10 Years of Bio-Outsourcing

The decade biomanufacturing grew up

By Eric S. Langer

The past 20 years of biopharma outsourcing has seen pendulum swings in strategy as kinks were worked out of the system and this new industry grew and matured. Ten years ago, the drug industry (including biopharma) was in the process of backing away from the ‘fully vertically integrated’ business model that had been in vogue in the early 1990s, and was moving toward an outsourcing model. Virtual companies were getting funding and investors were recognizing the value that contract manufacturers and other outsourcing firms added to good discovery and intellectual property. Now, 10 years along the biotech industry’s maturation, we’re seeing smaller swings toward more mature operating strategies. Fluctuations have leveled out, as has demand. For example, we’re now at an equilibrium with about 48% of biomanufacturers outsourcing at least some of their production, according to our recent 6th Annual Report on the industry.¹

The industry’s approach to outsourcing has changed over the past 10 years. Back then, the industry was quite focused on ensuring it could produce the biologics coming through the pipeline — having sufficient supplies of product to fill demand. Costs were a secondary concern.

Dr. Michel Ultee, vice president of Laureate Pharma, a biopharmaceutical CMO, recalled, “In 1999 the industry was beginning to focus on remedying the ‘capacity crunch’ that was expected based on the success of several antibody-related therapeutics, such as Enbrel, which at the time couldn’t be produced fast enough to meet demand.” This capacity shortage was seen as a serious threat to the biopharma industry, and some were predicting the need for huge increases in cell culture capacity as pipeline products reached commercialization.

Outsourcing Like It’s 1999

Looking back 10 years, outsourcing was common for non-core activities but restricted by conventional standards. A large portion of outsourcing involved repetitive, standardized tasks, such as analytical, preclinical and toxicology testing, and general business tasks. The other major outsourcing sector involved conducting clinical trials and preparing regulatory filings. Outsourcing was predominantly tactical, i.e., largely done as needed for specific tasks. Many companies outsourced some product candidate manufacturing tasks, usually smaller amounts for preclinical testing and early-phase trials, with commercial product manufacture generally performed in-house. And many companies contracted out product formulation, finishing and packaging.

At the time, there had been a big increase in the number of biologics coming onto the market.² These new products pressured many emerging biologics developers to abandon their plans to build vertically integrated facilities from the ground up. Even the larger biologics companies were finding it useful to leverage the expertise of companies offering outsourcing services. The risks associated with building a facility for a product that might not be commercialized were often too great for companies to take on. So they turned increasingly to outsourcing.

Back then, there were perhaps 80 companies, worldwide, offering contract manufacturing, especially fill-finish operations, which has long been a mainstay of the outsourcing business. The largest companies included Lonza Biologics, Boehringer Ingelheim/Ben Venue, DSM, Abbott, Covance, SP Pharmaceuticals, and BSCP. The total market for biologics contract manufacturing was estimated back in 1998 at around $780 million.³ Around that time, small-molecule pharmaceutical manufacturing outsourcing was generally estimated in the $15-$19 billion range, with R&D outsourcing at $5-$7 billion.

In 1999, as today, most of the growth in biologics outsourcing had been coming from expanding new product pipelines, and from the concerns biomanufacturers had regarding building facilities for products that might not gain regulatory approval. Further, outsourcing was often seen as a way to speed time-to-market for a new drug, and to avoid having to build capability and expertise in-house. In general, there were three models for outsourcing:

• Companies planning to outsource 100% of their biomanufacturing,
• Early-stage companies seeking to outsource their clinical biomanufacturing, and
• Companies planning to outsource production until they built their internal capacity.

Outsourcing Today

Outsourcing today has grown considerably over the past decade and continues to rise. Trends in pharma outsourcing are shifting, particularly as biopharmaceuticals grow in importance and provide an ever-larger share of industry profits.

Dr. Wolfgang Noe, vice president of Process Development, at Biogen-Idec, recalled the past decade: “Nowadays, we have a different situation: Quite a number of CMOs with a considerable track record are on the market, and companies with idle capacity even offer a ‘consortium approach’ to cover costs.” Dr. Noe, who is also responsible for outsourcing strategy at the company, noted, “Processes are sufficiently documented now that we can consider outsourcing and expect reliable, long-term relationships from our manufacturing partners.”

The pharmaceutical industry today must deal with a number of trends that are decreasing profits. Despite record levels of R&D investments, the industry is suffering from a lack of productivity, with drug development much more expensive and with fewer innovative and blockbuster products gaining approvals. Generally, industry response has involved contraction. Facing in-creased costs, anemic sales and upset investors, much of the industry has turned to outsourcing and other types of reliance on third parties, such as in-licensing of products and collaborative R&D agreements, with this increasingly involving biopharmaceutical products and companies. Outsourcing has played at least some role in the layoffs of tens of thousands of industry professionals recently. The proliferation of outsourcing options can provide an alternative to expensive FTEs.

Technological advancements in such regions as China and India have allowed many R&D and other functions to be outsourced to other countries where expenses, including staffing, tend to be lower. Although labor costs are rising in Asian countries, and some see pay parity as a not-too-distant eventuality, there continues to be cost advantages.

Small-molecule manufacturing outsourcing has increased many times over in recent years. China and India are the dominant suppliers of many raw materials. Besides R&D expenditures at least doubling in the past decade, the percentage of outsourced R&D has also at least doubled. Outsourcing of drug discovery and screening alone is now commonly estimated to be a $7 billion market in the U.S. It is now estimated there are more than 50,000 laboratories worldwide offering some type of analytical pharmaceutical outsourcing.

There appears to be no consensus on the current total size of worldwide pharmaceutical outsourcing; much of this is the result of how analysts define the market. In any case, it surely constitutes a large portion of the $60-80 billion annually spent on pharmaceutical R&D.

Changes in Biopharmaceutical Markets

The pharmaceutical market has also changed. Particularly in the U.S. and some other major markets, generic drugs now constitute a majority of product sales. An increasing number and percentage of new, innovative and blockbuster products are now complex biopharmaceuticals, rather than small-molecule drugs. The costs for the development, manufacture and marketing of these are generally much higher than for small-molecule drugs, and the end-user costs for these products are often orders of magnitude higher. Also, many countries outside traditional pharmaceutical markets are increasing in affluence, are growing faster, and have the potential to rival the current highly-developed countries for market opportunity. And, of course, most countries are working hard to decrease their pharmaceutical expenditures, putting further downward pressure on prices.

Today, the industry has dramatically increased its traditional tactical outsourcing of testing, clinical supplies manufacturing and finishing/packaging, and has extended outsourcing to many of the key corporate functions. Importantly, this is being done on a strategic and long-term basis.4 Illustrating the increasing strategic nature of outsourcing, in the 2008 Contract Pharma Outsourcing Survey, 74% of respondents said they would use the word “partnership” to describe their relationships with contract service providers.

Pharmaceutical companies are also making strategic decisions based on long-term needs to outsource broader company activities. For example, many companies now outsource much of their discovery and other research, development, manufacturing at all stages and scales, clinical trials, regulatory filings, legal support including patents, information center/library functions, public relations and human resources. A few smaller biotech-type companies are virtual by design, outsourcing most activities, with company executives largely being strategic planners and contract administrators. Some companies that can show dramatic short-term savings are reducing in-house functions such as R&D, manufacturing, marketing, training and other parts of their business.

Why Outsource?

Outsourcing and contract manufacturing are, of course, hardly new to the industry; in fact, over the past decade many more companies have found the need to pull in the expertise, tools and capacity of outsiders.

The basic reasons for outsourcing have not changed substantially over the past decade. Most commonly, the primary reasons cited in my company’s annual biomanufacturing study are cost-savings and risk reduction.³ Cost-savings are generally obvious, particularly in the short term. Risk reduction comes from minimizing corporate investments in developing and maintaining resources in-house. Other reasons to outsource include the ability to choose specific expertise among a number of outsourcing companies, which can translate into getting products to market quicker. Because outsourcing can provide access to specialized expertise, facilities and capabilities, it can offer a cost-effective alternative to performing tasks in-house.

Improved communications and a general improvement in service delivery have increased the ease of doing business on a global scale. Outsourcing is now a common business practice and is expected by investors and managers. Today, most companies no longer consider whether or not to do it, but rather how much and what to outsource. Outsourcing can also provide access to patented technologies developed or licensed by contractors.

Hiring another firm can be cheaper than doing the same task in-house, particularly if the task, such as biopharmaceutical manufacture, requires specialized expertise, equipment and other infrastructure maintained by the contractors; or is repetitive or low-tech. In any case, building a facility for manufacture of a recombinant protein can cost much more than for a small molecule drug, often in the range of $200-$500 million, and will also cost many millions annually to staff and maintain. Contracting out of biopharmaceutical manufacture can result in cost savings.

Biologics tend to be very complex to manufacture and there are numerous examples of manufacturing-related problems resulting in product shortages and loss of sales. Even many of the largest biopharmaceutical companies with internal manufacturing infrastructure routinely outsource a portion of the manufacturing of key products or have multiple plants, often in different parts of the world. With CMC problems and delays more common, and profits on biopharmaceuticals generally higher than for drugs, doing this tends to be good business practice — insurance against worst-case manufacturing disruptions.

Downsides to Outsourcing Today

Outsourcing does have a number of potential downsides. What proponents portray as providing access to the best on an as needed basis while saving money, critics portray as eroding corporate intellectual capital (collective knowledge), physical assets and technological capabilities, while transferring valuable expertise to contractors and, through them, to competitors. Companies may be able to save considerable money by outsourcing commercial-scale product manufacture, but by doing this, they forsake related assets they would otherwise own or control, including facilities and in-house staff expertise. This includes hard-to-quantify loss of — or simply not having — internal company resources, such as R&D and manufacturing facilities and other infrastructure, and loss of knowledge base from long-term employees.

Critics also note that what is portrayed as added adaptability from outsourcing actually results in a significant loss of control, which can be disastrous in the pharmaceutical industry, i.e., your business becomes increasingly dependent on lower-bid contractors that may cut corners to make a profit. For example, more than three-quarters of life science industry executives recently surveyed by IBM said they have experienced quality issues as a result of global sourcing and relocation of manufacturing to lower-cost regions; and 81% said they expected to see such issues in three years.

Trends in Bio-Manufacturing Outsourcing

A big factor in the move toward outsourcing has been the increase in the number of biopharma products. By 1999 more than 145 recombinant proteins and antibodies had been approved in the U.S. This has now nearly doubled.⁴ Along with this increase came growth in the size and number of biopharma CMOs, including many with world class capacity and expertise:

• Avecia
• Boehringer Ingelheim
• Celltrion
• CMC/ICOS
• Diosynth
• DSM
• Laureate Pharma
• Lonza
• Rentschler
• Sandoz (Novartis)
• Many mainstream biopharma companies, such as Amgen, also perform some contract manufacturing.

Over the past decade we went from a shortage of manufacturing capacity that could have caused disaster for many biopharma companies to a relatively good balance of bio-manufacturing capacity and demand. At least some of this is related to a single product and the immaturity of the biopharmaceutical sector. As noted in hindsight by Dr. Roger Lias, president of Eden Biodesign, “Most took an overly simplistic view of biotech’s capacity needs based on the successes of a few monoclonal antibodies, approval rates, and what were up to then normal process yields.”

In 1998, Enbrel, a recombinant monoclonal antibody from Immunex received approval for arthritis indications. Like other MAbs, relatively large amounts of protein must be frequently administered, requiring considerably more product than other recombinant proteins. Enbrel was successful far beyond market projections, and shortages rapidly developed, with Immunex (then owned by Wyeth, acquired by Amgen in 2001) losing out on billions in sales and profits. At the time, multiple other MAbs were nearing approval, and there were dire concerns that upon marketing, these products would take up the available large-scale manufacturing capacity.⁵ Eventually, Immunex/Wyeth/Amgen acquired and built new world-class manufacturing plants in Rhode Island and Ireland and also outsourced manufacture to MedImmune and Genentech. This shows how complex matching biopharmaceutical demand and manufacturing capacity can be, and how even major companies rely on outsourcing. Enbrel posted sales of approximately $6.5 billion in 2008.

As noted by Laureate’s Dr. Ultee, “[In hindsight] the crunch turned out to be not as dire as predicted. CMOs, however, did add more capacity. Another significant change in the capacity equation was the rising titer of cell-culture processes. Multi-gram per liter levels are now common for antibodies, roughly tenfold higher than in the previous decade. The effect has been to allow smaller bioreactor tanks to produce much larger quantities, thereby increasing capacity. Finally, cost pressures have become increasing important, and have resulted in a number of efficiency improvements, such as introduction of new disposable components to avoid expensive cleaning operations.”

A decade ago, there was about 400,000 L of mammalian bioreactor capacity available worldwide. Essentially all of it was already tied up manufacturing existing products. However, CMOs and biopharmaceutical companies responded quickly. Between 2003 and 2005, just four major biopharma CMOs — Boehringer Ingelheim, Celltrion, DSM, and Lonza — added a combined 260,000 liters of capacity.⁶ The biopharmaceutical contract manufacturing market is now estimated to be $2.6 billion and projected to grow at 16% annually for the next five years.

Thus, in the past decade, advancing technology, massive investments in new and expanded facilities by CMOs and biopharmaceutical companies, and (unfortunately) product failures combined to spare the biopharmaceutical industry from a “capacity crunch” that could have been fatal to many companies and products in development. Currently, the major concerns with biopharmaceutical manufacturing capacity involve the inability of downstream purification technologies to keep up with ever-increasing amount of protein resulting from improved expression systems, bioreactors and culture media.⁷

Biogen-Idec’s Dr. Noe summarized biopharma outsourcing over the past decade: “As an industry, we are still feeling our way toward the optimal outsourcing relationships; but it’s clear that, at least for some, if not all unit operations, we are moving in that direction.”

References

1. Langer, E., 6th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity, BioPlan Associates, June 2009
2. Rader, R., BIOPHARMA: Biopharmaceutical Products in the U.S. and European Markets, 1st Edition, 2000
3. Fox, S., Biopharmaceutical Contract Manufacturing, in Medical and Healthcare Marketplace Guide, Dorland’s Biomedical, 2001
4. MacDougall, L., “Making the Leap from Tactical to Strategic Outsourcing,” Contract Pharma, Dec. 1999
5. Rader, R., BIOPHARMA: Biopharmaceutical Products in the U.S. and European Markets, BioPlan Associates, Web database at www.biopharma.com
6. Biopharmaceutical Contract Manufacturing 2009: Expanding Markets, New Capacities and Improved Performance, HighTech Business Decisions, June 2009
7. Langer, E., “Quantifying Downstream Capacity Crunch,” Genetic Engineering and Biotechnology News (GEN), 28 (13), July 1, 2008

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.