By Joseph Fetterman, EVP - Colliers International Life Sciences Practice Group
Considerations for Biotechs at Drug Manufacturing Decision Crossroads
Over the last decade, the discoveries and ensuing results from revolutionary cell and gene therapy research have led to the rapid growth of biotech companies taking these immunotherapy treatments into early-stage development and clinical trials. Significant capital has been raised to support these startups that have spun out of the institutional research environment and into the clinical development process. In the life cycle of these companies, they are inevitably faced with a critical operational decision that will significantly shape their future and may determine the success or failure of the enterprise. The decision: whether to manufacture in-house or outsource to a third-party contract development and manufacturing organization (CDMO).
This decision point comes at different times for different companies but typically will occur either in advance of one of the clinical trial phases or upon FDA approval during the transition from trials to commercial-scale manufacturing. There is no universal “right decision” as each company’s decision will be viewed in the context of its product/therapy type, requirement for control of intellectual property, available capital, ability to raise additional capital, competing requirements for capital, timetable for delivery, in-house capabilities and business strategy.
This paper addresses five considerations that should be carefully explored when these pre-clinical and clinical drug development companies make their manufacturing decision. These considerations are control, cost/available capital, time to market, leverage, and business/monetization strategy.
The decision to manufacture biological materials in-house ensures complete control over the process and intellectual property (IP) associated with the therapy. This can be very attractive to early-stage companies with innovative processes or therapies that have been developed in the lab by founders and their research staff. Manufacturing its own therapies may allow a pre-clinical and/or clinical drug development company to eliminate production quality risk by conforming to established internal quality standards and testing protocols and mitigate performance risk by prioritizing activities and staffing to achieve critical milestone dates. In addition, manufacturing in-house can ensure an element of focus and attention to the scientific and schedule priorities of the development company itself.
The process of scaling operations for clinical trials and commercialization typically requires the addition of an experienced head of manufacturing and other manufacturing staff members to oversee and conduct daily operations. The trade-off here is whether the additional level of control is worth the time, effort and cost associated with recruiting, hiring, training and retaining the required staff to operate a manufacturing facility when CDMOs already have professional staff in place. If a synergistic relationship exists between the companies, the additional benefits a CDMO can offer pre-clinical and clinical drug development companies include scalability, speed to market, access to technical expertise without overhead costs and potential cost efficiencies, depending on the size and scale of the CDMO’s batch operations. In most cases, outsourcing clinical and/or commercial activities to a CDMO still requires hiring a senior resource to manage the external manufacturing process and schedule.
- Cost/Available Capital
For companies that elect to manufacture in-house, the costs associated with recruiting, hiring, training and retaining qualified staff are only part of the equation. In addition, there is the cost of leasing or owning and outfitting a manufacturing facility to produce the new therapy. The cost of leasing manufacturing space runs from $16–$80/SF NNN annually depending on the location, building condition and landlord’s contribution to tenant’s improvements. Add to that another $5–$15/SF annually for real estate taxes and operating expense to determine the total occupancy cost obligation. Further, the cost to design, build and validate manufacturing space typically runs from $300–$1000/SF depending on the requirements and existing conditions of a building, including mechanical, electrical and plumbing systems, interstitial space and other infrastructure required for manufacturing operations. Landlord’s contribution to this cost will vary by Landlord and geography but will range between $50/SF and $125/SF.
There are two fundamental considerations related to cost that factor a company’s decision to outsource:
1) The initial and ongoing cost of investments in facilities, staff and distribution vs. long-term production and distribution cost savings when compared to outsourcing; and
2) Realistic assessment of the availability of capital.
To adequately evaluate the initial investment cost vs. operating savings, a detailed net present value analysis should be performed over a pre-determined production period to assess whether there are sufficient savings or other positive considerations to justify the cost and energy expended to retain control over manufacturing. Each company considering this decision will need to factor applicable considerations into the economic analysis, including operational variables like proximity to staff scientists or proximity to patient base, among others.
The availability of capital assessment is a simple analysis of the amount of funding on hand and the potential for and timing of additional capital raised to support competing demands for capital, including clinical trials, ongoing research related to new product pipeline and/or other investments that might compete for current and future capital readily available.
- Time to Market
Regardless of stage, pre-trial, clinical trial or post approval, time to market is a critical consideration for an emerging and promising new therapy. As a result, planning for production must begin early, with a detailed understanding of the overall process and the steps required to commence manufacturing operations, whether in a self-operated manufacturing facility or by outsourcing to a CDMO. Either scenario has a critical path, with potential challenges that can create significant delays if not managed properly.
- Manufacture In-House
One of the most important and time-consuming aspects of the process for creating a manufacturing facility is determining the geographic location and identifying potential sites or buildings. The location can be driven by proximity to founders or lead scientists and existing operations, skilled workforce, cost of living, potential economic incentives, access to transportation (airport, rail, or highway), target patient markets and numerous other considerations. The critical factors in selecting a specific building or development site include zoning to permit the proposed use, existing infrastructure suitable for the required manufacturing operation, flexibility of existing improvements to incorporate required modifications, lease or purchase cost, expansion potential and anticipated timetable from commencement of design to completion of validation. Further, in the case of a development site, local development approvals and in-place site improvements can significantly accelerate the overall timeline.
While a basis of design process can begin prior to actual building selection, once a building or site is selected, detailed design should begin immediately to enable permitting, pricing and construction to follow as soon as possible. Given the complex design and infrastructure of manufacturing and associated lab facilities, the design and build-out phase can take 18––36 months with up to 12 months of validation to follow. Utilization of pre-fabricated cleanrooms, pre-engineered systems or other componentry can compress the construction period, but it takes time to design and build a flexible and sophisticated facility for manufacturing.
The selection of the right CDMO is a critical first step in outsourcing manufacturing. Factors for consideration include, but are not limited to, experience and expertise with projects similar in size, scale, stage and science, location, batch size capability, distribution capability, unit production cost, ability to scale production, the process for developing, sharing and releasing the standard operating procedure (SOP) and protocols for cGMP adherence, U.S. and multi-national regulatory compliance expertise, qualifications of key staff, staff retention history, current and projected workload, and the ability to increase manufacturing capacity to meet contractual obligations.
Once a shortlist of preferred CDMOs is determined based on established criteria, it is important to determine that satisfactory protections can be secured for confidential IP, including Confidentiality and Non-Disclosure Agreements. The drug development company also needs to understand how open, collaborative and transparent the manufacturing process will be once located at the CDMO’s facility. Critical operating and cost criteria can be established with an RFP that defines the desired capabilities and establishes operating requirements including, but not limited to, unit or overall cost, delivery milestones, QA/QC standards, performance requirements and remedies for non-performance. Once responses are received and reviewed and a CDMO selection is made, the RFP can be converted to a Letter of Intent (LOI) for execution between the parties. By utilizing the executed LOI as a basis—supported by more detailed specifications for set-up and delivery milestones, quantities, costs, processes and other critical operating information—the parties can execute a Services Agreement establishing the terms and conditions of the working relationship between the parties, including IP ownership, payment structure, change order process and dispute resolution.
This overall process of vetting and selecting a CDMO, performing a detailed review of the production process requirements and documenting agreements between the parties can take up to 12 months depending on the extent of the initial survey of potential CDMOs, the availability of staff to focus on the process, the complexity of the required manufacturing scope and the duration of contractual negotiations. That duration may not include the suitability of the CDMO’s facility, nor the retrofit time required to adapt it to its process. After initially outsourcing to a CDMO, if a drug development company decides to bring manufacturing in-house or change CDMOs for strategic, cost or quality reasons, it may be more difficult and time consuming than anticipated. Starting over means restarting the time-to-market process with limited ability to transfer capabilities and processes developed while working with the initial CDMO.
Another factor shaping a pre-clinical or clinical drug development company’s in-house manufacture vs. outsource decision is best described as leverage. Each company will make a manufacturing decision that leverages its current situation and strategic objectives.
By utilizing the services of a CDMO, a drug development company with one or more therapies in the pipeline and finite access to capital will be able to leverage existing manufacturing facilities of a CDMO, expertise of its manufacturing and scientific staff, in-place distribution channels, FDA and global regulatory certifications and relationships. In addition, the drug development company can quickly scale up or down by leveraging the in-place resources of the CDMO. Finally, it can leverage its available capital for investing in R&D, pipeline and other investments rather than sinking precious funds in a manufacturing facility.
Other drug development companies with financial capacity or the capability of raising the capital required to develop a manufacturing facility, support ongoing R&D, product pipeline and other investments may leverage their capital by investing in a manufacturing facility that eliminates the operating risks associated with reliance on a third-party CDMO. They will be developing and operating a manufacturing facility designed specifically to suit their manufacturing process. In addition, particularly if they intend to manufacture multiple therapies, they will have assembled internal manufacturing expertise and the capability to expand their manufacturing operations to support additional pipeline therapies or acquired therapies at various stages of development. The initial investment in a leased or owned manufacturing facility and the commitment to manufacturing personnel can be leveraged to create a vertically integrated biotech company capable of all phases of development from initial R&D to commercial-scale manufacturing.
- Business/Monetization Strategy
Perhaps as much as any other factor, the business and monetization strategy of the company’s founders, leadership and board, investors, venture capital and private equity partners will shape the manufacturing decision. If the company’s strategy is to incubate and develop a promising therapy utilizing a small group of researchers with the goal of licensing the therapy or selling to a larger scale drug development company, then the development of batches for trials or early commercial-scale distribution will likely be outsourced to a CDMO. This allows the company to achieve the milestones necessary to facilitate licensing or sale without a considerable investment in staff and facilities that would otherwise divert funds from important research activities.
Alternatively, if the company’s strategy is to take a promising therapy through trials and commercialization with the intent to grow a stand-alone, vertically integrated drug development company, utilizing a CDMO would be less integral to its overall plan. A CDMO could still create value in this scenario, if the funding or timing for identifying, constructing and staffing an owned or leased manufacturing facility could not support important delivery milestones. While the CDMO supports its immediate production needs, the drug development company could obtain the necessary funding, secure and build-out a manufacturing facility, and recruit the necessary staff to run manufacturing operations. Utilization of a CDMO in this way allows a company to bridge a funding or timing gap while continuing to realize the strategy of becoming a full-service research, development and commercial manufacturing drug company.
In summary, we reviewed five considerations that will shape the decision of pre-clinical and clinical drug development companies to manufacture in-house or outsource manufacturing to a CDMO. These considerations are Control, Cost/Available Capital, Time to Market, Leverage and Business/Monetization Strategy.
Ultimately, there is no universal “right” answer. Each drug development company must evaluate these five considerations in the context of its specific situation to determine the right approach to manufacturing. It is also quite possible the right solution today might not always be the right solution, based on the changing circumstances in a company’s situation, and a re-evaluation of these five considerations may be required.
The advice of qualified professionals who specialize in assisting life sciences companies, including process engineers/architects, real estate advisors, specialty construction firms, qualification companies, economic incentives professionals, accountants and attorneys, can be invaluable in assisting pre-clinical and clinical drug development companies through this evaluation process. Their prior experience navigating this process with their clients, having experienced first-hand many of the challenges which may be encountered, offers drug development companies expertise in determining the best course of action for its manufacturing strategy. While neither approach to scaling manufacturing for clinical trials or commercial production is without challenges, those challenges are easier to navigate knowing the decision was made based on a careful analysis of the key considerations, with the guidance of a team of experienced advisors.
Joseph Fetterman is a member of Colliers International Life Sciences Practice Group. Working together with Michael Brown and Clifford Brechner, our team advises pre-clinical, clinical and midsized drug development companies with their real estate and facilities requirements at critical transitions, including initial commercial research and development, clinical trial production, commercial-scale manufacturing, facility disposition and lease restructuring.