The proverb “desperate times call for desperate measures” might be an apt description for the way the pharmaceutical industry has operated over the last few years. The economic recession in combination with an almost manic desire to cut costs has forced many pharmaceutical companies to resort to tactics that in better times might not have been considered.
For example, contracting out your manufacturing to another company would have been likened to heresy only a few short years ago. But now, with big pharma reducing their manufacturing footprint as much as possible, and the “brain drain” that has resulted from layoffs, the industry is increasingly turning to manufacturing/service firms to provide them with cost-effective ways to manufacture and market products.
To find out what the latest CMO trends are Pharmaceutical Processing spoke to several industry executives.
Someone You Can Count On
For pharma companies to use a contract manufacturer they have to find someone they trust, who has the appropriate skill set and most of all can deliver a quality product on time.
Randall H. Guthrie, Vice President of Xcelience describes it this way, “In today’s marketplace, certainly quality has to be a given. But everyone is really tuned in to speed these days and how fast they can achieve their goals. I think there is an underlying vision, in the past it was price, reliability, the relationship, and certainly cost. But in today’s marketplace I think this dynamic of speed has been thrown into the mix and in some cases surpasses the previous things that I mentioned.”
“I think if you ask pharma companies what specific qualities they are looking for in a contract manufacturer they would say three things – security of supply, cost and ease of doing business, says Hans Engels, President of DSM Pharmaceuticals.
“Consistency,” says Tee Noland, Director of Business Development at Pharma Tech Industries, “is probably the biggest thing. Pharmaceutical companies are looking for someone who has a proven track record that delivers a quality product and service on time and at a competitive price. Reputation and track record is a big deal. It’s a highly regulated business and moving one product to another contractor is very costly. When they (a pharmaceutical company) spends the money to do that they want to make sure that they are doing it with the right partner, the right company and that they are viable in the long run.”
Specialization or Diversification?
One issue facing pharma companies when they decide to contract out their manufacturing is trying to decide what type of company they should do business with. Choices range from highly specialized companies offering limited services or more broadly based companies that provide a wide range of services.
“I don’t see companies looking for a one-stop shop, I see the opposite,” says Engels. “From feedback, pharma companies want to work with companies who are good at the things they are doing. The more diversified you are, the less likely you are to be good at everything.”
“On the other hand,” Engels continues, “and a little contradictory to that, is that large pharma is realizing that they have too many suppliers and they are now rationalizing their supplier base. But that doesn’t mean that every supplier needs to have a broad based offering. What they want to do is put together a portfolio of the right suppliers.”
Daniel Prince, President of Gibraltar Labs, has an alternate view on the question. “I do believe customers are looking for 'one stop shopping.' We find that our customers are looking for ways to leverage all of their core competencies and that means they may drop manufacturing of some things in favor of making more resources available elsewhere. One stop shopping can be much more simple to administer and can afford deeper discounts based on volume.”
PTI’s Noland sees diversification as a growing trend, “There is definitely more of a demand for diversification. Many of the companies we work with want to do more with fewer suppliers. They want to cut the number of contractors they use and get more from the good contractors they work with. They’ve found that it’s really expensive to audit and maintain a lot of different relationships. The trend going back was more of a trend toward specialization. That trend is becoming less and less. Now they are trying to go to someone they can count on.”
The FDA And Increased Scrutiny
Last year, in light of some headline grabbing quality control failures, the FDA floated a proposal that would make pharma companies more liable for the actions of their contractors. While this proposal has not yet been adopted as a regulation, the executives we talked to have noticed an increased amount of both sponsor and FDA scrutiny.
“My personal thought is that it (the proposal) is a very good thing, says Guthrie. “I haven’t seen anything change. I think we are still going at the same pace of auditing. People are coming out to audit their studies as part of the process. They may be there a little more often as the project is running. But generally, I have not seen a major change, at least in the early development phase. I would expect if you got into the commercial area I would suspect you would probably see a lot more activity there. That’s really where the liability lies.”
While companies that provide early development stage services like Guthrie’s Xcelience have not seen much a change, Guthrie is correct in pointing out that providers of manufacturing services are seeing increased scrutiny, as PTI’s Noland explains, “Recently we had an audit from a sponsor that was much more intricate and detail oriented than we had in the past. It’s now becoming more expensive to maintain these contractor relationships because there is so much more regulatory scrutiny. If one of these big pharma companies has a contractor that is not in line from the regulatory perspective its going to come back to them. There is more of a focus on auditing and more resources are being deployed by the big pharma companies for the audits – much more than a “check the box” kind of thing that they do every year. More people are being sent to our plant and staying longer and more frequent audits. When the regulatory agency raises the bar, it may not happen right away, but big pharma is going to raise the bar as well. It only takes one of these companies to end up in the headlines to scare the rest of them – they don’t want to be the next one.”
While traditional pharmaceutical manufacturers and the industry in general has seen a slowdown due to the recession, it has created increased opportunities for contractors serving the industry.
“I think it has helped us,” says Noland in regards to the current economic climate. “We focus more on the commercial side of production. We don’t do a lot R&D. The contractors on the R&D side have been pinched a bit. As far as commercial scale, which is our bread and butter, we’ve been awarded several pieces of business due to the economic climate. I think we are in a good place because I don’t see that dynamic changing much.”
The recession hasn’t hurt Gibraltar Labs either, as Prince explains, “We have grown during the recession in part because we completed a new facility just as the recession hit. So we had ready capacity that was easy to fill because when potential customers came to audit they were very impressed.”
Globalization & Consolidation
While recent mergers and acquisitions have created few big players in the pharmaceutical industry it has also made companies more global in their outlook and reach. And, as strong as the contract manufacturing services sector of the industry might be, no segment is immune to consolidation.
Commenting on the globalization and consolidation of the industry, DSM’s Engels believes it has helped the industry. “It has helped. Each pharma company has way too many assets. If you are a pharma company and you want to reduce your asset base it is a very difficult process, because there are internal policies, politics and emotions. But when you acquire another company you don’t have the same emotions. You can look at it very rationally. Then it’s easy for you to close plants.”
“At this point in time my feeling is that it must come,” says Engels regarding consolidation in the contract manufacturing industry. ”But I don’t see any indications. There are way too many underfunded players and for 80% at least they don’t have a sustainable business model. They don’t have the funds to reinvest in facilities, etc. So I think there will be consolidation coming."
PTI’s Noland offers this on the economic outlook for CMO’s, “I think that CMOs are generally strong. I can’t speak for my competitors. I go to the trade shows and it seems like the industry is thriving and doing well. I think acquisitions will be strategic in nature. Some of the good companies that have access to capital and are willing to take the risk will go out and acquire companies – to become more diversified. We’ve looked at acquisitions, but it’s a question of is the risk worth the reward? Typically it’s going to cost you more to acquire something than to grow organically.”
It’s tough to predict the future, but our execs have some thoughts on the outlook and future of the contract manufacturing industry.
“I think you are going to see more strategic partnerships between pharma companies and contractors,” says Noland. “Where they are not thought of as just a supplier but as an extension of their own teams so its more of a partnership. I think the domestic-based contractor is going to be in a good place. There is less of a focus on price than there was 5 years ago. More of a focus on continuity of supply and quality and the expertise that a lot of these big companies had to manage their products is going away – they need to trust and rely on companies like ours.”
"I think generally, be it a large pharma company or a small biotech, they are trying to do more with less these days,” says Guthrie. “As activity picks up, I think we are going to see outsourcing continue to grow. It’s been the case all this year (2010). There have been some wonderful signs of recovery, at least in our space - the early development space.”
Finally, DSM’s Engels see a future where more and more manufacturing will be done by contractors. “Presently large pharma is talking about 30% outsourcing and 70% in-house. I think the end game will be the reverse – in-house will be 20 – 30% and 70% will be outsourced."