the years to come.”