Bio-Manufacturing Outsourcing Trends

A funding crunch in biotech creates an outsourcing dilemma

By Eric S. Langer

The current funding crunch has put the brakes on some new R&D projects, and slowed the development of others in the pipeline. This, in turn, has begun to open more production capacity, as biopharmaceutical companies adjust their production and outsourcing planning. We discuss these trends based on data from my company’s 6th Annual Report and Survey of Biopharmaceutical Manufacturing¹. This year we evaluated global outsourcing, budgeting, capacity utilization, and other production trends. With a worldview defined by from 446 biopharmaceutical manufacturing executives in 35 countries, we can illustrate how the industry is responding to capacity access and funding shortages.

The top drivers for outsourcing in this industry tend to be capacity utilization, requirements for internal expertise, access to capital and funding, and time-to-market. When industry capacity utilization rates are high, there is increasing pressure toward outsourcing; when more complex or difficult projects are in the pipeline, drug innovators often turn to contract manufacturing organizations (CMOs) that have specific expertise; and, of course, when small- or mid-tier companies have limited access capital to build out production facilities, then outsourcing may be their only option.

Survey Methodology: This sixth in the series of annual evaluations by BioPlan Associates, Inc. yields a composite view and trend analysis from 446 responsible individuals at biopharmaceutical manufacturers and contract manufacturing organizations (CMOs) in 35 countries. The methodology also encompassed an additional 140 direct suppliers of materials, services and equipment to this industry. This year’s survey covers such issues as: current capacity, future capacity constraints, expansions, use of disposables, trends and budgets in disposables, trends in downstream purification, quality management and control, hiring issues, employment and training. The quantitative trend analysis provides details and comparisons of production by biotherapeutic develops and CMOs. It also evaluates trends over time, and assesses differences in the world’s major markets in the U.S. and Europe.

This year’s study found that the depth of today’s global economic situation is creating slight budgetary cutbacks in outsourcing, with the average facility reducing outsourcing budgets by 1.3%. In comparison, in-house process development budgets are expanding by nearly 4% this year. Companies are more likely to use their in-house expertise and capacity, since many see internal staffing budgets as fixed costs.

Primary trends in outsourcing this year include:

• Slight declines in capacity utilization
• Relatively stable outsourcing planning
• Clients’ increased expectations of their CMOs
• Shifts in destinations for international outsourcing
• Predictions of the causes of future capacity crunches

Capacity Utilization

Capacity utilization is a measure of how much, or little, idle capacity is available for production. It represents the percent of the industry’s total production capacity that is actually used. This information is important for planners and investors as they determine how effectively manufacturers are using their fixed assets². It is also important to planners who must judge whether capacity will be available for the production of pipeline drugs that are reaching approval. Biopharmaceutical companies want to avoid unanticipated high production demands that can create a capacity crunch. On the other hand, the cost of an idle biomanufacturing facility — as well as costly excess capacity — must also be actively avoided.

This year, capacity utilization remained nearly flat for mammalian cell culture systems (at 63%), and is virtually flat for microbial fermentation, as well (at around 55%). Since 2003, capacity utilization for mammalian cell culture systems has dropped significantly, over 13.1 percentage points from 76.4% in 2003 to 63.2% this year. However, over the past four years capacity utilization has flattened out, and change has amounted to a 2.8% annual decrease since 2005. Microbial fermentation capacity utilization declined as well, from 71.0% in 2003 to 53.8% in 2007 (CAGR –13.0%). But since 2005, the decrease has slowed to 2.9% annually.

A number of factors have converged to create a projected surplus of both mammalian cell culture and microbial fermentation capacity in the next five years: the current economic situation, improvements in manufacturing technology, and the building of additional capacity four or five years ago. The major biopharmaceutical companies with substantial mammalian cell culture capacity of their own (Amgen, Genentech, Wyeth/Pfizer, etc.) are likely to operate at less than industry-average capacity, despite having large production requirements.

Capacity Constraints

The percentage of respondents indicating they were experiencing “No Production Constraints” at all stages of manufacturing went up by 50% this year. Further, the percentage that are experiencing constraints (see Fig. 1) has declined since 2005. When we then compared responses by stage of manufacturing, we found that 17.3% of respondents were experiencing severe or significant constraints at the commercial manufacturing level — down somewhat from the previous year.

Fig. 1: Capacity Constraints, 2003-2008 “I believe our facility is experiencing capacity constraints ‘today,’”

Outsourcing Planning

Many small and mid-tier biopharmaceutical innovators are experiencing the impacts of the global financial crisis in their inability to access capital for manufacturing expansions. This is playing a role in how companies are defining their outsourcing strategies. For example, this year, we found that more than a quarter of biopharmaceutical companies (26.3%) indicated that, Lack of financing for production expansion was a primary cause of future capacity constraints.

Despite these expectations of future constraints, the financial situation has not yet substantially shifted existing outsourcing. This year, among respondents producing in mammalian cell culture, 52.5% (see Fig 2) indicated they performed all their production “in-house” (virtually the same percentage as last year). While 12.5% of respondents outsourced less than 10% of their production, 6.3% outsourced between 90-100%. Over the past few years, the percentage of biotherapeutic developers who are doing all their mammalian cell production “in-house” shifted downward slightly from 57.6% in 2005 to 52.5% today.

Fig. 2: Biomanufacturing facilities outsourcing NO production, 2005-2008 % organizations manufacturing 100% in-house

For microbial fermentation, this year, 60.3% of respondents indicated they performed all their production “in-house” (vs. 58.3% last year, see Fig 3). The percentage of biotherapeutic developers who were doing all their microbial fermentation “in-house” has remained very steady over the past four years (between 58.1% in 2005 vs. 60.3% this year).

The decision to outsource microbial fermentation is somewhat binary, with most either keeping work in-house or outsourcing substantial percentages. According to Geoff Hodge, vice president Process Development and Technology, at Xcellerex, Inc., “This may be a function of the greater ease of establishing microbial capabilities and expertise, allowing a yes/no decision vs. a gradual increase in capacity and capability.”

Fig. 3: Current % production outsourced; by system, 2008 “What % of biomanufacturing organizations production currently outsourced for each?”

Outsourcing is holding steady on all fronts, regardless of production system. Again, the split between traditional and newer systems appears in the lower percentages for traditional systems. It is likely that the newer systems will be increasingly outsourced as the industry gains experience and confidence in working with CMOs with these expression systems.

Outsourcing ‘Some’ Production

Fig. 4 shows the percentage of facilities that indicated they will outsource “at least some production” in 5 years (by 2013). In general, for all systems, the projection for outsourcing has declined. This is reversing a trend toward greater outsourcing in recent years. Likely, a result of economic pressures this year, 53.5% of respondents projected that at least some production in mammalian cell culture will be outsourced in five years, compared with 60.4% last year making that same five-year prediction. Similarly, 43.9% of respondents this year indicated that at least some of their microbial fermentation will be outsourced within five years. This compares to 47.6% of biotherapeutic developers last year who gave their five-year projections.

Fig. 4: Five-year projections: % biotherapeutic developers planning to outsource at least some production: 2011, 2012, 2013 studies % organizations projecting to be outsourcing at least some production in five years

Trends in Selecting a CMO

In this year’s study, we evaluated 19 critical issues concerning outsourcing of biopharmaceutical manufacturing to a CMO. Client-relationship issues are becoming increasingly critical, with Establish a good working relationship topping the list this year with 93.3% indicating the issue was either ‘Important’ or ‘Very important’. This year some of the top considerations rated as ‘Very important’ included:

• Establish a good working relationship (62.5% indicating factor ‘Very important’)
• Comply with my company’s quality standards (58.7%)
• Protect intellectual property (55.8%)
• Have capacity enough to meet my sales demand (52.9%)
• Stick to a schedule (52.9%)
• Effectively handle cross-contamination issues (51.9%)
• Offer a secure supply (Control of capacity) (47.1%)
• Have regulatory compliance expertise (47.1%)

The location of the CMO continues to show up as relatively unimportant (8.7% today indicating the factor is ‘Very important’). This may be a function related to the comfort many drug developers have with off-shoring parts of production projects. However, many CMOs have experienced the opposite, with proximity to the CMO being held as a strong consideration when outsourcing. It is possible that being “relatively” unimportant is not equivalent to “unimportant” and it may be that in the face of other factors, this one naturally falls toward the bottom.

Over the last three years, the attribute rankings have shifted toward areas involving relationship building, IP protection and operational issues. For example, the percentage of respondents indicating Establish a good working relationship was ‘Very Important’ moved from the #4 spot in 2006, to #2 last year, and to the #1 spot this year, with 62.5% of respondents indicating this is a critical selection attribute.

This suggests that expectations of vendors in the industry, in areas such as customer service, and client-vendor relationships are increasing. It is possible that this factor was undervalued in earlier days when the industry was less experienced with CMOs. This has been a prime focus of CMO presentations on managing contracts in recent years. It may be that the industry is maturing in its outlook and has finally come to fully appreciate the importance of ‘culture fit’ and client-relationships.

• Sticking to a schedule is another soft, client-relationship issue that does not appear to be getting resolved. In 2005, 47% indicated it was ‘Very important’ vs. 52.9% today.
• Offering a secure supply (control of capacity) continues to rise, and is now at 47.1%, vs. 43.6% of respondents last year who felt this issue to be critical.
• Demonstrating a track record with products similar to mine also continued to decline, from 49.7% in 2006 to 28.8% today. (a 21-percentage point drop over twoyears). This may indicate an increasing trust in CMOs as the industry gains more experience with outsourcing. This may not, however, apply to newer expression technologies.

CMO expertise is arguably the most valuable aspect of what vendors have to offer: As biomanufacturing increases in complexity, CMOs find it necessary to build on their specific expertise, their IP, cell lines or other service differentiators. Biologics CMOs today are increasingly recognizing that simply having capacity isn’t enough to ensure success. Because CMOs recognize they cannot provide all services to all clients, they are differentiating themselves based on expertise in areas such as upstream process development, downstream purification, fill/finish, or in handling unique production platforms.

Shifts in Destinations

Country selection for international outsourcing of biologics is shifting as the industry globalizes and matures. In the study we asked respondents to consider their current plans for international outsourcing in the next five years (to 2013).

U.S. Respondents Only

We tested 20 global destinations where respondents in the U.S. and in Western Europe, respectively, might consider outsourcing, that is, at any level from “Possibility” to “Likelihood” to “Strong likelihood.” Figure 5 shows the percent of U.S. respondents who indicated they might potentially outsource biomanufacturing to each of the 20 listed countries. Singapore was mentioned most often (with 36.5%), with Ireland, India, China and Germany in close proximity.

Fig. 5: % U.S. respondents considering outsourcing biomanufacturing, at any level of interest (possible, likely or very likely), by country % respondents considering country as a possible outsourcing destination

Note that when we removed the ‘possible’ option as a destination alternative, and assessed only countries that U.S. respondents rated as either a “Strong likelihood” or a “Likelihood,” we found more conservative responses: Singapore (9.2%), Germany (5.7%) Ireland (4.3%), and UK (3.5%) as outsourcing destinations.

Western European Respondents Only

Among Western European respondents (Fig 6), we find the following responses regarding possible destinations for their outsourcing activities. The U.S. was indicated most frequently, with 59.2%, followed by Germany with 43.1% indicating it as at least a ‘possible’ destination for outsourcing. Singapore was ranked fourth, after the UK.

Fig. 6: % Western European respondents considering outsourcing biomanufacturing, at any level of interest (possible, likely or very likely), by country % respondents considering country as a possible outsourcing destination

What Causes Future Capacity Crunches?

The factors indicated by biomanufacturers as creating future capacity constraints have fluctuated over the past six years. This year, we tested 18 areas where respondents identified major factors likely to constrain their organization’s production capacity “over the next five years.” We found the most common factors involved downstream purification: Physical capacity of downstream purification equipment was indicated by 30.5% of respondents, Costs associated with downstream purification (26.9%), Lack of financing for production expansion (26.3%) and Inability to hire new, experienced technical and production staff (25.3%) topped the list. Those who felt that they were unlikely to see capacity constraints in five years were in a minority (21.4%). Downstream purification issues are clearly recognized as the current bottleneck.

As the biopharmaceutical industry matures, the ability to predict, plan, and adapt to economic and technological changes improves. Today, despite the downturn in the economy, the primary issues facing manufacturers tend to be of a technical nature, including downstream production, hiring issues, and manufacturing bottlenecks. The industry appears to be increasingly able to adapt to changing outsourcing requirements and capacity fluctuations, as it continues to improve on its own managerial and technical hurdles.

Eric S. Langer is president and managing partner at BioPlan Associates, a Rockville, MD-based biotechnology and life sciences marketing research and publishing firm established in 1989. He can be reached at 301-921-5979.

---

References

1. 6th Annual Report and Survey of Biopharmaceutical Manufacturing and Production, April 2009 BioPlan Associates, Inc. Rockville, MD.
2. Federal Reserve Statistics for February 2009, at http://www.federalreserve.gov/releases/g17/Current/

All figures courtesy BioPlan Associates