Insourcing vs Outsourcing: Choosing the Right Strategy

March 1, 2017
Oskar Gold

Pharmaceutical Technology Europe

Volume 2017 Supplement, Issue 1

Page Number: s4–s5

The article reviews strategies for firms with or without existing in-house capacities and the pros and cons for outsourcing bio/pharmaceutical development and manufacturing.

Aseptic manufacturing is one of the key stages of drug development and commercialization. It is also a task that must be approached with the utmost care and attention to detail. Once the discovery cycle has been completed, how does a firm get a drug packaged and passed successfully through clinical manufacturing and into the marketplace? The answer to that question will depend on many factors, some of which are fundamental and straightforward. Others require careful thought and consideration of different criteria that can affect each individual situation. 

Leading global bio/pharmaceutical firms often have their own manufacturing capabilities comprised of a global network of sites that serve different regions. In the past, this business model was practically an industry standard. However, due to the combined effects of expiring patents, tighter regulatory requirements, and the emergence of generic drugs and biosimilars, the industry has seen an increase in competition driving the need for the highest-possible flexibility in the manufacturing model. 

Biologics, such as antibodies, peptide conjugates, and vaccines, are promising development fields and, if successfully marketed, can address a variety of previously unmet medical needs. Nonetheless, ever-increasing R&D spending and price pressures have created a re-thinking of the entire business model for pharma and biotech companies that, in turn, have led to the fundamental and strategic question of whether it is better to insource, or outsource, the clinical and commercial manufacturing of injectables.

A different business model for small bio/pharmaceutical companies

Not every pharmaceutical or biotech company fits the standard model described above. Small biotech companies, for example, will not have the in-house resources to perform development and manufacturing themselves as they lack a significant amount of specialized expertise and expensive equipment. For successful in-house aseptic manufacturing, companies need extensive experience in current good manufacturing practice (cGMP). They also require site approval from regulators and must be able to fulfill special tasks such as lyophilization. It, therefore, makes more sense for smaller companies to contract out most, if not all, of the development and manufacturing work once the discovery phase and preclinical development of their active compounds has been completed.

Additional options for medium-sized companies

For medium-sized companies, the strategic options available are not as straightforward. Many have the financial depth to build up the needed expertise and could arrange the technical equipment to do their own development and manufacturing work. Still, they tend to outsource. For example, over the past 10 to 15 years, a number of bio/pharmaceutical protagonists have appeared in the field that had major financial success with a small number of expensive compounds and therapies. They concentrate all their resources on R&D and marketing and have a business model that involves outsourcing of all capabilities including contract manufacturing of both clinical and commercial drug products.

The advantage of outsourcing non-core competency work is that it allows the company to focus its energy on meeting the development project expectations of investors and shareholders. Resources can then be used to set up a multi-candidate pipeline to mitigate risk of failure in the clinical phase. This model, however, does create an important challenge, because the use of multiple suppliers means that each contract service firm has to be formally audited to allow for the cGMP process and regulatory submission. At the same time, maintaining in-house resources can be impractical given that these capabilities cannot be used completely and as a result, are not cost-efficient. 

Relying on an outsourcing approach that incorporates reducing and keeping the number of strategic partners to a minimum can offer a promising approach to support the daily operations of a medium-sized company.

 

 

A balanced approach for large companies

Overall, it seems to be more promising if large bio/pharmaceutical companies do not have a fixed, single-sided strategy. In the past, a number of companies achieved major global manufacturing capabilities through mergers and acquisitions as well as through organic growth within their home country. 

When asked about their additional reasons for insourcing, they most often cite the term “control.” They want to mitigate risk, which means that the crucial steps in a product’s supply chain should not be entirely dependent on the skills and stability of a third party. Furthermore, a number of companies prefer not using contract development and manufacturing organizations (CDMOs) to handle their most valuable and confidential compounds if those CDMOs are serving other firms at the same time.

Still, other major players in the industry prefer a strategic balance of insourcing and outsourcing as it helps to secure supply, optimize performance, and minimize risks. The disadvantage of in-house manufacturing is cost efficiency because the same technology level cannot be used all of the time. Also, quality control and compliance at multiple sites within different countries can be equally difficult and risky as compared with having a single, well-vetted CDMO as a manufacturing partner.

Pros for insourcing and outsourcing

As noted, insourcing is the logical option if a company has the capacities available because it allows for full control over their drug product development and manufacturing. Also, it maintains their independence from suppliers, enabling complete control over their manufacturing processes and supply chain. Using in-house capabilities is also a strategy to avoid the unlikely event of company secrets being accidentally revealed to the competition if a supplier works for different customers.

Outsourcing, however, has a number of important advantages, for example, when the efforts necessary for reaching a global consistency in quality across sites are the same, or even more challenging than contracting with an external CDMO partner. 

Another significant benefit of outsourcing is economic efficiency. A committed and professional supplier will have skilled employees and keep its sites and hardware up to date in terms of regulations and technology, which are crucial and expensive elements of manufacturing. Thus, an appropriate solution for a bio/pharmaceutical company would be to have a supplier that has long-term expertise and state-of-the-art equipment to manage manufacturing in a cost-efficient manner that could likely not have been done in-house.

The right strategy

There is little doubt that outsourcing various types of manufacturing is trending in the bio/pharmaceutical industry. According to recent outsourcing surveys conducted by industry professionals and research institutes, including a 2016 Nice Insight CDMO buying trends study, approximately 60% of all drug product projects from both large and small pharma and biotech companies are performed in an outsourced manner with third-party manufacturing partners (1). Even large firms that have their own capacity may well choose to invest in intensive R&D activities of their pipeline candidates, leaving the manufacturing process to a high-level expert.

In the final analysis, however, each individual company must work towards maximum security and minimum risk. If possible, a combined strategy of both insourcing and outsourcing will most often provide the necessary flexibility and avoid any unsound dependence on third-parties. This strategy also has an impact on the relationship with a supplier, which needs to be based on long-term planning and cooperation to contribute to accessible external manufacturing capacity when needed. In addition, long-term strategic partnerships will continuously add experience and know-how to both parties, which is a crucial benefit when navigating in an increasingly challenging market setting.

Reference

1. Nice Insights, 2016 CDMO Buying Trends

Article Details

Pharmaceutical Technology Europe
Outsourcing Resources 2017
Supplement
Pages: s4-s5

Citation

When referring to this article, please cite it as O. Gold, "Insourcing vs Outsourcing: Choosing the Right Strategy," Pharmaceutical Technology Europe, Oustourcing Resources 2017.