Speed, competition drive outsourcing at Searle
By Christopher Reilly -- Purchasing, 9/2/1999
Purchasing professionals at pharmaceutical manufacturers deal with many sourcing challenges when developing new drugs. One practice that continues to grow strongly in pharmaceuticals is the outsourcing of key production steps to outside companies that are experts in specific technologies and processes.The benefits of outsourcing steps in pharmaceutical development, approval, and manufacturing are many--reduced cost, faster time to market, access to new technologies, for example. Of these, perhaps faster drug development is the most critical. Drug companies make massive investments in new-drug development, and developing new drugs takes many years. Beating competitors to market, even by a short time period, can be the difference between profits and losses.
According to PhRMA, the Pharmaceutical Research and Manufacturers of America, based in Washington, D.C., in 1998 it cost an average of $500 million to discover and develop just one new drug. Also, PhRMA estimates that it takes about 15 years from the time a drug is discovered in the laboratory to when it is marketable.
David Hurwitz, principal and analyst of the pharmaceuticals market at Arthur D. Little, Inc., Cambridge, Mass., says that pharmaceutical companies think of time in terms of potential earnings. "A successful drug at its peak sales might bring in about $400-$500 million/yr," he says. On a monthly basis, Hurwitz estimates the drug might be worth about $40 million/month. "If the companies get to market two months earlier than planned, that's about $80 million in potential earnings," he says.
But speed is not the only reason to outsource. "Now, not only do pharmaceutical companies want their suppliers to share in the risk, they also want them to bring insights, new technologies, best practices, and other value-added services into product development," Hurwitz says.
One drug producer that has pushed purchasing deeply into new-drug development is Searle & Co.'s Pharmaceutical business in Skokie, Ill. Searle's experience illustrates how pharmaceutical manufacturers are benefiting from purchasing's early involvement in this critical area of new-drug development.
Searle's purchasing evolution
To best develop the supply chain and speed NDAs through FDA regulatory approval, purchasing managers are getting involved in decision-making earlier in the drug development process than ever before at Searle. Most purchasing professionals will agree that early involvement is where purchasing can make the most impact on time- and cost-reduction.
Purchasing at Searle has undergone an evolution in the past several years, and some fundamental changes are planned for the near future.
Christian Frank, the company's senior director of procurement, says that he is in the process of developing a new supplier management program designed to fully develop and manage the company's supply chain, especially in terms of outsourcing key drug development steps.
While the program is currently in its infancy, Frank says it will focus on the early involvement of purchasing in new-drug development and on exploring the total value of the company's supplier base.
To achieve the benefits of early involvement and realize the total value of its suppliers, Searle's supplier management program will focus primarily on three key elements: identifying and developing the best suppliers, approving those suppliers, and monitoring their performance.
According to Frank, "Some of the pieces of the ongoing program are already being developed, waiting to be shaped and pulled together into the formal program," he says. The bulk of which, Frank hopes to have up and running by the end of the year.
For instance, under the key issue of identifying suppliers, Searle has been working to reduce its supplier base to a more manageable number of suppliers having multiple capabilities. "We have a little less than 50 key suppliers that we use on a regular basis," Frank says, adding that the current number of suppliers is considerably less than it was in years past.
Frank says that one measure the company is considering to help determine the best suppliers is creating a specific checklist of criteria for supplier selection. He believes this will help identify suppliers' strengths and weaknesses and help ensure that the right decisions are made regarding which suppliers to align with.
Early involvement
Frank explains purchasing's early involvement in Searle's new-drug development process: "We start working with our scientists when we first identify a molecule as a possibility for a therapeutic application," he says. "Typically, there are multiple routes you can take to construct a molecule. We help R&D efforts by identifying and evaluating specific supply routes," Frank says. "Then we select the most efficient and economical course of action. Usually, we end up with a shorter timeline and a less expensive process.
"In the past, we didn't get involved until the product had gone to the pilot-plant stage. By that time it was too late for purchasing to be effective, because the suppliers were already identified," Frank says. Once the company had started its clinical studies and documentation for submission to the FDA, "We were locked in."
Supplier approval
In the area of supplier approval, Searle has made some efforts--and found mixed results. "A couple of years ago, we instituted a supplier-certification program to develop our suppliers before we began the FDA approval process," he says. "The program did help us in some areas, but it was also met with some indifference."
Frank suspects that the program wasn't more successful because the company hadn't yet developed the groundwork to monitor and determine the value of the program. "Now, we're beginning to bring the pieces together," he says.
Another part of Searle's supplier-management program will involve approving suppliers, which, according to Frank, will also be targeted for early involvement and approval.
"The ideal is to go into the FDA drug development approval process with commercial suppliers that are already approved. Frank says, "Approving suppliers clearly takes time and money, but sometimes it is necessary. By approving the suppliers during the initial drug development cycle, it's less expensive from efficiency and potential commercial earnings standpoints," he says.
Searle's goal, which Frank expects to be outlined in the program, will be to have suppliers approved prior to technology transfer. Frank estimates that downstream, the new approach will be more efficient than the current procedure. But he admits that the company is not sure how it is going to work yet, because, "Sometimes, we work with one group of suppliers on new drug development and then a different group for commercialization of the project," he says.
"In the past, R&D would identify suppliers, then we would go through the drug-development process and on to the pilot plant. It was the plant quality group that was responsible for approving suppliers at that stage," he says.
Developing relationships with suppliers
Searle Pharmaceutical's Christian Frank believes in developing strong relationships with suppliers to keep him abreast of issues in the ever-changing pharmaceutical industry.
He offers some advice to pharmaceuticals buyers in developing lasting relationships with their suppliers. "You've got to constantly look to the future. Think of what the supplier can provide you today, as well as what they can provide tomorrow," he says. "The real goal is to explore their total value and work together to maximize that value."
Frank also emphasizes the need for pharmaceutical buyers to be flexible. "As we continue to develop new drug technologies and approaches, we're going to see both challenges and opportunities," Frank says. "There is no one best practice that fits the development of NDAs. It always depends upon the molecule, the circumstances, and the timing involved," he says.
In the pharmaceutical industry, it is always possible that the molecule could drop out, realizing no commercial return. "So we're trying to work with suppliers that have potential beyond the current project," Frank says. The reasoning is that the more new drug projects Searle is able to give to a supplier, the more chance that a project will make it through FDA approval. "Eventually, we'll get a winner," he says.
Monitoring performance
The third area Frank is considering for Searle's new supplier-management initiative involves monitoring supplier performance and providing feedback to improve operations. Frank says that formally monitoring performance is possibly the one area that is most in need of improvement.
Searle's strategy in this regard will address the definition of total value for each project with each supplier.
"In the past, we didn't fully explore the value-added aspects suppliers bring to the table," Frank says. "We were looking down the road toward achieving FDA approval, and we didn't share with them valuable information, such as what the supplier's intermediate was to be used for. When we finally got a new product and began launching it commercially, we began to consider that, in some cases, there may have been a better route," he says.
The company's new supplier-management program will also address ways of recognizing supplier efforts and achievements. The company has begun rewarding its suppliers, based especially on front-end efforts in product development. "Recently, we recognized some suppliers for the effort they put into developing a new product," Frank says.
The process will address Searle's expectations of its suppliers, as well as its suppliers' expectations of Searle. "The underlying theme is to work together for improvement--for now and for the future," Frank says.
Reasons to outsource
Many factors driving growth in outsourcing include these reasons why companies decide to outsource in the first place, according to The Outsourcing Institute, based in Jericho, N.Y.
- Accelerate reengineering benefits. Reengineering aims for dramatic improvements in critical measures of performance such as cost, quality, service, and speed, which are crucial to staying competitive in the pharmaceutical industry.
- Access to world-class capabilities. World-class providers make extensive investments in technology, methodologies, and people. They gain expertise by working with many clients facing similar challenges. This combination of specialization and expertise gives customers a competitive advantage and helps them avoid the cost of chasing technology and training.
- Flexibility. The use of outside sources allows a purchasing professional in the pharmaceutical field to plan the most timely route to get every stage of development completed and get the new drug to market, all the while improving quality.
- Free resources for other purposes. Every company has limits on its resources available. Outsourcing permits an organization to redirect its resources from non-core activities toward those that serve the customer.
- Environmental and regulatory concerns. "Years ago," says one East Coast buyer, "companies like Pfizer and Merck were doing a lot more basic chemical production than they do now. One of the reasons why they have stopped or limited their chemical production is due to environmental concerns," he says. "They simply don't want the liability of dealing with regulations regarding certain reactions and waste-management practices.
- Improved focus. Outsourcing lets a company focus on its core business by having operational functions assumed by an outside expert. Freed from devoting energy to areas that are not in its expertise, the company can focus its resources on its core strengths.
- Reduce operating costs. Companies that try to do everything themselves may incur vastly higher research, development, marketing, and deployment expenses, all of which are passed on to the customer. An outside provider's lower cost structure, which may be the result of a greater economy-of-scale or other advantage based on specialization, reduces a company's operating costs and increases its competitive advantage.
- Reduced risk. Tremendous risks are associated with the investments an organization makes. Markets, competition, government regulations, financial conditions, and technologies all change extremely quickly. Outsourcing providers make investments on behalf of more than one client. Shared investment spreads risk and significantly reduces the risk borne by a single company.
Catalytica contains costs through outsourcing
For H. Dale Hartough, director of purchasing at Catalytica Pharmaceuticals in Greenville, N.C., costs often drive the decision to outsource. "Pharmaceutical companies are under a lot of pressure to keep manufacturing costs down," he says. "If there's pricing pressure for new drugs, outsourcing will typically get you better pricing. In Catalytica's case we will also outsource some steps, even if we have developed the chemistry, if we feel that by handling it in house we're not going to be competitive," he says.
Pricing is especially important early on," Hartough says, "Because you wind up with a lot more disparity in pricing from different suppliers, depending on their technology base."
"When we first talk to a new supplier, we try to get an idea of the long-term costs of the project," Hartough says. "We have to determine price for our customers, not only for the pilot run or a clinical supply trial, but we also have to give them an idea based on the technology, where we think the costs are going to lie once it becomes commercially available.
Get to know suppliers
The decision to outsource carries with it the need to develop a strong business relationship with the supplier. Only then can both sides develop the maximum value, which can pay long-term dividends in cost reduction, improvement of operations, and new product ventures.
According to the Outsourcing Institute president and founder, Frank Casale, "In our work with clients, we have found that major corporations around the world are not obtaining the benefits from outsourcing that they had expected," he says. "This global disappointment is usually the result of two fundamental errors: first, the initial approach to outsourcing is tactical rather than strategic; second, the management of the contract is adversarial rather than cooperative."
Casale continues, "The most successful outsourcing comes from effective relationship management. The most successful outsourcers also hold high-level strategic reviews and have an effective process for continual improvement, underpinned by performance measures and end-user satisfaction," he says.
Gary Conte at Aceto Corp., is essentially a pharmaceutical manu-facturers' representative, who is in a position to see the benefits of relationship building on both sides of the outsourcing agreement.
"For pharmaceutical companies, strong relationships are essential in terms of regulatory issues. Once the initial regulatory dialogue between customer and supplier is complete, pharmaceutical companies can focus on R&D issues and commercial fine-tuning of new projects without necessarily having to approve a new supplier," he says.
"Confidentiality issues come into play as well," Conte adds. "When you come to trust the supplier, you'll tend to come back to them because you won't have to worry about them stealing your proprietary technologies and processes."
"Relationship building is also a boon for suppliers," says Conte, "Because they're able to develop a loyal customer base and a steady source of projects coming in. There are a lot of layers that affect that relationship with customers--and price is one of the layers--but in this business, price is often secondary in importance," he says.
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