Dos and don'ts of discovery outsourcing
By By Christopher Reilly -- Purchasing, 4/5/2001 2:00:00 AM
Behind the trend toward increased outsourcing in the pharmaceuticals sector, as well as the market segments that service it, is a desire among companies to concentrate their business resources on what they do best. Some companies are clearly better equipped to manufacture product rather than having the high level of research and development knowledge and resources needed to discover and develop new products. And because these pharmaceutical companies must continue to discover new drugs in order to be successful, a niche market comprising research-focused, custom service providers has emerged.
Companies like Albany Molecular Research, based in Albany, N.Y., offer customizable resources for medicinal chemistry, organic synthesis, process research, cGMP synthesis and analytical services. Using technologies such as high-throughput screening, they focus their product discovery efforts in order to investigate a more diverse range of molecules. They have limited manufacturing capabilities, usually only enough to manufacture very small volumes or samples, perhaps on a pilot basis.
For pharmaceutical companies, discovery services such as these are important because more new product possibilities in the development pipeline maximizes the probability of discovering a blockbuster drug. For purchasing, the task becomes finding the best discovery R & D firms and outsourcing their services with a close eye on speed, performance, quality, intellectual property and cost.
A different kind of buy
For purchasing professionals in the pharmaceutical market segment, outsourcing drug discovery research and development services is slightly different than outsourcing contract manufacturing.
What gets outsourced? At Eli Lilly & Co., a leading pharmaceutical discovery and research firm based in Indianapolis, Ind., purchasing often turns to custom research and development organizations to outsource resynthesis, which allows Lilly's own chemists to concentrate on new projects. However, Lilly also outsources custom manufacturing grams to multi-kilogram volumes, and intermediates to active pharmaceutical ingredients (APIs), process development or knowledge of how to make a particular molecule, analytical development, and new product development. The ultimate goal is to find a balance of internal resources and projects outsourced to custom research organizations and full-time equivalent (FTE) contracts made with specialty and fine chemical companies and custom manufacturers.
Dix Weaver, supply chain consultant for materials management at Lilly, explains that unlike contract manufacturers, contract research organizations must try to get their fee for service up front. "The only way these companies can cover their costs is to demand it up front," Weaver says, "because quite often there's nothing behind the one-time research. It may be that you have an ongoing contract with the contract research organization, but they'll never benefit from a commercial drug opportunity where they can make money off the production of thousands of tons/yr," he says.
Specialty or fine chemical companies such as Rhodia, Lonza, Clariant, Avecia and others, may offer their research and development services to pharmaceutical companies for new drug projects at cost or slightly below cost to get involved with more new projects, earlier. In this way they may be able to share some of the risk of new drug development with the pharmaceutical company. "These companies understand that by collaborating at such an early stage of product development, it's likely that they won't be profitable, but at the same time, they're going to look to make money on the back end," Weaver says.
So the main distinction of the two types of outsourcing buys is the degree of risk involved. "Custom research organizations have to get their money up front because for them, there is no tomorrow," Weaver says. "While specialty and fine chemical producers can share in some of the risk if they stand to benefit from commercialization of a blockbuster."
Without risk-sharing and cost reduction as incentives, one might think outsourcing from these companies would leave little room for partnering, but according to Weaver, there are ways to maximize efficiency and develop procedures that lead to indirect cost savings. "Maybe you can develop some longer-term contracts where the custom research organization knows they're going to make a certain amount of profit, so they can hire people based on long-term demand. For them, the alternative is a demand cycle with peaks and valleys," Weaver says.
Another way to maximize efficiency and foster cost reduction is to streamline communications with the contract research organizations. With a buy as technical as new drug discovery research and development, a lot of interaction between buyer and supplier is required. Any way to reduce the time spent on information transfer and eliminate mistakes that result in re-work, maximizes the possibility for blockbuster profits.
According to Weaver, Lilly is developing a secure e-mail bid-and-award system for new projects sent to custom research organizations. Through a secure e-mail link between the companies, Lilly provides the structure, process, safety information and literature references of the new project. The custom research organizations are then allowed to bid on the project. When completed, Lilly expects the system to allow purchasing to conduct the bid-and-award process in as little as 24 to 48 hours, eliminating a lot of the legwork currently required.
Lilly's approach
When strategic sourcing at Lilly is called upon to outsource new drug discovery research to a custom research and development organization, its process for finding, qualifying and awarding business to the best supplier is primarily designed with quality, speed and cost in mind.
Critical to Lilly's discovery outsourcing strategy is the development of a team of scientists in a flexible arrangement to meet the needs of rapidly growing projects. Finding and selecting these contractors depends on a number of criteria, including the overall quality and experience of the staff, a similar organizational structure and/or business culture, and a compatible philosophy regarding intellectual property.
Lilly then feeds its ongoing requests for proposal (RFPs) and new projects to a running short list of about five to 10 of these active, qualified custom research and development services suppliers. This is done to cover the expected technology bases for new projects, and to reduce the time and cost of approving a new supplier every time a product, process or reaction is required.
Next, information is transferred between the suppliers and Lilly through the secure e-mail system. "Then you begin to look at cost and total value to award the contract to the bidders," Weaver says.
It's important to note that cost usually takes a backseat in this market because companies are willing to spend a little extra if it guarantees the quality, improves the speed, or simplifies the development route used to get that project through clinical trials and on to commercialization. Buyers looking to outsource discovery research and development can "go cheap" and get a Ph.D. from a third-world nation for as little as $10,000/yr, or they can source from the major markets and spend upward of $250,000/yr. But whichever strategy buyers take, Weaver warns, "Ultimately, you'll get what you pay for."
Each of the pre-approved custom research organizations on the short list is measured by past performance in a variety of areas, including on-time delivery, quality and the economics of the projects.
The need for due diligence
To make it on the short list of custom research and development organizations, prospective suppliers must pass an elaborate due-diligence process. "We have to make sure that the contractor has the right quality systems, the right cost basis, the ability to handle relationships, the ability to manage and protect intellectual property, etc.," says Weaver.
As part of the program, Lilly begins to take a close look at the prospective contractor in terms of several factors, including: The similarity of the contractor's business culture with that of Lilly, their responsiveness to client demands, their willingness to work together and share information, their financial stability, and their long-term corporate vision for success.
Security factors are also taken into account. Because the pharmaceutical market is so competitive, procurement at Lilly must take the necessary precautions to ensure that its technologies (which may constitute its competitive advantage) are not compromised. Prospective contractor interviews include thorough coverage of intellectual property guidelines and procedures of both companies, as well as site and personnel audits for security reasons.
For example, purchasing will examine the contractor's staff experience levels in various phases of development and their continuity with the firm, as well as project staffing flexibility and their experience with technology transfer. The scale of the prospective contractors' facilities is taken into account, along with its quantity of equipment and available capacity, staffing level and cGMP capabilities. Management systems, such as health, safety and environmental, project management, commercial and procurement, and information technology are closely studied and weighed in the final decision to award business to the contractor.
And as buyers might expect, the due-diligence process also includes a close look at total cost and value. While cost has traditionally taken a backseat to quality and speed factors, Lilly, like many leading pharmaceutical companies, has made total cost and expense management an important part of its contractor qualification.
Identify the hidden costs
When outsourcing from a custom research organization, Lilly's Weaver advises buyers to keep an eye out for the hidden costs associated with discovery research and development services outsourcing, which can quickly add up.
"The key resources that a customer would contract include chemists and facilities, other items, such as supplies, support personnel, quality assurance and quality control procedures, analytical and clerical staffing and project management, along with procurement of materials may or may not be included in the original proposal," says Weaver.
For a buyer entering into an outsourcing agreement, "it is critical to clearly define the project scope and deliverable materials, as well as the responsibility for all the additional costs," Weaver adds.
Before making a decision, Weaver advises buyers to conduct a side-by-side comparison of several contract proposals from different contractors in order to identify some of these hidden costs.
Outsourcing vs. out-tasking
At a recent meeting of the National Association for Purchasing Management (NAPM) Warren Scott, president of Avecia Inc., the U.S. operating subsidiary of Avecia Ltd. headquartered in Wilmington, Del., which spun off from AstraZeneca last year, gave a presentation that involved some of the opportunities and pitfalls of supplying raw materials and intermediates to the pharmaceutical markets.
One of Scott's main thrusts was to point out the difference between outsourcing and what he calls out-tasking. Here are the characteristics of each:
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Outsourcing should be part of a strategic refocusing on those activities companies consider "core" to their businesses, whereas out-tasking usually involves a tactical need to solve a specific, immediate problem.
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Outsourcing should result in long-term relationships, where out-tasking is viewed as developing more opportunistic or one-time supply relationships.
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Outsourcing should be used as a strategic tool in a comprehensive supply chain management program. Out-tasking is used more for project management.
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Outsourcing should provide for the sharing of the development benefits between the customer and the contract manufacturer. Out-tasking often involves a single technology or product relationship that does not encourage further development.
Eli Lilly develops e-procurement
Naomi R Kooker
Eli Lilly & Co. is also developing an automated e-procurement system to streamline how the company does business.
At the center of the program is the creation of three different portals with a single portal access. One portal will service employees, another will focus on purchasing professionals' needs, and a third will be used by suppliers.
Self-service procurement tools will be provided by the employee portal, such as an electronic product catalog for office supplies from pre-approved suppliers. Also, an online requisition tool will allow employees to communicate their individual procurement needs to the company's purchasing function. A Web disbursement voucher form will allow employees to cut a check for payment to approved suppliers. In the event that a purchase order is not necessary for certain purchases. This will free up valuable time and resources for purchasing to concentrate on strategic agreements and outsourcing projects.
Procurement professionals at Lilly will naturally have access to the employee portal, but their dedicated portal will be specifically designed to help them in their transactions.
Connections will provide electronic RFIs (request for information) and RFPs (requests for proposals) so that purchasing can obtain the information they need about projects quickly and efficiently.
The e-procurement portal program is scheduled to coincide with the company's enterprise resource planning (ERP) upgrade in October.
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