Since the implementation of the patent regime under the General Agreement on Tariffs and Trade/Agreement on Trade-Related Aspects of Intellectual Property Rights (GATT/TRIPS) in India on Jan. 1, 2005, the Indian biotechnology and pharmaceutical industries have metamorphosed, and in the past two years, have seen three significant changes:  					

A higher comfort level among global pharmaceutical, biotechnology, and fine chemicals companies in working  in India and with Indian companies 

An increased appetite of global investors (particularly venture capital and private equity firms) to invest in Indian fine chemicals, pharmaceutical, biotechnology, and contract-research and manufacturing services companies

Eagerness and advanced capabilities of Indian executives to become global players, especially through inorganic growth. 

India's position in pharmaceutical outsourcing

Global biotechnology and pharmaceutical companies are attracted to India for several reasons:  					

Availability of English-speaking scientific talent

A vertically integrated industry with a range of capabilities 

Experience and knowledge of current good manufacturing practices, good laboratory practices, and guidelines under the International Conference on Harmonization 

The highest number of plants outside the United States inspected and approved by USFood and Drug Administration 

Evolution of pharmaceutical outsourcing in India

From the early 1990s to 2005, India's main attraction was from generics companies or fine chemicals companies, especially to source advanced intermediates and active pharmaceutical ingredients (APIs) or to carry out contract development of abbreviated new drug applications. India did not register on the radars of decision-makers at global biotechnology and pharmaceutical companies for innovation, collaboration, drug discovery, manufacturing of complex finished dosages, and licensing. During this period, the relationships between Indian and global companies can be categorized as lower-level procurement and nonstrategic. This situation was mainly attributed to the huge concern over the protection of intellectual property that loomed in the minds of executives at multinational biotechnology and pharmaceutical companies. Even though India was a signatory to the GATT/TRIPS patent regime, the actual implementation would not occur until Jan. 1, 2005, leading to a wait-and-see approach.  

There also were relatively few options for partnering with India-based companies. Options included: 					

Indian pharmaceutical firms focused mainly on generics, creating possible patent infringement or conflict-of-interest

Pure API and fine chemicals companies with limited capabilities and capacities

Less than a handful of pure contract-research and manufacturing companies.

In anticipating the implementation of the patent regime, Indian companies such as Nicholas Piramal (NPIL), Glenmark, Ranbaxy, Zydus Healthcare, and Dr. Reddy's Laboratories ramped up their capabilities in drug discovery for new chemical entities

in a more significant and faster manner than anticipated. These companies followed various business models, including setting up wholly owned subsidiaries or divisions or investing in a new entity.  

A new crop of companies focused solely on contract-research and manufacturing services also emerged. Examples included Syngene (a subsidiary of Biocon), Hikal, GVK Bio, Jubilant Organosys, Siro Clinpharm, Acunova Life Sciences, Chembiotek, Dishman Pharmaceuticals & Chemicals, and Research Support International Limited. These firms were pure-play service providers. Because they provided low or no conflict of interest with their own generics programs, they became lower-risk partnering options for global buyers. Global buyers had a choice in working with companies that could provide an individual set of products or services, such as Syngene's drug-discovery services, Siro Clinpharm's clinical trials, or Hikal's synthesis of APIs.  

Most innovator companies started working with Indian companies on pure sourcing or outsourcing deals to source analogs, libraries, informatics work, advanced intermediates, custom synthesis, and simple clinical trials or even rescue trials. These projects provided low risk and less of a bureaucratic hurdle than more intricate risk- and reward-sharing deals, which came during the past two years (see Figure 1). 

Today, major biotech, pharmaceutical, and fine chemicals companies are leveraging India in the form of outsourcing, offshoring, or licensing and collaborations deals (see Figure 2). Companies such as Wyeth and Bristol-Myers Squibb (BMS)are entering India with build-operate-and transfer deals as evidenced by Wyeth's outsourcing pact for synthetic chemistry research with GVK Bio and BMS's deal with Syngene under which Syngene will build and operate a 400-scientist research and development center for BMS.  

Two other deals showcase the increasing comfort level of global companies with India. Under a 2007 deal with Eli Lilly, NPILwill develop and, in certain regions, commercialize a select group of Lilly's preclinical drug candidates in multiple therapeutic areas. The companies will equally share risks and rewards, and NPIL is responsible for designing and executing the global clinical development program, including investigational new drug-enabling nonclinical studies and human clinical trials up to Phase III. NPIL will receive a call-back payment and potential milestone payments of up to $100 million, plus royalties on sales upon successful launch of the first compound. 

Advinus Therapeutics and Merck and Co. formed a pact in 2006 for the discovery and development of metabolic drugs.  Under the deal, Advinus receives an upfront payment, milestone payments up to $74.5 million for each drug target, and potential royalties on sales from products of the collaboration.   

Several factors account for the increased comfort level and interest of global companies:

Scientists of Indian origin with drug-discovery and clinical-trial experience at global firms are moving back to India to work at Indian companies or to start their own ventures

Ability of Indian companies to prove that they can create value in a time and cost-effective manner 

State-of-the-art infrastructure and a wide range of services

Ability of Indian companies to offer a complex and broad spectrum of services and products in a transparent manner

Opportunities in India's healthcare market based on the emergence of a 300-million-people-strong middle class 

Most global companies have or are setting up local offices  to manage relationships and projects in India

Creative deal-structuring by Indian executives for sharing  risks and rewards.

Stronger appetite of global investors for India

After China, India is the most sought-after country of choice by global investors for foreign direct investments (1). India's liberal and attractive investment policies, coupled with highly liquid financial markets, are key reasons for this growth. Creative deals are being struck between Indian companies and investors where funds are being used to finance specific projects instead of simply investing in existing companies or diluting current shareholders. Dr. Reddy's Laboratories used this strategy in 2005 in forming Perlecan Pharma, a drug-development company, by securing $52.5 million in funding from India's leading private equity investors ICICI Venture Funds Management Company and Citigroup Venture Capital International Mauritius Limited. In exchange, Dr. Reddy's transferred to Perlecan Pharma all rights and title, including the development and commercialization rights, for the assets of four NCEs used to treat metabolic and cardiovascular disorders.  

Advinus, founded by Rashmi Barbhaiya, a nonresident Indian scientist, received its funding from The Tata Group, one of the largest and most-well known corporate houses in India. Similarly, the US-based Carlyle Group invested $20 million into Claris Lifesciences, and the Blackstone Group invested $50 million in Emcure Pharmaceutical. 

Several key factors account for the increased comfort level and interest of global investors in India:   					

Investor-friendly policies of the Indian government

Increased attention from global biotechnology and pharmaceutical buyers of contract services 

Willingness of Indian entrepreneurs and promoters to forge creative and sophisticated deals  

Desire of Indian entrepreneurs to grow inorganically, requiring a large pool of cash and global financial capabilities.

Recent activity demonstrates that India is presenting itself as more than a destination for cost savings. By offering infrastructure in laboratories, manufacturing suites and informatics, coupled with project management and information-technology capabilities, Indian companies have attracted partners  in medicinal chemistry, bioinformatics,  cheminformatics, custom synthesis, clinical trials, and manufacturing of APIs, and formulations. Through increased projects, Indian pharmaceutical outsourcing companies have developed a deeper understanding of their customer needs and what additional services they can add to their current set of solutions (see Figure 3).  

From the mid-1990s onward, most Indian companies invested heavily on building infrastructure that could handle complex projects and attract world-class talent. Significant investments were made in project-management tools and people development. Company owners started hiring professional management instead of family members to run businesses and perform key functions such as business development (see Figure 4).  

As attention on India increased, along with the ever growing market capitalization of their companies, Indian executives began to evaluate whether they could build on their platforms in India to provide global solutions. In consultation with their clients, they quickly realized that in order to grab a bigger chunk of the outsourcing market, they would need to have a global footprint through which they can offer near-shore–offshore business models just like their counterparts from the information technology industry. This recognition led to Indian companies going out and acquiring companies or assets around the world, mainly in the United States and Europe. Recent examples include:  					

NPIL's 2006 acquisition of Pfizer's manufacturing facility in Morpeth, United Kingdom, with potential outsourcing revenues exceeding $350 million and NPIL's 2005 acquisition of the custom manufacturer Avecia Pharmaceutical in 2005 

Articles

The tightening of intellectual property rights in India under GATT/TRIPS was a crucial inflection point for pharmaceutical outsourcing in India.

Dynamics of India's Life Sciences Outsourcing Industry

Selecting the right partner is the key factor in every outsourcing relationship. Risk analysis can be the ideal instrument for obtaining preliminary information when evaluating a potential contract service provider and can become an integral part of the sponsor's supply chain. This article describes the main factors in risk analysis when transferring drug-manufacturing activities to a third party. 

When evaluating a potential partner, the following factors should be taken into account: 					

Partner's knowledge, experience, professionalism, and technology

Cost analysis; verification that requirements are met (e.g., regulatory, qualitative, technological, safety and environment, backup, and disaster recovery) 

Clear definition of the critical steps of the process and allocation of responsibilities (e.g., supply and analysis of raw materials, in-process controls, analytical controls on the finished product and release, preservation and shipment of the finished product)

Activities planning and intermediate testing

Formalization of the relationships (e.g., legal supply contract, secrecy agreement, quality agreement)

Collaboration between the customer and the partner during risk analysis allows an integrated and shared evaluation of risks and benefits. The key element of this process is to identify and understand risk and to determine how much investment is needed to reduce each existing risk. 

The acceptance level of risk and the margin of control must be determined. In addition to risk understanding, the main factors are identification, management, and weight-up.  

 Risk analysis is a continuous process that begins with the identification of all risks. During the first phase of analysis, opportunities and threats should be identified (see Figure 1). The probability of each opportunity and threat is determined, as well its their consequences, to assess the effect and benefit of each item.  

 The results of the identification phase determine the level of risk management (see Figure 1). First, one should plan activities by taking into account the availability of various resources (e.g., economic, number of personnel, experience, knowledge). Risk-management planning must be continuously monitored and documented, and a periodic follow-up of the status should be performed. The management-reviewing step can be a learning process because it provides an opportunity for partners to share knowledge and experiences and exchange analytical data. 

				The last phase of the continuous review process—understanding—is the most important because it involves shareholders in the activity, uses the analysis performed in the previous phases, and helps set the boundary conditions of subsequent steps in the process (see Figure 1).			

 An important instrument in risk analysis is the protocol of the preliminary evaluation. To analyze the risk of the suppliers and contract service providers, it is necessary to resort to a predefined instrument, adaptable to the demands of each partner, in which it is possible to include all the activities in the preliminary evaluation. The protocol document should include the following chapters: technical aspects; qualitative aspects (prerequirements); logistical aspects; organizational aspects and communication; vulnerability; safety; and environment. Elaboration of this protocol document is up to the contract provider. The compilation of various questions to be answered is up to the contract acceptor. 

Another important instrument is the inspection audit and the checklist of risk analysis. These documents are prepared by the sponsor, using the evaluation's protocol as a basis. They help the contract service provider verify all the risk elements and their weight. 

The final instrument is the evaluation's report, including the risk's weight-up and the action plan. The final report preparation is submitted to the sponsor. The report's basic chapters are the risk assessment, formulated starting from the compilation of the checklist indicated above, and the remediation and action plan that describes the interventions necessary to reduce the risk factors in the exposed analysis areas. 

				The assessment must differentiate the areas of higher risk (threats) from those that represent chances for improvement (opportunities). The operative tools necessary to identify risk areas are then finally presented to define the value (risk analysis) and to attribute the level of gravity and acceptance for business (risk assessment), the possible need for remedial actions, and the resolution time and responsibilities (action–remediation plan).			

 Risk weight-up considers the effect and probability of threats and opportunities enumerated in the risk identification phase; these can be weighted using the different levels shown in each quadrant in Figure 2. The levels are defined as follows: very high (VH), high (H), medium (M), low (L), and very low (VL). Because the defined levels are five in the ordinate and five in the abscissa of each quadrant, the worst-case risk is associated with the couple VH–VH (5 × 5 = 25). Similarly, the best-case risk is associated with the couple VL–VL (1 × 1 = 1). 

The quadrants are highlighted in colors corresponding to probability and impact-level combination. The yellow areas are where the risk is acceptable for threats and opportunities. The red and pink areas are associated with the unacceptable risk for threats and opportunities. 

For example, if you must transfer an industrial process in an emerging country in which partner knowledge (or experience, 

) may be very low and the cost is very low, then the evaluation of the risk is: 

 threat: impact VH(5) × probability VH(5) = risk 25  

opportunity:impact VL(1) × probability VL(1) = risk 1 

Therefore, there is a big threat to transfer the industrial process, with a very low confidence level and a very big economic opportunity. In this case, management must decide whether the economic opportunity is acceptable while considering the risk associated with the partner's inexperience or whether it is better to partner with another more knowledgeable service provider for an acceptable increase of cost. In this alternative case, the threat risk may be considerably less, and the opportunity could be less interesting. 

Example of a supplier evaluation questionnaire			

Essential elements of a preliminary evaluation protocol

The evaluation of a selected partner may involve several financial and industrial aspects (see sidebar, "Example of a supplier's evaluation questionnaire"). The evaluation should also contain information about the following: 					

Identification of the designated contact person

Company turnover during the past three years and turnover percentage connected to exportation(availability of the company's financial statements)

Number of employees, their turnover and distribution on the basis of the competence areas (e.g., logistics, administration, production, control)

Organization chart, roles, and responsibilities

Analysis of the processes and activities performed internally and externally

Main products and customers and their percentage division 

Problems from natural disasters (earthquakes, typhoons) in the contract manufacturing areas and protective actions

Dimension and layout of the property (covered and open warehouses, production, offices, 

), including their building standards, age, and possibility of expansion

Management of main energy resources (electricity, water, 

Protection of the area against damages and fire

Protection and backup of critical and reserved information

Production organization (e.g., number of shifts)

Costs for developing starting materials into the finished product

Saturation level of the most important systems (free capacity) and their age

Activities automation and information-technology levels 

Existence of management procedures for major good manufacturing practice processes (e.g., review and release of the batches, complaints, market's traceability and recall, deviations, changes, staff education, and training)

Manufacturing management and product control (e.g., written specifications defined for each product and its components, equipment, and critical validated processes; written analytical methods; batch documentation; and functions dedicated to the planning of productive activities and to materials stocks)

Main customers, their qualification, and reliability

Risk management is essential in any successful outsourcing partnership. The author outlines the steps toward identifying, understanding, and controlling risk in key manufacturing areas.

The Role of Risk Analysis in Expanding Business Activities

The market for contract-manufacturing services for biopharmaceuticals continues to expand, mirroring the growth of biopharmaceuticals. As in the recent past, biopharmaceutical products are expected to provide most of the future growth for the large pharmaceutical companies (1). In 2007, worldwide revenues for biopharmaceutical products are projected to exceed $65 billion, and the proportion of pharmaceutical revenues from biotechnology drugs is expected to surpass 10% of the total market (1). This increasing growth in biologics continues to stimulate the  contract-manufacturing services industry. 

A recent study by HighTech Business Decisions, 

Biopharmaceutical Contract Manufacturing 2007: Quality, Capacities and Emerging Technologies,

 analyzed the trends in the biopharmaceutical contract-manufacturing industry based on a worldwide survey of 41 biomanufacturing directors at pharmaceutical and biotechnology companies and 27 biopharmaceutical contract manufacturers (1).  

Supply of contract-manufacturing capacity has fluctuated from shortages to oversupply during the past five years. Currently, the supply of outsourced-manufacturing capacity has overtaken demand. Most respondents in the study stated that supply is available. During the last five years, biopharmaceutical contract manufacturers and pharmaceutical companies have made major investments in biopharmaceutical production capacity to meet growing demand for biologics. In addition to increases in physical capacity, new technologies and improved process technologies have increased production efficiencies and further contributed to more available capacity. 

Demand for biopharmaceutical outsourcing services 

To meet the expected growth in demand, biopharmaceutical contract manufacturers have been aggressively installing capacity during the last several years and continue to plan for more new capacity. During 2004–2008, worldwide contract-manufacturing capacity for biopharmaceuticals is expected to grow by approximately 40% (1). 

In macro terms, measuring capacity in tank liters under the two broad categories of microbial fermentation and mammalian cell culture, the study shows that biopharmaceutical contract manufacturers' installed capacity for microbial fermentation will reach 300,000 tank liters by 2008, an increase of 15% from two years ago. Biopharmaceutical contract manufacturers also plan additional follow-on capacity expansions throughout the next five years. (This estimate includes capacity for biopharmaceutical production only; microbial capacity that is used for microbially produced small molecules or products such as antibiotics is not included.)  

The expansion plans of biopharmaceutical contract manufacturers for mammalian cell-culture capacity are even more aggressive. Worldwide outsourced mammalian cell-culture capacity is expected to reach 670,000 tank liters by 2008, a 21% increase from two years ago. As with microbial-fermentation capacity, the biopharmaceutical contract manufacturers plan follow-on capacity expansions during the next five years. 

Biopharmaceutical contract-manufacturing expansions have kept up with demand. Most of the biomanufacturing directors at pharmaceutical and biotechnology companies that participated in the study stated that they had no problems finding capacity for their projects in 2006. As one biomanufacturing director noted: "For the last couple of years, it has been easy to find the capacity for microbial fermentation at all scales. This was not true four years ago."   

Although capacity has been readily available in the recent past, capacity utilization rates are currently beginning to increase as demand catches up with earlier expansions. Biopharmaceutical contract manufacturers reported average capacity-utilization rates of 72–87% for microbial fermentation production capacity. Average capacity utilization rates for mammalian cell-culture production capacity vary from 65% to more than 90%. In both instances, capacity utilization rates are expected to increase during the next two years and then drop slightly as current and planned capacity expansions come on line. An interesting point from the study is that smaller biopharmaceutical contract manufacturers report higher utilization rates compared with larger biopharmaceutical contract manufacturers (1). 

Spending on biopharmaceutical contract production, and therefore revenues earned by biopharmaceutical contractors, was estimated to be $2.1 billion worldwide in 2006. This global market estimate and forecast, shown in Figure 1, is based on outsourcing expenditures for the production of biopharmaceuticals, as reported in the survey by pharmaceutical and biotechnology companies, and on revenues recognized and capacity expansions by contract biomanufacturers, as reported in the survey. The growth in the biopharmaceutical contract-manufacturing market results from both higher levels of product production and expanded service offerings by biopharmaceutical contract manufacturers. 

Figure 1. (HIGHTECH BUSINESS DECISIONS)			

The demand for outsourcing services is dependent upon the outsourcing strategies of the pharmaceutical and biotechnology companies. The biomanufacturing directors participating in the study were asked to describe their overall biomanufacturing strategy from clinical to commercial production by asking them what they outsource and what are the drivers behind their strategic decisions. For the most part, biomanufacturing strategies are driven by the overall business strategy of the biotechnology companies. For companies that primarily outsource their bioproduction, the strategies followed are either to outsource all production or outsource production when good manufacturing practices (GMPs) are required. Biotechnology companies with GMP capacity in-house stated that they outsource on a case-by-case basis. Those respondents that do not outsource stated that their products were of a specialty or complexity that required technologies not easily transferred to an outside contractor.  

Each company's outsourcing strategy and plan of execution is unique, so the outsourcing strategies shown in Figure 2 should be considered as a general overview. Details of the differences in strategies may be found in select comments from the biomanufacturing directors further described in this article.  

Figure 2. (HIGHTECH BUSINESS DECISIONS) 			

 The following are comments from pharmaceutical or biotechnology companies that outsourced almost all of their biomanufacturing: 					

"Our business model and strategy is to outsource 100% of the manufacturing."  

"We always outsource. If we had a partnership (either in-licensing or out licensing), we would use the capacity of our partner instead of paying for outsourcing. One of the driving factors behind our decision to limit our internal manufacturing capacity is that our capital-equipment needs are very diverse. We make everything from small molecules to large biomolecules and use mammalian and microbial technologies. So, in order for us to manufacture in-house, we would need a very large variety of equipment."  

"We outsource 100%. It is cheaper and more efficient. Rent the facility; rent the expertise. Our business model doesn't support bricks and mortar; we won't be building a biomanufacturing facility."

"It is a technology-risk issue. We will always look to outsource. There are not enough biological products in our pipeline to do production in-house."  

 The following are comments from pharmaceutical or biotechnology companies that keep almost all of their biomanufacturing in-house: 					

"We truly are beginning to weigh all options. Should we expand microbial or go to a biopharmaceutical contract manufacturer? Literally, just this week, we started to weigh the pluses and minuses. It is starting to gel. Within the next year, we will make the call on what we are going to do. On the mammalian side, we have a good-sized clinical-trials production capacity. We are bringing it up to speed in our first GMP suite ... In 2005, we were manufacturing Phase III at a CMO [contract manufacturing organization]."  

"Our outsourcing decisions are based on cost and the difficulty of making the product. Our company is focused on immunotherapy in which we manufacture a recombinant protein." 

Early clinical biomanufacturing done in-house and commercial outsourced.

 The other scenario for outsourcing involved keeping early-stage or clinical biomanufacturing in-house and outsourcing commercial production. Select comments from biomanufacturing directors using this strategy follow:  					

"We manufacture [in-house] for Phase I and II; we will go elsewhere for finishing the material needed for clinical work. We would not do our own manufacturing for commercial product. For late-stage or larger Phase II trials and Phase III, we will go to a CMO."  

"We do all preclinical and Phase I–II production in-house.  We will continue to do that until it impacts our ability to take on new projects. We outsource Phase III and commercial production, and this will not change for the next five years."  

"Anything that requires GMP manufacturing, we outsource. We do all non-GMP production ourselves. Venture capitalists don't want to pay fixed capital costs for manufacturing facilities. For Phase III and commercial production, we are looking for a strategic alliance with a pharmaceutical company or CMO. We are also looking at regions outside of the United States for more cost-effective manufacturing."  

"Our goal is to keep the machines running 24/7. If we lacked capacity, we would go outside, and we won't go beyond Phase II internally, so we'll outsource after that. We want to keep our in-house manufacturing focused on the development phase."  

Outsourcing mixed: case-by-case decisions.

 Feedback from biomanufacturing directors also showed that the decision to outsource is made on a case-by-case basis as opposed to an overall strategic leaning toward outsourcing or keeping manufacturing in-house. Select comments are outlined below:  					

"Whether we outsource or not would be driven by our pipeline. Two sources contribute to our pipeline: our in-house R&D and molecules we acquire in early phases of development. We plan to expand our facilities, but we are conservative in our investments in GMP facilities. If we have a big project that requires more capacity than we have in-house, we would consider outsourcing GMP production."  

"Our strategy is a balanced approach between in-house production and outsourcing. In this way we can minimize our risk, and it gives us maximum flexibility."  

"Up to now, we have been trying to develop the processes ourselves. Now we have identified a few CMOs that can do process development better than us, and so we are in the process of changing our strategy. We would like to go backwards and let these CMOs do some process development. Our decision to outsource used to be based solely on volume and demand. Now we also include quality, technology, and previous experience with that CMO when we decide to farm something out." 

"Cost and time are our main drivers in our biomanufacturing strategy. Our philosophy is to keep flexible. We want to bring our products into manufacture as soon as possible, so we shuffle what we do in-house, versus outsourcing based on capacity and time." 

To understand what biopharmaceutical manufacturing directors believe are the most important services to outsource, the survey asked the directors to list the services that they plan to outsource within the next three years (see Table I). Many of the biopharmaceutical manufacturing directors would prefer to have their contract manufacturer offer a complete set of services, rather than dealing with several contractors for individual services. As might be expected, smaller biopharmaceutical companies with fewer employees and resources and less expertise are especially concerned about the burden of coordinating various service providers. In addition, some of the larger biopharmaceutical companies recognize that many of the biopharmaceutical contract manufacturers have areas of expertise that they do not have and are looking to contract manufacturers to provide. 

Table I: Services planned to be outsourced during the next three years (1).			

The majority of biopharmaceutical contract manufacturers are expanding their service offerings to meet demand for additional service offerings. Table II shows a list of expanded offerings by the biopharmaceutical contract manufacturers.  This list includes some of the service offerings that were added during the past two years and those that biopharmaceutical contract manufacturers plan to add in the next two years. 

Table II:  Select new or planned service offerings of biopharmaceutical contract manufacturers (1) .			

 One of the areas where the biomanufacturing directors and contract manufacturers expect to see a significant impact to their operations in the coming years is in the adoption of disposable technologies for the manufacture of biologics. Below are a few of the comments made by the biomanufacturing directors about the impact that the use of disposables on their operations and the improvements that they expect from the use of disposable technologies: 					

"Disposables will come more into use. They cut down on time and cost, so there are dual savings."  

"Disposable technologies for tissue culture and buffer bags are the newest products to have an impact on our operation."

"Only the implementation of additional disposables will decrease our contamination rate. Our success rate was really low when I first started here. Now it is up to 50%."

Disposable technologies can be applied in our operations, which will reduce our validation requirements."

Further analysis of the use of disposable technologies in the manufacture of biologics, shows that over half the biomanufacturing directors in the  survey are currently using disposable reactor technology and almost one-third of the biomanufacturing directors are planning to adopt this technology in the near future. Most of the biomanufacturing directors state that their companies primarily use disposable technology for small-scale and preclinical production. While a majority of the biomanufacturing directors in the study use disposable technology, very few of the biomanufacturing directors require their contract manufacturer to use disposable technologies in the production of their biologic products. 

The decision to manufacture using disposable technologies or stainless steel by the contract manufacturer is driven more by production volume, phase of production, or the specifics of the project. The advantages of disposable technologies most often stated by the biomanufacturing directors are easier validation, avoidance of cleaning processes, and flexibility. The biomanufacturing directors' concerns with the adoption of disposable technologies for the production of their biologic products include issues involving scalability, profitability, and compatibility with certain production technologies. Overall though, the biomanufacturing directors are optimistic about the use of disposable technologies for their production processes. Below are select comments by the biomanufacturing directors about the advantages in using disposable technologies in the production of biologics: 					

"We want to focus our effort on the task at hand rather than cleaning."

"Disposable technologies are the way to go.  They provide more flexibility."

"Disposables have the advantage of cheaper validation and the disadvantage of more upfront expense. However, the advantages and disadvantages may balance out. They are beneficial in that they save time and reduce cleaning. Overall they are a good move, and we are going in that direction."

"Disposable bioreactors are great for the production of small batches during development because you eliminate the cleaning of bioreactors. However, for scale-up it is questionable how good they are." 

"We see a big advantage to going with disposable technologies. It improves our compliance process, no cleaning is required, and validation is simpler. On the other hand, there is an upfront cost disadvantage."

Process-development is one of the key services biopharmaceutical manufacturing directors seek from biopharmaceutical contract manufacturers with the emphasis on improving yields and productivity. In the survey, a plurality of biopharmaceutical manufacturing directors states that they outsource process development. The rest of the biopharmaceutical manufacturing directors either keep process development in-house or outsource on a case-by-case basis.  

Almost all process development outsourced.

 Below are select comments from biopharmaceutical manufacturing directors about their decisions to outsource process development: 					

The authors analyze the supply–demand trends for contract biologics manufacturing and the strategies of pharmaceutical and biotechnology companies and their suppliers in the value chain.

Evaluating Supply and Demand Patterns for Contract Biologics Manufacturing

 Outsourcing Survey indicates that the contract services industry is going through a period of almost unprecedented growth. Pharmaceutical company budgets for contract services are rising, and contractor revenues are growing at double-digit rates, but the volume may be close to outstripping contractors' ability to deliver. 

Among the pharmaceutical company respondents to this year's survey, 94% report an increase in spending on outsourced activity for the year (see Figure 1). That's a big jump from 2006, when only 84% reported a spending increase. The increase in spending is remarkably consistent across company size (see sidebar, "Respondents profile"), and rates of growth for spending on commercial and development services also are about the same. 

Survey results indicate that the growth in spending on outsourced activities reflects a fundamental move in favor of outsourcing rather than conducting activities in-house. Among biopharmaceutical and pharmaceutical company respondents, 27% reported that their spending on contract services is growing faster than their overall spending, up from just 18% of respondents in last year's survey (see Figure 2). More than 20% of respondents report that half or more of the spending in their particular area is outsourced, which is more than double the response from 2006 (see Figure 3). Here again, the results are consistent regardless of company size or activity (commercial versus development). 

How do you expect your contract services spending to change from 2006 to 2007? (Figure 1)			

Not surprisingly, the growth in spending is translating into a banner year for contract services providers. More than a quarter of service providers expect revenues to jump by 20% or more this year; in 2006, only 17% of contractor respondents expected such robust results (see Figure 4). Just as revealing is the fact that none of the service providers expect revenues to decrease in 2007; 10% of respondents to last year's survey had expected their revenues to decline. The growth is coming from all customer segments, with mid-size and generic biopharmaceutical and pharmaceutical companies showing particularly big jumps. Service providers report that new contract signings are rising a bit more slowly than revenues, but they are still growing at a robust rate. 

How is your outsourcing spend growing relative to overall spending in your area? (Figure 2)			

The growth in spending has created a more fluid contract services market that offers more opportunities for service providers. In this year's survey, 57% of biopharmaceutical and pharmaceutical company respondents report that they are actively looking for new service providers, either to increase their vendor base or to replace current providers; that value is up from 37% in 2006 (see Figure 5). The number of respondents who are unwilling to look beyond their current provider base dropped by two-thirds: only 5% of respondents say they use only current vendors. 

What share of the total activity in your area is outsourced? (Figure 3)			

It comes as a corollary to the search for new providers that efforts to consolidate the vendor base have slowed somewhat, especially among smaller companies. Nonetheless, among the largest biopharmaceutical and pharmaceutical company respondents, 37% report that they have already reduced the number of providers they work with, and another 20% indicate they plan to do so during the next two years. The influence of procurement professionals also is greater at the major pharmaceutical companies, but even smaller companies report that procurement staff are gaining more influence over sourcing decisions. 

How do you expect your contract services revenue to change this year versus last year? (Figure 4)			

Interest in sourcing from service providers in India and China continues to grow, although it is hardly at an enormous scale. In 2007, 27% of respondents report that their company is already sourcing from India and/or China, up from 20% in 2006 (see Figure 6). Another 30% is figuring out how to source from those countries, but more than 40% continue to say they have no interest in offshoring. Not surprisingly, the greatest interest is among the largest biopharmaceutical and pharmaceutical companies, many of which have established R&D hubs in India and China. 

What is your company's stance regarding new vendors? (Figure 5)			

Our 2007 survey results suggest that the big jump in customer demand is really straining contractor capacity. This is especially true for basic infrastructure capabilities such as customer service and project management. Service providers themselves admit that rapid growth is causing strains. More than 50% indicate that a lack of capacity is constraining their ability to take on new business. Many of their customers have noticed that as well: 30% say that contractors appear to have all the work they can handle. 

What is the status of your company's sourcing activities in India and/or China? (Figure 6)			

The biggest single constraint cited by service providers is organizational processes, with inadequate capital to fund growth a close second. We explored this issue further by asking service providers whether their management and systems were adequate to handle growth of 20% or more (see Figure 7). Only one-third believe that their systems and management are up to the task: a quarter of contractor respondents indicate that neither systems nor management is adequate, and the rest that one or the other is lacking. 

If your business were to grow 20% or more this year, how prepared are your company's management and systems for that growth? (Figure 7)			

The survey suggests that service providers don't fully appreciate the impact that their capacity issues are having on their customers. When asked how they think their clients would rate the quality of their customer service, 35% of suppliers say customers would rate them as "excellent" (see Figure 8). When customers are asked how they rate their service providers' customer service, however, only 6% rate them as "excellent." Vendor performance on project management and technical/operational dimensions got similar marks. Overall, customer ratings of their service providers are not dire: most rate their vendors as "good" or "satisfactory" and less than 20% rate them as "fair" or "poor"—but there is clearly a big gap between customer and service provider definitions of service excellence. 

How would you rate your service providers' customer service performance? (Figure 8)			

The picture of market conditions presented in the 2007 edition of the PharmSource–

 Outsourcing Survey is much more robust than the 2006 survey led us to expect. Last year's responses suggested that spending would continue to grow, but that the rate of growth would slow. Most biopharmaceutical and pharmaceutical company respondents were projecting spending growth in the single digits, and most contractors were expecting the pace of new contract signings to decelerate. 

Given that context, we are inclined to temper our enthusiasm over the indications from this year's survey that 2008 should be another strong year for the industry. Among biopharmaceutical and pharmaceutical company respondents, 43% expect spending for contract services to grow by 10% or more next year, versus 36% in the 2006 survey; only 7% expect spending to decrease. Service providers are very optimistic as well: 80% expect 2008 to be better or much better than 2007. In 2006, only 55% had such expectations for the following year. 

Participate in our 2007 employment survey today!			

The high expectations of service providers are further reflected in another way. Most service providers accept that the major biopharmaceutical and pharmaceutical companies are moving to shrink the number of service providers they work with, but they are surprisingly sanguine about their prospects: 42% expect to gain business as a result of consolidation efforts, and 25% expect to feel no impact (21% claim to have already benefited from consolidation efforts). Such optimism is a bit surprising given the large number of small service providers in our sample (an appropriate representation of the industry). It suggests either giddiness in the midst of the current favorable market conditions or naiveté about their relative competitive position as ever larger competitors emerge. 

The optimistic growth outlook is consistent with other indicators of market conditions that PharmSource tracks, including the flow of funds into early-stage biopharmaceutical and pharmaceutical companies from venture capitalists and Big Pharma licensing deals, and the forecasts from preclinical and clinical contract research organizations. Still, just as Wall Street analysts view excessive investor optimism as a sign that stock prices may be ready for a correction, the unbridled enthusiasm makes us wonder whether demand for contract services may be approaching the end of a cycle. Clearly, many industry participants are unprepared for any kind of jolt that might slow development spending. 

Barring any unforeseen decrease in demand for services, this year's PharmSource–

 Outsourcing Survey suggests that the biggest risk for contract services providers lies in their continued ability to meet client needs and expectations. As we previously noted, many admit they are reaching the limits of their ability to manage growth, and many appear to be vulnerable to growing customer dissatisfaction. In part, this reflects the varying but intense expectations of the various customer segments: small biopharmaceutical and pharmaceutical companies expect to be walked through the drug development process but often don't appreciate technical and operational excellence, and major biopharmaceutical and pharmaceutical companies demand technical and operational excellence. And both customer groups demand favorable pricing, despite their protestations to the contrary. 

The capacity crisis may also reflect the fact that the industry continues to be dominated by small companies whose technically inclined owner–operators may lack the executive skills necessary to manage a growing enterprise. The industry is undergoing a process of consolidation that promises increased scale and greater management sophistication, but for now even the largest players seem to be struggling to meet the mounting expectations of customers. In the face of rapidly growing demand, contract service providers may need to learn to say "no" until their capacity catches up to their opportunity.  

is president of PharmSource Information Services, Inc., and publisher of 

A booming market may be stressing the service-delivery system.

Strong Demand versus Strained Capacity

Interactions between a sponsor and a contractor before and during the clinical manufacture of a drug product should involve discussions about responsibilities, current good manufacturing practices (CGMPs), regulatory requirements, and company operations. Documenting this information ensures both parties have a clear understanding of their roles and how the manufacturing operation will be conducted. The preparation and the ability of both parties to understand and agree upon their responsibilities in writing before the start of manufacture leads to a smooth and successful operation. 

The task of identifying the contract manufacturing organization (CMO)is beyond the scope of this article. Information about CMO selection may be available through networking with pharmaceutical colleagues or in trade journals (1–5). 

Once a contract facility is identified, a confidentiality agreement, also known as a nondisclosure agreement, is prepared by the sponsor's or the contractor's legal department before any exchange of information. When the confidentiality agreement is written by the sponsor, the agreement is forwarded to the contractor's legal department for review. If both companies differ on the content of the agreement, they negotiate the terms until a signed agreement is executed. The confidentiality agreement may be written by the contractor when the sponsor does not have a department that writes confidentiality agreements (e.g., a small start-up company). 

The agreement must be a bilateral confidential disclosure agreement. This type of agreement provides for the sharing of information on a confidential basis between both companies. Both parties agree not to disclose the other's proprietary information to any third parties other than affiliated companies and consultancy firms that are bound to the terms of the confidentiality agreement. 

Confidential information should include all proprietary technical, nontechnical, and commercial information marked "confidential" or declared to be confidential by the disclosing party and given to the receiving party. The length of time this agreement should be in place also is specified (see Table I). 

The confidentiality agreement is approved and signed by senior management at both companies. Confirmation of an executed confidentiality agreement by the clinical manufacturing representative is important before exchanging information about the active pharmaceutical ingredient (API), drug product, and manufacturing operation and performing a CGMP audit with the contractor. 

After the confidentiality agreement is signed, a technical assessment of the contract facility is recommended. The technical assessment can be performed by the clinical manufacturing representative and the formulator. 

A technical assessment ensures the contractor has the type of equipment required to manufacture the batch, the ability to handle the batch size, and the technical expertise to manufacture the dosage form. In addition, a technical assessment includes evaluation of the batch record documentation and processing operations with respect to the product that will be manufactured (see Table II). 

Of course, the most important aspect is to get a feeling for the type of working relationship the sponsor and the contractor will have (6). A good working relationship is especially important when the sponsor's long-term goal is to commercially manufacture the new drug product at the contract facility. This project involves the two companies working together through manufacturing clinical supplies, registration batches, technology transfer, process validation (7), and the US Food and Drug Administration preapproval inspection (8). 

A written report of the outcome of the technical assessment is recommended by one clinical manufacturing representative in conjunction with the formulator. This report, filed in a retrieval location within the representative's company, provides colleagues the opportunity to review the contractor's capabilities for this project and future projects. A positive technical assessment grants the go-ahead for the quality assurance (QA) audit. If the assessment is negative, then the decision may be to suggest remediation steps or evaluate another contract facility. 

The clinical manufacturing representative who performs the technical assessment also should attend the clinical manufactures at the contract facility. This representative is the contact person who should work firsthand with the contractor in planning, executing, and following through to manufacturing completion. 

If questionable issues arise during the technical assessment, then a request can be made to the sponsor's QA representative to address these concerns in an audit. The technical assessment and QA audit may be performed simultaneously. Nonetheless, the purpose of performing the technical assessment before the QA audit is to ensure that the contractor has the capabilities to perform the manufacture. If the contractor does not meet manufacturing requirements, then there is no reason to pursue a relationship with the contractor for this project. 

The sponsor's QA department arranges with the contractor's QA department to conduct a facility inspection. This CGMP audit includes but is not limited to an inspection of the building and company operations. This inspection also should include an audit of the departments with which the product will come in contact such as the warehouse, manufacturing areas, packaging areas, quality control (QC), and analytical laboratories. In addition, the review of personnel training files, standard operating procedures (SOPs), equipment validation reports, equipment cleaning validation, and equipment calibration programs are subject to inspection. Another area of concern is how the contractor maintains the sponsor's confidentiality when other clients are in the contractor's facility performing audits and observing manufactures (see Table III). 

At the conclusion of the inspection, the QA auditor conducts an exit meeting with those representatives who participated in the inspection. The exit meeting summarizes the observations of the auditor during the inspection. Inspections typically last a day and a half or longer, depending on the size of the facility, level of CGMP compliance at the contractor site, the length of time it takes for the contractor to retrieve requested information, and the number of departments that are inspected. Observations should be discussed as they are noted during the audit and agreement reached before the exit meeting. During the exit meeting, the auditor notes issues that already may have been addressed and corrected. The QA auditor then approves or denies the use of the facility. If appropriate, the auditor may conditionally approve the facility with stipulations such as: 					

Manufacturing operations may only be conducted in a particular manufacturing area 

Additional testing of raw materials may be required

Special requests may be made regarding the operations (e.g., a representative from the sponsor's company must be on-site during batch manufactures).

As a follow-up, the QA auditor issues a written report to the contractor detailing observations that were discussed during the exit meeting. In turn, the contractor responds to the observations in writing. The contractor's response should include the corrective action to take place with a timeline for implementation, or the contractor may reply that the current procedure is acceptable and include a justification for this decision. If the contractor's response is unacceptable and the observation is deemed critical, then the status of the contractor may change.  

Contract facilities are usually very flexible and, within reason, special requests can be handled. After all, the contractor wants the pharmaceutical company's business and if it is making the request, chances are another client will do the same. In addition, the QA auditor often identifies the contractor's weaknesses, and it may be to the contractor's advantage to reevaluate its operations. 

The primary objective of the audit is to ensure that clinical supplies will be manufactured under CGMP requirements and to the sponsor's expectations. Of course, this objective requires that the expectations be reasonable and that the sponsor only require of the contractor what it requires of its own company. Many companies expect the contractor to go far above a CGMP requirement because they are a paying customer. Such situations do not build good relationships. Remember that the sponsor and the contractor are a team working toward the same objective. Both companies are building a working relationship that will last not only for this but also for future projects. 

Once your QA department approves the contract facility for use, a quality agreement is prepared by the sponsor's or contractor's QA department. A quality agreement defines the responsibilities of both companies for clinical supplies manufacturing, testing, packaging, and distribution of a specific product. 

This article is written to assist clinical manufacturing representatives at pharmaceutical companies who are faced for the first time with outsourcing the manufacture of clinical supplies. The author describes the identification, writing, and execution of documents required to support the contract manufacture of products for clinical studies.

Pharmaceutical Technology-08-01-2007

Dynamics of India's Life Sciences Outsourcing Industry

The Role of Risk Analysis in Expanding Business Activities

Evaluating Supply and Demand Patterns for Contract Biologics Manufacturing

Strong Demand versus Strained Capacity

Preparing Documentation to Support Clinical Supply Manufacture

From Boon to Bubble?

Project Management and CMO–Sponsor Relations

Recovery of Precious Metals in Spent Process Catalysts