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home > ebr > summer 2010 > outsourcing comes of age

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European Biopharmaceutical Review Outsourcing Comes of Age
Eric S Langer at BioPlan Associates, Inc examines the trends of 2009 relating to outsourcing of manufacturing Most biopharmaceutical companies have turned to outsourcing in an attempt to control costs and manage their internal staff and resources, so that in-house activities are performed cost-efficiently. Economic conditions today are causing organisations to re-evaluate their core competencies and decide how they will direct their R&D and manufacturing resources. In an annual report on the industry, it has been found that many companies are starting to use outsourcing proactively rather than on a tactical basis (1). Outsourced projects now cover all areas of R&D, manufacturing, testing and services. They are being used to not only fill temporary gaps in capacity, but also to focus a company’s skill base on core competencies, in addition to controlling costs. OUTSOURCING BIOPHARMACEUTICAL MANUFACTURING Biopharmaceutical manufacturing is an area where outsourcing has been proven to offer advantages beyond costeffectiveness. The above-mentioned report has identified how outsourcing is maturing and becoming an essential part of the modern company’s R&D and manufacturing strategies (1). The report also describes trends in outsourcing in this segment. At a time when companies face some tough economic challenges, understanding trends can increase the speed at which the industry is adapting to new realities in hiring, budgeting and training. The results of the study provide a global view from executives at more than 327 biopharmaceutical and contract manufacturing organisations. A variety of predictions have circulated in the media about how the ongoing economic situation is affecting biopharmaceutical companies. Some observers believe that the current conditions have had a negative effect on companies, while others believe, at least for efficient suppliers to the industry, the opposite (2,3). It is impossible to predict the course for every company, but even taking into account the generalisations, the companies’ background attitudes are relevant to anticipating future company strategies. In extreme conditions, companies have no choice but to reevaluate their current strategies in order to survive and prosper. As a result, activities that were previously considered essential to retain in-house may become options for outsourcing. While cost has always been a factor in these decisions, biopharmaceutical companies are increasingly looking out for the long term, since R&D cycles and production build-outs are lengthy and riskintensive. Therefore, it is the additional benefits that outsourcing can bring to drug development and manufacture that will swing decisions. Similarly, potential outsourcing partners who can showcase value-added services beyond cost will be in the strongest position for deal-making. This thinking was evident at a recent IBC meeting on outsourcing held in Carlsbad, California. In his presentation, Paul Mehelic, Principal Scientist and Group Leader, Global Biologics at Pfizer, Inc, discussed Pfizer’s outsourcing approach, which involves determining, “what strategically we can outsource [to] reduce costs, optimise speed, increase flexibility of our internal operations...redeploy internal FTEs on more challenging, and more value-added activities.” Thus, outsourcing decisions, while ultimately centred on financial return on investments, are instigated by the analysis of the value of FTE activities, staff allocation and hiring. Increasingly, manufacturers are evaluating and planning to outsource manufacturing tasks to maintain productivity, despite the current economic challenges. Companies can see that there are advantages to be gained, and are following suit. This is especially true for typically outsourced activities. In a study, that tested 24 different areas of outsourcing, it was found, for example, that 25 per cent of respondents to the study will be outsourcing significantly more ‘fill/finish operations’ over the next 24 months than they do at the moment (see Figure 1). Following are ‘validation services’ and ‘product characterisation testing’; 24 and 23 per cent of respondents, respectively, indicated that this is where the greatest changes will occur in their outsourcing. Other areas of substantial growth include toxicity testing and downstream production operations (where 18 and 14 per cent of facilities, respectively, will see substantial changes). Given the more rigorous regulatory standards being imposed on manufacturers, it was interesting to note that relatively few respondents expected areas such as GMP training to be outsourced. Presumably, companies wish to keep tight control over specific aspects of operations and management. Biologics manufacturers may not yet be sufficiently confident in their outsourcing partners to guarantee quality standards. The rise in regulatory inspections, often featuring collaborations between agencies, may account for this reluctance to outsource in this area. For example, since 2008, the EMA and the FDA have been carrying out joint inspections of companies manufacturing pharmaceuticals in the US and the EU, and of companies manufacturing active pharmaceutical ingredients in countries (4). BUDGET GROWTH & OPPORTUNITIES The report also looks at CMOs to assess where they see opportunities for growth. This dual perspective gives a balanced view of the future of outsourcing. For example, the survey reveals that 30.4 per cent of biomanufacturers and CMOs will increase their budgets for outsourced biopharmaceutical manufacturing by at least five per cent, and 14 per cent will increase their budgets by at least 10 per cent. Figure 2 shows the average industry budget shift outlook for 2010. Outsourcing budgets, on average, were essentially flat. Therefore, the industry may be ‘bimodally distributed’ this year: that is, the number of companies increasing budgets are matched by those decreasing budgets. Outsourcing today continues to be dominated by relatively lower value-added services, such as fill-finish and product characterisation testing. Twenty-four areas of outsourcing were tested in the study. We found that the primary outsourced activity today, with over 75 per cent of biopharmaceutical companies outsourcing at least some of this activity, was product characterisation testing (see Figure 3). Toxicity testing (71.4 per cent) and validation services (64.3 per cent) were next on the list. At the other end of the scale, there appeared to be relatively low outsourcing activity for API biologics manufacturing and project management services. The report also examined how biopharmaceutical companies viewed the manufacturing outsourcing environment in the run-up to 2014 (see Figure 4, page 78). Overall, most companies plan to outsource at least some manufacturing. This was most relevant to areas such as mammalian cell culture, microbial fermentation and yeast systems. In contrast, a high number of respondents – well over half of those surveyed – believed that no outsourcing would occur in the domains of insect and plant cells. It is interesting to see that some biopharmaceutical companies believe that certain areas are still not options for outsourcing. Certainly, for plant cells and insect cells, relatively few organisations appear to want to hand over these areas to outside control. This trend has continued to grow, in general, over at least the past four years. For example, from the survey, only 17 per cent of companies in 2009 projected that over the next five years they would be outsourcing projects involving insect cells (compared with 33 per cent of companies interested in outsourcing insect cell work the previous year). With respect to plant cells, 33 per cent of companies in 2009 indicated that this would be an area for outsourcing over the next five years. This represented an increase over the survey response from the previous year. INTERNATIONAL OUTSOURCING As the pharmaceutical market has expanded globally, outsourcing has taken on an international dimension. With respect to the five-year period in the lead-up to 2014, respondents were asked to predict their facility’s current plans for international capacity expansion. Thirty-five countries were identified as potential outsourcing destinations; Figure 5 shows the top seven. The major geographic area considered was the US, with over 25 per cent of respondents backing this prediction by selecting a ‘strong likelihood’ or ‘likelihood’ for expansion. Next in line was India, with nearly 15 per cent of respondents suggesting a strong or moderate likelihood of expanding here. China was ranked lower in the list of responses than Singapore, the UK and Germany. However, China was a very late starter in the area of contract manufacturing and so it may still be too early for us to see this area matching the growth prospects of India (5). The few internationally-based CMOs in China are doing relatively well. Nevertheless, it is known that there is excess pharmaceutical production capacity in China and so outsourcing is likely to take off when the idle capacity of many production facilities can be dealt with (5). Thus, future annual surveys will be interesting indicators of when this trigger point is reached and how biopharmaceutical companies respond to the new opportunities. In comparison, US respondents indicated a high interest in using Singapore as a region for manufacturing outsourcing, which mirrored the preference from the previous year’s survey. Next in line were Ireland, Germany and then Switzerland, which showed a dramatic rise in popularity from the previous year. It will be interesting to see whether this preference for Switzerland continues into 2011. After these countries came India. China fared poorly as an outsourcing preference for US companies in the latest survey, showing an interest ‘drop’ of nearly 10 per cent from the previous year. EUROPEAN & US VIEWPOINTS Despite the rise of the emerging markets, the powerhouses of the biopharmaceutical sector remain in the US and western Europe. Together, biopharmaceutical companies in these regions represent over 70 per cent of the R&D efforts of the global industry and represent the major sources of new drug innovation. Yet within these areas there is considerable competition for R&D supremacy. In 1990, pharmaceutical R&D investment in the US was actually less that that in Europe, but currently R&D investment in Europe is only around 70 per cent of the US figure (6). Between 1990 and 2008, R&D investment in the US grew by 5.6 times whereas in Europe it only grew by 3.5 times (6). Therefore, an interesting angle to the report is to see how biopharmaceutical companies in these two regions are looking at outsourcing, and to compare the changes over time. For example, US respondents are seeing Singapore as an increasingly strong outsourcing destination over time (38 per cent saw the country as a ‘possible’ destination this year, versus 31 per cent last). Similarly Ireland jumped significantly to second place this year, with 35 per cent considering outsourcing there as at least a ‘possibility’. As discussed, for western European biomanufacturers, the US remains the primary destination for outsourcing. When we evaluate outsourcing destinations in terms of any level of interest (that is, not just a strong or likely outsourcing destination) 50 per cent of western European companies point to the US (down two percentage points from last year). India’s potential among western Europeans grew significantly this year, with 22 per cent considering it as a possible outsourcing destination. Germany and the UK followed as potential outsourcing destinations, but these countries showed a noticeable drop in popularity from the previous year. India showed a rise in popularity for western European biopharmaceutical companies, as did China, reflecting a more favourable view of these emerging markets than from US respondents. BIOTECH INNOVATION & OUTSOURCING With traditional R&D approaches failing to live up to expectations in terms of producing new drugs, many have looked to biotechnology to reinvigorate drug development and provide recognisable medical advances. The number of biotech compounds has been increasing steadily over the last 20 years, and most of these drugs are focused on difficult disease targets for underserved medical conditions. The US sector has been the clear leader in terms of biotech innovation and shows no sign of giving up this position. Yet despite its strong showing to date, efficient manufacturing has been identified as one of the core areas to be addressed if further advances are to be made in biotech success rates (7). CONCLUSION The report demonstrates that outsourcing has now come of age, with most companies having realised the strategic necessity to use internal resources more efficiently, and focus on core competencies. The potential that outsourcing has to offer in terms of improving efficiency while reducing cost continues to evolve as contract manufacturers restructure their service offerings to ensure they provide the flexibility to meet clients’ shifting needs. This will likely require time as current economic, hiring and budgetary realities settle in. All areas of R&D and manufacturing are now considered options for outsourcing, and the impact of this is being felt on a global basis, with emerging markets ranking favourably alongside established markets as outsourcing destinations. The rise of outsourcing has resulted in many companies establishing centralised contracting groups to handle the complex and time-consuming business of selecting and managing partners. This allows a greater consistency in evaluating the progress on projects and reduces start-up times. As the use of outsourcing partners becomes more embedded into the strategy of companies, effective management of the contract by pharmaceutical companies will become a more critical issue. References 7th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production, BioPlan Associates, Inc, April 2010, www.bioplanassociates.com Staton T, Execs talk deals, diversification and downturn, FiercePharma, www.fiercepharma.com/story/ execs-talk-deals-diversification -and-downturn/2008-10-31?utm _medium=rss&utm_source=rss&cm p-id=OTC-RSS-FP0, 2009 Anon, S&P: Europe’s Pharmaceutical Firms Buck the Recession with Strong Sales Growth in 2009, www.drugs.com/news/samp- p-europe-s-pharmaceuticalfirms- buck-recession-strong-salesgrowth- 2009-says-report- 18375.html, 2009 Anon, International Cooperation in Pharmaceuticals, European Commission. http://ec.europa.eu/ enterprise/sectors/pharmaceuticals/ international-activities/keydocuments_ en.htm, 2008 Zhou EY, Biopharma CMOs in China, Contract Pharma, www.contractpharma.com/articles/ 2006/06/biopharma-cmos-in-china, 2006 Anon, The pharmaceutical industry in Europe: key facts and figures, European Federation of Pharmaceutical Industry Associations (EFPIA), 2008 Anon, Protein therapeutic success rates increase with biotech advances, Tufts Center for the Study of Drug Development, Impact Report, 7 (2), March/April 2005
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Outsourcing Comes of Age