The upturn in the fortunes of pharmaceutical companies after the recession is mirrored by the U.S. contract manufacturing outsourcing (CMO) market, which is expected to grow at a compound annual growth rate of 8.3% from 2011 to 2016, according to Frost & Sullivan's newest analysis of the U.S. CMO market.

The sterile segment accounts for the highest share of revenues, with 38.7% in 2011, expected to rise to 47.5% by 2016. According to Frost & Sullivan, the U.S. CMO market earned revenues of $10.73 billion in 2011, and it estimates that to rise to $15.97 billion by 2016.

"The continued expansion of the U.S. pharmaceuticals industry and big pharma's increased outsourcing to improve cost structure and focus on core competencies will significantly augment the market's revenue growth," said Frost & Sullivan consultant Jesse Sullivan. "The pharmaceutical companies that had used their excess capacity during the downturn to retain in-house manufacturing are expected to gradually outsource as the economy improves."

Despite the inclination for pharma companies to outsource, R&D spending dipped from 2010 to 2011, according to Frost & Sullivan, resulting in fewer drugs being developed and marketed. As the CMO market's revenue inflow is contingent on drug development, the torpid R&D activity has slowed the pace of market development.

The fragmented nature of the CMO services market has necessitated consolidation to improve profitability. Many CMO providers rely on a single client for more than 50% of their revenue. This tilts the balance of power in favor of the manufacturers and reduces prices across the industry.

"To demonstrate value to clients, CMO providers are likely to continue focusing on strategic relationships and promoting more services such as formulation improvements, alternate dose forms, real-time order tracking, and logistics support," said Sullivan. "Further, numerous CMO providers are offering preclinical development services, which creates long-term relationships with manufacturers."