The Future of Bio-Outsourcing

A new report explores bio-manufacturing trends

By Eric S. Langer

Biopharma companies are outsourcing more today than ever before, and, according to our recent study, the 7th Annual Report and Survey of Biopharmaceutical Manufacturing,¹ they’re planning to do even more. It’s clear from responses that the drivers today are much more complex than simple cost savings. As the industry and its contract manufacturers have gained experience over the past couple decades, decision-makers have retooled strategies and are becoming much more performance- and productivity-oriented.

Service providers with the flexibility and managerial capability to ensure they are providing the services in greatest demand are weathering the global financial crisis. Certainly, many internal operations vital to biopharmaceutical manufacturing are ‘outsource-able’ and in some cases, outsourcing is being used to take up the slack where internal budgetary belt tightening has led to layoffs.

In my company’s 7th annual report,¹ we evaluate trends and the extent to which global manufacturers and vendors are being squeezed. Outsourcing and budget projections quantify how these fears may translate to capacity problems. The results provide a global view from executives at more than 400 biopharmaceutical and contract manufacturing organizations.

This year’s report clearly indicates that the critical factors companies use to evaluate outsourced manufacturing are not cost-driven, but rather are focused on quality (67% of respondents), product contamination (65%), and establishing a good working relationship (60%).

Outsourcing: Not About the Money

It’s a competitive industry, and with layoffs and tightening budgets, companies are finding it necessary to bring in expertise, tools and capacity they don’t have in-house. It’s increasingly becoming less about direct cost savings, and more about doing things better and more competitively. This can translate into getting products to market quicker.

Hiring an outside firm can provide a strategic advantage, particularly if the task, such as biopharmaceutical manufacture, requires specialized expertise, equipment and infrastructure maintained by the contractor (or if it is repetitive or low-tech). For small companies, outsourcing the manufacture of biologics may be the only way to get their drugs to market.

Drug innovators outsource operations for a variety of reasons, including:

• Competitive pressures
• Lack of access to capital and funding
• Lack of internal expertise (available staff)
• Urgency: time-to-market (smaller companies)
• Lack of available capacity
• Need for access to enabling technology (e.g. expression systems, downstream processing)

These drug manufacturers are increasingly viewing contract manufacturing and outsourced services more as an asset to drive strategic manufacturing decisions than as a simple way to save money.

Outsourcing Today

Outsourcing used to be primarily about cost savings, offloading repetitive, low-risk parts of doing business, and about ensuring sufficient capacity would be available for pipeline products, if it were needed. Not so anymore. Although most companies still prefer to keep manufacturing activities in-house, most recognize that’s not possible, if they want to remain competitive.

Outsourcing today has grown considerably over the past decade. Outsourcing of drug discovery and screening alone is now commonly estimated to be a $7 billion market in the U.S. Concurrently, technological advancements in countries such as China and India have allowed many R&D and clinical functions to be outsourced. While labor expenses tend to be lower, these costs are rising rapidly and some see pay parity in the not-too-distant future. Thus, most companies are wisely evaluating their international outsourcing partnerships by reasons other than strict cost savings.

Today, the industry has dramatically increased its traditional outsourcing of testing, clinical supplies manufacturing and finishing/packaging, and extending the practice to many key operational functions. Pharmaceutical companies are making strategic decisions based on long-term company requirements, rather than simple cost savings, as they plan to outsource broader company activities. In our study this year, the preliminary data showed that the biggest outsourced activities were product testing and fill/finish operations (74% and 69%, respectively). Validation services followed with 64%. The least often outsourced activities were process development and design of experiments.

Future Outsourcing

We also asked respondents where significant increases in outsourcing activities will take place over the next two years. We found that nearly a quarter will be outsourcing greater amounts of fill-finish operations. Further, 21%, will soon be seeking additional validation services (Fig. 1).

Fig. 1: Increased outsourcing by 2012 Where significantly higher levels of outsourcing will take place during the next 24 months (% respondents indicating) Source: 7th Annual Report and Survey of Biopharmaceutical Manufacturing, 2010, preliminary data

Competitive Environment

When CMOs were asked how they have changed prices on their services during the past 12 months, we found relatively minor reductions. This is likely the result of competitive pressures and attempts to attract new clients with lower pricing. Custom services pricing, for example, decreased more than 3% on average. Fill-finish pricing, on the other hand, increased an average of 1%. Because fill-finish services are in the heaviest demand, this may simply be following traditional supply-and-demand laws. This also demonstrates the obvious: outsourcers can benefit most when offering the services in greatest demand.

Fig. 2: Pricing issues To what extent have you changed your pricing for biomanufacturing services during the last 12 months (% respondents indicating) Source: 7th Annual Report and Survey of Biopharmaceutical Manufacturing, 2010, preliminary data

Summary of Outsourcing Trends for 2010

Based on preliminary results from our 7th Annual Survey, most companies are increasingly confident, but are also more realistic: 2010 will bring good results, but managers are expecting greater productivity and better performance from the same staff. We found, for example, that nearly two-thirds of CMOs are not increasing their efforts in the areas of production quality and service. This cost-cutting strategy may backfire as clients are increasingly demanding greater quality. Short-sighted quality cuts by CMOs may result in long-term damage to reputations and relationships.

Fig. 3: For CMOs Only How has global economic situation affected facility operations (% indicating Somewhat, or Much Greater) Source: 7th Annual Report and Survey of Biopharmaceutical Manufacturing, 2010, preliminary data

Other industry trends that are defining how biopharma outsourcing will evolve over the next few years include:

Biopharma approvals

2010 will see an increased number of biopharmaceuticals entering major markets. More than 60 biopharmaceutical products currently have applications either pending or expected to be filed in 2010, joining more than 335 currently approved by FDA². Many of these will receive prompt approvals.

Biosimilars are coming!

Legislation enabling abbreviated, comparisons-based, generic drugs-like FDA approvals pathway for biologics will be enacted. There will be a significant increase in the number of companies entering this field. This will include an increasing number of foreign service providers, many based in developing countries, seeking to develop biosimilars for the U.S. market.

Cost-containment

Governments in the U.S. and other major pharmaceutical markets will continue efforts to reduce costs. Therapeutics will increasingly need to show improvement and cost-savings relative to competing products.

Bioprocessing

Many recent trends in bioprocessing, particularly biopharmaceutical manufacturing, will continue. As has been reported by our current study, companies will continue to invest in expansion of manufacturing capacity, with increasing attention and investments being made to resolve bottlenecks in downstream purification.

Bioprocessing technologies

Cost-containment will continue to drive progress, led by the increasing adoption of new technologies, improved yields from upstream processing, and better expression systems, host cells and genetic engineering technologies for large-scale manufacture.

Industry consolidation

Merging and purging among companies will likely increase. Larger companies — particularly large pharma with ailing R&D pipelines — will continue to acquire smaller firms and merge among themselves, along with consolidation, post-merger downsizing and layoffs.

Internationalization

The growth in biotechnology, particularly biopharmaceutical, markets will continue worldwide, with much expansion in China, India, and other rapidly developing countries. In fact, India and China are quickly becoming strong alternative outsourcing destinations (this year, 33% of respondents indicated that India was a potential outsourcing destination, compared with 30% for China). As a case in point, AstraZeneca indicated that it is planning to divert most manufacturing activities to India and China in the next 10 years.

Economy, spending and outsourcing

The world economy will continue its slow recovery, while investments in biopharmaceutical manufacturing capacity and R&D continue and increase1. Despite this, companies will universally continue to cut back internally. However, this may support outsourcing activities, for both critical, and non-critical R&D and manufacturing. However, we are already seeing a slowing of this trend, as worldwide demand for experienced professionals and increasing growth and affluence in many foreign countries reduce the cost savings from offshoring.

New technologies in the market

Survey Methodology This seventh in the series of annual evaluations by BioPlan Associates, Inc. yields a composite view and trend analysis from over 400 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.

2010 could well see the first U.S. and other major market approvals of therapeutic technologies that have long been stalled in development, including gene therapy and cancer vaccines. Personalized medicine will continue to advance slowly, with more diagnostics being used to guide selective use of biopharmaceuticals, increasing efficacy for qualifying patients and decreasing overall health care costs.

Business model shifts

The global bio/pharmaceutical industry is seeking more competitive ways to conduct R&D and manufacturing. Outsourcing is increasingly seen as an unavoidable alternative to internal operations. It is improving efficiency, providing capabilities not otherwise available, offering greater flexibility, and reducing risks. Many outsourcing companies have retooled their services to address these needs. Outsourcing this year is likely to grow, as projects delayed by the economic downturn get the green light. Pricing will likely be held in check, even as we see significant new outsourcing activity in 2010. Companies will be negotiating to improve outcomes, and reduce risks through outsourcing, rather than simply to offer cost-reductions.

Companies are realizing that pricing cuts reduce quality of services, damaging relationships and the business value that should come from outsourcing. Companies are negotiating more collaboratively to ensure flexibility, and to enhance total value. As a result of this growth, when the shake-out from the current crisis is over, we can expect outsourcing hiring to return, and growth in new graduate hiring in emerging outsourcing locations. This is likely to be accompanied by wage increases across the globe, but especially in India and China.

Overall, 2010 will be a good year for biotechnology and biopharmaceutical segments. However, for outsourcing service providers to participate in this growth, they will need to refocus their efforts on delivering the services demanded by clients, and learn to streamline operations, while maintaining highest quality standards. This lean strategy, consistent with virtually all other manufacturing-oriented industries, is a prerequisite for solid future growth for the outsourcing industry.

References

1. 7th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production, BioPlan Associates, Inc, Rockville, MD, 2010 Preliminary Data
2. Biopharmaceutical Products in US and European Markets, 7th Gen Web, available at www.bioplanassociates.com

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.