Production pressures cured by contract

As the pharma sector struggles with price pressures and global competition, Cenexi's Dr Ingela Herrmann looks at the pros and cons of outsourcing manufacturing.

The focus of pharmaceutical companies has shifted over the past 15 years from one of development and delivery to that of commercial efficacy in the face of downward price pressures. For this reason the value chain in pharmaceutical manufacturing has been examined more closely than ever before. In 2001, Jim McKiernan, a partner at PricewaterhouseCoopers in Basel, Switzerland, highlighted in a published article that the complexities (and costs) of the value chain had to be addressed by pharmaceutical manufacturers. At that time he estimated that, 'most advanced pharmaceutical companies have rationalised down to between 10 and 20 plants globally, compared with 60 and upwards at others'. At the same time, he argued that the ideal vision of two primary and between five and 10 secondary plants was a long way away for most companies.

These observations reflect a growing trend toward outsourcing certain elements of the value chain. There is a distinct trend towards outsourcing clinical trial supplies (CTS) and formulation testing through contract resource organisations and other service providers to resolve capacity shortages, tighten development timelines, and reduce processing costs.

Indeed, contract resource organisations, especially those in formulation development, have grown quickly, evolving from 'an extra pair of hands' into strategic business partners, purveyors of innovation, and proprietors of novel drug-development technologies.

However, within the value chain there are three principal concerns for the pharmaceutical company. In a historical sense, most traditional pharmaceutical value chains consist of three easily defined, discrete manufacturing steps:

• Primary - the manufacture of the drug's active ingredient, usually through many steps of chemical synthesis

• Secondary - the conversion or formulation of the active ingredient into the tablet, ampoule or other dosage forms

• Packaging and labelling

Clearly, within the primary stage, the molecule development and formulation are least likely to be outsourced, although once the molecule has been patented and the formulation developed, the option to use contract resource organisations and CTS providers can become attractive. It is in the secondary stage and in packaging and labelling, that the attraction of outsourcing becomes most compelling.

political levers

According to McKiernan, 'the internal supply networks are usually more extensive than necessary, which means that capacity utilisation is poor, especially in secondary stages. The historic reasons for this include the fact that companies often used the establishment of local facilities as political negotiating levers for drug approval and optimum pricing. This situation was exacerbated every time a merger came along, as manufacturing networks were obviously joined together.'

This poses a number of problems for the manufacturer. The relocation and subsequent transfer of production is incredibly time consuming, very costly and potentially disastrous for production continuity unless two lines can be run in tandem until validation and stability studies are completed for the new line. This problem is exacerbated if the lines in question are on the downward demand curve, since amortisation of any manufacturing investment may take considerably longer in this instance, than for a new product: in some cases the costs of transfer may be considered too high to be recovered within a product's lifetime.

Typical of such products are liquid injectable treatments delivered in ampoule form. Ampoules are in decline and the total market is estimated to be falling by as much as 10% a year. Since it could cost between €8m and €10m to install a new ampoule line, it is clear that such investment must be considered carefully in the light of a potentially falling market.

The option to subcontract production, even for declining product lines, relies on a number of factors that, at times, have precluded big pharma companies from considering such a move. Briefly, the primary concerns are: the ability of the subcontract manufacturing company to meet compliance requirements; the management of the validation process; stability compliance; the cost of the product; the cost of transfer; the time taken to effect a transfer and the long-term financial stability of the subcontract manufacturing company to ensure continuity of supply over a long product lifecycle.

Within the above concerns are smaller, but by no means unimportant, considerations such as the quality of the overall product (including its packaging) and the reliability of the timing of shipments.

huge resources

Most pharmaceutical subcontract manufacturers are relatively small companies and this poses one reason for a reluctance of some big pharma companies to outsource. However, there are now some major manufacturing capacity providers backed by huge resources and with high levels of experience and expertise.

Considering that most drug treatments can literally spell the difference between life and death, the failure to supply products is not an option. However, this very factor can lead to a very high cost of service for the drug manufacturer, since continuity of supply is often met by holding excessively large inventories of product. To improve the move towards a more 'just in time' production requires dramatically better integration of the value chain - information flow must be fast and unambiguous and lead times have to be reduced.

large inventories

The build-up of inventory is a continual problem in the industry, particularly in the big pharma companies. Inventory turns of just one or two a year are not uncommon - a situation that would be intolerable in most manufacturing operations where turnover of product is usually measured in high tens or even hundreds. Similarly, because of a combination of the validation process and poor planning, many products have lead times of up to two years.

While this is understandable, the often cited three to six month lead times for packaging, labelling and distribution will soon be intolerable for the market. These situations are a further driver towards outsourcing manufacturing, packaging and distribution, yet the industry has been slow to exploit this option.

One impediment to outsourcing, or indeed, any production transfer, is the time and costs attached to such measures. These can, however, be alleviated somewhat when the right partnering subcontract manufacturer is selected.

Because it is possible to establish a new production line at the subcontractor's off-site facility, the original production line can remain operational until full capacity can be attained at the new facility. Hence, the potential for production disturbance is minimised. While this overcomes the easy transfer of production, it does not, in itself, obviate the time and expense of revalidation. This stage relies on the expertise of the subcontractor if it is to make a cost effective and competitive offer to the original manufacturer.

appropriate systems

To provide the required validated system, the subcontract manufacturer needs to have in place the appropriate machinery, systems, as well as hardware and software support. The company must also be conversant in all the requirements as laid out in the original drug manufacturers specifications.

Clearly, if the subcontract manufacturer has a track record in manufacturing, the equipment issue does not arise.

The stability of the manufactured product must also be thoroughly tested in line with GMP standards. Finally, the quality control processes must also meet acceptable standards - not only for legal purposes, but also to contain the costs of manufacturing and the ability to ship reliably and on time. Naturally, subcontract facilities are subject to the usual audits and inspections from the likes of local or regional health authorities and others.

Typically, in pharmaceutical manufacturing the lead time for a transfer is between 18 months and two years. The truncation, without compromising validation, stability or quality assurance is one area where some contract manufacturers can bring immediately tangible benefits. There have been instances where a completely validated transfer has been achieved in less than six months!

high expectations

Naturally, the appeal of subcontracting an existing product line to another manufacturer extends beyond the transfer itself and the validation process. Most manufacturers also look to reduce the costs of the production by outsourcing in this way. This places a burden on the subcontractor to meet those expectations with modern plant and equipment that potentially reduces the cost of manufacturing or packaging in some way.

For this reason the emerging subcontractors are likely to be exceptionally well equipped with fast filling lines, flexible packaging equipment and high yield (low reject rates in quality assurance). Of course, the medium- and long-term cost benefits to the original manufacturer in offsetting future validation requirements, demand fluctuations and ultimately the potential obsolescence of the product are also achieved by outsourcing.

There is a leap of faith required for pharmaceutical companies to outsource manufacturing and packaging. They themselves know only too well the potential for logjams and failures. It is, therefore, beholden on the subcontractor to prove its offer to the industry. This means having demonstrable validation expertise, measurable quality and timeliness and above all, the reliability to enable the customers' reassurance that delivery will be met ceaselessly.