Regarding the trends identified by the biopharma executives interviewed for this discussion on the state and future of outsourcing, I’m reminded of the tongue-in-cheek reply as to why people — and organizations — make some of the decisions they do: “Because we can.” Perhaps a better way to say that is, because they have become enabled. In our case, we are witnessing decisions to create new biotech models for drug development and new approaches to externalization at pharmaceutical companies, because outsourcing has become a multifaceted and trustworthy enabler. Outsourcing today de-risks creation through externalization. Biopharma executives are now empowered to formulate these new business and operating models to pursue both financial and scientific objectives.
So as we look to 2018, let’s start with Discordia’s discourse on variabilization and then circle back to Dunsire’s dissection of the continuing virtualization of the biotech model. We’ll learn that these trends dovetail and, via more intimate external partnerships, lead us to new vistas for drug development and manufacturing outsourcing.
VARIOUS WAYS TO VARIABILIZE
“In the pursuit of greater efficiencies throughout the pharmaceutical industry and a concerted push for earnings growth, we are likely to see two major trends in 2018,” says Discordia. “Pharma is focusing on increased variabilization of operational costs, and in a related development, we should see a continued consolidation and simplification of each pharma’s respective supply networks.” In other words, more outsourcing with less complexity. How will that work?
First, the focus on increasing variabilization starts with what Discordia says is a “hard and holistic look at all the constructs within a respective pharma company, in order to fully reconcile whether each serves as a core function that the company has no option but to possess.” An anticipated output of these in-depth investigations could be an even higher reliance on contract service providers of all kinds. Executives at drug companies are becoming better at discerning their core needs and recognizing the opportunities to transfer those costs to partners. These enhanced investigations have occurred independently across the industry over the past years, says Discordia, and also have added to the gradual expansion and maturation of the CDMO industry. That expansion has now reached critical mass, pushing the industry to take actions that will ensure it can handle the ever-increasing project load. “We’ve seen this maturation manifest itself in capabilities, quality systems, expanded service offerings, and a higher level of sophistication overall,” Discordia explains. “It’s brought our industry to a tipping point, where these now highly competent and reliable CDMOs rival, and in some cases, outpace capabilities within drug owners’ operations.”
This tipping point has emboldened Big Pharma to selectively sell off manufacturing assets to CDMOs and then enter into strategic, long-term supply and product-management agreements with the purchasers. The CDMO, “By nature of its theoretic ability to more efficiently fill the facility with projects — and thus improving the utilization factor — can supply product back to the seller at a reduced cost.” The resultant product-cost benefit is in addition to the more fundamental fact that this act of variabilization removes all the costs of owning and managing facilities from Big Pharma’s balance sheets.
At the same time, pharma has worked to streamline supply chains and thereby reduce overall internal operational costs of product and business management. Discordia believes this will likely cause “the continuation of supplier-selection strategies focused on extracting greater value from a fewer number of strategic partnerships.” Key to achieving these efficiencies is up-front, internal engagement and close collaboration between an organization’s operations and sourcing functions. Discordia notes, “The operations and procurement functions at BMS work hand-in-glove to ensure we have aligned strategies and streamlined internal processes.”
Furthermore, Discordia says this enlarged strategy of streamlining and externalizing more assets and fixed costs becomes part of a rigorous “total value of ownership” approach. It’s an all-encompassing strategy “to truly reduce operational costs, while at the same time providing greater autonomy to suppliers — and therefore holding them to greater accountability — and allowing them to generate additional value.” All of this seems consistent with what CMOs say they want: more freedom to operate, shared responsibility, and higher profitability from high-value and dedicated customers. Both sides should be able to reduce their overall business complexity and improve outcomes.
Discordia does, though, sound a single warning: “Continuation of these trends over years could lead to a large polarization in the demographics of CDMOs, as Darwinian M&A continues to select the stronger and more valuable suppliers and leads the others into minority positions or even forced exits.” But for the most part, he sees these trends as positive and growing. He notes the recent $7.2 billion purchase of Patheon by Thermo Fisher Scientific, “creating the largest and most end-to-end CDMO currently in the industry,” as an example of an M&A that could open up more variabilization opportunities for drug owners.
A VIRTUALIZATION VIRTUOSO
Pharma outsourcing of manufacturing dates back decades, but the engine that propelled us onto this high-speed autobahn of externalization was really the first decade of the 2000s. That’s when, among other developments, drug patent expiries (our so-proclaimed “patent cliff”), began to lead Big Pharma to fundamental structural reviews.
First among the changes at larger pharma companies was a comprehensive transference from internal to external discovery and development models, as well as an ever-increasing focus on the manufacturing of API and drug product. As important — and perhaps the real revolution — was the confluence of these economic and business realities, with breakthrough scientific advancements that also burst onto the scene (think ADCs, cell, gene, and immunotherapies). This helped create an invigorated external-support industry, which early-stage companies could also readily tap into. So where our industry used to have “biotechs,” we now spawn “startups,” predominantly based on the highest possible degree of virtualization — the fewer employees and hard assets, the better.
Dunsire sees these trends strengthening. “There will be more virtualization, well beyond today’s established manufacturing partnerships or certain pillars in drug research and development,” she says. “Perhaps one way this will advance is with experienced drug developers from industry taking positions at CROs, enabling drug sponsors not only to outsource the execution of clinical trials but also to receive a full-service solution. This could include the opportunity for drug sponsors to partner with clinicians with a tremendous amount of drug development experience in clinical strategy. Until now, that expertise and reliance was something that remained within the drug companies themselves – for good reason. But in the future I see a bigger offering from the CROs to inexperienced drug developers.”
Dunsire does add a qualifier: “This will still require additional changes to attitudes and business models, particularly regarding the partnerships to spur the growth capabilities at the contract partners.” These new kinds of partnerships, she says, are key to continuing the overall trend of virtualization of drug developers. “When I think about where I currently stand in XTuit — an early-stage company — I know the partnership aspect must grow up as we advance as a company and as our pipeline advances. Today it should become a hand-in-glove relationship starting early in the drug development phase. Our CDMOs are feeding us ideas on how our process is working and how to obtain a higher yield and more efficiencies.”
Moreover, Dunsire says early-stage companies are not only more virtual than ever before because of this collaboration, but also they can remain that way for a longer period of time. “This allows for the formation and expansion of new types of companies, and it allows them to reach a critical mass before they need to internalize particular functions. Yes, there’s always going to be a need to add some professionals within the drug company, but today their function is managing the selection of external suppliers to forward the work and performing specific troubleshooting.” With process chemistry, for example, Dunsire says a company can remain, well, virtually virtual, “while the critical internal element is having a person with sufficient experience and expertise to understand how to operate with those contract partners.”
Of course it all starts with selecting the best partners, those who have the right teams in place, but also whose business models mesh with the virtual drug developer. “Does the CDMO actually have the ability to work with smaller companies on process development?” is an example of a fundamental question, says Dunsire. “Because still today, certainly not every supplier is willing to work with virtual companies. Those that do are betting — and they’re right — that if you work well together and establish the process to get to clinical supply and ultimately commercial, that same partner will have been, and continue to be, your supplier.”
THE FINAL VISION
We started our discussion talking of enablers. But as mentioned directly above, there may not always be willing partners waiting in the wings. Sometimes — for example with new technologies and platforms — enablers don’t yet exist. Therefore, Dunsire says, for the modern-day startup, even at the stage of precompany formation, the scientists, entrepreneurs, initial board members, and financial backers need to determine whether, in fact, partners are out there. “Folks who have been in the CAR-T or mRNA (messenger RNA) space, like Arie Belldegrun of Kite or Stephane Bancel of Moderna, have told me they decided that manufacturing internally was a critical element to be successful,” she explains. “There simply were not established processes or experienced service providers to work with.” For that type of leading-edge technology, “They realized building and manufacturing was a strategic component to actualize the opportunity for these technologies to become therapies.” Another example she provides is the onset of the antibody-technology companies some years ago. “Companies that adopted that approach to antibody therapeutics had to grow most of the expertise in-house,” recalls Dunsire. “So even today, sometimes innovators will have to build out the organization themselves.” However, she quickly adds, “Sooner or later, the service providers will come along for the next generations of virtual companies in these fields.”
So as with all trends, we can bet on experiencing certain adoption cycles, new hurdles and opportunities, and perhaps some missteps along with mitigating circumstances. Don’t forget Discordia’s warning that too much M&A might grow service providers to sizes where they are no longer interested in assisting the new startups and virtuals and snuff out some that are. Nonetheless, it seems certain both virtualization and variabilization will continue to move forward. In fact, when you think about it, isn’t variabilization simply a form of Big Pharma virtualization? Discordia sums it up for both big and small companies. “These trends have the potential to transform the nature of competitive advantage by shifting the emphasis to competing on agility, value-chain orchestration, and risk management.” Key, then, to both variabilization and virtualization, and to big and small companies, is unleashing the creativity enabled by new outsourcing partnerships in drug discovery, development, and manufacturing.