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A roundtable with pharma majors Pfizer and Johnson & Johnson, moderated by Jim Miller.
Representatives from Pfizer (New York) and Johnson & Johnson (New Brunswick, NJ) discuss current and future trends in pharmaceutical outsourcing with a focus on chemistry, manufacturing, and controls (CMC) outsourcing. Participating in the roundtable, moderated by Jim Miller, are: Paul C. Stuart, vice-president of clinical supply manufacturing and distribution, Worldwide Pharmaceutical Sciences Supply Chain, at Pfizer Global R&D; Rhonda Griscti, senior director of category lead clinical services for Global Pharma R&D Sourcing at Johnson & Johnson Pharmaceutical R&D; and Macdara Lynch, vice-president/team leader for global contract manufacturing at Pfizer Global Manufacturing.
Chemistry, manufacturing, and controls outsourcing lags
Miller» Over the past five years, pharmaceutical companies have outsourced much of their clinical and preclinical research, but chemistry, manufacturing, and controls (CMC) development and manufacturing seem to have lagged this trend. Why do you think CMC development and manufacturing have moved more slowly?
Stuart» I think there are two key factors. First is the lack of robustness of the capabilities of the external market in these areas. External providers for clinical research in general are far more sophisticated compared to their CMC development counterparts. Second is the perceived risk of missing the opportunity for knowledge capture gained from internal formulation and process development. The downstream benefits gained from intimate product knowledge captured through the development cycle pay huge dividends when it comes to scale-up and commercialization activities downstream.
Griscti» Trust. In initial outsourcing efforts, there were significant issues with performance and learning to manage partner relationships. Expectations were not clearly articulated and, therefore, were not met. This has led to a distrust of third parties for CMC development and manufacturing that has taken a lot of time and energy to overcome.
Lynch» In terms of development work on new chemical entities, large pharmaceutical companies have tended to keep this function in-house based on a desire to retain control of the process and associated intellectual property. On the production side, if it's been moving more slowly, the reason is likely that many companies are still not comfortable with how to effectively manage the potential risk associated with outsourcing in general. Once a company begins to outsource, it starts moving up the risk curve; manufacturers always have more confidence in the robustness of their internal systems and processes. This is especially true in markets where regulatory systems are still developing.
Miller» What is different about CMC development relative to other development activities?
Stuart» Diversity of work in CMC is higher than in other areas. There is very high complexity and range of dosage forms for development and clinical manufacture. This complexity requires unique areas of specialization both from a human resource/skill standpoint and asset standpoint (e.g., process trains for manufacturing). To meet the full needs of a "Major Pharma" portfolio requires a fragmented vendor base, whereas clinical research can be consolidated to a few contract research organizations (CROs) who have proven expertise in areas such as study execution or patient recruitment.
Griscti» In reality, there is no difference. All these activities require talented individuals who can not only manage the projects and understand the science but also communicate effectively.
Miller» Emerging economies, including India, China, Brazil, and Eastern Europe, have become major centers for sourcing and targets for top-line revenue growth. How do you see emerging market vendors fitting into your sourcing and manufacturing plans? For example, will cost remain the major driver for sourcing in emerging markets?
Stuart» Cost, along with a proven ability to deliver, will ultimately drive business to emerging markets.
Griscti» Cost will always be an important consideration, but quality, sustainability, growth potential, and consistent performance will also be critical factors.
Lynch» Cost is only one of several factors that influence outsourcing decisions today. The need to have a balanced and flexible supply network is a critical driver as well. For products that require specialized processes, it may be prohibitive to develop certain manufacturing processes internally. Balancing the supply network means retaining some internal capability but also having the flexibility to outsource to meet business needs.
Research & development
Miller» Will having more sales and research and development (R&D) activity in the emerging-market countries result in more sourcing from those countries?
Stuart» Not necessarily. Cost and quality of service offerings will ultimately drive the sourcing decision.
Griscti» I do not think that increased sales will result in more sourcing. However, more R&D activity probably will.
Miller» How large and developed do you expect R&D activities in emerging markets (e.g., R&D centers in places like Shanghai and Bangalore) to become?
Stuart» They have already grown at a very fast pace, and I would anticipate this rate of growth to continue.
Griscti» I believe that the cost of doing business in India is escalating at such a rapid pace that it will become a limiting factor to continued growth there in the next 5 to 10 years. Shanghai is also expensive, so growth will not continue at the current pace. However, there are other places in the Asia/Pacific region where I expect to see substantial growth. In no case do I see these regions rivaling the scope of activities in Western countries.
Lynch» This is an interesting question. Some people feel that the cost advantages in India and China will begin to erode. But I believe that any movement to secondary markets will develop very slowly, largely because of the need to develop stronger regulatory structures in some of these markets. I think there is enough opportunity within India and China at this stage, recognizing that effort and resources are required to develop a strong supplier base. Pharmaceutical companies committed to outsourcing must be prepared to make this investment.
Beyond India and China
Miller» Do you see sourcing opportunities moving beyond the first-tier countries (e.g., India, China) to second-tier country suppliers (e.g., Vietnam, South Africa) in the near future?
Stuart» I believe there is lot of value yet to be extracted from the first-tier countries before any dramatic shift will take place toward second-tier country suppliers. I don't foresee a significant shift in the near-term (i.e., three years).
Griscti» Not in the immediate future, but I certainly do see such changes in the near term in places such as Shanghai and Bangalore. That said, the growth will depend upon their government's ability to develop an environment that is conducive to R&D activities.
Miller» How would you characterize the state of the vendor base for CMC development and manufacturing services? Do CMC service providers have the requisite technical and operation skills to meet your needs?
Stuart» In general, yes. Certainly, there are real and perceived gaps in technical expertise at CMC service providers, but many companies are figuring out ways to close these gaps. The key untapped opportunity may be more in the area of continuous improvement and demonstrated ability to drive down cycle times.
Griscti» Suppliers are selected based on these prerequisites for any given project.
Lynch» We see a broad range of capabilities across the vendor base. Some are highly capable and very technically competent on several fronts. If you look at the complete package of systems needed to effectively manage a manufacturing and supply system, there are invariably some gaps that need to be addressed.
Miller» Do CMC service providers have the global capabilities to address your growing geographic scope?
Stuart» I don't see global scope as a barrier at this point. Certainly for those providers that have it, it can be leveraged effectively, but overall, there is a broad range of providers across all geographies to meet CMC development and manufacturing needs. Having said this, investment and partnerships by established Western suppliers in emerging markets could provide an important strategic advantage over those who remain stagnant with respect to the global footprint.
Lynch» Across the range of service provider companies, many have established operations in the US, Europe, and in major emerging markets. However, very few companies are equipped today to support operations on a truly global scale.
Miller» Are you confident that the major CMC service providers have the financial staying power to be long-term partners?
Stuart» No. This continues to be one of the greatest areas of concern, considering the potential value of the assets being developed externally. Those companies that can demonstrate some level of financial stability can really leverage this as a position of strength when bidding or negotiating development contracts.
Lynch» It comes down to doing upfront due diligence to make sure the service providers are qualified to be long-term providers. Pfizer keeps a very close eye on the impact of global economic changes on some of these providers, and the potential to impact their ability to meet our needs.
Miller» Do you see a group of preferred providers emerging?
Stuart» I think this [group] has already emerged to some extent with the larger, multiservice providers. I don't see [the group] expanding much further and believe steady-state [providers] will include both larger, multiservice preferred providers as well as niche providers.
Lynch» We have a large number of suppliers at Pfizer, and our level of outsourcing has grown significantly in the past few years. Most of our outsourcing is now with US and European suppliers, with European suppliers accounting for about 70% of the growth in recent years. The number of sites we have divested drives much of our outsourcing activity. After two major acquisitions in the past nine years, we began a process of network optimization and were able to divest a number of sites. The divestiture process usually results in trailing supply agreements with other companies to supply product to Pfizer. In Europe, this represents a significant portion of the outsourcing we do today. Part of the evolution of our network will involve working with preferred providers.
Miller» Over the years we have seen a variety of sourcing models emerge, including preferred providers and full-time equivalent (FTE) arrangements. How do you see sourcing models emerging in the coming years? Do you see "one-stop shop" models gaining more traction?
Stuart» Not at this time. It has not been proven that the one-stop shop approach is viable over the long term. Opportunities to bundle like services will always be attractive, but in the end, excellent performance in a given area will win repeat business.
Griscti» I believe that the "one stop shop" is still the ideal, but I do not believe that any vendor has been successful in developing it. There is too much specialization required in certain categories, particularly when it comes to technology, for one vendor to be able to do everything well.
Lynch» Pfizer tends to focus on the specific strengths of individual providers. There is a legitimate concern about putting all our eggs in one basket. However, we do evaluate all opportunities and, where it makes good business sense, we are prepared to consolidate activities. Gaining experience and confidence from working with a supplier is a key element in this process.
Miller» Will global models develop—for example, a model in which providers are chosen to fulfill manufacturing, testing, or development needs using a full global network of sites? Could a contract manufacturing organization (CMO) such as Lonza, with facilities in the US, Europe, China, and India be advantaged?
Stuart» Possibly, but in order for this to be realized, the level of sophistication of integration across provider sites will need to increase dramatically. We continue to see more "site-based" operations as the current norm, despite efforts by providers to integrate their network.
Griscti» I think global models will be developed—some already exist. It's the next step down from the "one stop shop." If one vendor can't do everything, there is logic in having them do everything they can reliably do well on a global basis.
Miller» Will pharmaceutical companies and CROs/CMOs engage in risk-sharing arrangements?
Stuart» Yes. This is where significant opportunity lies. The challenge is the ability for the provider to be able to work from a position of financial strength to carry meaningful shared risked in the arrangement.
Griscti» Absolutely, they are already doing so. The providers, or at least the big ones, recognize this as a way to become embedded in the pharmaceutical company and to take their relationship to a new level, making themselves more difficult to disengage.
Lynch» I believe this mechanism is fairly well established already. It makes sense that both parties have a stake in the success of a project, either by sharing development expenses and revenues, or via a series of milestone payments.
Miller» Do you foresee more divestiture of facilities to start-up or established CMOs?
Stuart» As consolidation of the pharmaceutical industry continues, asset divesture will continue to be a factor for new and growing CMOs. CMOs should be careful when acquiring these assets, which are often being eliminated from internal networks due to excess capacity. In the mid-to-late 1990s, there was a similar shift in ownership of manufacturing capacity in the contract manufacturing industry for electronics. The suppliers that emerged strongest from this restructuring of the value chain were those that offered services in design, engineering, and after-market services as compared with those who attempted to build a business model strictly on manufacturing.
Griscti» Yes. I do not think the frequency will increase dramatically over what we have seen historically, but I do expect to see it happen.
Miller» What kinds of capabilities will niche providers need to have?
Stuart» Beyond the traditional niches of technology specific capabilities, I believe the ability for providers to create offerings around speed and flexibility of project delivery will be the next big opportunity to create highly valued niches.
Griscti» As I noted, there will likely always be a place for the specialist. I think the market will get much more competitive for them and it will be harder for them to survive, but I also expect that we will continue to use them, particularly when it comes to a complicated therapeutic or technology area.
Miller» During the next five years, what would you identify as the greatest challenges facing pharmaceutical manufacturers in managing an increasingly global supply chain? In particular, what role do you see for CMOs and other contract service providers (e.g., third-party logistics providers) in helping to manage that supply chain?
Stuart» Establishing fit-for-purpose facilities and networks that are readily adaptable to changing market and customer needs. Single purpose and product/technology specific facilities are too expensive to sustain in such a rapidly changing market.
Griscti» Those that can assist with lowering cost and/or easing transport into countries around the world will have a role in the process.
Lynch»There are two key areas here to consider. One is balancing the benefit of outsourcing with the added complexity of a longer supply chain. You need to factor in lead times, shipping costs, inventory levels, and the ability to respond in a timely manner to changes in demand and to new business opportunities. The other area to consider is risk management and business-continuity planning. How well do you understand inherent risk in your supply chain? Are you prepared to commit the resources to effectively manage that risk? Building trust and a strong working relationship with suppliers is key to addressing these questions.
For more on this topic, see the online exclusive, "Issue Extra: Executive Roundtable-The Future of Pharmaceutical CMC Outsourcing"
Jim Miller President of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, firstname.lastname@example.org