Getting the most out of outsourcing
Do your homework and clarify fee and ownership issues up front, industry sources advise
By Gordon Graff -- Purchasing, 9/2/2004 2:00:00 AM
Pharmaceutical companies, both large and small, see outsourcing as a way to preserve their cash, expedite the drug development process and get a jump on the competition. But the wrong choice of a contract manufacturer can cost a drug developer critical time and money, which can derail promising new products.
To avoid such pitfalls, and to derive maximum value from the customer-supplier relationship, outsourcing managers advise potential customers of contract manufacturers to carefully scrutinize the track records of the companies they are considering hiring, along with their technological capabilities, their personnel and their certifications. Moreover they counsel customers to pin down any vital intellectual property issues early in the game in the form of ironclad contracts. They also urge pharma executives to be aware of the multiplicity of arrangements that exist today, such as various risk-sharing ventures that can be of special help to cash-poor startups.
Outsourcing specialists say that all these precautions are probably well known to the pharmaceutical giants, which have set up institutional mechanisms for inspecting and rating potential suppliers. But small to medium-size firms, they add, often rush into a contract relationship without adequately vetting the supplier. "I'm amazed at the number of people in pharma who will do business with a contractor without checking their references," says Sean F. Bradley, regional director of business development at Regis Technologies Inc., a Morton Grove, Ill.-based provider of contract and manufacturing services.
Perhaps the first thing a potential buyer of outside services should consider is what to outsource. "Your company's strategic plan should determine what you outsource and what you keep in-house," says William S. Caldwell, vice president of drug discovery and development at Targacept Inc., a biopharmaceutical company that specializes in diseases of the central nervous system. In particular, Caldwell says it is unwise for a company to outsource its core activities or competencies, which he defines as the technologies or know-how that define the company and add to its shareholder value. A firm that outsources its core technologies, he says, risks losing control of them. For Targecept, in Winston-Salem, N.C., a core competency would be medicinal chemistry. Outsourcing work in this area, says Caldwell, would be "like giving away the family jewels."
But not everyone agrees that outsourcing core activities is risky. "A lot of companies that provide outsourcing services have IP [intellectual property] protection controls in place," says Carl Schrott, manager of strategic marketing at Sigma-Aldrich, St. Louis.
What does make sense to outsource, says Caldwell, is a class of activities he calls "context," a term that refers to everything outside the firm's core. Context "is sort of like brushing your teeth," Caldwell explains. "It's something you have to do, but you don't get extra credit if you do it well." For Targecept, he says, context might include such activities as regulatory toxicology, preclinical safety testing and—when a product goes commercial—bulk manufacturing. These are essential, he notes, but they are not activities that distinguish Targacept from its competitors.
Even when something is not a core competency, it shouldn't automatically be outsourced, Caldwell cautions. Difficult issues of money versus time come into play when managers must decide what to outsource, he says. Are the expenses of outsourcing a process or synthesis worth the benefits of speeding it up? Sometimes the answer is yes, Caldwell says, if it will help get a product to market by a targeted launch date. To decide whether to allot resources for outsourcing, he notes, "you've got to consult with your CFO, and look at your company's finances." Above all, he adds, "look at your company's business plan and make sure that whatever you do is consistent with it."
Outsourcing, when part of a well thought-out strategy and not something done frantically in a rush, can benefit a company by allowing it to plan ahead, Caldwell notes. "It gives you the opportunity do prequalification audits of service providers," he says, which can save both time and money for a company.
Making a choice
Once managers make a decision to outsource, they face a daunting array of choices. Typically, a drug company sends out requests for proposals to different contractors and then makes a selection from the proposals that come back. "You need to do your due diligence" in evaluating the contractors' proposals, says Bradley. Among the questions to consider, he advises: Have the companies actually done your kind of chemistries before? Are they in the same ballpark on price? What kind of scientists do they have on staff? And do you know if those scientists are the ones actually doing the work?
Once a company has narrowed down an initial list of bids to perhaps the top two, there's an additional winnowing process that must take place, says Bradley. "Now you have to go and do an audit" of the top candidates, he says. Among the questions to ask at this point, he says: Is this a GMP [good manufacturing practices] job or a non-GMP job? What kind of quality systems do these people have in place when you go out there? Is the place clean? And what does their QA [quality assurance] department look like?
When making a final selection of a contractor, "a site visit is a must," Bradley declares. While large pharmaceutical companies do this routinely as part of their supplier qualification process, he adds, many smaller organizations lack the funds for site visits and often skip this vital step."
It is also very important that a potential contractor "have an effective technology transfer policy in place," says Schrott. Such a policy provides sufficient documentation to enable a customer to transfer to its own premises any process or method developed by the contractor for that customer.
Companies that outsource should also make sure their contractor has the appropriate certification, say at the GMP level, for the work to be done, Schrott advises. And it is helpful if a contractor has an analytical services unit on its premises, he continues. This makes it easier for the firm to provide the reams of data that are required for submission to regulatory agencies once a drug candidate reaches the preclinical and clinical testing stages.
Of great concern to drug developers are the scaleup capabilities of contract manufacturers. "This becomes really relevant," says Schott of Sigma-Aldrich, "if you have a potential blockbuster drug out there and you want to be sure they have the capacity to handle the product quantities that would be needed for the commercial market."
While it is common for the same company that works on development of a new drug or device to manufacture it if it goes commercial, this practice is not universal. For instance, Bristol-Myers Squibb has made it a policy to solicit bids separately for the development and manufacturing phases of a new medical product. D. Rob Hannay, vice president for global strategic sourcing at the company, says that a contractor with expertise in development may not necessarily be the most economical manufacturer of the product on a large scale. [PUR, Chemicals Edition, Oct 9, 2003, p. 24C1]
Bristol-Myers Squibb has done only a small amount of outsourcing of commercial-scale pharmaceuticals, Hannay notes, though the firm frequently outsources manufacturing of medical devices and drug packaging. "In the past," he says, "we've outsourced finished pharmaceuticals as a matter of expediency, with the idea that we'll bring it back in-house as soon as we can." But now, he adds, "we're just awakening to the fact that we need to treat contract manufacturing [of finished drugs] more strategically."
Helping your supplier
Whatever its size, when a pharmaceutical company decides to outsource, it is of paramount importance that it provide potential contractors—after they sign secrecy agreements—with as much information as possible about the product or process to be developed or improved. "The strength, detail and completeness of the technical package you send out in your request for proposals will dictate the strength of the proposals you get back," says Bradley who classifies the technical packages he receives into four categories:
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No information. "They just have a molecule and say 'we want you to make this.'"
A "bare-bones" literature preparation. -
Some of the chemistry has been done in-house but nothing on a large scale. This is the most common situation.
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The process, often from a large pharmaceutical house, is already fully developed, with documentation of batch records and methods.
Each additional level of detail in a submitted technical package shortens the time it takes to come up with a competent proposal, Bradley notes.
Once a contract is signed, it is fairly common for a customer to supply its contractor with chemical ingredients sourced on the outside. "Where you're sourcing those chemicals and what you know about the quality of those starting materials before you begin a synthesis is a huge issue," says Bradley. Even minor impurities in starting materials can foul up or delay a project, he notes.
Bradley recounts many examples of what can go wrong when a customer neglects the quality and purity aspects of the starting materials it provides. In one case less than six months ago, he recalls, "one of our customers went and procured a raw material from somewhere on a non-GMP basis without checking it out." (Materials made under non-GMP conditions are generally less costly than those produced under the stricter GMP standards.) "That material completely ruined the whole synthesis," he continues. "And this didn't become apparent until after the synthesis was done, and the yields were terrible. Ultimately we traced the problem back to the beginning, where we found that the starting material had trace impurities that beat up the whole project."
The lesson to be learned from this experience, Bradley says, is that companies that provide their contractors with chemicals should be able to trace those materials back through the supply chain, even if they originate in China or India, as is often the case with chemical raw materials today. To ensure that these materials meet adequate quality and purity standards, he adds, purchasers must audit the manufacturer in the country of origin.
Striking a deal
Pharmaceutical companies seeking outsourcing services have various options. The simplest arrangement is the fee for service, where the contractor agrees to do a specific type and amount of work in return for a specific fee. This approach can be applied not only to process development and scaleup but even to drug discovery, where the customer essentially rents the services of chemists and other scientific personnel from the contractor. In fee-for-service arrangements, contracts usually award the sponsoring company ownership rights to any technology that comes out of the collaboration.
But new models of collaboration are emerging. One of them is the risk-sharing arrangement. Under such a deal, says Caldwell, the contract research organization is willing to share the cost of a development project, which may or may not yield marketable products, "if you promise them a piece of the pie downstream." Risk-sharing deals are becoming more and more popular with small biotech companies that want to move into the product phase but are short of cash, Caldwell says.
In all contract negotiations questions of ownership and intellectual property rights can become contentious. A rule-of-thumb guide to how much equity a party should receive in a new product, says Caldwell, is how much risk the party incurred in the product's development. If the original relationship was a fee-for-service arrangement, he notes, the contractor usually gets no ownership rights in the new product. "Things get a bit dicey," he adds, when there was a risk-sharing arrangement and the time comes to assign royalties and fees to each party. He advises the services of "a good patent or contract lawyer" to handle such issues.
Still, says Caldwell, although each party in a contract negotiation has its own interests, the relationship between the two sides needn't be adversarial. He suggests that both parties meet informally at the onset of talks to air their goals and expectations. This, he says, will help smooth the way once the serious bargaining begins in a later meeting.
For the parties in a negotiation the issue of intellectual property rights should be settled and put in writing very early in the relationship, Caldwell says, "even before the work begins." This is true, he adds, whether a company is working with a university or a contract research organization.
Another question that should be decided even before the work commences is product specifications, says Bradley. Specifications "can't be a moving target" as the work progresses, he adds, and a manufacturer who keeps shifting the specification goal posts "has a greater chance of failure."
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