The spiralling cost of drug development is no secret. As pharma companies come under growing pressure to develop
new drugs at speed, the market has become increasingly competitive and budgets tighter.

As a result, many are looking to shake up existing modes of practice and re-evaluate working models that have been in place for years.

Most broadly, the trend has moved away from a vertically integrated business model and towards a network of third-party organisations. This applies above all to the manufacturing side of the equation, where contract manufacturing organisations (CMOs) are starting to become far more than just suppliers.

Whereas, in the past, third-party manufacturers were typically treated as somewhat interchangeable and disposable – a far cry from the strong relationships built up with contract research organisations (CROs) – today’s CMOs are more likely to act as partners in a strategic alliance. Offering the gamut of services, ranging from drug discovery to packaging, these companies tend to be larger than their predecessors and tied to longer-term contracts.

"That’s where I think most big pharma companies would like to go," said Jim Browne, director of JTB Consulting, at last year’s Global Pharmaceutical Contract Manufacturing conference. "You have people with whom you’re aligned, who have similar values and who will be mutually beneficial in terms of the long-term picture. You don’t want to be managing a global network of over 400 contractors; you would ideally want to be managing a network of ten big contractors who have multiple sites."

According to the report ‘Contract Manufacturing in Pharmaceutical Industry, 2015-2025’, the contract manufacturing market has witnessed significant growth over the past few years, as pharma companies seek ways to save time, cut costs and harness third-party expertise.

Faced with increasing competition in this sector, the CMOs that stand to gain ground are the ones that can most successfully differentiate themselves from established and emerging rivals. This has led some CMOs to invest in IT solutions such as cloud-based computing and risk-monitoring tools, as well as setting up shop in high-growth areas such as biopharmaceuticals manufacturing.

A different report has suggested that the global pharmaceutical contract manufacturing market, valued at $58 billion in 2014, is set to reach $84 billion by 2020, meaning it is growing at a compound annual growth rate of 6.4%. As pharma companies focus more heavily on their key business processes, they are continuing to outsource many aspects of drug production. This may help them recover from economic pressures and post-patent-loss overcapacity.

All this said, it would be disingenuous to depict the industry as moving inexorably towards more outsourcing. Recently, we have seen a concurrent trend towards insourcing – in other words, bringing processes that were formerly outsourced back in house.

While there is no going back to full self-sufficiency in the current marketplace, a number of pharma companies have opted for a hybrid manufacturing strategy. In effect, they delegate some of their processes to CMOs while performing others on site. Typically, insourced employees would be brought in through an outsourcing budget and would be overseen by a project manager from a third-party organisation, making insourcing an interesting halfway house.

Perhaps counterintuitively, the goal of insourcing is exactly the same as that of outsourcing: saving money and heightening efficiency.

"The model of bringing things in house is more efficient and more effective so long as you take time to do it at a pace that you can manage," AstraZeneca CIO David Smoley told the Wall Street Journal in January.

Inefficient business

Smoley was talking about the company’s IT strategy, but the same principles apply elsewhere. Before shaking up its IT strategy in 2013, AstraZeneca outsourced 70% of its operations, which Smoley viewed as an inefficient way to do business. After bringing these in house, he managed to cut an impressive 13% off the company’s IT costs.

In some cases, insourcing starts to become popular where outsourcing goes wrong. For some time, Western pharma companies were heavily reliant on CMOs in China and India, which formulated APIs at a low cost. Even during the 2008 recession, as US pharma plants closed and teams downsized, outsourcing to east Asia continued unabated. More recently, however, a number of companies have cut ties with these manufacturers, citing concerns about quality and hidden supply costs. And rather than seeking out Western CMOs, the trend has been to revert to in-house production.

Pfizer in 2009 was one of the early movers. Pfizer CentreSource, its third-party manufacturing arm, was working to transfer some of the firm’s steroid production from Michigan, US, to firms in China and Taiwan. Ultimately, however, it rethought its Asian plan. Aside from China’s well-publicised heparin and melamine contamination scandals, outsourcing to this part of the world can prove surprisingly expensive – it typically requires hiring costly consultants and undertaking a great deal of overseas travel.

"Looking at the combination of the investment that would be required, the quality and environmental issues involved, and the delays, we decided to maintain production activities in Kalamazoo [in Michigan]," said Michael Kosko, president of Pfizer CentreSource, in a press release.

Similarly, in 2011 GSK shifted 1.5t of biomanufacturing from India to Scotland as part of a bid to bring more of its overseas manufacturing processes "home to the UK". CEO Sir Andrew Witty explained at the time that the company was looking for "the highest quality with the most cost-effective process and, in this case, the Montrose plant fits the bill".

At the Global Pharmaceutical Contract Manufacturing Conference last year, Roger Cassidy, managing partner of Tamesis, explained that while the Asian CMO market was becoming less appealing, all was not lost for its Western counterpart – contract manufacturers would still play a role for pharma companies, it was simply that "the threat is now from insourcing, rather than between Eastern and Western CMOs".

For other companies, the decision to insource is based less on soured relations and more on a cool assessment of the practical benefits. Because the insourced employees are not permanent contractors, their numbers can be very flexible, allowing companies to scale up workloads quickly or cut back on staff without resorting to lay-offs. It also allows pharma companies to keep a tight rein over their processes. When a CMO team is based off site – sometimes on the other side of the world – there will always be an element of surrendering control with regard to scheduling, cost and quality. This is not to mention issues when it comes to transferring data or even security concerns.

After a spate of job losses in 2012, Eli Lilly brought in 40 contract researchers from AMRI to use the lab space left vacant. It simultaneously scaled back its third-party operations in China in a bid to improve project management and communication with its scientists, as well as eliminate difficulties related to the time zone difference.

"Our partnership with AMRI is another example of how Lilly is transforming the way it conducts R&D, enabling our scientists to discover potential new medicines in as proficient a manner as possible," said Alan Palkowitz, vice-president of discovery, chemistry, research and technologies at Lilly. "We look forward to working with AMRI chemists on the Lilly campus to help us build our pipeline of the future."

Recently, service providers have started to offer flexible insourcing/outsourcing options, which allow pharma companies to maintain as much, or as little, direct control as they’d like over their resources. This enables closer collaborations with contractors, and leverages existing laboratories and staff for the strategic benefit of the company.

For instance, in 2014, the contract research organisation Charles River Laboratories launched its ‘Right Source’ option – in effect taking control of a client’s quality-control testing procedures, and delegating some of these to outsourced vendors whenever desirable.

Sanofi, meanwhile, is preparing to undergo a major corporate restructuring that will see the company expand its inhalable drug production site in Cheshire, UK. This will increase capacity not only for its own manufacturing operations but also for its insourced contract manufacturing business.

The precise blend of insourced/outsourced processes will depend on the specifics of each company. Some pharma companies, such as Valeant, rely entirely on CMOs – and since this is a ‘virtual company’ with no manufacturing facilities of its own, insourcing is not an option. For others, the drive is towards consolidation, whittling down a long list of contractors to a small number of trusted partners.

Whatever the case, bringing a new CMO on board is undoubtedly a major commitment – owing to regulatory factors, it can take more than 18 months to transfer a pharma product to a new manufacturer. A company’s manufacturing strategy will need to be carefully thought through, creative and centrally controlled.