Can Pharma Build An Innovation Business Model For CMOs?

By Louis Garguilo, Chief Editor, Outsourced Pharma

The spirit of innovation — the zeitgeist of our times — permeates much of the biotechnology and pharmaceutical industries. But how about outsourcing, and specifically the drug development and manufacturing supply chain? Many pharma sponsors — those we already deem “innovators” — say they need more innovation from their contract development and manufacturing organizations (CMOs).

The trouble is, sponsor-provider relationships in development and manufacturing haven’t been set up to accommodate innovation. While there are exceptions, CMOs were founded less around innovation and more on rigorous controls and process replication. That’s what pharma has wanted. So now CMOs are leery of this new expectation — some say it’s a burden “pushed over the wall” and unto them. The CEO of a CMO said recently, “When you say Big Pharma has changed, I think it’s true. Pharma went from saying 'we must invent it here' to 'we can't invent a lot of it here. But you’ve got to help us with this change.'”

Dirk Redlich, Ph.D., VP of technical development R&D at Janssen Vaccines, understands that sentiment. “We just don’t have a better model for incentivizing all parties for what the industry is now talking about,” he says. “We’re still struggling with finding a model of innovation that fits together to unleash the next level of ideas.” He adds, “We are living in complex times, and this is not straightforward. But I see more openness on both sides to at least discuss it.”

Discussion is always a good place to start. Along with Redlich, Sesha Neervannan, senior VP of pharmaceutical development at Allergan, and Joanne Beck, EVP of pharmaceutical development and global manufacturing at Celgene, add to our conversation about driving more innovation and new technologies into partner and supplier networks. We’ll find out that, as we start turning the pages of calendar year 2017, we’ll also be moving through new modes of collaborative innovation in outsourcing.

A THIRD ENTITY OF INNOVATION

Redlich starts us out by describing the current landscape for development and manufacturing. Pharma, he says, typically starts with an internal development group that works out a process, begins scaling up the manufacturing process, and at some point asks, “OK, what’s our supply strategy — internal, external, or both?” If there is an outsourced component, the sponsor works diligently on defining specs and transferring a set process to a CMO. The focus is on ensuring that process is run exactly as described by the sponsor.

“But I’m wondering,” says Redlich, “whether today we shouldn’t, as a matter of course, invite partners in while we are still working out various possibilities. CMOs should be there discussing how to make the process more robust, maybe cheaper, and easier to implement later at the supplier’s facility. That’s something we haven’t fully tapped into: inviting CMOs in to create more value together.”

This sentiment has been traveling throughout pharma-dom. Unfortunately, as alluded to above, initial attempts have come off more as a transfer of responsibility to the CMOs than collaborations. “We can’t just decide to switch the burden onto the partner,” Redlich explains. “We can’t just say we expect you to innovate, to become more efficient.” He continues, “And what often happens anyway? CMOs come back to sponsors with ideas, and we have to admit it’s too late in the project to get ‘too creative.’ We have to come up with more than mandating, ‘Go forth and innovate.’”

The biggest challenge revolves around incentives. Innovation requires investment in human resources, time, capital, equipment, and facilities. “How do you pay for that? How do you incentivize, for example, a supplier to invest in a process efficiency increase, and how do you split the upside?” asks Redlich. “This needs to be figured out; otherwise, why would anybody invest the time and effort?”

What he suggests next takes this partnership for innovation — or value creation, as he’d rather call it — to a level I’d not heard before. He says when the sponsor’s product team fully engages with the CMO’s, and both are equally empowered early on, the two sides create “a third entity of innovation.”

“The thinking changes from ‘I’m company A, you’re company B,’ to combined thoughts on how to create value independent of our mother companies,” explains Redlich. “In essence, we create a separate body for product value-creation.” He calls this a “mentality shift,” from thoughts of maximizing the advantages of one company to focusing on creating value for the specific project alone. “That’s the way I personally think we grow our business and get real innovation in the future. Therefore, we must work toward a business model that allows for this mindset and then translates that into specific processes and systems, equipment and platforms, and the exchange of information and ideas.”

But what is that model?

BOUTIQUES MAY HAVE THE BEST BARGAINS

Neervannan agrees that evolving from the traditional model of fee-for-service to one of partnerships is key to the industry’s future. However, he doesn’t see a need to overthink this. “Shared innovation can be approached initially from a strict business sense,” he says. “You can ask if a quid-pro-quo approach works.” He then adds, “No one size fits all, so this model allows for an individualized approach, where the innovators are rewarded with payments for specific innovations. This can then evolve into an ongoing milestone approach, not unlike licensing deals we are familiar with and that are done frequently.” But there’s still that same caveat: “It does require, though, evolved thinking from both the sponsor companies and the service providers, specifically on how to estimate valuation and come to a mutually acceptable business agreement.”

I ask Neervannan if Allergan has been able to make the evolution in practice. “Yes, we’ve worked effectively with several vendors and partners on novel technologies. We don't apply innovation as a routine selection criteria for CMOs,” he further explains, “but it is an important part of our business, particularly where we rely solely on outsourcing. We are increasingly selective in looking for innovative partners, for example when difficult-to-synthesize molecules or unique formulation technologies are needed.”

Beck agrees building innovation models starts early and with clarifying the approach to outsourcing from within.

“We’re arriving at a balanced view,” she says of her company. First, she says, when there’s a straightforward project that’s easy to outsource, the current model works perfectly well. This is especially true for proven API or drug product manufacturing relationships. Second, says Beck, there are some needs so highly specialized that Celgene doesn’t have the full internal capability. “We approach this differently,” she says. “We look for a complement from ‘boutique’ CDMOs.” At the same time, “Celgene is also always looking at developing that internal capability for these highly specialized platforms, because often we want to develop IP.

“We’re trying to apply the right solution to each situation,” she continues. “However, there are a growing number of innovators out there that we’re interested in partnering with, and the shift has certainly been from, for example, toll manufacturing to long-term development partnerships with CMOs. I do believe most everyone is shifting more toward the CMO that’s an innovator or that has special technology — formulation technology being a good example to start with.”

But are there enough CMOs currently willing to invest the resources, funding, and efforts in a new partnership for shared innovation?

Neervannan has this take on the current situation. “I believe most large CMOs today are looking for big manufacturing contracts and not so interested in R&D work where more innovation is called for,” he says. “At the same time, we too are seeing more boutique companies — mostly in the U.S. and Western Europe — who thrive on this innovation model, and we increasingly seek them out.”

What’s then the model for this approach? “These relationships are dependent first on mutual trust and respect,” he says. “That starts with a big company like mine realizing we want the help from the outsourcing innovator community and taking responsibility for providing the appropriate incentives. We’ve started using the philosophy of ‘open innovation,’ a concept that taps innovation from anywhere on the globe, but more importantly provides clear rewards in exchange for solutions to problems. Ultimately, it comes down to recognition and reward.”

THE ADVENT OF INNOVATION

But what comes first, a preexisting innovator CMO or the request from sponsors that drives the innovation?

“A little bit of both,” says Neervannan. “Typically the CMOs already have the talent, so it comes down to a business agreement to tap that talent appropriately for innovative work. And we also target CMOs with unique technologies already in place that match our specific needs.”

Beck says one path to innovation for CMOs is via acquisition. She offers the example of Capsugel acquiring Bend Research to bring in innovative delivery and formulation technology. As she cites her example, I can quickly come up with other CMO-CMO examples, such as Catalent acquiring Pharmatek, predominantly for spray-drying technology, and India-based Piramal acquiring U.S. companies such as Coldstream Laboratories and Ash Stevens, with an eye for highpotency capabilities, among other reasons.

Specifically, Beck sites single-use technologies as a perfect example. “CMOs are picking up innovations that are available out there and introducing them into their facilities. This is very attractive to us, because then we’re not feeling like we are developing or manufacturing our products with decades-old technology.”

Redlich also mentioned single use as the innovation that has been most helpful at CMOs. “My area of activity is vaccines,” he says, “and I’d put it this way — sponsors and CMOs in the biopharmaceutical space have very similar interests here. Single-use equipment works for both sides. CMOs see in this case a clear financial rationale to get this technology into their facilities.”

While Redlich focuses on vaccines, Beck mentions the manufacture of oligonucleotides. She says the manufacturing technology is still immature, and echoing Neervannan’s comments above, she says Celgene actively seeks out boutique firms with specialized capabilities. “There are only so many companies that can manufacture oligonucleotides at large scale and cost-effectively,” she says.

Which raises this next question, and brings us back to the need for a business — mostly meaning financial — model for a co-innovation relationship. Does a company like Celgene, for example in the oligonucleotides space, decide to proactively assist a smaller service provider to continue to develop a desired technology?

Beck welcomes the question. “Yes, definitely,” she says enthusiastically. But her excitement is for the challenge as much as the opportunity. “This, though, is where you really need to be on the ball,” she says of sponsors, “because it now becomes a true partnership, where we leverage their specific technical expertise, and, for example, they leverage our quality systems. Many smaller outfits that we partner with early on won’t necessarily have the quality systems to grow into a larger or commercial CMO. We have to invest in them to help them grow.”

Going one step further, is there ever the situation where a pharma sponsor might turn to its more-established CMO partner and suggest they acquire a smaller, boutique CMO? “This is certainly not out of the question,” Beck replies. So, does she think the large CMOs acquire a smaller company because, for example, they are targeting Celgene’s pipeline? Is there a relationship between the sponsor and the CMO before they consider acquiring new technologies? In other words, how do CMOs know what innovation or technology to go after?

“I’ve seen a lot more CEOs and senior leaders from various CMOs — and I mean well beyond the Lonzas and the Boehringer Ingelheims — start to attend all the industry conferences, participate in leadership and industry technical meetings, present and copresent with their sponsors,” replies Beck. “Yes, I do think these relationships between CMOs and sponsors is motivating them to acquire or develop technology. Certainly, we discuss this with partners we’ve worked with for many years. Also, in this type of partnership, we will actively invest. We don’t necessarily want to own a facility and all this equipment; we want to be able to use it when we need it. I think that’s a big part of this ‘targeted innovation’ and new technology model that enables us to develop new drugs for patients, regardless of modality.”

DON'T INNOVATE; CREATE VALUE

Let’s return to Redlich’s defining of innovation as “value creation” and the deriving of new models for co-invention from this concept.

“When we are talking more about value creation, we can see various avenues,” he explains. “First, when someone says, ‘I can do it cheaper,’ what does that really mean? It may mean I can create flexibility in my production plans. We all know that forecasts change, sometimes significantly. How can a supplier anticipate this, be prepared to produce 20 instead of 10 metric tons? That is value creation — creating the flexibility to react to market needs.”

Redlich continues, “Price is only a dimension. In this case, it is defined as manufacturing flexibility. Both parties must consider implementing systems and processes that allow the CMO to be more flexible, to have a leaner change-control process, to be able to move from one product to another, maybe slip in another batch of something. That is value creation. Unfortunately, neither side seems to know yet how best to approach this. For me, single-use equipment is not an example of systems and processes, but of minimizing changeover times, of creating flexibility.”

Redlich believes that the fundamental question is not what should pharma expect from its suppliers in terms of innovation, but rather, “How do we design the processes to create opportunities on the supplier side?” “In a way,” he says, “there are no answers outside of the relationship. I mean that pharma must do more internally to create those opportunities for innovation. This is collaboration from early on by ensuring you think about processes in the sense that you are optimized for working with your partner.” His company has begun to “carefully strive to create processes early on that use lower volumes, or reduce investment costs, not only internally but also externally. We carefully think about whether these processes can be optimized for our partner’s multi-use facilities.”

THE INCESSANT INNOVATORS

Drug development and manufacturing — along with quality controls, precise replication, consistent and reliable delivery, and strict regulatory compliance — are also part intuition, inspiration, and innovation. And in fact our industry has always progressed by way of science and technologies newly minted from both the brains and brawn of talented men and women. This has manifested over centuries. Just recently we’ve seen breakthroughs in hepatitis treatments, ADCs (antibody-drug conjugates), new development platforms, single-use equipment, and continuous-flow manufacturing. In a sense, what we see today is pharma’s logical expansion of innovation potential to the external and extended supply chain.

That's what innovators do — incessantly look to raise the total real value of goods and services that can be produced for given inputs. Now the focus is squarely on the outsourcing business models needed to accelerate and enhance these potentialities. Who among us doubts that our industry will succeed in coming together to build these new models for co-innovation and value creation? With industry experts like Redlich, Neervannan and Beck, it’s getting harder to bet against the march of rapid progress.