The threat of lower profit margins and decreasing revenue streams is creating intense pressure for many pharmaceutical and biopharmaceutical companies. Patent expirations loom for major brands, average drug development costs continue to rise, while research and development productivity is declining. The overall success rate for drugs moving through clinical trials to approval in the United States has dropped by 50 percent for small molecules [1]. The reimbursement picture is equally challenging. Even when a drug can traverse the regulatory hurdles, reimbursement is no longer guaranteed.
Collectively, these factors are forming a perfect fiscal storm affecting how the pharmaceutical and biopharmaceutical industry conducts business. Driven to capture profit margins, company managers naturally look for ways to streamline their operations and reduce costs to stay competitive. This response continues to be a focal point in management articles, seminar topics and even direction from company boards of directors. Outsourcing or transferring manufacturing to lower cost environments, particularly to emerging markets, has been one growing trend within the industry.
Since 2000, U.S. drug master filing has grown seven-fold in India and has more than doubled in China [2]. But this rise in manufacturing outsourcing has been coupled with a dramatic and troubling rise in quality issues across the industry, resulting in product recalls, contamination problems and supply shortages. During the past decade, U.S. Food and Drug Administration (FDA) inspectors have been increasingly investigating facilities in emerging markets. The question this raises is whether the focus on driving down costs through outsourcing or transferring production to emerging markets is also driving down quality and contributing to drug shortages. As an industry, do pharmaceutical and biopharmaceutical companies adequately understand the riskbenefit balance of outsourcing?
An Industry Under Fire
For a good part of the past decade, drug recalls have been plaguing the industry. Beginning in 2006, drug shortages have been steadily increasing, rising to 267 medications in 2011 [3]. In many situations, this shortage is a failure in the supply and often because product sourcing has moved offshore. In 2009, for example, eight pharmaceutical companies recalled generic products in the United Kingdom after regulators found “serious deficiencies” at a single contract manufacturer in India [4]. Last year, an investigation by the news organization Reuters found that unregulated chemical companies in China were manufacturing active pharmaceutical ingredients and selling those products with little to no oversight. It is clearly not acceptable when cost pressures impact human health [5].
An industry consulting firm recently recommended that pharmaceutical companies take a lesson from the automotive industry and other sectors on approaches to lower costs while maintaining quality [6]. While there may be instructive learnings to be shared from other industry models, approaches for cutting the manufacturing costs of consumer goods such as sneakers or t-shirts, or even cars, cannot be blindly applied to pharmaceutical and biologic therapies because the risk of failure is inherently different. Biopharmaceuticals are particularly at risk because, unlike small molecules, our products are defined by our manufacturing processes and environment. Moreover, the complexities associated with manufacturing biologics – handling of raw materials, the environment, specialized technologies and expert techniques – puts biotechnology companies at even greater risk of quality issues, when compared to those producing small molecules.
Whenever a company outsources part of its manufacturing process to an emerging market – even in a location where it may already be outsourcing – it incurs risk because that process is no longer in its direct control. Applying formulaic solutions to issues facing drug development can be a dangerous proposition. Outsourcing labor to China or India solely based on cost is generally the right solution for a mid-range sneaker manufacturer because labor costs are high in that industry and the quality models are different. Manufacturing issues that interrupt product supply may create a nuisance, but do not pose the same issues as breaks in the supply of medical therapies and devices.
What happens if you are the sole supplier of a specific drug class and cannot supply that product to part or all of the market for several weeks or months? That could be a regulatory disaster because patients will need to be switched to other drug classes that may not provide the same efficacy or safety as the approved product. Now consider what might happen if you are facing a drug shortage in a market where there are competitive pressures. If you are off the market for any period of time, then will your brand ever recover its market position? What costs are you willing to incur to mitigate that risk?
Taking an Enterprise View of Outsourcing
Companies drawn in by the short-term cost savings of outsourcing because of cheaper labor costs must first take a long-term view on the potential costs associated with a breach in quality and supply.
Taking proven steps to ensure product supply begins with better decision making. Many companies are focused on cost reduction as a narrow and generalized approach in which cost-saving initiatives are evaluated solely on their impact on day-to-day costs. That may be fine in the apparel industry, but not in areas where there are greater risks involved. Before shaving away at costs, an organization must have a fundamental understanding of what the costs represent and the risk trade-offs involved.
Modeling supply risk starts with truly understanding an organization’s top-to-bottom costs at the Profit and Loss (P&L) level. Not many companies have a strong vision of their costs. However, P&L doesn’t provide the full picture. By reanalyzing total costs – the costs it actually requires to manufacture the product - an organization can look at the biggest line items and evaluate if it can shift those costs without incurring risk. For a small molecule therapy, for example, the average COGM (Costs of Goods Manufactured) is about 30 to 35 percent, with labor representing about 20 percent. That means labor costs account for about seven percent of the total revenue stream. Is a relatively small savings in labor costs worth the potential risk to the product supply if an issue arises?
Across the industry, we complete a “Quality Risk Assessment” (QRA) anytime there is a change in process. Although this is not a regulatory requirement, regulators will take notice if a company modifies its procedures without completing such an assessment. As an industry, pharmaceutical and biopharmaceutical companies also should be performing a “Supply Risk Assessment” (SRA) whenever there are material changes in sourcing. Only then can these companies make a more informed decision that protects their businesses and the patients they serve.
Similar to a QRA, an SRA requires a multi-functional team – not just the people managing supply chain sourcing, but also those involved in quality control, commercial and finance. Risk models are different based on the issue. If a company has three manufacturing plants, for example, the risk to its supply chain is relatively low when adding a new supplier to the roster. The risk is higher if that company plans to shut one plant down and shift operations to an offshore source. Without taking a more in-depth view, it might be betting the success of its franchise.
MedImmune, the global biologics research and development arm of AstraZeneca, took this enterprise approach to risk mitigation when determining how to manufacture the respiratory therapy, Synagis® (palivizumab). This monoclonal antibody is used to help prevent a serious lung disease caused by respiratory syncytial virus (RSV) in children at high risk for severe lung disease from RSV. Based on its current manufacturing capacity, MedImmune has the ability to manufacture 100 percent of product in-house to meet the market need for Synagis. The level of risk involved was not the only factor weighing on the company’s decision. What would happen to the high-risk infants who need Synagis if the manufacturing plant were to go offline? Instead, MedImmune mitigated its risk by sending a portion of the supply manufacturing to a contractor. Staying in-house would have been more cost effective, but the need to protect the supply outweighed the added cost of bringing a contract manufacturing organization onboard.
For the pharmaceutical and biopharmaceutical industry, there clearly is not a one-size-fits-all approach to outsourcing. Gaining access to a specific international market may require shifting some of the product manufacturing in that market. In those cases, a team must still assess quality and supply risks by assessing the plant, the owner and even the country. Those instances require balancing risk with business access and revenue stream added into the equation. If the risks are high and the market is small, then the answer is relatively simple. It becomes more complex when entering larger markets for financial reasons.
Some CMOs also offer core competencies that are vital to the industry. India, for example, has strength in chemical synthesis for small molecules. Outsourcing then, would be a more economically-feasible route than building a new plant. But a firm would still have to carefully analyze all risk elements to supply, including a solid assessment of quality risks.
Overall, before making any shifts in manufacturing process, first understand the risk model and level of risk tolerance. Next, complete a broad enterprise review of the risks being taken. Some risks may be required to address growing cost restraints. It is important to make these decisions consciously. Finally, ask if cost is truly driving the decision. Cost basis alone may simply not drive the same outsourcing model as seen in the automotive or apparel industry.
References
- Cooley, T. “New Study Shows the Rate of Drug Approvals Lower than Previously Reported.” Biotechnology Industry Organization. February 14, 2011.
- Kennedy, B. & Bowman M. Special Report: Current & Future Sourcing Trends: Is India and China the Only Future for API Sourcing? Thomson Reuters. October 24, 2011.
- Schoen, D. “The Drug Shortage Crisis in America.” Forbes. February 13, 2012.
- Medicines and Healthcare products Regulatory Agency. MHRA Statement Relating to Recent Class 2
- Lee, M., & Hirschler, B. Special report: China's "wild east" drug store. Reuters. August 28, 2012.
- Hirschler, B., & Burger L. “Big Pharma gets a Driving Lesson from Carmakers.” Reuters. December 4, 2011.
Andrew D. Skibo serves as Regional Vice President, Supply Biologics at AstraZeneca, overseeing biologics manufacturing. Andy has led numerous strategic initiatives to scale and refine the biologics manufacturing organization, and has overseen large-scale expansion projects, which has resulted in two ISPE Facility of the Year awards.