(© Michael Austin) 

Overseeing Outsourcing

Bradmer Pharmaceuticals lost more than one-third of its value in February. This small, Toronto-based biotechnology firm’s losses arose from stopping a Phase III trial for its lead product, Neuradiab, an antibody in development for glioblastoma, a form of advanced brain cancer. Bradmer had outsourced the 760-patient study to Icon Clinical Research—a Dublin, Ireland-based clinical research organization (CRO)—but delays in recruitment pushed Bradmer beyond its financial ability to continue to fund the study. This episode illustrates the perils attached to outsourcing. Regardless of the vendor involved or its location, outsourcing necessarily implies a certain loss of control and a certain degree of risk. Managing that risk successfully is now a key function for most pharmaceutical firms.

Outsourcing benefits pharmaceutical and biotechnology companies in many ways: saving on operational costs and capital expenditures, as well as providing access to expertise, facilities and technology. Over the past decade the practice has become deeply embedded in the business models of life sciences companies, large and small. Whether the function is in general administrative areas—such as payroll, information technology or human resources—or in core operations—such as drug discovery, clinical-trial management, manufacturing or drug sales—a growing roster of external specialists will take on the task. Business models range from the rare companies that use no outsourcing to virtual organizations, in which everything is outsourced. "There’s no inherent reason why one model is better than another," says Kim Wagner, senior partner at The Boston Consulting Group of Boston, Mass. "I personally believe any model can be made to work."

Variation In Application

Many biotechnology firms are happy to outsource most, if not all, of their manufacturing requirements. On the other hand, Tengion—a tissue-regeneration specialist headquartered in East Norriton, Penn.—does the exact opposite. This company is developing bladder-replacement therapies, and its manufacturing process, which involves the cultivation of autologous cells on biocompatable scaffolds, has to be tailored for each individual patient. Moreover, this has to be done at scale. “Most biotechnology companies see manufacturing as a burden. It’s not something they want to invest in. For us, this is all about manufacturing,” says Tengion chief financial officer Gary Sender.

Companies with more-standard production processes, however, can take advantage of the expertise and the facilities of contract manufacturing organizations (CMOs). According to Bruce Carlson, publisher at New York-based market research firm Kalorama Information, revenues from contract manufacturing of biologic drugs are growing at about 13 percent annually and will reach an estimated $5.2 billion in 2013. For CMOs making biologic drugs, 55 percent of them are in North American, and 24 percent are in the European Union.

Asia accounts for only three percent of biologic CMOs, according to Kalorama data, but Asia has obviously come under sharp scrutiny following the heparin-contamination crisis of last year, in which an estimated 200 people died. The deaths were caused by an apparently deliberate adulteration of raw material in China with over-sulfated chondroitin sulfate, a substance with heparin-like activity, which can trigger fatal immune reactions. It was not detectable in the quality-control tests then in use. Although Baxter of Deerfield, Ill., was most prominently associated with the incident—given its 50 percent share of the U.S. market for the blood thinner—more than a dozen companies around the world were affected.

The whole incident highlighted—for the public and politicians alike—the increasingly global nature of the pharmaceutical supply chain, and it has put pressure on both companies and the U.S. Food & Drug Administration (FDA) to ensure that the quality standards implicit in an FDA approval are upheld, regardless of the origin of a product or its constituents. "I think the phrase 'made in China' has taken on a whole new meaning, not only for the pharmaceutical products and drugs that are manufactured there," observes Mike Keech, director of pharmaceutical industry advisory services at PricewaterhouseCoopers, noting problems in other areas of Chinese manufacturing, such as food and toys.

The Price Of Vigilance

Additional vigilance, of course, will erode some of the savings that companies achieve by outsourcing. "Companies are doing those calculations," says Carlson. But no pharmaceutical company wants to save money by endangering patients, Wagner points out. "There’s no desire to do things cheaply and introduce more risk into the system. There is a desire to do things more flexibly." Companies are tightening up their supply chains by reducing the number of vendors they work with and by working more closely with those that they do select. "People are more rigorous in how they oversee the vendors," Wagner says. This can include placing company employees on site and conducting more inspections. Testing, of course, remains a key guarantor of the quality of a manufactured product. "The importance of testing cannot be over-emphasized: test, test, test," Keech says.

There is no immediate equivalent for companies that outsource the management of their clinical trials, Wagner says. "When the thing that you’re buying is clinical data, how do you know it’s clean?" she asks. Developing a close relationship with a CRO is the best solution. This can extend to providing training to its staff and accompanying them to clinical-trial sites. "By being there with them you will observe practice and be able to train them further," she adds.

In parallel with the efforts of companies to effectively manage outsourcing, FDA is increasing its focus on the area. For example, it recently established three offices in China and two in India to support these activities, and further expansions are planned for the Middle East, South America and Europe.
The heparin incident notwithstanding, a PricewaterhouseCoopers report published in October 2008 ranked China ahead of India as Asia’s most attractive outsourcing destination, based on a combination of cost, risk and market opportunity. Companies that can successfully manage partnerships with China's CMOs and CROs are also expected to be best positioned to tap into the country’s significant potential for innovation. But successfully managing the resulting matrix of relationships will be the ultimate determinant of their success.