The variables that companies can manipulate to drive revenue growth are pretty straightforward: customers, projects, services, and prices. During the middle part of this decade, those variables were relatively easy to influence, but things are not so easy anymore. 

In the current cost-conscious environment, there are fewer customers and fewer projects, and the surfeit of capacity relative to demand has precipitated major price cutting. Contract service providers are engaged in fierce battles for market share to hold on to what they have and stay in the game until market conditions improve. 

With opportunities limited in their traditional service segments, more service providers are trying to expand their service offerings. Some of this service expansion is tactical—that is, it's aimed at gaining a slightly higher percentage of the clients' development spend or at defending current revenue against more integrated service providers. Tactical expansions bolt on new service offerings contiguous to the contractor's existing offerings. They require a small expenditure for capital investment and staffing, and little additional sales effort because they are targeted at current customers. As a result, they entail limited business risk and limited upside. A common case in point these days is the addition of early-stage formulation services by contract manufacturers that offer process development and small-scale manufacturing service for active pharmaceutical ingredients (APIs).  

Strategic service expansions are far more ambitious. They involve a major investment in a new service area, typically through one or more acquisitions, where the objective is to quickly achieve critical mass in the service sector and have a major impact on the service provider's top and bottom line. Strategic expansions are often undertaken by companies that foresee slower growth in their current core service offerings, perhaps because they already have a substantial share of the market, and see greater returns by investing in new service sectors. Strategic acquirers also have the financial wherewithal to make investments that will have a significant and immediate impact on the company's prospects. 

Drug discovery has been an important target area for strategic expansions lately. The two market leaders in preclinical toxicology, Covance (Princeton, NJ) and Charles River Laboratories (Wilmington, MA), have placed major bets that drug discovery is the next great opportunity for contract services.  

Covance launched its expansion into drug discovery by buying major research operations from large pharmaceutical companies. In August, it acquired Merck's (Whitehouse Station, NJ)  Gene Expression Laboratory, based in Seattle, Washington, which specializes in genomics services such as genotyping, gene sequencing, and gene expression profiling. As part of the deal, Covance received a contract to provide genomic analysis services during the next five years for $145 million. One year ago, Covance acquired the Greenfield, Indiana, research facility of Eli Lilly (Indianapolis). In that deal, Covance obtained a team of scientists experienced in late-phase discovery research as well as advanced imaging technology that has become a major part of the discovery toolkit. 

Charles River Laboratories (CRL)—Covance's principal rival in the preclinical toxicology business—is also expanding its Discovery and Imaging Services business unit. In August, CRL acquired Cerebricon (Kuopio, Finland), a company that provides discovery services for therapies aimed at treating central-nervous-system diseases, for an estimated $9 million. Last year, CRL acquired MIR Preclinical Services (Ann Arbor, MI), a provider of discovery services supported by 

 imaging capabilities, and in April 2009, CRL picked up PPD's (Wilmington, NC) Piedmont Research Center, a provider of preclinical discovery services focused on oncology. 

The discovery-services sector is somewhat unique because it is less penetrated by outsourcing than most development services (with the exception of medicinal chemistry). We expect to see strategic service expansions into sectors where the fragmented market still presents opportunities to gain market share. One such sector is dose manufacturing. In their July conference call announcing first- half financial results, executives of API manufacturer Lonza (Basel, Switzerland) announced that the company has $1 billion available for acquisitions, and has targeted acquisitions in dose manufacturing as its next step in the commercial value chain. We also may see some deals in the analytical chemistry sector, although few target companies there are large enough to make an impact on the performance of a strategic acquirer. 

 is president of PharmSource Information Services, Inc., and publisher of 

Articles

Outsourcing

Contract-service providers are expanding their offerings in this slow-growth environment.

Expansion Plan

As contract manufacturers and suppliers gather for CPhI Worldwide in Madrid this month, a key question is the overall performance and outlook for the pharmaceutical and biotechnology industries. A recent report by the life-science practice of Capgemini, “Life Sciences: Performing in the Downturn and Beyond,” surveyed eight of the top ten pharmaceutical companies and other leading life-science industry executives in Europe and North America to provide insight into how current economic conditions are reshaping the model for supply-chain practices, outsourcing, and other areas of the value chain.


Executives interviewed as part of the Capgemini study expressed mixed opinions as to the effect of the economic recession on the life-science sector. On one level, the industry has fared better compared with other industries. In the five years to September 2008, the Dow Jones Pharmaceuticals index was “significantly underperforming,” the Dow Jones Global Index, according to the Capgemini analysis. Since September 2008, however, the gap has narrowed and the pharmaceutical index is now tracking the global index. This shift may be attributable to a shift by investors that see the life-science sector as a relatively safe place to invest during a downturn.

The report, however, points out a concern among life-science executives over the effect the economic downturn has had and may have in reducing the ability of both public and private concerns in paying for the products of life-science companies as well as the resultant push toward generic drugs. “With diminished cash streams, both public and private payers will be forced to tighten their budgets, and there are already signs that governments are doing so,” says Jean-Marc Neimetz, Capgemini Consulting's life-sciences leader for North America. “Several of our interviewees from pharmaceutical companies, especially those with significant business in developing countries, have been seeing slower cash collections. Lack of cash, combined with growth in demand, means that the switch to generics is likely to accelerate wherever there is an alternative to the branded product.”

Small pharmaceutical companies, particularly emerging and biotechnology companies, face more immediate concerns over liquidity and sustaining operations. The report points out as of November 2008, out of the 370 publicly traded biotech companies in the United States, 140 companies had less than one year’s cash. Since that time, there have been some positive signs in US biotechnology financing. Financing and partnering deals were collectively more than $13 billion for US biotechnology companies in the third quarter of 2009, with more than $4 billion raised through financing and $9 billion in partnering capital, according to a recent analysis by Burrill & Company, a San Francisco-based private merchant bank. “This 147% increase in funds raised compared to the third quarter 2008 total clearly shows that conditions have improved considerably since the initial capital markets meltdown,” said G. Steven Burrill, CEO of Burrill and Company in an Oct. 1, 2009 press release. 

Financing from partnering for the third quarter 2009 was $9.39 billion, compared with $2.96 billion in third quarter of 2008. Through the first nine months of 2009, financing from partnering more than doubled compared with the same period last year: $22.17 billion in the first three quarters of 2009 compared with $10.19 billion in the same period in 2008. Public financing (i.e., initial public offerings, follow-on offerings, private investment in public equity, and debt) in the US biotechnology companies totaled $4.98 billion in first nine months of 2008 and increased to $10.23 billion for the first nine months of 2009.

Private capital, however, did not see similar rebounds. Venture-capital funding for the third-quarter 2009 was $759 million, down from the $1.09 billion raised in the third-quarter 2008. However, year-to-date venture capital increased. The aggregate financing raised by venture capital through the third quarter of 2008 was $2.93 billion; this level increased to $3.09 billion for the first nine months of 2009.

 
Only a small majority, 57% of respondents, in the Capgemini survey indicated that the recession is not causing their company to do anything differently.  Such respondents tended to be from large or mid-sized pharmaceutical companies, who also indicated that their companies had already initiated cost-cutting initiatives. While the recession did not change those plans, it contributed to the scope or speed of implementation of the initiative. The other 43% of respondents that said the recession is having an effect are taking more transactional (such as cost reductions through personnel cuts, hiring freezes, and administrative-cost reductions) as opposed to strategic changes.

 
Given the prevalence of cost-reduction measures, among large, mid-sized, and small pharmaceutical companies, the Capgemini study examined areas of current cost reduction and strategies for effective cost reduction. Supply-chain cost reduction was cited by respondents in the survey as the leading area with the greatest cost-reduction opportunity, with 52% of respondents citing this area. More than one-third of respondents cited cost-reduction opportunities in research and development (39% cited as such), local marketing (39%), and information technology (35%).

The study points out opportunities for cost-reduction and supply-chain optimization. “It is only recently that pharmaceutical companies have made supply-chain optimization the focus of the cost of goods sold (COGS) improvement activity, and they are still in the process of dealing with complexity built up over many years,” says Neimetz. “At the same time, in the case of biological products, they are having to adopt supply chains that are intrinsically more complex, characterized by processes and analytical methods that cost more and are harder to master, products with shorter shelf lives and cold-distribution chains.”

 
The Capgemini report outlines several areas for supply-chain optimization and simplification such as tax optimization of a company’s manufacturing network and a specialization of manufacturing sites by product type. The report also points to the value in reducing the number of stock-keeping units (SKU) for products, which have increased as a result of life-cycle management decisions and country-specific requirements, and the opportunity for increased outsourcing. 

In offering a framework for supply-chain optimization, Capgemini segments supply-chain activities into four main areas: plan, buy, make, and move. In the planning phase, “the emphasis has shifted away from product availability to reduction of excess inventory at all stages of the supply chain,” concludes the report. The report points to the value in conducting more thorough demand and supply planning, which includes sales and operations planning activities. 

In the buy phase, companies should focus on supplier-relationship management, which encompasses procurement, strategic sourcing, and supplier risk management. Under the make phrase, in addition to closing redundant facilities and increasing outsourcing, the report points to the value in adopting process excellence or lean-manufacturing programs.

In the move phase, the report points to opportunities in consolidating the supply chain and rationalizing stock holdings. The report points out that certain companies are evaluating the cost-effectiveness of the historical logistical channel involving wholesalers and distributors. Some options include the use of third-party logistic providers, direct sales to pharmaceutical, and direct-to-patient distribution.

Supply Chain

A recent analysis by the life-science practice of Capgemini provides insight in how current economic conditions are reshaping the model for supply-chain practices, outsourcing, and other areas of the value chain.

Strategies for Supply-Chain Optimization

Incorporating sustainability into operations and the supply chain is an important focus for pharmaceutical companies. While the complete definition of sustainability includes social, environmental and economic impact, the emphasis in this analysis will be on the incorporation of environmentally favored approaches. To gain a perspective of these issues, Patricia Van Arnum, editor of 

, discusses the emphasis for industry- and company-wide sustainability practices and the challenges in implementing such an approach with Thomas LaVake, manager, worldwide environment, health & safety at Johnson & Johnson (New Brunswick, NJ). LaVake will be offering a presentation, “Sustainability: A Business Imperative” at the 

, which will be held Nov. 4–5 in New Brunswick, New Jersey. The summit is presented by the Drug, Chemical, and Associated Technologies Association (DCAT) in partnership with the Pharmaceutical Forum and Chemical Group of the Institute of Supply Management (ISM).

 What challenges and opportunities does the pharmaceutical industry face in incorporating sustainable practices in its sourcing, manufacturing, and supply-chain practices? 

 At Johnson & Johnson, we have a long history of sustainability efforts and programs, but the current global economic and business challenges that the pharmaceutical industry is facing puts the effort alongside many other competing initiatives and programs. Once side-by-side, these efforts and programs have the potential to be further scrutinized for business value and impact. Since the terminology associated with sustainability may not be quite common yet, the business case for sustainability becomes that much harder to sell. Harder because the stakeholders may first need to be educated and that has an upfront potential to impact interest level and commitment.

Although first illustrated as a challenge, the education effort may quickly turn into much opportunity. The opportunity comes from people, internal and external, within the supply chain who see the win-win outcomes associated with some basic sustainability efforts such as increasing energy, material, and resource efficiencies. These efficiencies usually have a significant return on the investment. Other win-win outcomes may result from avoiding or minimizing the hazardous components that lead to increased complexity and controls and potential for incidents and business interruptions.

 Given the complexity of the molecules used as active pharmaceutical ingredients and the related synthesis and purification of these compounds, the pharmaceutical industry as a whole faces certain technical challenges in greening its manufacturing practices. 

 is a widely used roadmap for best-practice approaches in green chemistry. Can you outline approaches that the industry as a whole and/or that Johnson & Johnson may be employing to incorporate or facilitate efforts in green chemistry?  What strategies or approaches may be used to address barriers in terms of training/education or cost constraints?

 It is critical that the principles and concepts of green chemistry be integrated as early as possible in the pharmaceutical product pipeline. At Johnson & Johnson, green-chemistry efforts are explored in the earliest stages of drug discovery. If the chemistry and chemical syntheses of a product are impacted in later stages, the potential for cost increases, and impact may decrease. Many of the fundamental concepts associated with green chemistry are aligned with standard ‘design excellence’ and ‘lean’ manufacturing programs.  The more that the complete pharmaceutical supply chain can speak a common language with common outcomes (e.g., reducing process steps, designing in less material needs), the more efficient and certainly more sustainable the product pipeline will become.

 The American Chemical Society’s Green Chemistry Institute Pharmaceutical Roundtable (ACSGCIPR) recently announced that it, along with other industry groups and representatives, is working on drafting a voluntary green standard that will set criteria for chemical producers and users to evaluate the environmental impact and sustainability attributes of chemicals and their derivatives. As a member company of the ACSGCIPR, do you think such voluntary standards will be helpful for the pharmaceutical industry and its suppliers? 

 Johnson & Johnson supports the effort and sees the benefit associated with expanding the understanding and expectations of green chemistry. Standardizing should help the industry be united on common expectations (although voluntary) that in turn should help all manufacturers or suppliers, regardless of their size or current understanding of green chemistry.

 Sound sustainability practices for a drug product not only incorporate the manufacture of the drug product, but also include measures throughout the product’s life cycle. Looking at the sourcing of raw materials and pharmaceutical ingredients, what would you identify as key best practices or approaches in achieving sustainability? Can you share any insight into how Johnson & Johnson addresses these issues? 

 When sourcing raw materials and/or pharmaceutical ingredients, we are very much aligned with the statement of Terry Simmons, vice-president of global purchasing with Baxter International Inc., “simple, yet structured process with strong specifications and comprehensive planning helps to set us up for success” (see article, 

 "Evolving Global Pharmaceutical Supply Chain."

) We have strong and structured efforts for our external manufacturers and active pharmaceutical ingredient suppliers.

To build on this at Johnson & Johnson, we have begun a simple process within our procurement and external supply chain organizations that seeks answers to three basic questions: (1) Who do you buy from? (2) What are you buying? and (3) Where is it coming from? 

To better illustrate this approach, we have developed a scoring system that is determined by Procurement’s understanding of ‘who’ they are buying from. For example, if they know the number of suppliers within their procurement category and have identified their key suppliers, they are just beginning to answer the ‘who’ question and would be assigned a low score. If their suppliers begin to look ‘sustainable’ and a certain percentage have publicly available sustainability reports, the procurement category is assigned a medium score. If the suppliers have sustainability reports and are participating in some key external efforts that Johnson & Johnson supports (i.e., 

 and the US Environmental Protection Agency’s 

) then that procurement category is assigned a high score. The higher the score, the more sustainable the external supply chain within that procurement category.  A similar set of scoring criteria exists for the other two ‘what’ and “where’ questions.

 Can you outline other industry initiatives or company initiatives addressing sustainability practices that you feel are important for the pharmaceutical industry and its suppliers to be aware of? Are there certain approaches in other industries outside the pharmaceutical industry that you think are helpful to consider? 

 Johnson & Johnson currently supports several external initiatives related to sustainability. One example is within the US where we seek external manufacturers and suppliers willing to sign up and participate in the US Environmental Protection Agency’s (EPA) Green Supplier Network. The program has been developed to help small- to medium-sized companies complete a ‘lean and clean’ assessment using expertise coordinated by the EPA.

Another example is at the global level, and in this case, we seek suppliers willing to evaluate, report their energy use and greenhouse gas emissions, and disclose their reduction plans through a web-based questionnaire called the Carbon Disclosure Project (CDP). Johnson & Johnson has completed the CDP questionnaire each year since it was launched.  For the past two years, we have approached more than 100 key partners within our external supply chain to complete the CDP questionnaire.

Thomas LaVake, manager, worldwide environment, health & safety at Johnson & Johnson, provides a perspective on sustainability practices for the pharmaceutical industry.

PTSM: Pharmaceutical Technology Sourcing and Management-10-09-2009

Expansion Plan

Strategies for Supply-Chain Optimization

Building Sustainability into the Supply Chain and Pharmaceutical Operations