Biopharmaceutical Contract Manufacturing: Contractor Selection by Market Segment

The market for biopharmaceutical contract manufacturing services continued to expand in 2007. For the year 2007, HighTech Business Decisions estimates year-to-year market growth of 14%–15%.Fueling the growth in the biopharmaceutical contract manufacturing market is the growth in biologics throughout the product pipeline, and the increased use of contract manufacturers by the pharmacuetical and biotechnology companies. As these pharmaceutical and biotechnology companies pursue their outsourcing strategies, the choice of a contractor becomes a critical and strategic decision.

In the latest report by HighTech Business Decisions, Biopharmaceutical Contract Manufacturing: Quality, Capacities and Emerging Technologies, 41 biomanufacturing directors at pharmaceutical and biotechnology companies worldwide were surveyed regarding contractor selection. All respondents in the study said outsourcing is part of their production strategy. The directors discussed their criteria and the essential characteristics they look for when choosing a contractor.

Contractor Selection Criteria

In the study, the directors ranked the four most important characteristics that they seek in a contractor. Overall, the key criteria used to choose a contractor are a) the contract manufacturer's experience and reputation, b) price, c) customer service, and d) quality. These characteristics are a composite of all criteria mentioned, weighted by the directors' ranking of each criterion. While the macro view of the criteria for choosing a contractor provides a good overall view of the requirements needed by a contactor to win business, a deeper understanding of the specific needs of the market can be gained when the criteria are segmented by organization size. Therefore, for this analysis, the criteria for choosing a contractor are grouped by the size of the firm. We define a small firm as a biotechnology company with no manufacturing sites and a large firm as a biotechnology or pharmaceutical company with multiple manufacturing sites, that usually operates multiple international sites.

Experience

For smaller firms, the most important characteristic sought in a contractor is its experience and reputation (Figure 1). Experience includes both technical and process experience, as well as experience with similar products and projects. The contractor's experience and reputation is most important because it proves to the directors that the contractor has the quality, technical, and production capabilities in place to execute the project. Not only is the experience of the contractor company as a whole an important criterion, but also the experience of the contractor's staff is equally important. The staff's experience is critical to be able to provide the assistance and depth of knowledge needed to keep the project running smoothly. Some of the manufacturing directors surveyed pointed out the importance of experienced staff in dealing with the regulatory paperwork in particular.

Figure 1. In this study, the selection criteria were ranked as high, medium, or low based on their importance. For example, experience and reputation of a contractor are the most important characteristics sought by smaller firms.

Finding a contractor who has the requisite experience is especially important for small firms, because most of these companies are working with new products. With so many unknowns at the beginning of a project, from process development to scale-up and regulatory requirements, it is important to have a contractor who has experience with similar projects. A few of the manufacturing directors mentioned that they have encountered contractors who claim to have certain capabilities, only to discover later that the contractor lacked the capabilities or misunderstood the complete requirements needed for the project. One director cited a project delay caused by inexperienced staff dealing with regulatory paperwork issues.

Below are a few comments made by the manufacturing directors of pharmaceutial/biotechnology companies whom we interviewed.

"In my experience, if you ask a contractor if they can do something they say 'yes' a lot even if they have never done it before or don't have the equipment. There are often gaps in a contractor's capabilities. We look to see if they have done a product similar to ours. We are not interested in being a beta test site for a contractor. We want to talk with former customers and see if they were happy with the contractor's work. Cost is generally a non-issue for us. All of the contractors tend to be similar in cost, or at least within a two-fold range. Just as no two people are the same, no two contractors are the same. I have never done an evaluation and said that 'two contractors are exactly the same, let's flip a coin.' If they were similar in our four top criteria then we would look at availability and cost."

"Experience is the most important because if it is a new or inexperienced contractor, they're going to go through the growing pains with you and we don't want that."

"The experience of having delivered multiple products, having a good track record, is what we look for. We know from our own experience that this helps, particularly in early phase development. If all criteria fit, it would probably be a gut-level feeling. When you meet people you form a gut-level feeling of how comfortable you are with them, and it is worth listening to this. Price would be next on the list. It isn't at the top because, based on our own experience, it is more important to have the project done well and delivered in a reasonable timeline."

Reputation

The reputation of the contractor goes hand-in-hand with its level of experience. The manufacturing directors evaluate the reputation of the contractor for producing a quality product and to solve unforeseen problems as they arise. Contractors having experienced staff, who can provide the requisite technical knowledge to solve a problem, are preferred. Reputation also includes the experiences that other biotechnology companies have had in dealing with the contractor on a quality and commercial level. Reputation is especially important because the directors usually find potential contractors through networking, word-of-mouth, and personal history. As mentioned by one director from a pharmaceutial/biotech company:

"Networking is by far more important than anything else. We really rely on references about who did a good job."

Quality and Regulatory History

The other two top-ranked characteristics mentioned to a lesser extent are quality and regulatory history. It is interesting to note that none of the directors at the small firms mentioned price as a top criterion when choosing a contract manufacturer for their project. However, price does become an important criterion for choosing a contractor after other essential characteristics are satisfactory.

The essential characteristics sought from a contractor by the directors at large firms are slightly different than those mentioned by those at small firms. An overview of the essential characteristics sought by large firms from a contractor is shown in Figure 2. While the contractor's experience and reputation is an important consideration, the contactor's quality and quality systems are equally important for the directors at large firms. Regulatory history, however, is not a top criterion for evaluating a potential contractor.

Figure 2. In this study, the selection criteria were ranked as high, medium, or low based on their importance. For example, quality, along with experience and reputation, are the most important characteristics sought by directors of larger firms.

How Important is Price?

As noted earlier, there are slight differences between large and small firms in the criteria used to choose a contactor. For small firms, experience and reputation are the most important, whereas large firms are equally concerned about quality and quality systems. Second, price is slightly more important to a large firm. For both market segments, price sensitivity becomes more important once the top-ranked criteria are met. In addition, price becomes more important once the product reaches commercial production with larger volumes and defined processes. Further analysis shows that price is a higher priority for pharmaceutical and biotechnology companies with multiple biomanufacturing sites. These firms have more in-house skills available to them, and therefore, they place a lower value on the capabilities offered by the contactor. In the final analysis, the importance of price may be a matter of simple economics. Pharmaceutical and biotechnology companies with multiple sites have greater bargaining power against the contractors because they have the option to keep the production in-house.

Other Criteria

Other essential characteristics sought by the directors include offering turnkey services, production schedule availability, capacity, intellectual property protection, and proximity. While a vast majority of the directors consider it an advantage to be near their contract manufacturers, it is not a major concern for them when choosing a contractor. In general, if all other characteristics are equal between two contractor, then the proximity of the contractor may be a deciding factor. In our study, the directors discussed the possibility of outsourcing their biologics production to other world areas, including outsourcing to Asia.

Changes in Attitude

The industry's attitude toward outsourcing biologics production to contractors located in other world areas, including Asia, is changing. In 2005, when the directors were asked if they would consider outsourcing to contractors located in other world areas, out of 49 responses, over half the respondents stated that they would consider it as an option. In our latest study, 80% of the directors stated that they would consider using a contract manufacturer located in Asia. In analyzing these responses, taking into account sampling error, the results show with 95% confidence that a change in attitude toward outsourcing to other world areas has occurred over the last two years. This change is significant, but subtle; the manufacturing directors will not dismiss a contractor from consideration simply because it is located in a different world area (Figure 3).

Figure 3. As compared to 53% in 2005, 80% of the directors surveyed in 2007 stated that they would consider using a contract manufacturer located in Asia. The results show with 95% confidence that a change in attitude toward outsourcing to other world areas has occurred over the last two years.

One of the primary reasons driving this change in attitude is the expected cost savings from using a contractor located in a low-cost geographic area. Seventy-one percent of the directors who see an advantage in outsourcing to a contractor in Asia cite cost savings as the primary benefit. Cost savings, however, is not the only benefit that the directors see in working with a contract manufacturer in Asia. Other benefits mentioned are shorter timelines, availability of capacity, and access to local markets. An overview of these results is shown in Figure 4.

Figure 4. Potential benefits cited in the survey that motivate the directors to use an Asian contractor.

Following are comments provided by the directors we interviewed on the advantages of working with a contract manufacturer in Asia:

"We would consider working with an Asian contractor. The circumstances would be that there is a significant cost savings of 50% or greater with regulatory and execution risks of less than 10–20%. An Asian contractor with a proven track record and regulatory experience would be highly attractive."

"During the development phase of the projects, we prefer to work with a US or European company and have close interactions with them. For routine manufacturing, we would consider a contractor in Asia . . . When pricing is most important, we would consider going to an Asian contractor."

"The main reason we would consider working with a contractor in Asia is if they could do something faster or cheaper. They would need to demonstrate they can meet the EU and FDA regulations."

"Today, we have not established a relationship with any contractors in China or India. There would need to be something that attracted us to work in Asia, such as lower cost. We of course would need to check the quality of their work and it would have to meet GMP standards."

"We would like to work with Asian contractors. Contract manufacturing is booming in Korea, China, and Taiwan. Using Asian contractors provides a big opportunity for price reduction."

"In order for us to go to an Asia contractor there would have to be a big cost incentive. For large volume production, we may consider partnering with a contractor in Asia."

This shift in attitude is expected to continue as European and North American pharmaceutical and biotechnology companies gain more experience using biopharmaceutical contract manufacturers in other locations. Recently, the US Food and Drug Administration approved Celltrion, Inc., a South Korean contract manufacturer, for the production of Orencia, Bristol-Myers Squibb's fusion protein for treatment of rheumatoid arthritis. This is the first FDA approval of a large-scale Asian biopharmaceutical contract manufacturer for the manufacture of recombinant proteins for therapeutic use. This further highlights that the industry's attitude toward outsourcing biologics production to contractors located in other world areas is changing.

William Downey is the president of HighTech Business Decisions, San Jose, CA, 408.978.1035, wdowney@hightechdecisions.com