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Increasing Efficiency and Flexibility through Pharmaceutical Contract Manufacturing The pharmaceutical companies are constantly revising their business strategy to address multiple challenges faced by them and to compete in the dynamic pharmaceutical market. Some strategies that companies have adopted are in-licensing, outsourcing, improving pipeline, reducing the cost of drug discovery, development, manufacturing and sales & marketing. In addition to outsourcing other non-core business functions, companies are outsourcing their manufacturing operations (“Contract Manufacturing”) as part of their “virtual” operations model. This approach provides them an efficient and flexible model, without making any large capital investments. This also allows companies to invest and focus their resources on their core competencies to generate more value. This paper discusses various approaches that drive the depth and breadth of contract manufacturing in a pharmaceutical company and how to adopt the “right” outsourcing model for the company.
About the Author Sanjeev Sachdeva Sanjeev Sachdeva has been working in the IT industry for the past 17 years and has work in different verticals such as Life Sciences and Healthcare, Transportation and Retail. Sanjeev has experience in driving large IT business transformation engagements. Additionally, he has experience in managing various consulting assignments. Sanjeev is also vigorously involved in multiple strategic initiatives for TCS’ Life Sciences vertical.
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Table of Contents 1.
Pharmaceutical Industry Market
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2.
External Collaboration Models
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3.
Drivers for Contract Manufacturing
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4.
Manufacturing Strategies
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5.
Factors Considered for Outsourcing Strategy
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6.
Partnership Operating Model
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7.
Challenges in Outsourcing
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8.
Industry Outsourcing Trends and Observations
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9.
Summary
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10.
References
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Pharmaceutical Industry Market Pharmaceutical industry’s challenges are patent expiry and thin pipeline, reducing drug approvals, declining R&D productivity, stringent regulations, increasing development costs, reducing periods of exclusivity, increasing generic penetration and others. Additional and increasing pressure on pharmaceutical company over drug safety (because of updated regulations) has increased the clinical trial period. This led to higher development costs and increased time-to-market. Hence, the pharmaceutical companies are looking for various opportunities to reduce cost, improve efficiencies, improve pipeline and reduce the time-to-market. To reduce cost, the pharmaceutical companies are adopting different strategies like outsourcing (in areas like research, manufacturing, clinical trial management and other functions), restructuring R&D models, moving part of business functions to low cost countries (like China, India, Puerto Rico), adopting efficient sales and marketing functions (to have more impact with less sales force) and other related initiatives. A competent strategy that the pharmaceutical companies are adopting is “virtual” execution delivery model as this model allows companies to focus on their core-competencies and leverage others partner’s capabilities. In this model, companies use in-house resources for some functions of their value chain and collaborate with external partners for other functions. Apart from outsourcing non-core support services (for example, IT, F&A and others), research manufacturing, sales and marketing, clinical trial/development activities are also considered for outsourcing through this model.
External Collaboration Models Different collaboration models are successfully used to reduce cost and increase pipeline and sales. Some collaboration models adopted by the companies are as follows: n
Outsource: In this model, some functions are outsourced to vendors. Earlier, only non-core activities were outsourced, however, now core functions from value-chain (For example, manufacturing, clinical research, clinical trial management, marketing and so on) are also outsourced.
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In-license: In this model, the ownership to develop and/or manufacture products of the company is transferred to another company. Pharmaceutical companies adopt in-licensing strategy to close the gaps existing in their capabilities and requirements. This allows pharmaceutical companies to leverage its core competency and to develop/market the product in shorter duration.
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Out-license: In this model, the ownership to develop and/or manufacture the products of the company is sold to another company. In out-license strategy, companies analyze limitation of the product. The company adopts strategies to maximize returns in spite of the constraints.
Among these collaboration models, outsourcing model is adopted in the manufacturing business function, where either part or complete manufacturing operations is outsourced to vendor on contract (Contract Manufacturing).
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Drivers for Contract Manufacturing Drug manufacturing represents typically 25-30% of total cost of producing drug and so achieving the agility in production process has become essential for pharmaceutical companies, which are expected to align their supply chains with constant shift in global demand. Pharmaceutical companies are increasingly adopting the “virtual” model and outsourcing their manufacturing functions to optimize manufacturing cost and focus more on core activities like research and marketing. The key objectives and drivers for outsourcing the manufacturing functions are as follows: n
Improving cost
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Better capacity management with flexibility to handle business needs
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Effectively utilizing internal core expertise and other resources (including financial) and more opportunity to focus on core competencies
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Quick time-to-market
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Leveraging external expertise (and addressing the challenge of non-availability of internal resources and capabilities)
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Investing less capital (and leveraging financial resource in other core activities)
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Leveraging vendor’s innovative, state-of-the-art process and production technologies to support the rapid technical transfer of products from R&D to full scale commercial manufacturing.
Contract manufacturing approach is adopted for improving cost, process and capabilities as Contract Manufacturing Organizations (CMO) can leverage their skills and competencies to improve process, provide volume discounts on raw material and deploy units in low cost countries. In case of small companies, the knowledge and experience of CMO helps to deploy the best practices and leverage experiences in manufacturing their products. Also CMO provides a range of services like pre-clinical development, commercial batch manufacturing, active manufacturing, packaging and other related services. CMO employs latest manufacturing facilities and techniques and has the capability to understand and deploy multiple regulatory requirements. CMO brings maturity while integrating with customer process and system. To provide efficient and integrated services, CMO integrates with supply chain activities of the pharmaceutical companies.
Manufacturing Strategies During the complete development cycle of the drug, the manufacturing’s requirements come at multiple stages. In addition to manufacturing of drug at the commercial scale, there is also a need during the preclinical supplies as well as during the clinical trial supplies (but on a smaller scale). So companies adopt the different manufacturing strategies for manufacturing outsourcing based on the stage of drug
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development, as the objective and business needs (such as volume, cost, time) are different in different stages of drug development. In addition to this, companies also considers various others factors for outsourcing decision, such as products related risks, internal competencies & capabilities, cost of operations and others. Some manufacturing functions are completely outsourced, while some are partly outsourced. If specific manufacturing function(s) are not outsourced, then for any additional capacity need, or for any new drug manufacturing need, the company needs to either expand the existing facilities, or acquire the additional facilities. The key manufacturing strategies considered by companies are as follows: n
Complete In-house Manufacturing - Drug is completely manufactured internally. This drug can be for commercial purpose or a drug manufactured during pre-clinical and clinical trial stage.
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Complete Contract Manufacturing - All the manufacturing functions are outsourced to the vendor.
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Part In-house and Part Outsourced (Hybrid Approach) - A combination of in-house and outsourced manufacturing is used to address the company’s need.
Most large companies adopt hybrid approach. The approach taken in hybrid outsourcing is as follows: n
Part of manufacturing steps like early/late stage ingredients, API are outsourced and later stage steps like final formulation are performed in-house.
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All manufacturing steps are performed internally, expect additional capacity as it requires outsourced partner.
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For commercial use (large quantity), manufacturing is outsourced and for clinical trial or pre-clinical trial, products are manufactured in-house (small quantity).
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API process development and clinical supply manufacturing is performed in-house and the scale-up to commercial and commercial manufacturing is outsourced.
Companies as a whole may adopt different strategy for different drugs in their portfolio, for example Company may outsource the complete manufacturing of old or generic drug (stable and less risky drug), and may adopt hybrid approach or complete in-house manufacturing strategy for other drugs. Contract manufacturing especially sees extensive outsourcing for specialized skills like biopharmaceutical manufacturing, sterile manufacturing and others. For bio-manufacturing and API, most outsourcing is done to matured markets like US, Europe and countries like India and China are used for raw material and intermediates contract manufacturing.
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Factors Considered for Outsourcing Strategy The decision to outsource depends on the following factors: n
Company internal capabilities and capacity
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Product development related risks
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Strategic importance
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Cost of internal operations
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Availability of internal resources (including Financial)
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Stage of drug lifecycle
This figure represents the guidelines to choose the outsourcing model based on in-house capabilities and competency, strategic importance and associated product risks. These guidelines and other factors are used to decide on outsourcing strategy for the company.
Build or Acquire Competency
m iu
In-House or Out-Source
High Medium Low
Strategic Importance
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al
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Ri
Collaborate or Out-Source
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sk
s
La
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In-House
Low
Medium
High
In-House Capability and Competency Spin-Off Out-Source
Figure 1 : Outsourcing Strategy Decision Framework
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In a business scenario, if there are low risks and if manufacturing needs are given low strategic importance, then manufacturing functions are outsourced. Most companies outsource completely, or outsource only the additional capacity requirements for commercial manufacturing, whereas for the clinical supply related requirements, the companies build their own in-house capabilities. In-house capabilities allow them to have better control over the critical phase of the drug development (Phase-I to Phase-III) both from process (and compliance) and confidentiality perspective. Outsourcing approach is different here as during clinical supply the speed and quality of manufactured product are important than volume and the cost of final product.
Partnership Operating Model The partnership operating model, which follows the outsourcing strategy, is decided on factors like the right partner, location of partner, technology and process transfer model, performance parameters, level and depth of partnership required, model for governance and engagement. The most important objective in partnership operating model is to meet objectives of outsourcing without taking too many risks. To manage the contract manufacturing activities in the partnership model, the following three approaches are suggested (the level at which the outsource activities are managed and control): n
Self Managed: Company takes control of all the key operations (including procurement and inventory) and governs the respective partner. Company uses the partner resources and manufacturing facilities but key activities are supervised by the pharmaceutical company.
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Partner Managed: All activities related to manufacturing are managed by the contract manufacturer (partner). This is most commonly used practice where the contract manufacturer takes the ownership for delivery and process compliance.
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Co-Managed: Company and its partner come together as partners and design the manufacturing model leveraging their individual strengths.
The following figure represents the guidelines to choose the right operating model based on factors like partner capability and maturity, relationship (with Partner) maturity and risk (related to outsourced activities).
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Partner Managed or Co-Managed
Ri sk s iu m
La
rg
e
Self Managed
ed
M
High Sm al l Medium
Self Managed or Co-Managed
Low
Relationship Maturity
Co-Managed or Self Managed
Low
Medium
High
Partner Managed
Partner Capability and Maturity Self Managed or Co-Managed
Figure 2 : Partner Operating Model Options Framework
If risks are high and the partner capability to handle end-to-end services is low, then Self Managed model is used as companies leverage their experience and can control operation and quality of products. If the partner has the required capabilities and competency to delivery products, then Partner Managed operating model is used as the partner can completely manage and deliver the products with required specification and quality. The partner can also allows leverage their experience including process knowledge, optimized delivery mechanisms, sourcing cheap raw material and other related skills.
If risks related to product, and/or relationship maturity with partner is low, then initially companies adopt Co-managed operating model as companies have control and visibility in operations. Later, based on comfort, risk and maturity of process deployment, the company migrates to Partner Managed model from Co-managed operating model, where responsibilities are transferred to the partner.
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Challenges in Outsourcing Though manufacturing outsourcing methods are conducive, few challenges and risks in the decision to outsource must be assessed: n
CMO failure to deliver supplies of the drug on time as per the requirement and standards and consequently customer losing control over the function.
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Risk of non-compliance of regulatory requirements by CMO.
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Reduction in in-house manufacturing expertise (in terms of resources as well as process knowledge), which some companies consider as the competitive edge.
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Risks are not managed well, as lot of contractor manufactures will demand for minimum volume business to cover their risk.
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Customers are required to invest resources in finding an outsourcing partner and managing the relationship (treated as additional cost).
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Confidentiality of customer’s proprietary information, including intellectual property can be breached.
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Increasing the dependencies on the CMO is risk as thus strategy has high exit barriers and also there is risk of pilferage and QC Compliance.
Few of these risks are fading as contract manufacturing market is maturing and different methods are employed to manage these risks. There is tremendous improvement in regulations related to IP protections in low cost countries and outsourcing process, which includes process for managing the vendors to ensure the product quality and compliance to regulatory needs.
Industry Outsourcing Trends and Observations Some key trends and observations in pharmaceutical manufacturing outsourcing are as follows: n
Leveraging low cost manufacturing locations (countries in Asia such China, India).
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Outsourcing bio-manufacturing and API to matured markets like US, Europe and outsourcing raw material and intermediates contract manufacturing to countries like India and China.
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Concentrating more on outsourcing generic API, intermediates and raw material.
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Growing bio-pharmaceutical manufacturing outsourcing (than Chemical API) as it requires complex and special skill.
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Developing capabilities and expanding capacity in bio-manufacturing market by CMOs as the demand and potential increases.
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Retaining in-house manufacturing and out-sourcing additional capacity.
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Shifting manufacturing base for API stage drug bulk manufacturing to locations like Puerto Rico, Ireland for tax benefits.
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n
Relying on major outsourcing as small companies have constraints in using resources and capabilities.
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Few companies’ leverage their internal additional capacity and capability to provide contractmanufacturing as service to other companies.
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Few companies work jointly with contract manufacturer to improve manufacturing process and sharing of savings earned, which is incentivizes both parties and hence encourage the investments in improvement’s initiatives. This model is normally adopted with long-term contracts (4-5 years) where companies commit certain volume to the contract manufacturer.
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Large companies divest their non-core assets to invest capital in core activities. Companies sell their manufacturing sites as they are either utilized less (For example, where drug is going out of patent), or outsourcing these functions are more cost effective.
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Earlier, companies outsourced for lack of expertise (mainly valid for small companies), or time and/or resource to build the manufacturing capabilities. Now outsourcing is a part of company’s strategic plan and make outsourcing decision based on factors such as internal capability and capacity, cost and product related risks.
Summary The cost of drug development has increased in last few years forcing pharmaceutical companies to adopt new approaches towards drug discovery and delivery. As part of various core and non-core operations, companies are increasingly deploying outsourcing strategies to increase revenues through faster and cost effective drug development. In addition to outsourcing other non-core and secondary functions, most of the pharmaceutical companies outsourcing manufacturing functions. Consequently, cost is controlled with flexible model, without making any large capital investment and also allows companies to invest and focus resources on their core competencies to generate more value. In addition to transactional outsourcing to address ad hoc need, now companies are also adopting longterm strategic manufacturing outsourcing. Companies consider their long-term strategy, corecompetency, risk and the need before defining the framework for contract manufacturing. Contract manufacturing trend is more prominent in high-skill areas such as bio-pharmaceutical manufacturing. Each company must evaluate its manufacturing strategy based on new options, challenges, internal capabilities and constraints. Recently, a large pharmaceutical company announced that it will outsource all the manufacturing functions of the company within the next 10 years as they do not consider manufacturing as their “core” activity, but “innovation and brand-building” as core activity.
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References [1] Contract Manufacturing: Realizing the potential (ATKearney: Executive Agenda) by Charles Davis and Per Hong [2] Contract Research and Manufacturing (CRAM) by Mahesh Sawant, November 2006 [3] Emerging Opportunities in Pharmaceutical Contract Manufacturing by Pratik Kadakia, Jeffry Jacob & Ankur Singhai [4] Outsourcing among Pharmaceutical and Biotech Firms - Report prepared by CFO Research Services in collaboration with A.T.Kearney [5] Pharmaceutical contract manufacturing challenges by Yvon R. Tessier, ISPE Central Canada Chapter Annual Meeting September 28, 2006. [6] Pharmaceutical Outsourcing Part 1: An Introduction to Contract Manufacturing Strategies (Datamonitor) [7] The Pharmaceutical Industry : Current and Future Trends and Strategic Issues Shaping Pharma (Datamonitor)
Acknowledgements I would like to thank Rahul Luthra and Vikram Kunnath for their insight and suggestions on the content of this paper.
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