Biopharmaceutical companies are beginning to reflect the slow recovery from recent economic problems, with companies reporting overall budget increases, including for outsourcing, in 2011 . While much of the world’s economy still lags, the biopharmaceutical industry remains relatively healthy with overall growth in sales, R&D and outsourcing budgets. However, companies are continuing to follow a conservative path, and are maintaining their focus on cost reduction, performance improvements, and more careful evaluation of cost-savings efforts regarding outsourcing. In fact, according to our 8th Annual Report and Survey of Biopharmaceutical Manufacturing, a major stand-out shift was in the focus on production quality (see Fig 1). Here, we saw an 11% increase to 57.1%. In addition, some of the drastic budget cutbacks that occurred in 2010 in manufacturing process improvements have significantly scaled back.
This trend toward productivity, cost cutting and quality focus is impacting outsourcing in conflicting ways. While some companies are cutting back on outsourcing, others are increasing their outsourcing as in-house activities and staff are reduced. The current survey data indicate the latter trend is more prevalent and that increases in company budgets will not be entirely devoted to restoring in-house activities and staff that had been reduced or eliminated in recent years. Overall, the prospects for outsourcing by biopharmaceutical companies appears promising with growth expected, particularly for the most sophisticated and broadly-capable contractors.
In fact, survey respondents consistently projected budget increases for 2011. This was a substantial change from previous years when budgets continued to show decreases in a number of areas ranging from outsourcing production, hiring new scientific staff, and new facility construction. However, responses indicate that companies are cautious and any new expenditures will be critically evaluated. Overall, with ever more biological products on the market and more deals being made, financing is less restricted, and spending in virtually all budget areas is up in 2011, between 1% and 6%. This includes expansion of spending on new capital equipment and facilities, a significant reversal from the past three years.
Outsourcing is ultimately about jobs and production efficiencies, as work is shifted from in-house to service companies. As shown in Fig 2, when asked where costs were successfully reduced last year through outsourcing of jobs, 13.2% reported outsourcing in process development, and 11.8% in manufacturing, with 5.7% off-shoring manufacturing jobs to foreign CMOs and 9% outsourcing R&D jobs.
The results show that companies are incorporating outsourcing as part of their manufacturing strategy, rather than simply as an ad hoc method of adding flex capacity or eliminating jobs and overhead costs associated with lower value production activities. Decision factors now generally go beyond simply reducing costs, and include consideration of speed, flexibility of internal operations, and internal employee placement in higher value positions. For example, survey data show a significant increase in the percentage of biopharmaceutical companies projecting outsourcing of upstream and downstream production over the next 24 months.
Outsourcing and Industry Sophistication are Increasing
Contract service and manufacturing organizations (CSOs and CMOs) can expect steady increases in their business, especially where service offerings provide greater sophistication than is available in-house. Virtually every biopharmaceutical
company uses outsourcing services of some kind, whether for manufacture of clinical or commercial supplies, process development, R&D, assay services, fill-finish or a wide variety of other outsourced activities. Companies have become increasingly comfortable with outsourcing of manufacturing and other critical and high-tech tasks; and outsourcing and offshoring have become part of standard operations strategy. Along with this, companies are increasingly comfortable with their ability to model and assess the value delivered by outsourcing partners, and are increasingly expecting more value from their CSO/CMO partners.
As a result, companies are expecting increasing technological and regulatory sophistication on the part of CMOs, especially as in-house staff with requisite expertise may have been eliminated. Along with this, companies are increasingly outsourcing complex tasks formerly reserved as in-house activities. For example, process development has traditionally been primarily an in-house activity, but 12% of companies now report outsourcing this activity. Survey results overall indicate not only growing reliance on outsourcing but growing expectations for what these relationships yield. Despite the economic climate, companies appear to be trying to establish deeper technical relationships with their outsourcing partners.
While many companies continue to consider outsourcing of manufacturing as a means to reduce costs, more are now carefully considering how they can incorporate outsourcing of up- and down-stream operations as part of their overall strategy. This year, 22.1% of respondents reported expecting to significantly increase outsourcing of downstream manufacturing (e.g., purification) operations, a jump to 2nd from 6th place (14.3%) last year. Similarly, 22.1% expected significant increases in outsourcing of upstream manufacturing operations, an even more dramatic increase from 8.6% last year. These expectations for increased outsourcing of manufacturing suggest a healthy market for sufficiently capable CMOs, as clients expect increasing sophistication and services from their contractors.
CMOs are meeting those expectations by offering increased expertise, technologies, tools and capacity that developers do not have in-house, and clients are electing to outsource more as part of their strategic planning, rather than for direct cost savings.
Thus, outsourcing is becoming more about doing things better and more competitively. The time-tested reasons for outsourcing remain: cost and time savings, increased flexibility, convenience, and relying on specialists with needed expertise and infrastructure in place. However, companies are now looking to strategically outsource to optimize speed, increase flexibility and redeploy internal staff to more challenging and more value-added activities. Outsourcing decisions often remain largely centered on expenses, but are also driven by analysis of the value of FTE activities, staff allocation, and hiring.
The increasing availability and sophistication of single-use/disposable bioprocessing equipment appears to be affecting outsourcing of manufacturing in somewhat conflicting ways. On the one hand, single-use systems make in-house manufacturing cheaper, simpler and more flexible. But single-use systems also do much the same for CMOs. In the near-term, CMOs appear to be winning, with CMO use growing as these companies successfully adopt single-use systems, with many developing their own preferred plastform systems and expanding their experience with a wider range of single-use systems. Overall, single-use systems are providing cost- and time-savings for biopharmaceutical companies that simply did not exist before, increasing the industry’s productivity. Single-use systems, allowing rapid turnover, are also enabling CMOs to gain experience in a wider variety of expression systems and manufacturing platforms, further extending the options for clients and increasing CMOs’ offerings and value.
Trend Toward Greater Outsourcing
Overall, results indicate a trend towards greater outsourcing of biopharmaceutical manufacturing, particularly those products involving well-established manufacturing platform technologies. A majority (≥60%) of respondents project at least some outsourcing, by 2015, of manufacturing using the current predominant mammalian and microbial systems. Well over half (63.5%) currently using mammalian systems indicated they expect to outsource at least some of this production by 2015, about the same as last year. This suggests a relatively stable production environment for outsourcing of mammalian cell culture, the current platform for manufacture of most biopharmaceuticals, including most recombinant proteins and antibodies with the highest costs and profits. Similarly, 59.6% of those currently using microbial systems plan to outsource at least some production by 2015. Among those currently using yeast systems, a smaller percentage, 52.2% expected some outsourcing by 2015.
Commercial Scale Outsourcing
Outsourcing of manufacturing will increasingly extend to commercial product manufacturing, not just R&D and clinical trials supplies. This is apparently a result of the increasing capabilities and experience of CMOs and clients placing increased trust in these organizations. Those CMOs with the most established, broad and sophisticated services (e.g., having the infrastructure and in-house expertise to support product applications and commercial manufacture) appear to be the likely winners in terms of gaining new commercial manufacturing business. However, there are currently relatively few CMOs with such broad Resources and experience in commercial manufacturing. These will likely continue to garner more of this business.
What is Being Outsourced?
Despite the increasing demand for more sophisticated services, outsourcing today continues to be dominated by relatively lower value-added, mostly testing, services, as shown in Figure 3.
We tested 23 areas of outsourcing services. Fig 3 shows where the highest current outsourcing response. We found that 70.0%, was for product characterization, e.g., pre-release, testing, followed by validation testing services (69.3%), plant maintenance (67.1%), toxicity testing (65%) and analytical testing and bioassays (60.7%). Toward the bottom of the list, with the least outsourcing, reported by fewer than 25%, were Design of Experiments (DOE), and upstream process development. These appear to be the tasks where companies are more hesitant to trust to others.
When comparing recent years’ results, we find that outsourcing activities are being projected at slightly lower rates for some major activities, such as fill-finish and validation services (each down slightly), while some activities are now being outsourced at substantially higher rates. These include both downstream and upstream production operations (although such PD services are still an outsourced activity with fewer than 25% of respondents). In addition, cell line development and project management services are becoming increasingly integrated into companies’ manufacturing planning.
Quality control and other specialized testing, including for product release, are the leading biopharmaceutical company outsourcing activities, with more than 70% of companies outsourcing at least some of these. This is expected, since this
testing requires specialized experience and costly equipment. Testing is becoming more complex and can be expected to further increase in coming years, as the logic of outsourcing specialized testing continues (along with pressures from regulatory agencies requesting such analysis as product characterization data). Fill-and-finish is another area similarly involving special expertise and equipment and becoming more technologically complex, with outsourcing expected to increase, as the sophistication of the technology grows. In the future, this may include use of newer, more efficient fill-and-finish technologies, including increased use of prefilled, safety (needle-stick prevention) and dosage-adjustable syringes, along with novel delivery methods. In the future, more outsourcing of up- and down-stream manufacturing can also be expected, as manufacturing platforms become more standardized and transferrable, and as improved single-use equipment becomes available.
International Outsourcing and Offshoring
Outsourcing is clearly being done on an international scale. Among 35 countries cited as potential outsourcing destinations, China ranked as the number one destination for the first time, with 17% of respondents indicating a “Likelihood” or “Strong likelihood” that they would outsource manufacturing to facilities there. This was followed by the U.S. (15.1%; keep in mind that this survey was international in scope). India (13.2%) and Germany (12.3%) were followed by the U.K., Singapore, Switzerland and Ireland.
U.S. respondents particularly cited China as an increasingly likely outsourcing destination, with 31% citing China as a ‘possible’ destination, a significant increase from 17% last year. We note that CMOs in China are an emerging business; the pressures for access to domestic Chinese markets may be driving some of this nascent interest.
Improvements in economies in developing countries, including popular outsourcing venues such as China and India, are putting increased cost pressure on these outsourcing suppliers. For example, rising employee compensation rates in China are increasing the costs for outsourcing (offshoring), with Chinese CSO/CMO labor and also material costs rising as the country’s infrastructure and economy improve, resulting in decreased cost-savings for those outsourcing to these countries. This also reflects the trend toward clients demanding greater performance and sophistication and better technologies from outsourcing service suppliers, not just cost savings.
As economies, technological capabilities and infrastructure of lesser-developed countries improve, their costs will increasingly tend to match those of developed countries. Although it may take time to reach parity, this trend may limit rapid growth in outsourcing to developing countries, including China and India. While this may not be good for companies seeking low-cost outsourcing, economic growth will result in increased (bio)pharmaceutical manufacturing and sales. As low-cost offshoring destinations mature they are likely to become biopharma innovators, manufacturers and consumers. In addition, domestic manufacture of biogenerics and commodity biopharmaceuticals, such as pediatric vaccines, in lesser-developed countries will support an local industry growth, including an increasing number of both regional product developers and CMOs.
1 Langer, E., 8th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production: BioPlan Associates, April 2011, 490 pages.
2 Rader, R.A., BIOPHARMA: Biopharmaceutical Products in the U.S and European Markets, online database; 1290 pages www.bioplanassociates.com/biopharma
Eric S. Langer is president and managing partner at BioPlan Associates, Inc., a Rockville, MD-based biotechnology and life sciences marketing research and publishing firm established in 1989. He can be reached at email@example.com or 301-921-5979.