Adapting To New Pressures And Emerging Markets

May 2, 2011

Gilles Cottier of SAFC offers a glimpse into the challenges facing CMOs in the changing pharma landscape and the need to adapt to emerging markets.

Q: How have the changing strategies of pharma/biopharma companies affected your business?

Gilles Cottier

Bio/pharma companies are continuing to reduce costs and there is increasing pressure for their respective supply chains to comply. As a consequence, we have seen more outsourcing of manufacturing and minimised investment in fixed costs, such as plant costs. Pharma is also looking for greater supply chain flexibility, and is seeking to reduce working capital while still being able to respond to demand fluctuation, so outsourcing is becoming more and more relevant. Of course, quality levels at outsourcing companies need to be at the same level as a pharma company's captive facility. Currently, many plants can also only manufacture a limited number of products, but both the pharma and biopharma industries are demanding contract manufacturing partners who have the ability and resources to switch between a diverse range of products every few months.

Another trend we are witnessing from major pharma is a move towards 'preferred vendor' strategies to consolidate outsourcing requirements from a single supplier. As such, we have built up SAFC's image as a solution provider for early-stage drug discovery through to bulk API manufacture, where clients and partners come to us with an issue and we then work alongside them to determine the best course of action. We then help to implement it from the ground up.

As an industry, contract manufacturers need to move away from the old ways of doing business and improve the entire value chain, rather than just a few convenient elements. This means being proactive in anticipating client needs before they arise. At our company, for instance, we anticipated that there would be increased interest from clients for high potency API (HPAPI) manufacture. We invested in this area so that these capabilities were already online when the demand arose, rather than waiting until clients requested these facilities.

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Q: How have you adapted to rising pressures to compete with less costly service providers?

While there is enormous pressure on cost, there is greater pressure in terms of quality and risk mitigation throughout the supply chain, including in the components that constitute an API. Regulatory bodies are demanding increased GMP compliance and there is also increased pressure from consumers, triggered by various industry scandals over the past few years.

Interestingly, we have witnessed an increasing number of late phase projects returning to the West, where the previous supplier had been located in the emerging markets. The reasons behind this shift can be attributed to quality, reliability and communication. Although cost remains important to our customers, it is more apt to focus on 'total cost', which factors in the cost of potential "non-quality" products.

As with any market, we must remain competitive so we've been working to optimise our cost structure through process improvements.

Q: As the emerging markets continue to experience high growth rates, what strategies can be employed?

Well, SAFC is currently building sales and marketing forces in China and India to sell into the emerging markets, and are actively increasing our presence in terms of sales visibility throughout Asia. We are also expanding our capabilities at facilities in Wuxi (China) and Bangalore (India), which will be completed by Q3 2011. Longer term, we will look to increase manufacturing capacity at both these locations, but while we want to be cost competitive to ensure that we are not priced out of the market, our chief differentiator will be quality.

The other main benefit of being active in these markets is the low-cost material sourcing opportunities provided by suppliers in the region. Over the past five years, we have developed teams dedicated to sourcing services and products in Asia.

Q: What are your predictions for the future of Western contract manufacturers?

Rising industry pressures, such as the expirations of patents, the decrease in the numbers of approvals, and negative pricing pressures, are all having an effect on Western contract manufacturers. I believe that the outsourcing trend will continue as pharma divests both fixed cost and R&D assets, and exits non-core activities.

CMOs, operating with an increasing proportion of their business concentrated on niche, specialised capabilities have performed well relative to the general market. While such niche markets offer opportunities for CMOs, however, it's also important to increase focus and resources on bringing in, or creating, experts for each technology.

CMOs will also need to differentiate themselves through quality, security and supply chain transparency.

Q: With increasing pressure to reduce costs, increase efficiency and reduce the environmental impact of manufacturing processes, how has SAFC adapted?

We will continue to improve profitability through plant process efficiency improvements, facility rationalisation and the development of our global manufacturing 'centres of excellence,' in which we bundle our technologies in selected locations. For example, we have a risk mitigation plan in place for both dry and liquid media capabilities in North America and Europe, and we're also reducing our number of global facilities from five to three. We will increase our capabilities significantly at each of the remaining sites. These centres of excellence are more than just physical structures; rather, they are a coordination of intellectual resources to improve knowledge sharing, innovation management, quality and systems integration.

Additionally, we have sought to differentiate ourselves in the market by focusing on niche areas, such as high potency, viral vaccines and fermentation, to enable us to support increasingly complex technology platforms. We have also developed our gene-editing ZFN technology for cell design and liquid and powder media. This technology has the ability to make targeted, heritable changes to genes, and will enable us and our customers to create knock-in and knock-out cell lines for drug discovery programmes, as well as more productive cell lines for manufacturing.

Q: What are the company's key areas for future growth? Where are you currently investing and why?

As outlined previously, we're investing in differentiating technologies where customers are searching for high quality solutions. Specialised capabilities such as high potency, oral vaccines and ADCs have performed well relative to the general market in recent years because these capabilities pertain to drug candidates and drug platforms that have the potential to be game changers in the treatment of important diseases, such as cancer.

We are also continuing to branch out into other practice areas to diversify our offerings. Some of the application areas in which we are growing are oncology, vaccines, RNAi, biologics and molecular diagnostics — all of which we see becoming increasingly important in the coming years.