Weigh the Risks in Outsourcing Decisions

July 1, 2004
Size, Style and Synergies Dictate Best Approach

By Angelo De Palma, Ph.D., Contributing Editor

Much of the streamlining that's occurring in industry operations today is the result of uncovered synergies. Unit operations that fit well together, or sequentially, save time, space and money, and help turn out better product. With outsourcing, an established strategy for filling capacity shortages, pharmaceutical manufacturers are discovering new ways to make the most of contract manufacturers' varied and often complementary expertise.

How a sponsor organization specifies, acquires and manages the services of a contract manufacturing organization (CMO) depends on a sponsor's size, workload and in-house capabilities. It's sometimes useful to distinguish between large and small firms, biotechnology and small-molecule developers, and prescription versus over-the-counter drug makers.

"Larger pharmaceutical companies already have pilot plants, researchers, and manufacturing capacity," says David Sovello, Ph.D., regulatory vice president at Cardinal Health (Dublin, Ohio). Therefore, such firms typically look for specialized expertise or one-off manufacturing or packaging services to fill in for overworked in-house groups.

By contrast, smaller companies that are short on facility and expertise tend to outsource bigger chunks of projects. Start-ups and virtual companies face huge logistical hurdles unless they outsource to a one-stop shop.

Indeed, managing scale-up, manufacturing, filling, labeling and distribution is difficult enough when those activities are performed under one roof. Spreading them over several contractor sites, sometimes in different geographic regions, can result in chaos. The difficulty in moving material from one contractor to another is compounded by knowledge and information transfer at each handoff point.

Even transferring product from one contractor to another is far from trivial, says Michiel Ultee, Ph.D., senior director at Laureate Pharma (Princeton, N.J.). "Bulk product is at its highest value right after manufacturing. If something happens during transit to a fill/finish facility, all upstream work will be wasted. Keeping big projects under one roof reduces the risk inherent in handing off a project to a second contractor."

"There's always regulatory concern when bulk product is shipped," Ultee notes. "Sponsors can use FedEx, but that usually means shipments must stop over in Nashville. Specialized courier services can deliver product in refrigerated vehicles, but that there's transit risk in this as well. Both situations introduce chain-of-custody paperwork."

Handoffs Mean Delays

Not surprisingly, working with multiple manufacturing partners multiplies management overhead compared with a single-contractor relationship. Handoff points add delay and potential discomfort regarding intellectual property. "The fewer partners you have the better, but sometimes you have to make a choice based on specific technology that only one available contractor can offer," says Leendert Staal, Ph.D., president of DSM Pharmaceuticals Inc. (Greenville, N.C.).

Biotech is more risky than chemical synthesis because of longer change-over times, uncertainty inherent in the growing and harvesting products from microorganisms, and the complexity of multi-component biopharmaceuticals such as vaccines. With price tags of several hundred million dollars for biotech facilities, it's no wonder so much outsourcing occurs within this sector. "A biotech company with several development-stage products is forced to bet on which one will succeed," notes Edward Tomlinson, managing director for life sciences at BearingPoint (MacLean, Va.). "Biomanufacturers try to decrease cycle time, but it may be more important from the standpoint of planning to reduce variability in cycle time," Tomlinson says. "If the cycle time varies between 30 and 90 days and you are trying to plan capacity needs on a monthly basis, your variability is twice your planning horizon."

Large pharmaceutical companies are responsible for the vast majority of commercial product outsourcing, according to Cardinal Health's Sovello. The reason: an uneven and not always harmonious match between need and capacity. Large sponsors also own the vast majority of commercial products, and hence have a greater need to outsource older drugs to make room for pipeline drugs.

Line Extensions the Norm

With drug approvals over the past few years, product-starved large pharmaceutical firms also are looking for ways to extend the patent life of successful products while they await arrival of the next blockbuster. These include combination products or new dosage forms such as fast-dissolve and controlled-release. Sovello says he sees these so-called "line extensions" earlier and earlier. For example, Cardinal has a contract to create an extended-release form of Eli Lilly's Zyprexa antipsychotic product, whose sales are still growing. "Line extensions test manufacturers' ability to juggle outsourced competencies and are by no means limited to mature products," Sovello notes.

Like their customers, CMOs are getting bigger through mergers and acquisitions. Even though room still exists for small, specialty contractors and packagers, the full-service CMOs carry a lot of weight and credibility, even with customers who only need them for one specific service.

Many of the largest pharmaceutical companies now offer outsourced manufacturing services themselves. For example, Pfizer CentreSource (PCS; Kalamazoo, Mich.) customers range from top-ten international pharmaceutical companies to start-ups that lack a manufacturing base. As the CMO division of a pharmaceutical giant, PCS can afford to be choosy. Aside from usual issues of timing, capacity and technology, PCS will not accept projects that clash with its parent company's products or intellectual property, a practice that is fairly standard among other sponsor/CMOs such as Abbott, Schering, Aventis and Glaxo SmithKline.

Nevertheless, top-ten sponsor/CMOs actively trade among each other based on expertise rather than pure capacity. "The money maker for us is not machine time but proprietary technologies," says PCS president Pete Stevenson. "That's the major difference between us and pure-play CMOs, who measure profitability based on reactor-gallons, development work or number of tablets processed."

Generally, PCS gets involved around Phase I, as clients are developing processes and entering clinical trials. They usually work together until launch and commercialization. Customers "stay on that train" as long as the product is commercially viable, or build their own commercial capacity.

One-stop Outsourcing Far From the Norm

"If by "integrated outsourcing"you mean one-stop shopping--making the API [active pharmaceutical ingredient], formulation, packaging and distribution--"then only about 10% of our business is in that category," says Stevenson. "We don't often perform soup-to-nuts contracting. We may make the API but not the drug product, or vice versa."

Some large CMOs retain the organizational structure of independently operating subsidiaries working together. DSM's (Heerlen, Netherlands) contract services, for example, span the pharmaceutical value chain, from proof-of-concept R&D through API manufacture, packaging, and distribution. DSM's three pharmaceutical business units cover biopharmaceuticals (DSM Biologics; Montreal), active pharmaceutical ingredients (DSM Pharma Chemicals; Netherlands and Saddle Brook, NJ), and fill/finish operations (DSM Pharmaceuticals Inc.; Greenville, NC). Each operates as a separate business unit. However, a good deal of communication and handing-off occurs between them, giving DSM the ability to offer services that extend vertically and horizontally into the development/manufacturing train.

Clients can enter or leave the outsourcing train at different points, but rarely go all the way from development through fill/finish. "We'd be delighted if a customer wants to talk with us about collaboration across a large piece of the value chain," says Leendert Staal. "We have that capability, but the majority of our business is not offered that way."

According to Staal, except for virtual pharmaceutical companies, most customers stick to one DSM business unit or another. "Virtual companies usually wish to keep innovation, intellectual property, and sales or marketing in-house while outsourcing the manufacturing. DSM Pharmaceuticals Inc. works mostly on existing solid-dose products and processes. DSM Pharma Chemicals and DSM Biologics get involved much earlier, in the chemistry of APIs, which Staal described as "a very critical entry point" for outsourcing customers.

Come Together

Consolidation among contractors and their big pharma clients continues to alter the contracting landscape. Fewer drug approvals, merged product lines and growing sponsor capacity has reduced their interaction with integrated outsourcing organizations to overflow situations. No more than one third of Cardinal Health's "integrated" outsourcing projects come from large pharmas. "Pfizer has something like 135 facilities, most at less than 30-40% utilization," notes Renard Jackson, Cardinal Health vice president of business development. "In many cases they're trying to bring business back in house to fill that capacity." Jackson sees this as a short-term trend which will reverse as sponsors trim excess capacity and fill pipelines.

On the plus side, larger manufacturers are shedding small product lines, often selling them off to generics houses. A good number of these companies, along with start-up biotechs, will never build capacity and should keep CMOs like Cardinal busy for some time.

By virtue of its acquisition of Packaging Coordinators and PCI Services, Cardinal Health has been "in" the packaging business for 30 years. Cardinal is a primary packaging organization by virtue of taking product in stainless or plastic drums directly from manufacturers (including other Cardinal divisions) and putting it into primary packages such as bottles and blister packs. "We never take ownership of the product," says Jackson. "We package under the manufacturer's National Drug Code number."

This is in direct contrast with the prevailing practice just a decade ago, when it seemed that anyone with a garage and a proprietary chemical reaction could dream (and boast) about "partnering" with large pharmaceutical companies and collecting royalties for years on resulting products. Today most of these firms have gone under or been swallowed up.

A majority of Cardinal's packaging business is directly contracted from outside manufacturers, but a growing portfolio arrives from one of Cardinal's manufacturing sites. According to Jackson, Cardinal is seeing many more integrated turnkey projects that include development, manufacturing, and finished goods packaging.

Contract Packaging on the Rise

Clearly bucking the consolidation and full-service outsourcing trends is contract packaging, a niche service that is still going strong. CMO's with filling and packaging capabilities are rare. For example, neither Lonza nor Diosynth, biopharmaceutical CMOs, performs fill/finish work. One reason for this is that packaging, especially for sterile formulations and injectible drugs, falls well outside most drug developers' comfort zone.

Large, established manufacturers engage packaging contractors early and often, according to Don McMillan, vice president of marketing for sterile package manufacturer West Pharmaceutical Services (Lionville, Pa.), whereas smaller firms usually don't appreciate the intricacies of packaging services, and tend to wait. Sterile dose CMOs, especially, need to work with packaging experts to assess package extractables and leachables, and any potential interactions between product and package. "Too many firms think that CMOs will take care of everything," McMillan observes.

West spends a good deal of time educating contract manufacturers, through on-site seminars, on packaging science and technology. "The more they learn, the more they realize how little they know about packaging," says McMillan. "They eventually see the potential pitfalls and recognize the importance of specifying the right package."

"During a call on a start-up company client, someone from the company handed me a rubber stopper and said, 'I want some of these,'" McMillan says. "It was just a plain rubber stopper they'd gotten from someone down the street." After taking it back to the lab, McMillan discovered the stopper material was not up to the task. "Using that particular material would have been a disaster. It's shocking how little some drug manufacturers appreciate the science of this critical component."

Contractors Fight Counterfeits

With many pharmaceuticals more valuable than gold, drug counterfeiting has become big business, threatening industry profits and consumer health. Manufacturers routinely specify anti-counterfeiting packaging, but counterfeiters are even reproducing the packaging's barcodes, holograms and other identifiers. At sterile package manufacturer West Pharmaceutical Services (Lionville, Pa.), the company must rigorously control distribution of its seals and stoppers, to the point of instituting special warehousing and inventorying and destroying scrap materials. "We even disguise our product during shipment with plain cardboard overwrap," says Don McMillan, vice president of marketing.

No system thwarts counterfeiters for long, but radiofrequency identification (RFID) tags hold the greatest potential for staying several steps ahead of counterfeiters. Cost and technical hurdles have delayed the technology's adoption by pharmaceutical distributors, but experts agree that RFID's eventual implementation in pharmaceuticals is a matter of when, not if.

Two RFID frequency standards compete in pharmaceuticals and other industries. Ultrahigh frequency (UHF) offers long-range reading capability suitable for pallets and large boxes, but is prone to interference from nearby metals and conductive liquids such as water. High frequency 13.56 MHz tags operate at distances of up to one meter but are less subject to interference.

Although some experts still hold out for a "one frequency fits all" technology, performance will eventually determine which technology is adopted. Alastair McArthur, CTO of Tagsys (Doylestown, Pa.), believes that 13.56 MHz standard is most suitable for item-level tagging most appropriate for stocking shelves in pharmacies and dispensaries.

Among Tagsys' product offerings are two proprietary RFID tags. Ario SDM (Small Disc Module), an 8.9-mm rigid tag, combines a unique serial number, on-chip memory, and the ability to be injected into plastic. Ario also permits simultaneous reading of several tags, useful when searching for a specific sample among many. Folio, a paper-thin flexible RFID structure may be converted into an adhesive label, and accepts printing of barcodes and other security measures.