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Sponsor companies' increasing focus on strategic outsourcing has changed the rules of the game.
As pharmaceutical companies face greater cost pressure, they must decide how to best allocate resources for development and manufacturing, which entails working with contract services providers. To examine these dynamics, Pharmaceutical Technology conducted an industry roundtable to gain input on how the expectations between sponsor companies and contract service providers have and will evolve. Participating in the roundtable are: Kuljit Bhatia, vice-president of R&D, DPT Laboratories; Arnaud Hanquez, head of business development, EU Pharmaceuticals, Hospira One 2 One; Michael Kosko, president of Pfizer CentreSource; Andreas Weiler, global director of technical sales, SAFC; Derek Hennecke, president and CEO of Xcelience; and Michael Ruff, PharmD and vice-president of pharmaceutical development, and Jeffrey Basham, vice-president of business development, both at Metrics.
A decade of change
PharmTech: What have been the most significant changes in pharmaceutical outsourcing during the past 10 years,
Kosko (Pfizer CentreSource): The most significant change over the past decade has been the ever-growing acceptance of outsourcing as a core supply-chain strategy within the pharmaceutical industry. In the past, most major pharma companies felt the need to control the vast majority of their supply chains internally. As these companies have faced loss of exclusivity on patent-protected products, research productivity challenges, and capital constraints, the contract manufacturing market segment has thrived. The emergence of specialty, second tier, and virtual pharma companies has supported this developing trend. The type of outsourcing has shifted as well–away from 'transaction activity' and toward 'strategic activity.' Key factors influencing the relationship between contract service providers and their customers include supply assurance, regulatory compliance, product quality, customer service, and cost. A shortcoming in any of these areas could result in a challenging situation for the sourcing company.
Industry roundtable participants, from left to right: Kuljit Bhatia, vice-president of R&D, DPT Laboratories; Arnaud Hanquez, head of business development, EU Pharmaceuticals, Hospira One 2 One; Michael Kosko, president, Pfizer CentreSource; Andreas Weiler, global director of technical sales, SAFC; Derek Hennecke, president and CEO, Xcelience; and Michael Ruff (not pictured), PharmD, vice-president of pharmaceutical development, and Jeffrey Basham (not pictured), vice-president of business development, Metrics.
Bhatia (DPT): Internal cost pressures and a dearth of blockbuster approvals have driven Big Pharma and emerging bio/pharma companies to look outside their organizations to contract pharma, but life-sciences companies have become more selective in choosing a contract provider. They are increasingly moving toward a strategic partner relationship model rather than a tactical one. In the past, Big Pharma would only outsource specific tasks of the development program to a CRO or CDMO. This resulted in increased overall cost (translational and professional), increased cycle time, and significant oversight. A strategic partnership with a 'one-stop-shop' CRO that specializes in the sponsor company's specific therapeutic area eliminated these drawbacks. This is the most significant change that has occurred in past 10 years.
Hanquez (Hospira): The change is the organic maturation of the industry for both categories of players. On one side, customers grew internal outsourcing/purchasing groups and developed skills in CMO selection. They have accumulated experience, started to use sophisticated evaluation tools, thereby making the whole CMO-selection process structured and more predictable. This level of sophistication decreases randomness of the outsourcing relationships and is a major driver of growth for top-CMOs
Providers, on the other side, started falling into two distinctive categories: CMO powerhouses, rich in experience and technical capabilities, and those who purchased one to two facilities from larger biopharma companies hoping to build a healthy CMO business while harvesting the inherited contracts. Now, many of them struggle to fill capacity and keep up with investments required to stay on the top of growing quality and compliance requirements. So, we have a duality in the market: relationships are becoming more strategic between visionary biopharma companies and preferred CMOs, but relationships with second-tier CMOs are becoming even more transactional based on the short-term customer benefit of a lower price.
Hennecke (Xcelience): Ten years ago, pharmaceutical outsourcing was still viewed with a touch of suspicion, and when it was embraced, it was for two fundamental reasons: reducing costs and increasing turnaround times. Those two reasons are still front and center, but now they're so basic, customers take them for granted. Of course, outsourcing will cut costs and increase turnaround time. But what else? The field has grown increasingly more competitive and today's client expects an innovative, high-performance provider that will open doors to specialized expertise or proprietary technology, help them with solubilization challenges and other problem-solving, reduce business risk, and tighten the supply chain. Really what we're talking about is a change of mindset among outsourcing providers from reactive service delivery to proactive solutions. Many firms still haven't adapted. Those who have are not only increasing market share, they're embedding themselves in the pharma decision-making process at a higher level because the outsourcing solutions they provide are strategically important.
Basham (Metrics): A key change is the transition from the technical lead independently deciding where, when, and how to outsource to an outsourcing manager leading the decision on a team. Outsourcing management by teams allows for preferred-provider operations and cost controls. Additionally, the cycle of spend on outsourcing ranged from a frenetic pace during the first five years of the last 10 years to the drying up of venture money supporting the outsourcing of the virtual bio/pharma business model. During the first half of the past 10 years, there has been a switch at the top 25 to 30 large pharma companies, both in mergers and in consolidation of their facilities, which has both provided opportunity to the outsourcing company as well as challenges. In addition, large pharma companies have begun to compete in the CMO area by offering contract manufacturing to keep their facilities operating. At the same time, outsourcing competition has expanded exponentially due to large layoffs in the large pharma/biotech companies. Many very good scientists in R&D and manufacturing have gone out on their own to build new competitive businesses.
Weiler (SAFC): During the past 10 years, we have seen significant change. In 2010, only 20% of all launched drugs were originated by the top 25 Big Pharma companies. This paradigm shift and the increase in more specialist-care drugs coming to market have made it a requirement for drug manufacturers to have faster and more flexible processes to get drugs to market. Smaller pharma or virtual biotech companies are looking for a different type of partnership with their CMO. These companies need speed, regulatory experience, technical knowledge, and best-in-class project management, which creates opportunities for CMOs in the Western world, including for emerging technologies, such as high-potency APIs, gene therapies, and microbial fermentation.
The preferred-provider model
PharmTech: In certain areas (i.e., clinical research), we see the preferred-provider model. Will the preferred-provider model evolve for other segments?
Kosko (Pfizer CentreSource): A definite trend toward the preferred-provider model is gaining marketplace momentum. A number of current examples show major pharma companies establishing partnerships with CROs as they focus on managing fixed costs and increasing productivity. As more and more technical platforms become universally available, I can see this trend expanding into formulation development and process development. Manufacturing may be a larger challenge, in that the best solid dose preferred-provider may not be the best sterile partner, which increases the likelihood that preferred providers may segment along technology lines rather than on inclusive one-on-one relationships. By using a preferred-provider model and consolidating to fewer providers, outsourcing firms can exercise greater influence and control over the operation of the CMO. The industry preference for secondary sourcing, which may or may not be available from a preferred CMO's network, will be another challenge.
Bhatia (DPT): The preferred provider model will surely evolve into other CMC segments, including formulation development, process development, and manufacturing. As drug products become more complex, sponsor companies are looking for an outsource provider to draw a roadmap to the target goal. They are primarily looking for reduced cycle times (both in contract negotiation and development times due to preferential treatment) and limited oversight, resulting in cost savings and more importantly, quick approval and launch. The reasons to deviate from the preferred provider model may be because of a specific task or technology that only a non-preferred provider can deliver.
Hennecke (Xcelience): I don't think you can take for granted at this point that the preferred-provider model is strongly rooted and gaining ground in other segments. It's certainly an arrangement that is being experimented with by companies. A preferred provider is a marriage of sorts—one with a pretty serious pre-nup. Should you marry one key outsourced provider in your pipeline? Maybe. Should you look for long-term happiness with every outsourcer in your pipeline? Probably not.
The whole concept of preferred providers is still developing. Some global CROs have established these partnerships and have delivered real client value while others have failed to lead to the returns expected by either side. Ultimately, this sort of business-relationship decision is, like marriage, personal. There's no one-size fits all. Each company must look for the arrangement that best de-risks its overall drug-development program. Most will probably continue to choose best-in-class providers that can provide services, such as formulation development, which require a level of complexity or attention than a one-stop shop cannot provide. The key to a successful portfolio strategy is to have service providers that are willing to coordinate with upstream/downstream providers to smooth transitions, accelerate timelines, and ensure quality of supply.
Basham (Metrics): We have seen this already taking place. While specialty needs will still be needed, the outsourcing management model will continue to downsize the number of contractors with which a company will work. This is particularly true for large pharma/biotech and the larger mid-sized pharma/biotech companies. This allows for streamlined management of the vendor, common rules, and less overall personnel needed to manage the outsourcing model.
Influence of quality by design
PharmTech: Has quality by design (QbD) influenced the outsourcing relationship? (See also "Reader Views on Changes in Pharma Manufacturing").
Kosko (Pfizer CentreSource): I fully expect that the benefits and advantages bestowed by a QbD approach will be an increasing topic of discussion, especially for new high-value projects proceeding through the development cycle. Selecting a service provider with expertise, capability, and experience can lead to a valuable dialogue on the range of potential benefits. A robust QbD approach also can lead to a greater understanding of the manufacturing process for both partners, which ultimately results in a better management of quality, change control, and supply.
Bhatia (DPT): Increased FDA oversight has resulted in a strong emphasis on quality management systems. Failure to adopt new initiatives that drive quality has recently resulted in warning letters, consent degrees, and even closure of plants for pharma, biotech, and contract providers. QbD is a similar initiative that will ultimately drive quality. It is expensive and requires change in processes and systems. But that is what is needed to deliver the quality that the agency is targeting for the future. The survival and success of the CRO that supports CMC could depend on the decision to either sit on the sidelines or make the tough decision to support this initiative.
Weiler (SAFC): With more than 80% of all new chemical entities originated by small virtual pharma or biotech companies, QbD plays an important role. CMOs have to use all their experience to advise their sponsors on the fastest and most efficient way to move forward. An experienced CMO will have worked with many different sponsor companies, so the concept of continuous improvement is built into daily operations. As a CMO, we are always looking at ways to build out each process by adopting and implementing best-practice procedures. This experience, coupled with the speed and flexibility of virtual pharma companies can be one of the key success factors when using the QbD approach in an outsourcing relationship.
Hennecke (Xcelience): The pharmaceutical industry has learned the collective lesson that a lack of process control can lead to significant downstream costs in terms of time and money. The industry's response has been to bring QbD into the earlier stages of development. The question is not really whether or not to implement QbD, but how and when. Because of their breadth in customer bases and scientific understanding, service providers are increasingly in a strong position to offer solutions to complex formulation and process-development needs using QbD.
Many sponsors are looking for advice from consultants and outsourcing partners on the role of QbD in their drug-development strategy. More and more, I see contract service providers actively engaging in discussions with sponsor companies early in the development process, recognizing the significant value in the CMC data package as sponsor companies consider approval submissions or technology transfer to commercial manufacturers. A provider that can provide QbD services really sets itself apart from the pack and takes solutions selling to a new level.
Ruff (Metrics): QbD has definitely raised client expectations. They have read the ICH guidances and listened to FDA, which has signaled that failure to follow QbD is to invite delays in drug approvals. Sponsors now expect their providers to fully understand and apply QbD principles in their development projects. Clearly, this is already happening and will become increasingly important. Contract service providers who follow the QbD pathway will have a significant competitive advantage.
PharmTech: How will the contract service provider of 10 years from now differ from today's provider? Are there models from other industries that might be adapted?
Michael Kosko (Pfizer CentreSource): I see a number of areas where contract providers might modify their existing business model to be successful in the future:
Bhatia (DPT): The future contract service provider will be an extension of the pharma or biotech industry in the true sense, with a focus on approvals rather than task completion. Decision-making, regulatory strategy, and a global presence will be key prerequisites in selecting a contractor. The relationship will be more strategic rather than tactical with a significant monetary milestone focus on final approval from the agency (i.e., risk sharing).
Hanquez (Hospira): The biggest driver of the future change in outsourcing relationships is the ever-increasing regulatory scrutiny, and it will reshape the outsourcing competitive landscape. Certain providers will weather the storm by keeping one step ahead of changing regulatory expectations and by investing in equipment and facilities to meet what will become the 'new norm' with regard to pharma manufacturing. Many others will not. Those providers that come out on the winning side will find themselves much more aligned with the pharmaceutical industry, paving the way for the creation of stronger and broader relationships.
Weiler (SAFC): The expectation is that our industry can move into the type of relationships that one sees in other industries. An example could come from the auto industry, where you see that the key suppliers of automobiles are truly an extension of the branded automaker, and the question is whether this can be applied, through QbD and other methods, to a highly regulated pharma marketplace. I have confidence that we will continue to move in this direction, but it will not be easy as regulatory guidance, innovation and clinical attrition will be key differences to other industries.
Hennecke (Xcelience): The next big change in our industry may come from within, but it will more likely be adapted from a peek over the fence into another industry. There is a small chance that our own industry's Steve Jobs is out there now envisioning what none of us have yet imagined, but that will soon become obvious .
What do I see happening in our industry right now? There are so many changes afoot, but one I find particularly interesting is the increasing separation of new product development from existing operations– something our industry is gleaning from the high-tech industry. This separation lets each functional group focus on what it does best. Operational plants can apply lean Six Sigma concepts to streamline process flow and re-engineer facility design in a way that maximizes quality, productivity, and safety while new product-development sectors can harness their market knowledge and development strengths. The contract service provider of tomorrow will almost certainly be one best able to incorporate the voice of their customers into their service offering, but more than that, tomorrow's provider will challenge its customers to think about why they buy the way they do and to help them adjust their business models to better achieve their goals.
Basham (Metrics): We view the changes over the next 10 years will direct most CDMOs to become more global; that is multisite facility operations. However, different than today, we think that these sites will need to have offerings that encompass the whole of the development process. This does not include discovery and research, but a focus on delivering the development process, including analytical support. We think that the pharma industry has some differences in modeling that make it more difficult to use models from other industries. The key item from other industries will be oriented to in process quality and the extension of this into our industry.