Growing use of European contract manufacturers by pharmaceutical and biotech companies seeking to cut costs could double the drug producers’ revenue by 2018, according to a new report.

Strict regulation will pressure contract manufacturing organizations, but drugmakers’ growing need to trim operational expenses by outsourcing production is likely to drive demand for CMO services to new heights, an analysis from Frost & Sullivan finds.

“As pharmaceutical and biotech companies strive to enhance their internal core competencies, outsourcing is likely to become increasingly entrenched as a strategic manufacturing option,” says Frost & Sullivan Research Analyst Aiswariya Chidambaram.

“The impact of the economic crisis, coupled with the poor performance of the venture capital industry in Europe, has underlined the popularity of contract manufacturing as it has become synonymous with cost-cutting and the timely entry of products into the market.”

Despite the rosy outlook, Frost’s report cautions that Europe’s regulatory environment is becoming progressively stricter, “owing to contamination issues, safety compliance and drug recalls,” adding to the total fixed costs contract manufacturers will bear.

European pharmaceutical contract manufacturers could achieve sales of $20.8 billion by 2018, more than twice the $10 billion they earned in 2011, Frost & Sullivan estimates. Over the same period, the European biotech contract manufacturing market could expand to an estimated $2.67 billion from $1.21 billion in 2011, the report says.

Patent expirations on key biologics will play a growing part in demand for contract manufacturing services, freeing up capacity at European contract manufacturing facilities, the analysis predicts. Companies seeking the savings to be generated by outsourcing will fill that. But before manufacturers rush to expand capacity to handle any overflow, Aiswariya counsels “a careful weighing of benefits and risks is required by CMOs while planning capacity expansions lest they be hit by over capacity, which, in turn, could lead to the acquisition of smaller CMOs by larger ones.”