Continuity and Connectivity: We Can Do That, Too

Are CDMOs the Next Big Thing?

By Tom Spurgeon

CMOs and CROs face a future defined by an explosion of international competition and a growing stormcloud of increased attention to the more comprehensive areas of facility and expertise demanded by domestic outsourcing clients. How these companies manage to stay apace of low-cost competition from abroad while developing greater capabilities will determine the success or failure of contract services organizations for the next 10 to 15 years. The changing landscape will force providers to look inward, toward proprietary technology and existing contracts. Deepening their relationships with their current business partners and then being able to turn around and provide that increased capacity to future, potential clients may be the only way for such companies to stay consistently profitable.

Photo courtesy of DPT Laboratories

Here are a few of the realities facing outsource service providers in the near future:

1) Not only have pharmaceutical manufacturers in China and India begun to pursue business with clients in the U.S. and Europe more aggressively, they’re beginning to see the benefits of a push begun early in the decade for more rigorous standards that, once in place, will allow exponential increases in the ability of Western companies to outsource work to such companies. As an added bonus, any companies working with a manufacturer in China and India may see such an arrangement as gaining a foothold within the lucrative and rapidly growing markets represented by those nations. A shift has already moved the business landscape from areas like Puerto Rico and Canada to destinations east. This shift now stands to draw more business directly from the contract providers within the U.S.

2) A few companies that got their start buying facilities and performing processes that used to be done by large pharma are now divesting some of those same facilities and focusing on core, profitable segments. Within those core segments, some service providers are even broadening and deepening their capabilities.

3) The drivers in terms of whether or not a process is outsourced have shifted from regulatory pressures to economic motivations. This places a greater emphasis on earlier stage partnerships as well as increased efficiency in getting product to market. Early-stage partnerships thwart tactical (task-based) outsourcing more than late-period partnerships because of:

• the cost of technology transfer,
• the potential for diminished speed to market in splitting regulatory concerns between multiple facilities, and
• the potential for repeating work and the resulting loss of time that often accompanies tech transfers.

Therefore, contract service providers must on the one hand fend off international competition, and on the other engage with a more demanding landscape in terms of the needs of North American businesses. The solution lies in extending the parameters of their partnerships with existing clients. Companies can do this in part by offering a greater number of services that cover a greater portion of the development and manufacturing journey of a product to market. The advantages should be numerous, including:

• a deeper partnership arrangement between sponsors and service providers,
• an opportunity to provide more value to clients with increased expertise and more services,
• the ability to have longer partnerships with sponsors,
• potential new business from tactical outsourcing
• greater continuity and efficiency between stages of the development and manufacture process, and
• increased focus on core areas of expertise as opposed to contract service providers trying to be all things to all customers.

How companies get there and what they emphasize along the way leads to several clear distinctions between companies and their approaches to meeting future trends.

For some, adding services is a natural, ongoing process, which will continue unabated and perhaps even unhurried. “We’ve always had manufacturing ability,” said Tom Salus, business development manager of Glatt Pharmaceutical Services. “But the way we provide contract manufacturing has been changing over the years as we focus in on our development area.” According to Mr. Salus, both the competitive nature of the market and the increasing breadth of customers’ needs have led Glatt to add services. This has made their transformation client-driven. “In the early days of Glatt Air Techniques here in the U.S., we started out as a laboratory to help introduce fluidized bed granulation into the pharmaceutical industry. At the time, fluidized bed granulation was not as well known, so we offered contract manufacturing for bulk granulation. As we’ve started to develop our strengths in the developmental area, we found that the use of a variety of technologies that applied to controlled release development has pulled us along into offering manufacturing, and that goes in step with our developmental growth.”

Other companies see extending their services as a key corporate strategy to match industry trends for increased demand for outsourced services — a tactical approach that in this case ironically favors a move away from what is generally called tactical outsourcing, or specific function outsourcing. These companies see the increase in outsourcing as inevitable, not simply as an opportunity, but as a trend that demands a response. “In the past two years, we have seen several restructuring initiatives that indicate that global pharma is preparing to focus on their core businesses and outsource more of their non-core functions, such as manufacturing,” said Shelley Jouard, spokesperson for Patheon. “This is clear as well from our discussions with our clients — an increasing number of clients no longer see outsourcing just as a ‘concept,’ but rather as an accepted strategy for optimizing internal resources and accelerating new product pipelines.”

Still others see the move toward greater continuity in services as a reaction to price demands and a hedge against market loss through specialization. As existing processes become more streamlined and their solutions less dependent on proprietary technology, a lower threshold for participation will bring outside companies into competition to execute specific services. “With products that are fairly easy to manufacture, over time they’ll migrate to a low-cost provider,” suggested JJ Feik, director of corporate development and marketing at DPT Laboratories, Ltd. “For today they’re still here. For example, products with no patent life remaining and products that have less complex manufacturing requirements will move to low cost providers.”

Companies that wish to thrive without chasing the diminishing returns of lower-cost solutions must find ways to provide services aimed at bringing to market the most complex molecules from the widest variety of client types. Despite their general orientation, the best positioned contract service providers will leverage proprietary technologies and specific dosage form experience, as well as promote their capacity for making lengthier processes cost efficient for their clients. This may include reducing the risks and costs inherent in technology transfer from one company to another, providing greater vision and foresight based on experience in bringing certain items to market, and offering continuity and accountability between divisions and facilities. In order to compete, these niche technology and dosage form companies will increasingly mirror the comprehensive services found at the largest service providers, only restricted to the area of their historical expertise. In this way, clients come to established serviced providers for their experience with a specific technology, and stay as long as it remains cost-efficient to do so, expanding the relationship as they go.

Current evidence suggests a variety of ways companies can pursue more comprehensive relationship strategies.

One strategy is to build from a company’s core expertise outwards, to focus on a specific technology or area of expertise and allow that to become the draw that shapes the kind of business the company receives. “It was strategically advantageous for us to expand our development services, but secondarily. In the early days, since we were focused on semi-solid and liquid dosage forms, we had people seeking out  our services because we had that specific expertise,” Mr. Feik told Contract Pharma. “In turn, that expertise and focus allowed us to provide not only comprehensive manufacturing solutions in that segment, but also drug development capabilities in that particular segment of the contract services market. Our focus on a core idea has given us more expansive capabilities from a development and manufacturing standpoint. It’s been a strategic intent to do that as well. Today, clients clearly see our focus on the semi-solid and liquid dosage forms and our ability to take their molecule from pre-formulation to commercialization.”    

A second strategy is to invest in services that current clients are seeking elsewhere. This allows companies to retain clients through the process represented by those services, and ameliorates their desire to seek comprehensive services and continuity between services elsewhere, which may take place despite losing advantages in technology.  “As companies look to a life of their product, they might go to somebody else who maybe isn’t an expert in beaded technologies or controlled release, but they’re good enough and they have a contract manufacturing arm,” said Glatt’s Mr. Salus. “We might lose projects. That’s how we’ve driven our business.” The ability to provide continuity becomes the key. “If a client comes to us, they can see a clear path to commercialization,” Mr. Salus remarked.

A third strategy, and perhaps the most innovative, is to make a company-wide commitment to providing comprehensive services from development through manufacture in a way that affects both the company’s external identity and its core orientation. Some companies with both contract development and contract manufacturing capabilities have chosen to market themselves more clearly with both designations, placing a greater emphasis on their ability to provide quality assurance and cost efficiencies in both areas.

DPT has taken that strategy to heart by re-defining itself as a new category of business that reflects the more comprehensive process. At the beginning of 2007, the company began to refer to itself as a Contract Development and Manufacturing Organization, or CDMO. “What we wanted to do and what we think is appropriate to do is to create a new category – CDMO – in the contract services sector,” said Mr. Feik. “We came up with the terminology because we felt that terms like CRO and CMO didn’t describe or define the range of services we provide. CDMO defines who DPT is and where we feel the market is heading in the future: toward a service model that brings development and manufacturing expertise together under one roof.”

Mr. Feik added, “We believe there’s a benefit to clients when development folks are working with manufacturability in mind. That’s not always the case when we a CMO receives a product from another developer source. It’s a much different story when a provider’s formulation scientists are speaking regularly to the manufacturing guys.”

Acronyms abound in this industry, but sometimes a new one makes sense as a more complete descriptor of an evolving business. The new CDMO category is meant to describe the service offerings the company provides to clients with early-stage needs while also underlining its ability to provide comprehensive manufacturing services to clients old and new.

“We know that there are a few other providers out there doing this,” Mr. Feik admitted, adding, “But we feel we’re the first to communicate this new reality. Over the long haul we hope the terminology catches on and the industry comes to recognize this new category and the value that companies in the category provide to them.”

While some companies are quick to dismiss the move as putting a new name on an old way of doing business, at least two other companies have also adopted the appellation: NJ-based ChemSun Pharmaceutical and Swedish giant Biovitrum.

The majority of outsourcing companies seem fully cognizant of a future driven by deeper relationships with clients old and new; what each company will do to move in that direction is defined by how they view the coming storm.

A company that already claims a great measure of integration between development and manufacturing operations can point to that as a significant business driver in terms of launching newly patented products.  This also brings increased opportunities to participate with sponsors over longer periods of time. In turn, companies that provide such services hope to become strategic partners, not just tactical ones.

There are plenty of roads for contract service providers to follow. Some will lead to profit, others to dead ends. Faced with international competition and domestic pressures, contract service providers may find that expanded services lead to deeper business relationships and greater opportunities.

Tom Spurgeon is a contributing editor at Contract Pharma.