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Leading contract manufacturing organizations share their views on the current and future market dynamics shaping pharmaceutical outsourcing.
The elongation of the pharmaceutical supply chain is an important influence on the current and future state of outsourcing. To keep pace with changing requirements of sponsor companies, contract manufacturing organizations (CMOs) have broadened geographically to create a global footprint. Several Asia-based CMOs recently invested in manufacturing and development operations in North America and Western Europe, and select Western CMOs have similarly strengthened their positions in Asia. To gain a perspective on the critical issues, challenges, and factors affecting outsourcing, Pharmaceutical Technology conducted a roundtable of leading CMOs that have pursued this strategy in primary (i.e., intermediates and active pharmaceutical ingredients) and secondary (i.e., finished drug product) manufacturing and development.
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Participants in the roundtable were: Steve Hagen, vice-president of pharmaceutical development and manufacturing at AMRI (Albany, NY); Tim Tyson, CEO of Aptuit (Greenwich, CT); David Andrews, sales director at Dishman USA, and Christian Dowdeswell, sales director at Dishman Europe, part of Dishman Pharmaceuticals and Chemicals (Ahmedabad, Gujarat, India); Abhijit Mukherjee, president and head of pharmaceutical services and active ingredients at Dr. Reddy's Laboratories (Hyderabad, Andhra Pradesh, India); N. Santhanam, chief operating officer of Piramal Healthcare (Mumbai, India); Terry Novak, president of North American operations and chief commercial officer at Patheon (Toronto); and Ed Roullard, vice-president of SAFC Supply Solutions, part of SAFC (St. Louis, MO).
Cost differentials between Western and Asian suppliers
PharmTech» CMOs in Asia have generally been perceived as being able to offer lower costs compared with their counterparts in North America and Europe, but rising costs for labor, transportation, and energy have eroded some of this differential. What cost pressures have arisen in the market and what has been their effect on the competitive dynamics of outsourcing to Asia?
»Mukherjee (Dr. Reddy's): The custom-manufacturing landscape has become extremely competitive around the world. The cost differential between India and the West still exists to an extent, but the West has become far more competitive with respect to price by embracing process and manufacturing efficiency, driving the cost out of their production. They are accomplishing this by utilizing a global network of suppliers for their materials as well as achieving operational efficiencies. Today, the selection of a supplier is no longer driven by pricing, but rather by the total service offering. Service providers from Asia need to demonstrate their technical sophistication and manufacturing efficiency in a way that was not required in the past. Cost is no longer the single competitive advantage for any CMO. To be successful, cost along with strong quality, safety, health, environmental, sourcing, and supply-chain programs must be evident.
»Roullard (SAFC): Adam Smith's theory of the "invisible hand" is actively at work between the Western and Asia marketplaces. Costs have definitely increased in Asia, driven by many factors, the most significant being an increase in labor costs for chemists and engineers. Labor costs in Asia continue to be lower than those of Western suppliers, but the gap is closing due to shifting demand, competition for resources, and the spread of relative wealth as these economies develop. The existing differential has customers setting explicit strategies for utilization of Asian outsourcing partners for projects requiring commoditized capability. And, those in the West with common technologies, common quality, and common supply-chain capabilities are feeling the most competitive pressure. However, those companies that are able to provide unique technologies or provide supply-chain security for critical raw materials are able to differentiate to an extent that ensures, at worst, mid-term viability as a value-added supplier.
»Dowdeswell (Dishman): The pressure has been seen in two ways—some key elements of cost have risen in Asia while European and US manufacturers have taken steps to make their businesses more cost effective. Some Asian companies have been slow to appreciate this, however. The costs of investment in Asian countries remain significantly lower, and this will continue to drive the dynamics of outsourcing to Asia.
Roundtable participants: a snapshot of company capabilities and positioning
»Santhanam (Piramal): While costs in Asia have been rising at a faster rate than in the West, the differential in costs is still very large due to the abundant technical pool available in the emerging countries. The cost of FTEs (full-time equivalents) for chemistry or formulation work continues to be approximately 50–60% of the costs encountered in the West and is likely to remain at those levels for at least the next five to seven years.
The challenge to Asian companies in competitiveness is often not from cost-per-hour, but productivity due to tools, techniques, and drug-development approaches. A large number of scientists of Indian/Chinese origin from the West are now returning to their homeland and helping train the larger scientific population in these techniques. The access to state-of-the-art equipment is also helping making step improvements in productivity, but there is still a ways to go.
On the horizon...
»Hagen (AMRI): Current economic conditions have driven down the cost of energy and raw materials from their peak in 2008. In a tighter market, such as we have experienced in the last few quarters, there is more of a willingness on the part of suppliers to negotiate the price of raw materials. If we continue to reduce the cost of raw materials while maintaining strict quality standards, we can provide the customer with the assurance that less expensive does not mean lower quality. Hiring and retaining a qualified workforce is also a priority. Customers have expressed a concern about the level of internal resources required to manage an outsourced project at some of the Asia-based companies with which they have worked. This utilization of internal resources adds to the true project cost. [We feel] using a US-based point of contact, if necessary, and solid project-management skills provides an optimum interface for reducing the need for a customer to dedicate internal resources. Managing a project across multiple locations requires us to recognize potential issues, including cultural barriers, time-zone differences, and potentially logistical issues, but [we] strive to make the experience feel like it is all being done under one roof.
»Tyson (Aptuit): India's impressive technical and scientific talent and resources are paramount to any perceived or actual cost differentials available in that market. Certainly the industry—like all industries—is facing additional cost pressures in the current economic environment. However, cost pressures are inherent in drug development in any economy, and drug developers should be seeking outsourcing partners that understand their program, challenges and objectives, and who will be able to work strategically with them to advance their drug-development programs in an integrated network and deliver results on time, regardless of geographic location.
Impact of marcoeconomic conditions on outsourcing
PharmTech » What impact has the global economic downturn had on drug-development and manufacturing services overall, and specifically for contract services from Asia? Can you characterize the near- and long-term prospects?
»Tyson (Aptuit): There has been a slowdown in the pharmaceutical services sector in general, which has affected all parts of the world, including Asia. However, we believe that the future growth potential continues to be significant as innovation remains the leading driver of pharmaceutical company value, and also that continued consolidation will increase the need and demand for professional, capable contract services. I believe that the five-year growth outlook continues to be in the double digits and that the demand will continue to increase.
»Andrews (Dishman): There has been a decline or slowdown in the number of drugs in development globally, and everyone has had to operate within this reality. The prospects both near and longer term look very healthy for contract research organizations (CROs) and CMOs based in Asia. As Asian companies mature, they become more experienced and capable of fulfilling their pharmaceutical customers' needs with less support; this in itself will open up more opportunities.
Roullard (SAFC): There has been a definite slowdown, especially for CRO services, and we would expect the current state to hold until late 2009. There will always be an outsourcing market within Asia. The size and rate of growth will depend on the way in which large pharma develops their research and development programs (most are under significant scrutiny). Asia's capacity to deliver to quality expectations and long-term sustainability will be a second determining factor.
»Mukherjee (Dr. Reddy's): The global economic downturn has impacted the drug-development services arena. Drug-development programs have been severely scrutinized by the pharmaceutical companies themselves, having either cut or reprioritized many molecules in development simply because of budget cuts. However, when a molecule is supported, the drug-development process remains well supported. With respect to manufacturing, the economic downturn has many pharmaceutical companies scrutinizing their working capital, and as a result, are holding less stock and ordering less materials from their supply base. The reduction of stock and working capital is short-term and a stopgap and has had a visible effect on the CMOs around the globe, including Asia. As Asian sources continue to become more competitive from a development- and manufacturing- sophistication point of view, the cost competitiveness should continue to support sourcing from Asia.
» Santhanam (Piramal): The economic downturn has made low-cost sourcing for late life-cycle products an urgent imperative for pharma companies. A number of assets in the West are being divested or liquidated, and the need to outsource solid dose, syrups, liquids as well as APIs and intermediates is very high. A number of pharma companies are also looking long term for Asia for their development drug-sourcing. [They] are closely evaluating CMOs that have a reasonable strategic, operational, and investment fit, and that can be worked with to upgrade their skills to the pharma companies' levels.
Long term, a lot of outsourcing related to patented products' process development, drug development, packaging, and labeling services is foreseen. Late life-cycle products, difficult-to-do products (such as steriles) will also be increasingly outsourced from Asia as the current wave is focusing on the easy-wins only.
» Novak (Patheon): The economic downturn has had an impact as many companies have postponed, reprioritized, or placed development projects on hold in an effort to conserve cash. On the manufacturing-services front, those companies that have manufacturing capabilities are evaluating how they can optimize their own in-house capabilities before looking to outsource. For those without manufacturing capabilities, the economic downturn has not impacted their outsourcing.
I think the near-term prospects for outsourcing will be the same as we see now, but the long-term prospects should be very positive, especially in the parenteral area as there are many biologic products in the pipeline awaiting approval that will be, and have been, outsourced. In the solid-dose area, pricing will continue to be a critical factor for basic tablets and capsules as there remains a lot of available capacity, but long-term prospects should be positive as large pharma completes site rationalizations following recent merger and acquisition activities. Specialty manufacturing such as DEA-scheduled [Drug Enforcement Administration], controlled release, and high potency, will continue to be in demand and show solid growth.
Supply-chain practices and requirements
PharmTech » Supply-chain integrity is a major issue when outsourcing, and its importance has been underscored by recent high-profile events such as the incident of contaminated heparin from China. Have sponsor companies' requirements and expectations changed as a result? Is there an increased focus on additional qualification, auditing, or supply-chain practices? Are there specific programs that your company has adopted in response these changes?
» Mukherjee (Dr. Reddy's): Absolutely. The pharmaceutical companies are increasing their intensity when it comes to inspections and audits of sources in Asia. These inspections are now a significant criteria for the selection of a CMO, which reinforces that price competitiveness is not a single selection criteria anymore. The audit process typically looks to ensure that the CMO has a management system in place that not only addresses individual problems that may occur, but that the root, the systemic problems, get recognized and corrected as well. The customers expect that our management systems extend beyond our own works and that we apply the same criteria and scrutiny to our supply base as well. While Dr. Reddy's has traditionally had strong quality and supply-chain systems, these systems have been enhanced to clearly demonstrate to our customers that these programs are under control.
» Andrews (Dishman): We haven't seen a marked change in the way that our customers deal with us as a result of these incidents. There have always been rigorous qualification processes in place either through independent organizations such as FDA, MHRA [UK's Medicines and Healthcare products Regulatory Agency], etc. as well as customer audits of quality systems, processes, and ESHA [environmental, safety, and health affairs] standards. Customer audits have always contained a review of all aspects of supply-chain procedures. [We] have always been open to any such audits and have maintained a policy of continuous improvement to our in-house systems independently and following audit feedback.
» Roullard (SAFC): Without question, this is one of the most critical issues that the pharmaceutical industry must address over the next few years. As a result, both the criteria and the standards of acceptability have changed significantly for sourcing, not only from Asia, but from the rest of the world. There are increased requirements for better understanding the quality capabilities and security, of the Asian vendor/outsourcing partners, the vendor of their raw materials, and even further down the line. As one customer told us: 'I want to know the farm that the potatoes came from.'
We find several of our customers battling the question of 'information at what cost' and, frankly we are in the midst of the same conversation. As customers come to us with the question, we find it essential to answer it together. We both need to understand 'how critical is the material,' 'what cost are we willing to incur to understand the material's pedigree?,' and 'how do we get there most efficiently?'
SAFC/Sigma-Aldrich has taken several steps to address this challenge. Firstly, we have developed explicit tiers of quality, so that customers can balance their requirements with our quality systems to deliver the appropriate quality at the appropriate cost. And, most importantly, do so with absolute clarity about what they are receiving. Secondly, we have recognized that the industry's current standard of one vendor X one customer = one audit to be far too expensive to sustain as the criteria and standards of the industry change. So, we have adopted two approaches to address the challenge. We have developed a vendor audit service that aims to spread the cost of audits across at least two parties. We have also taken an active role within the Rx-360 initiative to set stronger standards across the industry. Based upon standards that we see in other business sectors in which we are active (AIB International for the food industry and SEMI for the semiconductor industry), we know that this initiative will ultimately reduce costs for all industry participants.
A future look at outsourcing
PharmTech » Looking ahead five years, how do you think pharmaceutical outsourcing will have evolved as it compares today in terms of the number of suppliers, the type of suppliers and capabilities offered, and growth in specific geographic markets? Also, taking a visionary look, what other factors will affect the paradigm for pharmaceutical outsourcing and what do you see as the impact on suppliers and sponsor companies?
» Andrews (Dishman): Certainly the breadth of services offered from Asian API producers is expanding at present into areas such as biopharmaceuticals, formulation, and clinical research with ever improving levels of service and quality, and this trend will continue over the next five years. Asian providers will increasingly develop their business from life-cycle management to production of new chemical entities for launch. Increasingly, large pharmaceutical companies are working with generic API providers, and some consolidation will occur between suppliers. [We] believe the number of suppliers will probably not grow significantly.
» Dowdeswell (Dishman): The pharmaceutical industry faces a patent cliff in the next four to five years, and there will certainly be a marked shakeup in the industry. The traditional dependence on blockbuster drugs will be replaced by niche therapies, with necessarily reduced volumes. The pharma industry is increasingly dependent on the emerging pharma industry for its pipeline of new drugs, and these companies are generally conservative in their outsourcing.
» Novak (Patheon): I think the number of suppliers will shrink as consolidation takes place in the face of continued mergers and acquisitions at the client level and as suppliers continue to expand their capabilities by adding development and specialty manufacturing services as well as expanding their geographical footprint.
Tyson (Aptuit): Pharmaceutical outsourcing, like the larger pharmaceutical industry, is constantly evolving, and we'll continue to see sponsor companies and outsourcing partners working to develop efficiencies to bring critical drugs to market. Rather than a sponsor company outsourcing projects to a variety of different vendors, it will be increasingly important from a cost, scientific, and strategic perspective to work with outsourcing partners across multiple facets of a project to capitalize on integration of project management and services.
The steep decline in the number of drugs reaching the market, particularly due to the difficulty in translating promising laboratory candidates into products suitable for Phase I studies, will continue to be an important issue for drug developers to tackle. Drug-development companies should choose partners that can help them overcome obstacles in the traditional drug-development model that are curbing the progression of new medicines.
» Santhanam (Piramal): The downturn in the last year is resulting in significant long-term paradigm shifts in drug development and outsourcing. Drug development will have stricter gates of efficacy, innovation, and market size for funding, and there will be a constriction in the pipeline when the industry revives.
Large Pharma is looking at consolidating sites, retaining only a few key sites for product launch, finishing, or for tax advantages. Along with this, alot of excess capacity in the West in API and formulations will need to be taken out (closed versus sold) in the next five years. Pharma companies currently outsourcing intermediates only will also look at finished APIs, and the need for capacity in Asia for late life-cycle formulations (i.e., solids, solutions, steriles) will increase at a faster rate.
Large Pharma is also currently buying small pharma/biotechs or forging relationships via small equity stakes. The small pharma/biotechs are also consolidating/aggregating to be larger and stronger and have a mix of both early and late pipelines to be able to attract funding. The landscape of biotechs, therefore, will change significantly. The barrier for small pharma/biotechs to source from Asia has been the management bandwidth to assure proper vendor selection and monitoring. Intermediaries that will help with this process will emerge in the next two to three years and help the small companies work with Asia in early-phase work as well. Large Pharma with equity stakes in these companies will also drive more Asia-based sourcing as almost all of Large Pharma now have an office in Singapore/ Hong Kong/India, and [they] are setting up API and formulations development centers in these geographies.
The industry, particularly the venture-capital firms and PE [private equity] firms, will also try to hedge risk (as will be the case with Large Pharma) by having exposure to small molecules, large molecules, consumer health, and medical devices versus being focused on one category only. The pipeline in large molecules will increase more, but there is a fair bit of excess capacity in the West in this sector, and large-scale outsourcing of this category is not expected in the next three to five years. The imperative on CMOs in Asia will be to provide reliability and scalability in the next years and gradually add technological edge to move up the value chain of activities as the market matures from tying up the exigent needs for low-cost commercial sourcing to long-term life-cycle sourcing.
»Hagen (AMRI): Within the industry, there will continue to be an effort to drive improved efficiency. The challenge to success in regions such as India and China will be the ability to balance required standards for quality, safety, and reliability with the need for lower costs. Companies in Asia will come under increasing pressure to upgrade their businesses and accept the inevitability of more frequent and thorough regulatory auditing. The pressure to conform to a Western standard to meet regulatory requirements is already beginning to claim casualties.
The influence of the FDA on companies in India and China is beginning to make an impact. US facilities are accustomed to being audited annually. Companies that cut corners or do not comply with regulatory requirements will be culled out. There has not been a level playing field between companies operating in Asia and the US, and once the playing field is level, there will be fewer companies than there are today.
Another more significant development would be the acknowledgment by the industry that development and manufacturing of APIs and drug products are not a core competency. Pharmaceutical companies could outsource 100% of the development and manufacture of APIs immediately, which would lead to increased productivity, improved cost structure, and greater efficiency. In the short term, CMOs continue to invest in technology and development both in the US and in Asia in anticipation of the day when the dam breaks and the CMO industry experiences a period of unprecedented growth. [We] will be waiting.