Biopharma Outsourcing Trends

Client-contractor relationships grow more complex

By Eric S. Langer

CMOs are evaluating how current economic conditions will change the outsourcing landscape in the $125 billion worldwide biopharma industry. This industry sub-sector is estimated by various sources at around $2.6 billion, and growing. So the stakes are high, and current economic pressures are putting strains on both sides of the relationships between biomanufacturers and their CMO service suppliers.

Photo courtesy of Coldstream Laboratories

We track these trends in our 7th Annual Report & Survey of Biopharmaceutical Manufacturing & Capacity. This year we surveyed 327 qualified biopharmaceutical manufacturers at facilities in 35 countries. The annual study provides trends that affect the biopharma and CMO industry, as well as the suppliers to this segment¹. The study covers capacity, outsourcing, downstream purification issues, emerging technologies, budgetary changes, quality management, use of disposables and other key trends.

Impact on Outsourcing Relationships

Biopharmaceutical companies, both large and small, are becoming increasingly risk- and cost-averse, especially for high-risk, high-cost projects such as manufacturing. Outsourcing and CMO activities are growing along with the trend as biologics organizations strategically manage their internal staff and resources, while targeting short term cost-savings. This has further contributed to future prospects for biopharma CMOs. Economic pressures, however, have increased problems in the Client-Contractor relationship. For example, in this year’s study we identified 11 critical issues that CMOs (Contractors) find are the most common mistakes made by their clients (biomanufacturers). The most critical, mentioned by 78% of CMOs as either “Very Important (48%) or “Important” (30%), was “Clients want to contain cost by doing limited development runs, but still expect successful full scale manufacturing” (see Fig. 1). This issue involves cost containment and time-to-project completion. It also suggests that the majority of biomanufacturers, who are under increasing cost and time pressures, are pushing that stress onto their suppliers. The second relationship problem involves unrealistic expectations: “Clients don’t build in sufficient time for the project (unrealistic timeframes).” This was mentioned by 46% as “Very Important.”

Figure 1: Selected critical problems from CMOs’ perspectives “What are the most common mistakes made by your biopharmaceutical clients?” % responding “Very important” and “Important.”

Other pain points on the part of CMOs were, “Clients don’t plan their tech transfer process,” and, “Clients don’t communicate with us effectively.” Both of these involve time, client support, and project management. In a high-stress environment, these factors may be in short supply.

The Other Side of the Fence

On the other hand, biomanufacturers this year continue to be stressed over the same issues they’ve worried about for the past seven years. But recently, concerns about compliance with quality standards have jumped dramatically to 64% from 59% last year (% respondents indicating the factor as “Very Important”). Among the 25 factors we evaluated, “Protecting intellectual property” was also seen as critical by 60% of respondents this year. The quality issues may be the result of worries about possible cost-cutting and service reductions on the part of CMOs while the IP concerns may potentially be showing up due to increased interest in offshore outsourcing. Worries about handling cross-contamination issues, again this year, jumped significantly, from 20% in 2007, to 52% last year, and 58% this year. The relationships trend between CMOs and clients have improved slightly this year; CMOs have moved the “Establishing a good working relationship” factor, with 63% seeing it as “Very Important” last year, compared to 58% this year.

Figure 2: Selected “critical issues” when considering outsourcing bio-manufacturing to a CMO % responding “Very important” and “Important” (comparison 2005-2009)

Increased Outsourcing

Essentially all biopharmaceutical developers sooner or later use the services of CMOs, whether for manufacture of clinical or commercial supplies, or for testing, fill-finish or other outsourced activities. Nearly two-thirds (63%) of responding biopharmaceutical developers reported that they expect to outsource at least some of their mammalian cell culture (up from 54% last year), and a majority (52.7%) expect to outsource some of their microbial fermentation by 2014 (see Fig. 3). This includes 15% more biopharma companies planning to outsource all (100%) of their mammalian cell culture-based manufacture over the next five years. It is likely that CMOs will capture a significant portion of this expansion.

Biopharma companies have become increasingly more comfortable with outsourcing of manufacturing, particularly their mainstream mammalian and microbial production. Outsourcing of other, newer manufacturing platforms is expected to be lower. From the survey only 17% of companies this year projected that during the next five years they would be outsourcing projects involving insect cells (compared with 33% of companies interested in outsourcing insect cell work the previous year). With respect to plant cells, 33% of companies this year indicated that this would be an area for outsourcing over the next five years. While this represented an increase over that survey response from the previous year, the figure represented the first rise since the 2007 survey for this aspect of outsourcing.

Figure 3: Selected results — outsourcing in five years, by production system % organizations projecting to be outsourcing at least some production in five years (projections made 2007-2009)

CMO Industry Shifts

Following trends in the CMO industry is a strategic necessity for biopharmaceutical companies.For example, the BioPlan survey shows that CMO capacity utilization is declining this year, from 61% last year, down to 56% this year, a 5% decline in usage of total installed capacity. This represents additional available (idle) capacity in this segment. In times when there was less available capacity, CMOs with better technologies, expertise, and facilities would have simply been too busy — and pre-booked — to handle new clients. Today, relationships between client companies and biopharma CMOs are maturing; companies are recognizing the increasing value offered by most CMOs, while CMOs are understanding their clients’ needs more insightfully. As a result, nearly one-half (48.2%) of surveyed biopharma manufacturers noted that they expect to increase their budgets for biopharma CMO outsourcing.

Many of these shifts are the result of financial pressures. According to many industry observers, outsourcing drivers have changed over the last 18 months. Financial pressures have created real concerns over hiring, and staff allocation among biomanufacturers. Today, not only do CMOs need to justify the cost benefits, but now it’s the impact on FTEs, staff allocations, speed to project completion.

Acquisitions and Partnering

A few companies have gone to great extents to accomplish closer relationships with CMOs, including acquisitions. For example, Merck recently acquired Avecia, a major U.K. biopharma CMO, and Merck now also owns Diosynth, another major biopharma CMO, via Diosynth’s earlier acquisition by Schering-Plough, which recently merged into Merck. In some cases of CMO acquisition by a bio/pharmaceutical company, the CMOs are being allowed to operate as largely independent subsidiaries, continuing their existing contracts and seeking new contracts, including with parent company competitors. Fully integrating a CMO into a company could well result in loss of many of their advantages, such as competitiveness, adaptability, unique expertise, speed and ingenuity, found in these companies.

The BioPlan survey shows that industry outsourcing for biopharmaceutical manufacture is a distinct trend, with increases expected to continue. The industry and client-contractor relationships will continue to mature and become more complex. The underlying reasons why companies want to outsource biopharmaceutical manufacture are changing as the biopharmaceutical industry matures. With this change will come steady growth and greater value.

Capacity Constraints

In many cases, using CMOs is simply a necessity due to lack of funding or expertise. Nearly one-half of BioPlan survey respondents predicted that their manufacturing facilities would experience capacity constraints within five years (2014). Only 53% predicted no or minor (vs. moderate, significant or severe) constraints for early stage clinical supplies and 55% predicted no or minor constraints for later-stage (Phase III) clinical supplies. Thus, nearly half of companies expect problems in these areas. And only 40% of companies predicted no or minor problems expected for commercial-scale manufacture, meaning that 60% foresee problems in this area (see Fig. 4).

Figure 4: Expectations of capacity constraints, by stage of production, five-year projections “I believe our facility will experience production capacity constraints by 2014”

What’s Being Outsourced?

The use of biopharma CMOs has become common, particularly for mammalian cell culture, but developers are uniformly keeping some manufacturing in-house, i.e., relatively few are outsourcing all of their manufacturing needs. CMOs involved in manufacturing approved products for commercial sales are also increasing², as are the activities in which they are involved.

Outsourcing activities today continue to consist of relatively lower value-added services, such as fill-finish and product characterization testing. We tested 24 areas of outsourcing in the study and we found that the primary outsourced activity today is product characterization testing, with biopharmaceutical companies outsourcing an average of 75.6% of this activity (see Fig. 5).

Toxicity testing (69.2%) and validation services (63.5%) were next on the list. At the other end of the scale, there appeared to be relatively low outsourcing activity, percentage-wise, for API biologics manufacturing and project management services.

Figure 5: Selected results — % outsourcing activities done today “How much outsourcing of the following activities is done by your facility today?” (average % outsourced by industry)

Greater CMO Risk Analysis

Companies of all sizes are increasing their outsourcing and use of biopharmaceutical CMOs. The same reasons companies have always outsourced still apply, notably saving money and time, increased flexibility, convenience, and relying on specialists with needed expertise and infrastructure in place. However, we are seeing increasingly that biomanufacturers are evaluating these relationships based on more rigorous risk analysis.

The traditional rather straightforward relationship between client and biopharma CMO — involving simple on-time delivery of ordered products or services — is evolving. Today most want to work smarter, more efficiently and establish CMO relationships that allow this. Dr. P. Mehelic, principal scientist and group leader, Global Biologics, Pfizer, Inc., discussed Pfizer’s outsourcing approach at a recent IBC meeting in Carlsbad, CA. He noted it involves determining “what strategically we can outsource [to] reduce costs, optimize speed, increase flexibility of our internal operations . . . redeploy internal FTEs on more challenging, and more value-added activities.” Thus, outsourcing decisions, while ultimately centered on financial return on investments, are instigated by analysis of value of FTE activities, staff allocation, and hiring. Rather than just simply fulfilling a contract, clients are expecting more from their CMO relationships.

At the same meeting, Roger Symezak, product supply chain leader at Genentech, noted that risk varies inversely with knowledge, and that Genentech evaluates “a thousand different items as we assess risks of working with a CMO. We create a simple rating system . . . [so that] we may assess the risk of only a few dozen items.”

Competitive CMO Environment

Many biopharma CMOs are expanding their manufacturing competence through the use of novel technologies, single-use/disposable bioreactors and other differentiated bioprocessing services. Expansions are resulting in increased adaptability, lower costs, faster turnaround and higher yields. For clients, this means that more CMOs will likely meet their needs (more competition, more choice) and the costs for using CMOs for product manufacturing are becoming at least slightly more competitive.¹ Prudent companies are taking advantage of CMO industry expansion by growing their relationships with CMOs. As an executive with a mid-sized biopharma company remarked, “Transactional relationships are all about cutting costs. Alliances will likely be more expensive initially, but long-term we expect to be able to manage our costs more effectively and reduce redundancy.”³

It is becoming more common for companies to use their experienced CMOs either as a back-up manufacturer, with ‘flex’ capacity available as needed, or to use CMOs on an ongoing basis for manufacture of a portion of marketed product sales. This way, companies have alternatives available, if they experience difficulties with their own in-house manufacture (or their other CMOs). Biologics manufacturing is inherently very complex, and companies are heavily dependent on their ability to manufacture.

Some biologics manufacturers are offering their excess capacity for external manufacturing. For example, according to Mark O’Neill, director business development for Amgen’s CMO business, “Biopharmaceutical companies are struggling with how to balance the cost of excess capacity . . . mixed capacity models [exist] where a company can use internal network capacity for both captive programs and external programs if the arrangement makes sense.” With CMOs working ever closer and assuming more responsibilities from their clients, such assurances of quality and reliability are becoming the norm.

Despite the general move toward greater integration, the current economic situation is creating an environment that, in some cases, is more transactional. Daniel Leone, V.P., business development, Laureate Pharma, a Princeton, NJ-based bio-CMO, noted, “Biopharmaceutical companies are managing their risks more carefully today. They fund their project in stages and make project go/no-go decisions at specific milestones. To our clients, this means less exposure and risk. But to CMOs this means doing step-wise work, rather than full project contracts. Overall, this causes CMOs to demonstrate reliability and value because they have to prove themselves at each milestone before being awarded the next step. This is good for the industry, and good for us, competitively.”

Budget Growth & Opportunities

Our annual report looks at opportunities for industry growth. For example, the survey reveals that 30.4% of biomanufacturers will increase their budgets for outsourced biopharmaceutical manufacturing at least ~5%, and 14% will increase their budgets by at least 10%. We also looked at total industry budget projections. Figure 6 shows the average — both biomanufacturer and CMO — industry budget outlook for 2010. The average outsourcing budgets were essentially flat. Based on our report data, we believe the industry may be ‘bimodally distributed’ this year: that is, the number of companies increasing budgets are matched by those decreasing budgets (see fig. 6).

Figure 6: Selected results — average change in biomanufacturers’ budgets for 2010 Top four budget areas: Avg. change 2010 budget: biomanufacturers & CMOs

Even in today’s tough economic climate, clients are increasingly seeking alliances with CMOs, and although milestones are increasingly being used to measure performance, relationship building and risk sharing are recognized as important for long-term success. In some cases, CMOs are being asked to perform basic process design, scale-up, equipment selection, quality control testing and other key aspects, such as validation and support for regulatory approvals.

Establishing longer-term relationships with CMOs may be more expensive in the near-term, but in the longer-term this will allow companies to better manage their development plans and reduce internal expenses. As just about every company continues to cut costs, and lay off staff, they increasingly need to assure themselves of access to critical expertise no longer available in-house.

Big and small clients are more closely evaluating their relationships with outsource vendors. Companies are assessing more than the monetary expenses, they are including the overall risks of working with a CMO. Using in-house rating systems, risks are measured and weighed, quality standards are compared, and decisions are being increasingly made on relationship management and overall probabilities of successful outcomes.

Even as pharmaceutical companies continue to define their own internal core capabilities, they will likely establish more, deeper alliances, and expect to get more out of their provider relationships. Generally, the CMOs able to adapt to the changing economic situation are keeping busy, and demand is increasing, especially as adjustments to the new climate take place. As larger companies continue to cut back and lay off staff, the need for greater external technical expertise and resources to support biopharmaceutical development will expand.

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: www.bioplanassociates.com
3. Tufts CSDD Presentation, Zuckerman R, September 24, 2009

Survey Methodology: This seventh in the series of annual evaluations by BioPlan Associates, Inc. yields a composite view and trend analysis from over 327 responsible individuals at biopharmaceutical manufacturers and contract manufacturing organizations (CMOs) in 35 countries. The methodology also encompassed an additional 117 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.

Eric S. Langer president and managing partner at BioPlan Associates, Inc., a biotechnology and life sciences marketing research and publishing firm established in 1989, and located in Rockville, MD. He can be reached at elanger@bioplanassociates.com or 301-921-5979.