Outsourcing goes from strength to strength

Predictions of healthy growth in pharma outsourcing in 2015 seem to have been fulfilled, but can the trend be sustained this year? The latest surveys from Nice Insight suggest it can, writes Nigel Walker, Managing Director, That’s Nice LLC/Nice Insight

The healthy growth rates of 6–9% predicted by market research firms for the pharmaceutical contract research and manufacturing markets seem to have been realised in 2015. The factors driving that growth continue to influence the pharmaceutical market in 2016, leading to further expectations of increasing demand. In fact, the latest surveys from Nice Insight – the new 2016 Nice Insight CDMO and CRO Outsourcing surveys, each comprising input from nearly 600 outsourcing-facing pharmaceutical and biotechnology executives – suggest that the depth and breadth of outsourcing by pharmaceutical/biopharmaceutical companies will indeed continue to expand significantly in 2016.

Conjunction of factors

Growing demand for outsourcing services should not come as a surprise, given the current global economic trends and dynamics within the pharmaceutical industry itself. There has been and continues to be, in fact, a convergence of positive and highly influential drivers for the outsourcing of research, development and manufacturing activities.

One of the biggest drivers external to the pharma industry is a rising demand for advanced medicines, not only in mature economies, but also in markets with rapidly improving economies. There are several reasons for this increased consumption:

  • The ageing of the global population;
  • The increasing numbers of patients with chronic diseases (heart disease, diabetes, etc.), most recently including people in once-emerging economies that now have established middle classes; and
  • The improving global economy and continued increase in wealth in many emerging markets, which also now have increasingly sophisticated healthcare systems.

The growth in demand for advanced treatments, combined with the improving global economy, have resulted in several internal industry dynamics that are having a direct impact on the need for outsourcing. Top on the list include:

  • A pipeline of drug candidates that is more robust than has been witnessed in more than a decade;
  • An increasing rate of FDA NDA/BLA approvals, with 2014 and 2015 seeing near-peak numbers and similar levels expected going forward, largely due to the greater number of accelerated approval pathways (Fast Track and Breakthrough Therapy Designations and Accelerated Approval and Priority Review processes);
  • The growing number of biologic drugs in development, many by traditional pharma companies that lack biotech expertise;
  • The entrance of numerous small, virtual startups into the market which have no manufacturing capacity;
  • The increasing complexity of both small- and large-molecule drugs, such as poorly soluble compounds, antibody-drug conjugates (ADCs) and highly potent APIs, that require specialised facilities, equipment and operational expertise; and
  • The movement away from blockbusters, many of which have or will soon fall off the patent cliff, to small-volume, niche and targeted treatments that require unique skills and expertise.

At the same time, pharmaceutical companies are eagerly seeking ways to increase efficiency and productivity and reduce cost throughout all operations from discovery to clinical trials to commercial manufacturing and regulatory compliance. A number of factors are driving these efforts:

  • The movement towards evidence-based medicine continues, with drug companies increasingly expected to provide new treatments that provide significant improvements over existing therapies, and at a reasonable cost;
  • Increasingly aggressive competition from generics, and now biosimilars (particularly with the US approval pathway now established), which is also requiring new strategies and often proprietary technology to achieve effective lifecycle management; and
  • A shift in demand growth from mature economies to emerging markets, where low-cost drugs are expected.

2015 spending way up

These many factors are definitely having an influence, according to the results of Nice Insight’s new CDMO and CRO surveys of professionals in the pharma and biopharma industries. Respondents indicated that their companies dramatically increased year-on-year spending on outsourcing from 2014 to 2015 – the fourth year in a row of significant rises.

The dramatic increases in outsourcing seem to reflect, at least in part, the strong growth in the number of drug candidates

Most notably, while the percentage of respondents whose companies spent more than US$50m annually on outsourcing remained fairly stable at 23–24% from 2012–2014, that number nearly tripled to 71% for CDMOs and more than doubled to 56% for CROs in 2015. Meanwhile, the percentages of respondents whose companies spent less than $10m and $10–$50m on outsourcing both decreased from 2014 to 2015 from 62% and 16% down to 23% and 3% for CDMOs and 32% and 10% for CROs, respectively. Likewise, manufacturing equipment needs are shifting; as seen in the Nice Insight 2015 Pharmaceutical Equipment Annual Study, 54% of respondents (n=560) indicated that their companies spend more than $100m on equipment per year.

As important, 75% and 71% of respondents to the new surveys expect that their companies will increase expenditure on contract services over the next five years. Another 18% in CDMO (21% in CRO) expect their outsourcing expenditure to remain the same, while just 4% (6%) predict a decrease. In addition, three-quarters of respondents to both the CDMO and CRO surveys indicated that they use as many as 10 service partners, 7% use 11–20 and 5% use 21–30. Furthermore, 69% of participants in the CDMO survey expect to increase the use of CDMOs and CMOs going forward, with 29% expecting the number of manufacturing partners to remain the same, and only 1% expecting it to decrease. Similarly, 64% of respondents to the CRO survey expect to increase the number of service partners they hire going forward, with 33% expecting the number to remain the same, and only 1% expecting it to decrease.

The dramatic increases in outsourcing by respondents seem to reflect, at least in part, the strong growth in the number of drug candidates. Just over 50% of respondents to both the CDMO and CRO surveys indicated that expanding R&D portfolios are driving their increasing use of outsourcing partners.

The number one reason respondents give for outsourcing to traditional CMOs, CDMOs and CROs is to improve quality

Companies are also shifting towards a larger proportion of outsourced relationships in their supply chains due to the need to address patent life issues, the need for novel delivery forms and other specialised capabilities, and a desire to increase decentralisation for greater flexibility. Respondents also indicated that they are increasing their level of outsourcing based on earlier positive experiences.

What do they hope to accomplish when outsourcing beyond meeting R&D and production needs for which they lack the internal capacity? The number one reason respondents give for outsourcing to traditional CMOs, CDMOs and CROs is to improve quality. Other important drivers include the desire to improve time to market, increase efficiency, reduce costs and leverage contractor regulatory and specialised expertise.

Participants in the 2016 Nice Insight CDMO and CRO Outsourcing surveys are also looking to gain competitive advantage and improve processes by outsourcing to CMOs, CDMOs and CROs. And they are doing so for projects at all phases of development, although the largest percentage of respondents (63% for both surveys) indicated that they are outsourcing Phase II projects to CDMOs/CMOs and CROs. A similar number of respondents are using manufacturing services for Phase III (54%/51%), Phase I (53%/58%) and pre-clinical (including discovery phase) (51%/53%) projects. This strong distribution also reflects recent industry investment in innovation and the robust pipeline, with drugs steadily moving toward commercialisation.

Phase IV/post-launch projects are outsourced by 39% of respondents to both surveys; the lower percentage reflects the attrition that occurs as safety and efficacy are evaluated. However, the fact that Phase II projects are most often outsourced and the high percentage of participants outsourcing Phase IV projects may indicate that new programmes to ensure that only candidates with a high likelihood of success enter into clinical trials are achieving the desired results.

Preference and performance count

While these numbers suggest that all CROs and CDMOs will experience burgeoning project portfolios, in reality, a limited number of service partners that earn the position of preferred or strategic supplier will capture most of the expanding business. These CDMOs and CROs will offer a combination of high-quality, superior, flexible customer service and novel, proprietary technologies designed to address key customer needs, all at a competitive price (and often through creative contractual agreements).

The switch to preferred and strategic suppliers is occurring at the expense of tactical relationships

The switch to preferred and strategic suppliers is occurring at the expense of tactical relationships. Indeed, 43% and 45% of respondents to Nice Insight’s 2016 CDMO and CRO Outsourcing surveys seek ‘Preferred Suppliers’, up from 36% the previous year, while the preference for tactical suppliers dropped from 34% to 31%.

Be warned, however: 50% of survey respondents also indicated that they would switch CDMOs for poor quality and lack of on-time delivery.

A Note on Nice Insight’s new CDMO and CRO surveys

For the first time in 2016 the original Nice Insight outsourcing survey was divided into two separate surveys to focus on the differing aspects of the contract manufacturing and research markets.

In recognition of the key trend toward companies that provide integrated development and manufacturing offerings, the new manufacturing survey specifically explores the use of CDMOs and CMOs.

The CDMO and CRO outsourcing surveys include the responses of 587 and 586 outsourcing-facing pharma and biotech executives, respectively.

Importantly, the majority 39% (37%) of survey participants are key decision-makers in their organisations. Professionals with positions in R&D, formulation and analytical 18% (15%), development, production and manufacturing 13% (5%) and operations and engineering 10% (4%) functions are also well represented. As a result, the surveys are quite balanced with the opinions of both company leaders and those in the trenches.

The new CDMO/CRO surveys are also truly global in nature, with 56% (61%) of respondents from North America, 28% (20%) from Asia and 16% (19%) from Europe. They also include input from representatives of biopharmaceutical and pharmaceutical companies of all sizes: large (>$5bn in annual sales), medium ($500m to $5bn), small ($100m to $500m) and emerging (<$100m) with 36% (39%), 43% (41%), 12% (14%) and 9% (6%) share, respectively.

Initial analysis of the data also indicates that survey participants utilise contract services in all key pharma and biopharma markets around the world. Most manufacturing/research projects are outsourced in the US/Canada 30% (31%), Western Europe 14% (14%), India 12% (9%) and China 9% (10%), but a reasonable amount of activity is also taking place in Singapore and Southeast Asia 8% (7%), Japan and Korea 7% (9%), Argentina and Brazil 7% (7%), Eastern Europe and Turkey 7% (8%) and the Middle East 6% (6%).

To learn more about Nice Insight, the report, or about how to participate, please contact Guy Tiene by sending an email to guy@thatsnice.com.

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