Outsourcing: What is the Path Forward?

Sales of biopharmaceuticals are projected to grow at a rapid pace over the next few years. Biological products are expected to account for 60% of revenue growth for large pharmaceutical companies by 2010, with annual sales increasing by $26 billion, compared to a $13 billion increase for small molecules.¹ Meeting the production capacity for this remarkable expansion, however, will have many companies, large and small, competing for solutions. Although several large drug companies have built up manufacturing capacity in anticipation of future growth, small- to mid-size biotechnology companies may be left exposed to fluctuations in demand, a shortfall of skilled labor, or a lack of flexibility in adapting to new technologies and regulatory demands. Smaller companies may simply remain behind the curve of anticipated demand. One solution lies in using outsourced expertise to rapidly adjust to changes in production requirements, to improve efficiencies, and ultimately to transfer this expertise in-house. In fact, a survey conducted in 2004 showed that 35% of companies with biologics outsourced at least some of their production, and the survey predicted that this number will increase to 47% by 2008.² This article examines some of the emerging trends and strategies for meeting anticipated growth through outsourcing, particularly among smaller companies that focus their core competencies on discovery, and that lack their own infrastructure for product manufacturing and development.

Outsourcing Development: Where to Start

The areas of greatest need for outsourcing in the biopharmaceutical sector include drug substance and drug product manufacturing, preclinical biology, regulatory oversight, and first-in-human studies. The foremost challenge for emerging companies is drug substance and drug product manufacturing, followed by the rest of the critical path activities that lead to Phase 1 clinical development.

Discovery-based organizations' core expertise is the ability to decipher biological pathways, to identify disease targets, and to develop novel drug candidates. These companies are able to make small quantities of their lead compounds; to take a drug into Phase 1 and Phase 2 clinical development, however, they must dramatically increase the scale of production under good manufacturing practice conditions. This step is extremely resource-intensive, and it is a step that most small companies cannot manage independently because it is a distraction from their core competencies.

Emerging and mid-size companies have a number of choices when considering how to ramp up production of a drug candidate. Outsourcing to multiple vendors does not, by itself, protect these companies from wasteful and costly inefficiencies in development and manufacturing if the project is not managed properly by the skilled staff. To help smaller companies navigate these complexities, experienced consultants have taken an increasingly prominent role in shepherding biopharmaceutical or pharmaceutical products through the manufacturing and development processes, as well as in coordinating relationships among companies and their vendors. Consultants can help emerging companies realize greater efficiencies, speed development, and generate the quality of material needed for reliable preclinical and clinical safety and efficacy studies. Getting it right the first time adds long-term value to a project.

Consultants can help biopharmaceutical companies and their boards understand the complexities of manufacturing systems, thereby minimizing mistakes that a company might make if it tries to do it alone. Biological manufacturing is an area where depth and breadth of expertise is commonly scarce at small companies. A company that deals directly with multiple vendors, without the benefit of a knowledgeable and experienced consultant, risks the expensive prospect of having to repeat its efforts as it endeavors to generate well-characterized biologics and meet regulatory requirements. Investing early and gaining access to consultants with hands-on drug development expertise is vital to achieving best practices on the first attempt.

Strategic Versus Tactical Outsourcing

The greatest benefits of outsourcing as a whole are realized when a company takes a strategic rather than a tactical approach. Using a strategic approach, a company can team up with a vendor that provides a full suite of services—including manufacturing, preclinical, or clinical development—to develop integrated knowledge and technology around a product, and to eliminate the need to transfer this knowledge and technology among numerous vendors. By becoming involved early, a comprehensive drug development outsourcing firm can engage its scientists in preclinical safety and efficacy tests, and in formulation and manufacturing of the product, thus saving precious time and effort, and helping the company realize the synergies among each of these stages. Consultants can further streamline the process by identifying an appropriate vendor, solving problems, and managing timelines and budgets.

A strategic outsourcing approach is particularly important for any project that requires substantial product knowledge and access to many chemical, biological, and clinical skills to drive the project through agreed-upon milestones. Small companies typically choose to deal with multiple vendors for development, manufacturing, preclinical, regulatory, logistics, and other services; this often leads to higher costs, mistakes, longer timelines, and higher risks. Companies should seek outsourcing partners that can provide a substantial number of development tasks internally, to reduce risk, time, and expenditure.

Shared-Risk Relationships and Incentive-Based Relationships

One example of the strategic approach involves making outsourcing interaction either a shared-risk relationship or an incentive-based relationship. The outsourcing vendor presented with a lead compound must do the following: identify how best to formulate it, recognize the most stable form, determine how to scale up production, run preclinical and clinical programs, and guide development through to regulatory approval. The sponsoring company will commit this project to the outsourcing vendor as long as the compound remains viable. If the vendor can shepherd the novel compound through the development process to the agreed-upon accelerated milestones, it will be offered a reward. For example, if compressing the development timeline leads to $100 million in savings and recovered opportunity costs, the outsourcing vendor might be offered a bonus equivalent to 10% of that amount. Strategic outsourcing of this kind provides incentive for the vendor to identify efficiencies along the entire product development timeline. In other cases, the outsourcing firm may be responsible for all manufacturing and supply chain management of a sponsoring company's compound, ensuring that preclinical and clinical studies for various indications are adequately supplied, while avoiding oversupply.

Strategic outsourcing exemplifies a "big picture" view of the outsourcing relationship. Rather than focusing on tactical requirements that may change with the ebb and flow of product development, the strategic relationship motivates the outsourcing vendor to realize efficiencies along a much larger segment of the research and development value chain.

Looking from the Inside Out

Perspectives on the value of strategic outsourcing can vary widely within a sponsoring company. Mid-level managers may have different concerns than executives have. For example, mid-level managers tend to outsource tactically; often, they do so because they are experiencing temporary shortfalls in capacity and need to augment their in-house efforts. These individuals may avoid long-term strategic approaches, especially if they perceive these approaches as threats to their roles in the company. A procurement person typically is driven to find the best price for a service and might not have a strategic view of the overall time- and cost-savings of outsourcing. A vice president of development, a CEO, or a CFO, on the other hand, often will have a better understanding of the objective of getting a compound through the approval process and to market as quickly and economically as possible. If an outsourcing vendor demonstrates a way to get the product to market six months faster, but with a 10% higher expense, the time saved probably more than compensates for the added upfront expense.

To ensure a successful outsourcing relationship with various interests within an organization, two or three external consultants might work closely with the company, perhaps joining the internal project team. Having an internal champion within the sponsoring company can be crucial to success. This champion can serve as a liaison among consultants, the vendor, and the company.

The sponsoring company also must understand that although integrated services provided by a single outsourcing partner may be more expensive than services "cherry picked" from multiple vendors, the upfront investment will probably deliver greater returns downstream (for example, by bringing the product to Phase 1 and beyond more quickly and economically). In drug development, time is typically more important than money. Speed, flexibility, expertise, and innovation have their own currencies, and these must be weighed against costs.

Consolidating Outsourcing Relationships

The trend in the industry today has been for pharmaceutical and biotechnology companies to consolidate outsourcing among fewer vendors—a trend that offers several key advantages. By consolidating outsourcing strategies around the full development of a compound, small- to mid-size biotechnology and small molecule companies can focus on their core competency: the discovery process. An experienced consultant, who can manage manufacturing through preclinical and clinical development using a limited number of external vendors, is able to build a repertoire of knowledge and experience around the compound. Even for a company with in-house manufacturing and supply chain capability, outsourcing the entire development of a compound enables a vendor to help the sponsoring company realize gains in efficiency, cost savings, and timeline management—greater gains than if the vendor had been assigned only pieces of the project. Working with fewer vendors also helps minimize the time-consuming task of transferring knowledge among multiple vendors.

Continued consolidation of the pharmaceutical market will present challenges to contract service organizations. In recent years, the demand for manufacturing and development has fluctuated between feast and famine. Going forward, it is of paramount importance that each vendor develop a portfolio of projects to spread its own risk. In the past, vendor portfolio diversification was difficult to achieve. Now, however, the projected increase in the number of drugs moving toward commercialization suggests that the biopharmaceutical outsourcing market will stabilize and grow. Smart vendors that provide a suite of services, from manufacturing through clinical development, will survive consolidation, build a diverse portfolio of clients and projects, and establish a rich pool of knowledge and expertise.

Outsourcing can Facilitate Growth

The value proposition of outsourcing has not only caught the attention of the pharmaceutical and biotechnology sector, but of the investment community as well. Investors have become more savvy about corporate evolution and about the role of outsourcing in leveraging and protecting core competencies. They recognize that as nascent companies, staffed with a handful of very bright discovery scientists, approach milestones requiring increased production of drugs and delivery of clinical results, the mere act of investing in internal development skills can be daunting and disruptive to an organization focused on new drug discovery. For emerging companies that need to respond rapidly to pipeline needs, to mitigate risk, and to focus on discovery, outsourcing development to consulting groups and service organizations has become a logical move.

Many pharmaceutical and biological products originate from truly innovative discovery-focused companies with little internal development expertise. External consultants with broad hands-on drug development experience, and contract service organizations with full suites of drug development services, will play a central role in managing the projected expansion and commercialization of biopharmaceutical products over the next ten years.

William Kerns, DVM, is managing director at Aptuit Consulting, Lexington, MA, 978.456.9975, bill.kerns@aptuit.com

References

1. Big pharma turns to biologics for growth to 2010. London: Datamonitor; 2006.

2. Langer ES, editor. Advances in large-scale biopharmaceutical manufacturing and scale-up production. Washington, DC: American Society for Microbiology and the Institute for Science and Technology Management; 2004.