Virtual reality

Mergers and acquisitions in the pharma sector and the birth of 'virtual' companies for specific projects has increased reliance on the contract sector by large and small players alike. Dr Sarah Houlton examines how the dynamics are changing

The shape of the pharmaceutical industry has changed dramatically in recent years. Where once there was a multitude of companies, all with a very small share of the world market, merger mania means that there are now fewer, larger companies, each with a rather larger share of the market. Trying to keep up with which company makes which product and who owns whom gets ever more difficult, as mergers, acquisitions and spin-offs have led to the market changing almost monthly.

Yet the industry is not just made up of mega-merged enterprises; at the other end of the scale a new breed of small, often virtual, companies have sprung up, particularly in the biotechnology sector. These companies are frequently established to exploit a single idea or technology, and their in-house capabilities are increasingly stretched the further a drug lead gets along the development pathway.

Both of these factors have been major drivers behind the rapid growth in pharmaceutical contract manufacturing in the past few years.

Virtual companies have no manufacturing capabilities of their own, so if they do not want to go down the route of licensing their discovery out to one of the big boys, they need either to build production capacity or to outsource it. The former is both expensive and risky, as facilities have to be in place before a product has approval, so if the drug is knocked back this spending will be disastrous, and could well lead to the company failing. Therefore outsourcing to one of the many contract manufacturers is generally much the most sensible way of making the product.

underutilised capacity

The rationale for big pharma companies outsourcing manufacture is rather different. Historically, manufacturing was a core part of their operations, with all stages from primary through to packaging carried out in company-owned facilities. But the gradual realisation that having spare or underutilised capacity was an avoidable inefficiency has led to a growing proportion of the manufacturing chain being outsourced to third parties. Some companies have sold off at least some of their manufacturing facilities to other companies and then contracted product manufacture back to it. Reducing manufacturing operations allows the companies to concentrate on what they see as their core strengths — the discovery and development of novel drug products.

Whether or not to outsource manufacture is a decision that depends on the type of product. Mature products, frequently late in the life cycle, are much more likely to be outsourced than those new to the market purely for cost reasons. It is far less important to keep in house a product that is about to lose its patent protection and be open to generic competition than a new-to-market potential blockbuster. Clinical trials materials are very different, however. These are made only in small runs, and speed and flexibility are essential, whereas cost is less sensitive.

surge in demand

A third possibility is that there may be a short term surge in demand for a new product, and the most cost-efficient way of manufacturing the extra is often to outsource some of the production rather than invest in further capacity in house that will soon become redundant. And then there are products that are complicated to manufacture or unpleasant to handle, when the best option may be to hand the difficulties over to a specialist. And if the process is not very robust, outsourcing it to a contract manufacturer may be the most efficient way of getting the process improved and the product made reliably.

As contract manufacturing becomes an integral part of the pharmaceutical supply chain, both outsourcer and outsourcee have to work closely together to achieve the best possible service. As secondary manufacturer Celltech Manufacturing Services' head of operations Tony Weeks explains, Celltech's aim is 'to work much more closely with the client, from technology transfer to bringing the product in house, to improve process efficiency. We can "hand hold" from an early stage, or merely produce products to order'.

An established contract manufacturer's experience of a wide range of different processes gives it a big advantage when it comes to developing new ones. Weeks cites an example of a major pharmaceutical customer that had a process it wanted to scale up, but found that this would require a spend of at least £25,000 (US$36,000) on new equipment. Celltech used its manufacturing expertise to develop an alternative process, with the result that the company was able to use its existing plant.

It is not only full secondary manufacturing that is being outsourced: some companies outsource just the packaging operations. Contract packer Brecon Pharmaceuticals has seen healthy growth in business over the past few years. Business development director, Steve Kemp, explains: 'I believe the sector is growing at around 5–6% p.a. I don't think we will see much faster growth in the next few years, but this growth rate should be sustainable for at least the next 6–10 years or so.'

Kemp notes that there has been an increase in business from Japanese companies, who prefer to carry out bulk manufacturing in Japan, and then ship the finished dosage forms to be packed in their final market place.

diverse operations

Flexibility is the key for a successful contract packer, he says. 'Our operations are diverse: we pack in strips, bottles, wallets, sachets and so on. And we may run a line for only two or three days before it is changed over to a completely different product.' He adds that Brecon's main competition comes from its own customers, who could at any time take the product back in house or kill it off entirely.

Standards of quality and control within the outsourcing sector are, if anything, higher than in the pharma companies themselves. 'Because contract manufacturers deal with so many different companies, we have the benefit of huge past experience,' says Alan Black, chairman of the British Contract Manufacturers and Packers Association. 'Each company has specific areas where it has had problems in the past, and which it wants to concentrate on. We end up with quality manuals and procedures that benefit from all these companies' experiences.'

unnecessary audits

Black thinks that much of the time and money spent by companies on auditing contract manufacturers is unnecessary. 'The pharmaceutical company believes that the contracting company merely having an MCA licence is not enough to ensure high standards. But couldn't there be some way we could create an industry endorsement so that all this information could be shared, saving all the pharmaceutical companies time and money?'

Celltech's head of business development Mark Quick believes that contract manufacturers will increasingly have to focus on giving good service. 'Getting closer to our customers will help,' he says. 'Being able to optimise the supply chain should give more efficiencies for us and savings for them.'

Secondary manufacture is following in the footsteps of primary manufacture, with an increasing reliance on third parties for production. But the more stringent regulatory requirements in place on dosage forms than on early stage intermediates means the wholesale export of manufacture to India or China, as has happened to some extent in primary manufacture, is not likely to happen in the short term. Indeed, new players are entering the market in the UK, with Indian companies like Dabur setting up secondary manufacturing operations here.

But in the longer term, as standards rise, it is easy to envisage that far eastern competitors will be able to achieve the necessary standards for regulatory compliance and undercut western contract manufacturers as they have in the chemicals market. Therefore the focus on service and speed will become paramount — order turnaround will always be slower in a geographically remote location.

And if a pharma company has built up a long-standing business relationship with its manufacturing partners, and is able to trust them to make high quality products with no compliance problems, then they are more likely to stay with them.