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European Biopharmaceutical Review

Made to Measure

Many Big Pharma companies are outsourcing part of the drug manufacturing process to contract manufacturing organisations. But with emerging markets threatening to rival the US and Europe, what lies in store?

The weak economic situation, and continuing problems for Big Pharma, are leading companies to rethink their organisational strategies, with outsourcing now a commonly considered option compared to a decade ago. Getting drugs to market is more costly, while at the same time many blockbuster drugs – a major source of revenue for Big Pharma – are going off-patent, reducing access to critical investment capital. In addition, tighter regulations for drug approval have led to fewer new drug proposals, and prices are facing downward pressure from generic competition.

Outsourcing Options

As pharma companies look for options to consolidate their operations in order to focus on the core functions of new drug discovery and development, one of the strategies is to divest manufacturing assets with excess capacity and outsource a part of drug manufacturing to contract manufacturing organisations (CMOs). Indeed, the global CMO market is growing rapidly and is forecast to reach $60 billion by 2018, driven primarily by demand from developed markets (1). However, the attraction of lower costs is also driving the outsourcing of manufacturing to CMOs that are based in emerging markets. Most of the big business is captured by large CMOs in the US and western Europe, as pharma companies place more emphasis on quality, reliability and continuity in supply, and believe they are more likely to find this in a larger organisation. A major share of the CMO market is dominated by a few large global players, while a lot of small players in emerging markets are targets for mergers and acquisitions driving consolidation. Although cost advantages and capacity constraints are considered by many as the primary drivers for outsourcing decisions, the ability of the partner to get the drug to market swiftly, along with the resulting profits, far outweigh cost savings from an outsourcing partnership, especially for innovator drugs. Similarly, any inconsistencies in quality of production or continuity of supply can wipe out all other advantages derived by outsourcing the manufacturing to an external partner. Hence, both the outsourcing decision and the selection of a CMO partner are complicated for a pharma company, and making the right partner choice is vital.

CMO Selection

For pharmaceutical manufacturing outsourcing, a CMO’s technical expertise, cost advantages and quality are mandatory requirements, while consistency and reliability in ensuring supply are critical. As it is costly to change the contractor mid-stream in the event of production mishaps, consistency and continuity must be demonstrated in a company’s track record and are critical when selecting a CMO as a partner. Additionally, their reputation for confidentiality is just as important because each CMO often deals with multiple pharma companies, handling highly sensitive information and proprietary technologies.

As regulatory scrutiny is increasing, more rigorous and frequent audits and quality assurance parameters are employed by Big Pharma, making partnerships more expensive. More marketed drugs in the US and Europe are coming from CMOs, compelling the Food and Drug Administration (FDA) and European Medicines Agency (EMA) to increase their scrutiny of the contract manufacturing of drugs. Hence, the regulatory compliance of the contract manufacturing partner and approved facilities are also critical to avoid penalties and minimise potential future losses. The FDA directions during prior cases emphasise the need for quality audits and agreements to be owned and driven by the pharma company, as opposed to a consultant or the contract manufacturer.

Agility in the supply chain remains a priority, particularly in light of a recent spate of recalls. These have forced biopharma companies to ensure that all the partners in their supply chain remain flexible, and able to take prompt action in compliance with agreed protocols in the case of recalls. The FDA proposes stricter regulatory scrutiny and action on supply chain oversights, and holds the pharma company liable for these.

CMOs in Emerging Markets
Emerging market partnerships need cross-culture, long distance collaboration. As a result, there is a need for experienced CMO partners with exposure to working in a multicultural environment, and with an understanding of partnership expectations. As the market is dominated by large, mature CMOs which have comparable profi ciency in terms of their technical expertise and quality, other soft attributes such as relationship management and collaboration abilities are being considered as differentiating factors. These attributes are also critical for CMOs operating in emerging markets to counteract the cross-cultural issues and to offer a competitive advantage over US or European CMOs.

Ensuring Compliance
With increasing regulatory oversight by the FDA and EMA, compliance with current good manufacturing practice (cGMP) standards is essential across the pharma supply chain. CMOs in emerging markets have struggled with regulatory compliance, although India has a high number of FDA-approved facilities. Recently, the FDA imposed a ban on the import of Ranbaxy’s products from two of its facilities, citing violation of guidelines (2). The regulatory framework is inconsistent across India, with each individual state having independent state regulatory authorities. In China, most of the manufacturers are compliant with national cGMP standards but need additional investment and effort to reach international cGMP standards. A CMO in emerging markets has to demonstrate a reliable track record of regulatory compliance to be considered for a partnership.

Protecting Intellectual Property Rights
One of the key concerns in emerging markets is intellectual property (IP) protection and regulatory frameworks. Both China and India – the leading CMO players in emerging markets – have had considerable issues and a history of lapses in IP protection. One recent example is the compulsory licence issued to an Indian pharmaceutical company for Bayer's cancer drug, Nexavar (3). A partner with a strong track record of reliability, backed up by clearly outlined legally binding partnership agreements, is mandatory to operate in emerging markets. Often, legal battles are drawn out in the case of IP violations, and regional laws and regulators might be favourable to local players rather than overseas innovator companies. An understanding of local regulations and regulatory challenges in business continuity are imperative to partner with any players outside of the home country.

Transparency
As the CMO partnership is carried out at a distance, with minimal direct control by the pharma company, it is critical for the CMO to demonstrate a good reputation and track record for transparency, right from the outset, in order to be considered for a partnership. The pharma company needs to ensure that the CMO clearly understands and is willing to follow the protocol for sharing information and treats it as a priority, especially in the event of production delays, recalls or any other unforeseen mishaps. While laying out rules for these agreements, both partners must also take into account the cultural differences in interpreting various contexts for immediate action and attention, or most of the agreement could become meaningless.

Demonstrating Quality
As the initial vendor assessment is carried out based on the information supplied by the CMO, the pharma company must ensure that all the quality systems are in place during quality audits to guarantee they are being complied with in the fi eld. The vendor must be able to provide the client with standard quality information such as regulatory inspection records, standard operating procedures, any external audit reports or any other process documents, and must demonstrate actual implementation in the manufacturing facility that is being proposed for the joint venture.

Introducing Innovation
While CMOs from emerging markets compete with US and European CMOs based on the lower cost of labour and infrastructure, to remain competitive they must be able to score highly on their ability to innovate in improving manufacturing efficiencies. Pharma companies look for CMOs which can demonstrate the optimal utilisation of capacity with shorter product timelines, while ensuring adherence to quality and the process guidelines of the client. While the lower cost of labour and production in Asian markets might be attractive, operational efficiencies could also deliver similar cost savings using other CMOs from Eastern Europe, which would also ensure the reliability in supply due to location advantages.

Diverse Service Offerings
Pharma companies now look for partners which can cater to all of their manufacturing needs in order to optimise the size of their supply chain. Traditionally, Big Pharma companies manage a portfolio of fi ve to six direct partners in the supply chain, along with numerous others downstream. However, rising costs and the complexity of managing outsourcing partners, plus the need to ensure consistency and reliability, are forcing companies to reduce the number of players in the supply chain. As a result, the CMOs which can provide them with a ‘one-stop shop’ for managing all downstream activities would have an advantage.

Conclusion

While large CMOs from the US and Europe dominate the business, emerging market CMOs are gaining on their competitors, with improved capabilities adding to the lure of the existing low cost advantages. CMO growth in emerging markets has until recently been primarily driven by demand from small to mid-sized biopharma companies. Those CMOs that can demonstrate consistency and reliability in their supply could compete with their US and European competitors in winning outsourcing contracts from Big Pharma.

References

1. GBI Research, Contract Manufacturing Organizations to 2018, Ref GBIHC206MR, 2012

2. Food and Drug Administration, FDA takes new regulatory action against Ranbaxy's Paonta Sahib Plant in India, FDA News Release, 2009

3. Rajagopal D, Bayer petition against Natco over manufacture of Nexavar dismissed, Economic Times, 2012


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Vijaya Vulapalli works as a Senior Analyst with GBI Research. She has industry research experience within the life sciences and healthcare space at Satyam and Deloitte. Vijaya holds a BA in Life Sciences from Osmania University and an MBA from the University of Bradford. She also attended an Executive Business Management Programme at the Indian Institute of Management, Calcutta.
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