By Cliff Mintz
The current financial crisis, increasing global competition, and near patent expiry of several multibillion dollar drugs is fundamentally reshaping the pharmaceutical industry. As consolidation in the industry continues through merger and acquisitions, companies are being forced to examine new strategies to cut costs and improve efficiencies to adapt to new financial realities. To that end, pharmaceutical companies have begun to outsource greater percentages of their drug development and commercial manufacturing operations to contract manufacturing organizations (CMOs). As this new trend continues, pharmaceutical companies will become increasingly reliant on CMOs to help to develop and bring new medicines to market.
To gain a better understanding of the impact the changing pharmaceutical industry is having on the continuing evolution of CMOs, Life Science Leader conducted a roundtable discussion with CMO executives. The discussion focused on the economic, operational, and tactical challenges CMOs will face as the pharmaceutical industry reshapes itself.
The panel included: Chris Calhoun, president of Norwich Pharmaceuticals; William Philip (Phil) Hodges, president and founder of Metrics; Phillip Meeks, CEO of AzoPharma; Marcelo Morales, CEO of Hollister Stier; Alan Rubino, president and CEO of Akrimax; Timothy Tyson, executive chairman and CEO of Aptuit; Wesley Wheeler, CEO of Patheon; and Richard Yarwood, group president of sterile technologies for Catalent.
Life Science Leader (LSL): What effect has the economic downturn had on the CMO industry?
Phillip Meeks of AzoPharma: There has been a slowdown in the CMO industry for the past year. I expect there will be more consolidation and increasing pressure to improve efficiencies and cut costs. Consolidation will result in leaner and stronger CMOs that can deliver quality products at lower costs.
Marcelo Morales of Hollister Stier: The financial crisis is reshaping the pharmaceutical and CMO industries. There are fewer products in company pipelines and excess manufacturing capacity worldwide. This is forcing CMOs to look at ways to bring innovation to the manufacturing process, cut cost, improve efficiencies, and still maintain high regulatory and quality standards. This is not a temporary but a permanent change in the way we do business; I expect this trend to continue even after the economy recovers.
Alan Rubino of Akrimax: It’s forcing pharmaceutical companies to carefully reexamine their manufacturing strategies. Many companies are abandoning old, antiquated facilities with poor regulatory compliance records and are increasingly turning to contract manufacturers for a variety of services. I expect to see a 40% to 60% increase in business over the next few years as pharma increases its reliance on CMOs as a cost-effective, regulatory-compliant manufacturing alternative.
Wesley Wheeler of Patheon: The pharmaceutical supply chain has slowed down, and business has been off at most CMOs. Pharmaceutical companies are closely watching cash flow, trying to improve efficiencies and cut costs. The slowdown in the CMO sector is temporary, and business will improve as the economy begins to right itself.
LSL: The contract manufacturing business is extremely competitive. What must a CMO do to be competitive in this industry?
Phil Hodges of Metrics: A CMO must be able to establish close working relationships and grow with the needs of its clients. A strong record of regulatory compliance, a focus on quality, and meeting project timelines for deliverables is essential.
Tim Tyson of Aptuit: You have to offer innovation and continuous improvement with an emphasis on regulatory compliance and quality. This enables you to establish long-term strategic partnerships with clients, which is critical in this business if you want to be successful.
Richard Yarwood of Catalent: The proven ability of an outsourcing provider to enter into successful partnerships with clients is vital. A strong regulatory record, excellent project management, open channels of communication, and an ongoing commitment to quality are essential to making a partnership work.
Meeks: Service is king! A successful CMO must provide its clients with outstanding customer service and be able to deliver regulatory-compliant products in a timely fashion.
LSL: When considering a CMO for outsourcing manufacturing, how important is its regulatory record?
Chris Calhoun of Norwich: The regulatory record of a CMO is extremely critical and should be the first thing a client looks at. Noncompliance represents the largest risk for supply chain interruption and may have serious financial consequences — especially for small companies that can’t afford to retain multiple suppliers for their products
Rubino: The pharmaceutical industry is the most highly regulated business in the world. A CMO’s regulatory record must be as good as or even better than its pharmaceutical clients if it wants to stay in business. There is absolutely no compromise when it comes to quality standards and regulatory compliance.
Yarwood: A long history of regulatory compliance and a strong commitment to quality are absolutely essential. Regulatory requirements are becoming more stringent each year. An outsourcing provider must always be looking for new tools and innovative approaches to ensure quality and regulatory compliance.
LSL: Should the size of a CMO matter to prospective clients?
Morales: I think size does matter, as does the total scale of service offerings — especially for commercial manufacturing of a product that has a global distribution. Having multiple manufacturing facilities in different regions of the world provides a CMO with flexibility and the ability to scale capacity to meet demand. Size becomes less critical for noncommercial manufacturing activities during preclinical and clinical development of most products.
Tyson: Yes and no. It depends on whether or not the CMO has the resources and capacity to meet its customer’s demands. In the end, a commitment to quality is more important than size but sometimes size does matter from an operational standpoint.
Yarwood: Size is important, because it gives customers a sense of security and confidence, both from a financial and customer-service standpoint. And diversification combined with size is even better. For example, larger, more geographically or customer-diversified organizations are usually better equipped to weather financial downturns as compared with smaller, less well-financed companies that often are significantly dependent upon one product, customer, or market to stay afloat. Also, a larger outsourcing provider with multiple, globally located manufacturing facilities and fewer resource limitations may be able to work with tighter, more aggressive time lines.
LSL: Is the location of a facility or proximity of a client to a CMO important?
Rubino: Some of my clients have told me that it is extremely difficult and challenging to manage overseas projects. Although many companies have experimented with offshoring manufacturing, there is a growing movement toward “proximity” in the industry. CMOs with large operations and a global presence will likely benefit from it.
Tyson: Sometimes, but generally no. In general, CMOs with a large global footprint have enough expertise to address most issues even when they are not co-located with a client.
Wheeler: Location shouldn’t matter but it does. A short plane or car ride — rather than a long, time-consuming trip to a CMO — can work wonders when addressing serious problems or ones that require immediate attention.
LSL: What are some common mistakes or misassumptions that clients make when they decide to outsource manufacturing?
Calhoun: There is a troubling trend emerging in the industry where clients are relying on information gathered on the Internet to solicit quotes from CMOs. While there is value in competitive pricing practices, selecting a CMO based on the lowest quote — without conducting a thorough, comprehensive quality audit or technical capability review — substantially increases supply chain risk for a client, destroying the value of a lower price.
Tyson: Looking for the cheapest cost supplier rather than focusing on quality and regulatory compliance history.
Wheeler: Customers frequently compare their internal manufacturing costs to ours when negotiating service agreements. This isn’t particularly instructive because their cost structure is almost always lower than ours. Prospective customers need to understand that cost isn’t the only factor to consider when outsourcing manufacturing. Regulatory compliance and a commitment to quality will trump minor cost savings every time.
Yarwood: Sometimes, clients don’t provide all of the necessary information to successfully manufacture a product. This is a serious problem that can often lead to manufacturing delays and increased costs.
LSL: Can you speak to the importance of “first time right” for your customers?
Hodges: This is a relatively small industry that is largely built on reputations and customer satisfaction. While it isn’t always possible to get it right the first time, repeatedly being unable to achieve this can destroy a CMO’s credibility and cause the business to fail.
Meeks: There is a lot of emphasis placed on the “first time right” concept in the CMO business. However, ultimately, “science happens,” and things can go wrong that lead to delays. The ability of a CMO to find solutions to manage these hiccups and still deliver product on time is what leads to customer satisfaction and repeat business.
Morales: “First time right” is very important in this business, both to us as well as to our clients. Beyond the financial impact due to production failures, the delays in product manufacturing can impact availability to patients and customers. The ability to get it right the first time is achieved through strict adherence to regulatory guidelines, outstanding project management, managing change control, and continuous improvement. In addition, it is important to ensure a culture of “quality built in” is followed throughout the organization. This can range from adherence to internal procedures through continuous training and performance management.
Rubino: “First time right” is a very important concept in the CMO business because failure to achieve this can be very costly. It isn’t always possible to get it right the first time, but CMOs must work toward this goal if they want to remain in business.
Tyson: This is a very critical concept, and successful CMOs are companies that cultivate a “first time right” attitude and culture at their facilities. This can be achieved through outstanding project management, good communication channels with clients, and lean six sigma strategies designed to improve efficiencies while managing costs.
LSL: Many pharmaceutical companies are offshoring or outsourcing manufacturing to companies overseas in an attempt to cut costs. What are your thoughts on this trend?
Calhoun: All business involves competition, and the CMO that offers a client the best value proposition is going to win the business — it doesn’t matter where in the world the company is located.
Hodges: It’s a long plane ride to Mumbai, India, and cultural differences between the United States and foreign manufacturers can cause problems. I don’t see much development and formulation work being outsourced overseas. However, many commercial manufacturers have either moved or are considering moving manufacturing offshore or to foreign countries — it’s the nature of this business.
Meeks: This may make sense for commercial manufacturing of an API or a finished product as long as product quality can be maintained. It will certainly help control costs and ought to be considered as a manufacturing option. However, many U.S. companies are reluctant to outsource preclinical development or clinical manufacturing to CMOs overseas mainly because of proprietary and intellectual property concerns that arise during the drug development process. Also, when given a choice, most pharmaceutical companies will almost always choose superior product quality and timely product delivery over cost.
Rubino: Offshoring is a fact of life these days. Most of the larger CMOs already have a global presence. I think high value and special pharmaceutical products will continue to be manufactured in the United States. In the future, a large percentage of commercial manufacturing will take place overseas because of the availability of a well-trained and lower cost foreign workforce.
LSL: Will the CMO industry look much different in 10 years than it does now?
Calhoun: Pharmaceutical companies are moving away from manufacturing their own products. This will expand the reliance on CMOs, which is positive for our industry, but this will also drive consolidation in the CMO industry. CMOs will need to broaden their services to deliver the breadth of services that these new “customers” of CMOs will need and expect.
Hodges: There will be consolidation in the industry, and companies will become leaner and more efficient. The future outlook for the CMO industry is bright. Product quality and timely delivery — not cost — will continue to be the main drivers of the CMO industry.
Meeks: There will be consolidation in the CMO industry — which is fragmented now — as pharmaceutical companies look for CMOs that offer one-stop-shopping capabilities and services. It is much easier to manage one CMO as compared with three or four during drug development. Pharmaceutical companies will continue to outsource greater percentages of their manufacturing operations during drug development as they increasingly focus on marketing, distribution, and sales of their products.
Morales: New technologies and discoveries will force more complexity to be transferred to CMOs. Pharmaceutical companies will become more reliant on CMOs for early discovery and preclinical development work. Speed to market will continue to be a pressure that will drive continuous improvement to cut costs. CMOs will continue to become an integral part of the pharmaceutical drug development process.
Yarwood: I think there will be fewer pharma companies and also fewer outsourcing providers 10 years from now. The remaining providers will be larger than most of the ones operating today. Consolidation in the industry will be driven by leveraging scale and continuous improvement in an attempt to drive down costs.