To assess current trends in outsourcing, BioPharm International turned to Geoffrey M. Glass, executive vice president of global strategy, sales and marketing at Patheon; Michael A. Griffith, chief executive officer of Laureate Pharma; and Rajan Puri, director of business development at Therapure Biopharma.
Q: Where do things stand now in terms of the recession's affect on outsourcing?
Glass: We certainly have seen a pickup versus last year in our pharmaceutical development services business, which covers formulation, analytical, and clinical trial material manufacturing services. We are not experiencing anything like the cash "freeze" we saw at small and large companies alike. Decisions on outsourcing commercial products, mostly driven by network rationalization plans of the large pharma companies, continue to be slow.
Griffith: We may have reached a bottom, as we have seen several clients secure new financing to allow them to expand their work with us. Small biopharma companies are becoming more resourceful in their funding sources. Overall, market demand is still well below levels of just two years ago.
Puri: The recession and its impact on the biotechnology sector will continue to be felt for years to come. Small companies, which have been the initial source of many of today's commercial proteins and antibodies, have been forced to focus their resources on a single lead candidate. With the historical attrition rates, this strategy will have a few winners and significantly more losers. Also, the smaller, early stage biotechs have had a strained ability to raise funds, which has a trickle-down affect on our business. The number of companies requiring outsourcing services will continue to diminish over the next few years.
Q: Have you seen important differences in the way outsourcing contracts are being written as a result of the recession? If so, are the changes likely to continue even after we see economic recovery?
Glass: Clients and service providers alike are paying a lot more attention to payment terms and CFOs are becoming aggressive with cash management. I'm not sure this dynamic has been well thought out by the large pharma companies. The large pharma companies have a lot of control in negotiating with service providers, because of the substantial revenue they can provide. What they need to be very wary of is that their short-sighted "win" garnered by stretching their CMO providers (whose liquidity and margins pale in comparison) to something like net 60 days payment terms has the potential to jeopardize the existence of many suppliers and put mission-critical products at risk.
Griffith: We have seen increased interest in detailed scoping of work before agreeing to contract terms. This is more effective for both parties, and results in greater certainty in execution, so our expectation is that it will continue after recovery of the larger economy.
Puri: In our experience, clients have become increasingly focused on cutting non-essential costs from their development projects. From clone development to GMP manufacturing to aseptic fill–finishing, our clients want to ensure that they are getting the most for their development dollars. Another shift is the movement from time-and-material contracts to fixed-price contracts. These trends are likely to continue for at least a few years post-recession.
Q: In the last year, several contract organizations folded and others were acquired. How do those changes affect the overall outsourcing environment?
Glass: Overall, the industry has too many providers in both the pharmaceutical development and contract manufacturing sectors. Pricing in 2009 at times was just irrational; we knew people were pricing their services at a loss, which isn't good for the industry or for clients. Today, potential customers are much more focused on your financial stability, quality, and track record than price, whereas 12 months ago price was almost the sole focus of many.
Griffith: The CMO industry has always been dynamic, with varying players and customers. Market projections continue to be strong for biopharmaceutical outsourcing as biopharmaceuticals maintain their strong growth. We are embarking on a $15-million expansion and upgrade of our operations in anticipation of the market returning.
Puri: The shifting landscape has created opportunities in terms of previously signed clients looking for a new CMO as well as the availability of experienced talent. At the same time, it has created new hurdles. Clients have become increasingly focused on the financial viability of their CMO as they recognize that their future success is intimately tied to the ability of their CMO to deliver on their manufacturing commitments.
Q: Is the financial stability of outsourcing providers a bigger issue than it was before the recession?
Glass: It's now a much bigger issue. This has been great for Patheon given that we're the only publicly traded pure-play CMO in the world. The value of financial transparency and stability, especially when dealing with specialty and large pharma customers, is greater today than it has ever been.
Griffith: Yes. As demand fell during the 2008–2009 period, many providers struggled to make money. As a result, capital investment has been delayed. Laureate was cash positive in 2009 and has recently received equity funding to support expansion and upgrades.
Puri: No question. Although our capabilities are always the primary focus, having a solid private financial backing has become an increasing important asset for landing new clients. Our continued investment into our facility, coupled with our mix of commercial and clinical clients, has provided Therapure with a strong financial base which has allowed us to secure a number of clients negatively impacted by their previous CMO going bankrupt.
Q: Today, many CMOs are diversified; some offer technologies such as proprietary cell lines, and others are part of companies that develop therapeutics. Is this a trend that will solidify in the coming years?
Glass: The trend that's here to stay is you must deliver value. Whether this comes in the form of proprietary technology, unique service offerings, creative contracting, etc., is of less importance than the value delivered to the customer for their specific product(s). What is clear is that the industry will no longer support simple fee-for-service that isn't adding value to the product or project in question.
Griffith: Customers seek CMOs that offer a breadth of technologies and services, so a trend of CMOs providing more service offerings is not surprising. We have found, for example, that offering aseptic filling services enhances our appeal over CMOs that only offer bulk drug supply. While there will always be specialist providers, there is a trend to consolidate activities to garner a bigger share of the customers' business.
Puri: One aspect of our value proposition that resonates well with clients is the diversity of services offered. By offering services from clone development to nonGMP or GMP manufacturing to aseptic fill–finishing to lyophilization to in-house analytical development and testing, our clients can mitigate some of the risks and costs associated with technology transfer.
Q: There has been a lot of talk recently of larger pharma companies embracing outsourcing much more than in the past. Have you noticed a philosophical shift?
Glass: Our experience is there are some who really understand how to partner with an external organization in way that creates value for them and for the provider. I would say that less than half of the larger pharma and biopharma companies truly understand embrace and execute accordingly. Those that do, do it well, and will get the best people, capacity, and service first—which will be an advantage because the list of broad global service providers is a short one.
Griffith: We have seen more engagement and interest by larger pharma and biopharma customers. We believe that a robust set of providers is a prerequisite for large pharma to outsource development and supply. The risk-management practices of large pharma favor a choice of suppliers and multiple suppliers in the same supply chain.
Puri: Although the reasons differ, we have seen an increase in the number of large biopharma and pharma companies looking for a CMO partner. Some of these companies have decided that their manufacturing resources are best used for large-scale production and have subsequently outsourced production of preclinical and early clinical products. Others have engaged us to manufacture commercial products to support their growth into global markets.