Large strategic outsourcing deals are becoming increasingly common in the clinical and preclinical research sectors, but manufacturers
have not shown much creativity in putting together innovative sourcing arrangements. Lonza (Basel, Switzerland) has been the
principal exception to that rule, and they have done it again.
In July, Lonza announced a long-term relationship with Novartis (Basel, Switzerland) to develop and manufacture biopharmaceutical
candidates in Novartis's pipeline. Under the agreement, Lonza will provide a broad range of services to Novartis, including:
- process development for all biologics in the Novartis pipeline,
- manufacturing clinical trial materials,
- manufacturing supplies for commercial launch, and
- engineering and other assistance to build Novartis's commercial manufacturing infrastructure.
LONZA'S RISK-MANAGEMENT STRATEGY
Financial terms of the deal were not disclosed, but Lonza CEO Stefan Borgas indicated that the relationship could last 10
years or more, considering the time required to develop, test, and launch candidates in the pipeline and build a commercial
facility to manufacture them beyond launch.
The Novartis–Lonza deal is notable on several accounts, not the least of which is the fact that Novartis already has considerable
expertise, experience, and manufacturing capacity in its Sandoz (Holzkirchen, Germany) generics unit. Sandoz was one of the
first companies to launch a biosimilar product in the European market (the human growth hormone Omnitrope) and has been actively
selling contract biomanufacturing capacity for many years. It's also notable because Novartis has not been viewed as being
particularly active in outsourcing the manufacturing of its branded products.
It would appear, however, that Novartis has been attracted by the risk-mitigation aspects of the relationship. By looking
to Lonza for manufacturing clinical supplies and commercial launch quantities, Novartis is avoiding one of the major risks
in biopharmaceutical development, i.e., investing in enormously expensive biomanufacturing facilities that could become white
elephants if their intended products don't achieve regulatory approval and commercial acceptance. The Lonza deal allows Novartis
to wait until commercial product success is demonstrated before making the big capital investment.
In addition, the unusually close nature of the relationship (I hesitate to call it a true partnership because it's not clear
how much risk and reward sharing there really is in the deal) also mitigates the risk that Novartis won't be able to find
adequate capacity when its products are ready to launch.
Lonza is proving to be particularly adept at developing innovative, long-term relationships that mitigate risk for developers
of biopharmaceuticals. In 2005, it announced a deal with UCB (Brussels, Belgium) to build two 15,000-L microbial fermenters
to support the launch of Cimzia, which was recently approved in the US for treatment of rheumatoid arthritis. Lonza made the
investment to build the facility, but the terms of the deal with UCB assured it of a return on the investment.
In 2006, Lonza and Genentech (South San Francisco, CA) announced a pact under which Lonza acquired a Lonza biomanufacturing
facility in Spain and agreed to design and build an 80,000-L facility dedicated to Genentech in Singapore. Lonza secured financing
for the Singapore facility from a government-backed investment firm, and gave Genentech an option to buy the facility at a
later date. That deal gave Genentech immediate cash for the facility in Spain and guaranteed future capacity without it having
to put up any upfront investment capital.
Borgas indicated that Lonza has at least five similar biomanufacturing deals in negotiation, and hopes to reach a point where
as much as 60% of its volume is from such strategic relationships. Further, he noted that the Novartis announcement stimulated
interest in similar arrangements from several clients of its exclusive synthesis (small molecule) business, although those
talks have barely started.
Lonza is one of the few contract manufacturing organizations (CMOs) to recognize that strategic outsourcing relationships
must be based on more than just capacity, and that risk management means more than just security of supply. Senior management
has realized that it can and must bring other sources of value to the table, and it has redefined its core competencies to
go beyond manufacturing knowhow. It has identified facility engineering and financial engineering as critical skill sets that
can enable it to secure long-term strategic deals with the most attractive clients. Further, as Borgas noted, Lonza today
has the business scale and financial strength to absorb the volatility and uncertainty of drug development and commercialization,
to which the Novartis deal will expose it.
In a market where capacity has become a commodity (often in oversupply), CMO executives will do well to study Lonza's strategy
carefully to learn what new direction they need to take with their own businesses.