The role of emerging markets in pharmaceutical outsourcing is evolving as the strategic importance of these markets is increasing, based on strong current and projected growth. Historically, outsourcing in select emerging markets such as India and China was primarily centered on chemical production for raw materials and early (i.e., non-good manufacturing practice (GMP)) intermediates. But as time progressed, outsourcing activities expanded to include production of advanced intermediates (i.e., GMP intermediates) and finished active pharmaceutical ingredients (APIs), particularly for generic drugs and drugs late in their product life cycle, where low-cost production is a consideration. Although those activities and functions are still important, the potential for outsourcing in emerging markets is moving beyond low-cost chemical production to other parts of the drug development and pharmaceutical value chain. 

JGI/TOM GRILL, BLEND IMAGES, GETTY IMAGES			

The pharmaceutical majors' strategic shift to emerging markets relates to those markets' strong growth. The global prescription-pharmaceutical market was valued at $837 billion in 2009, according to an April 2010 analysis by the market research firm IMS Health. Led by growth in emerging markets, the global prescription-drug market increased 7% in 2009, up from 4.8% growth in 2008. IMS projects that global pharmaceutical sales growth will increase 4–6% in 2010 and will increase at a 5–8% compound annual growth rate during the next five years, when the market is projected to reach $1.1 trillion in 2014.  

Growth in the pharmerging markets, defined by IMS to include Brazil, Russia, India, China, Turkey, Mexico, and South Korea, will be more than double overall pharmaceutical industry growth. Pharmerging markets are expected to grow at a 14–17% pace through 2014, compared with only 3–6% growth in the developed markets. Relating these percentages to absolute growth, the aggregate growth through 2014 from pharmerging markets will be similar to the growth experienced in developed markets; both will be around $120–140 billion. This projected parity of aggregate growth compares with growth during the past five years  of $69 billion in pharmerging markets and $126 billion in  developed markets.  

Part of the focus of the pharmaceutical majors' activities in emerging markets has been to expand into these markets with locally based companies that have manufacturing, supply, and distribution networks in their domestic markets, as well as in other markets in India, China, South America, and Central and Eastern Europe. The focus is largely on established products—generic drugs or innovator drug products that may be late in their product life cycle—reflecting the lower-cost product mix that may be needed to compete effectively in those markets.  

Kimberly Wagner, senior partner and managing director at The Boston Consulting Group, who spoke at the Drug, Chemical, and Associated Technologies Association's (DCAT) Business Development Forum held during DCAT Week in mid-March 2010, explained some of these differences (1). "In established markets, product strategy evolves around new chemical entities, a long innovation cycle, building a strong patent position, and seeking registration or approval of pharmaceutical products in the US and European Union," she said. "In contrast, the criteria for success in emerging markets evolve around line extensions and fixed combinations, a rapid innovation cycle, speed to market, brands, and local registration," she said. With these requirements, the emphasis in emerging markets is on local manufacturing, low-cost sourcing and manufacturing, and product registration of multiple small products that can be differentiated at a local level, explained Wagner. For established markets, the product strategy is different, marked by an emphasis on achieving higher scale in manufacturing to meet larger volumes, the use of imports from high-cost countries such as the US or countries in Western Europe, and more reliance on the global blockbuster model (1). 

Several large pharmaceutical companies' recent activities in emerging markets reflect this strategic focus on established and generic products. For example, in May 2010, Abbott (Abbott Park, IL) agreed to acquire Piramal Healthcare's (Mumbai) Piramal Healthcare Solutions business (domestic formulations) for $3.72 billion. Abbott sees the acquisition as a way to bolster its revenues in emerging markets, which currently account for approximately 20% of Abbott's pharmaceutical sales, according to a May 2010 Abbott press release. Upon completion of the deal, which is expected in the second half of 2010, Abbott estimates it will have a pharmaceutical market share in India of approximately 7%. Abbott estimates the growth of its Indian pharmaceutical business with Piramal will approach 20% annually and expects its sales in India to reach $2.5 billion by 2020. Piramal's Healthcare Solutions business is becoming part of Abbott's stand-alone Established Products Division, which Abbott formed earlier this year.  

The move follows recent deals by Abbott to increase its presence in emerging markets. In May 2010, the company signed a licensing and supply agreement with the pharmaceutical company Zydus Cadila (Ahmedabad, Gujarat, India) for a portfolio of pharmaceutical products that Abbott will commercialize in 15 emerging markets. Under the agreement, Abbott gained the rights to at least 24 Zydus products and will have an option for an additional 40 products.  

Other companies have made similar deals. In March 2010, AstraZeneca (London) signed a license and supply agreement with the Indian drug company and manufacturer Torrent Pharmaceuticals, under which Torrent will supply to AstraZeneca a portfolio of generic medicines for emerging markets. In 2009, GlaxoSmithline (GSK, London) partnered with India's Dr. Reddy Laboratories (Hyderabad, Andhra Pradesh, India). Dr. Reddy will manufacture and supply drugs to GSK, which will license and comarket the drugs in various countries in Africa, the Middle East, Asia-Pacific, and Latin America. In December 2009, GSK extended its strategic relationship and acquired a 19% stake in the South African pharmaceutical company Aspen PharmaCare to serve emerging markets. 

Earlier this year, Pfizer (New York) formed a collaboration with India's Strides Arcolab (Bangalore, India) under which Pfizer will commercialize off-patent sterile injectable and oral products in the US. The finished dosage-form products will be licensed and supplied by Strides, Onco Laboratories, and Onco Therapies, two joint ventures between Strides and Aspen PharmaCare (Durban, South Africa), according to a January 2010 Pfizer press release. And in 2009, Pfizer partnered with two Indian pharmaceutical manufacturers: Aurobindo Pharma (Hyderabad, India) and Claris Lifesciences (Ahmedabad, India). Under the deal with Aurobindo, Pfizer acquired the rights to 55 solid oral-dose products and five sterile injectables in 70 emerging markets and will commercialize those products, according to a May 2009 Pfizer press release. Pfizer also acquired the rights to 15 generic injectables from Claris Lifesciences. 

Also, sanofi-aventis (Paris) enhanced its generic-drug portfolio and position in emerging markets during the last two years with several acquisitions of generic-drug companies: Zentiva (Prague), Kendrick (Mexico City), and Medley (Campinas, Brazil). And the Japanese pharmaceutical company Daiichi Sanyko (Tokyo) acquired a majority stake in the Indian pharmaceutical company Ranbaxy Laboratories (Gurgaon, Haryana, India) in 2008. 

As the strategic importance of emerging markets increases, pharmaceutical companies are evaluating the full spectrum of activities in the pharmaceutical value chain in these markets, including the role of outsourcing. Historically, pharmaceutical outsourcing to emerging markets involved the commercial supply chain. Outsourcing activities involved the sourcing of raw materials and non-GMP intermediates and later progressed to include advanced intermediates and finished APIs. The type of activity that is outsourced depends on the company, the product, the stage of the product in its life cycle (i.e., generic drug or a product late in its product life cycle), and other factors. However, pharmaceutical outsourcing in emerging markets is evolving to research and development (R&D) activities.  

Examining the R&D models of the pharmaceutical majors in emerging markets provides insight into how the outsourcing paradigm may also further evolve in emerging markets. Pharmaceutical companies use several approaches: building internal R&D assets in those markets, a virtual model, creating collaborations for building, operating, and transferring R&D assets, and a partnership and risk-sharing model.  

Several major pharmaceutical companies are investing to build their internal R&D capabilities in emerging markets. A prominent example is the $1-billion investment by Novartis (Basel), announced in November 2009, under which Novartis will expand its research center in Shanghai during the next five years. In 2007, GSK formed a new R&D center in China to focus on neurodegeneration disease. The R&D operations there encompass the full range of drug-development activities from drug-target identification to late-stage clinical studies and involve collaborations with research institutions in China and other countries. In 2006, AstraZeneca announced a $100-million investment for a research and innovation center in China. Roche established research operations in China in 2005 and later expanded its activities there. 

Under the virtual approach, pharmaceutical majors partner with contract R&D providers. Examples include Eli Lilly's (Indianapolis) partnership with ChemExplorer (Shanghai), which began in 2003, for drug-discovery activities, including a dedicated staff of 300 scientists, and Eli Lilly's collaboration with Hutchinson MediPharma (Hong Kong) in 2007. The contract research organization (CRO) WuXi PharmaTech has partnered with several major pharmaceutical companies in R&D: Johnson & Johnson (New Brunswick, NJ) in preclinical services; Pfizer for 

 absorption, distribution, metabolism, and excretion services; and Merck & Co. (Whitehouse Station, NJ) for chemistry-related discovery services, according to company information from WuXi PharmaTech. 

Under the build, operate, and transfer model, pharmaceutical companies partner with contract service providers that serve as a foundation for making investments and developing shared assets in a particular country. Two examples illustrate that model. In 2007, Wyeth (Madison, NJ, now part of Pfizer) partnered with the CRO GVK Biosciences (GVK BIO, Hyderabad, Andhra Pradesh, India) to open the GVK BIO Wyeth Hyderabad Chemistry Center, a built-to suit research center for Wyeth, which included a team of 200 synthetic chemists, according to a 2007 GVK press release. Wyeth and GVK previously formed a collaboration in 2006. With the facility, GVK BIO assumed responsibility for designing synthetic routes for new molecules by carrying out the synthesis and characterization of target molecules for Wyeth. 

Bristol-Myers Squibb (BMS, New York) partnered with the CRO and contract manufacturing organization Syngene (Bangalore, Karnataka, India), a subsidiary of the biotechnology company Biocon (Bangalore) and opened a dedicated R&D facility for BMS in March 2009. Construction on the facility began in March 2007 when BMS and Biocon entered into an agreement to develop integrated drug-discovery and development capabilities at Syngene. The facility houses 360 scientists and related staff and could accommodate as many as 450 employees. The facility spans the drug-discovery and development process from initial hit to lead optimization, early pharmaceutical development, and clinical nomination, according to March 2009 Biocon press release.  

Under a partnership and risk-sharing model, pharmaceutical companies collaborate with contract service providers. Both the sponsor company and the contract service provider play a role in drug-development activities and share the risk of drug development. For example, AstraZeneca formed an R&D alliance with Torrent Pharmaceuticals in 2005. Eli Lilly formed a five-year deal with Jubilant Organosys (Nodia, Uttar Pradesh, India) for discovery services in 2006, extended that relationship in 2008, and in 2007 formed a $100-million deal with Nicholas Piramal (now Piramal Healthcare) for several preclinical candidates. Merck & Co. formed a drug-discovery pact with Advinus (Pune, Maharashtra, India) in 2006 and formed a collaboration with Ranbaxy Laboratories for development of anti-infective drugs in 2008. 

As sponsor companies' model for R&D outsourcing evolves, so does the model for CROs. For example, in late April 2010, the CRO Charles River Laboratories (Wilmington, MA) agreed to acquire WuXi PharmaTech for $1.6 billion as a way for each company to enhance their capabilities in drug development. Charles River had 2009 sales of $1.2 billion: approximately 55% of its sales were in research models and services and 45% in preclinical services. WuXi had 2009 sales of approximately $270 million: 93% were in laboratory services and 7% in manufacturing services. The combined company will have sales of $1.5 billion, with 44% of its revenue in research models and services, 41% in preclinical services, and 15% in discovery services. With the acquisition, the size of Charles River will increase from approximately 8000 to 12,200 employees. WuXi's 4200 employees include 2900 scientists with advanced degrees, and 2000 of them are chemists (2). 

Charles River is gaining several facilities in the acquisition: a 1-million-ft

 R&D discovery facility in Shanghai; a 253,000-ft

 discovery-chemistry facility in Tianjin, China; and a 314,000-ft

 good laboratory practice preclinical toxicology facility in Suzhou, Jiangsu, China. Charles River is also acquiring a 300,000-ft

 GMP API manufacturing facility in Jinshan, China, and a 75,000-ft

  biopharmaceutical services facility in Philadelphia, which includes biologic drug-substance manufacturing (2). 

Clinical development and the related supply chain may offer the next opportunity for R&D offshoring. This part of the pharmaceutical value chain involves drug-development activities such as preformulation, formulation development, drug delivery, and drug stability. The shifting geographic footprint for clinical research is providing consideration as to whether and to what extent these drug-development functions can be developed in an outsourcing model in emerging markets. One factor to consider is the shift of clinical research from traditional developed markets to emerging markets, where recruitment rates are higher and competition for patients is lower. This shift, in turn, creates opportunities for contract manufacturing and packaging to grow in emerging markets. Aligning these activities with the locations of clinical trials offers the potential advantages of eliminating import hurdles, increasing speed, and lowering costs.  

Although the outsourcing of formulation services, related service, and dose-manufacturing in emerging markets is not that common, certain contract service providers are developing their capabilities in these markets. One such example is Aptuit (Greenwich, CT), a contract drug-development company, which formed a new entity, Aptuit Laurus (Hyderabad, India), in 2007 through a phased acquisition with Laurus Labs (Hyderabad). Aptuit's strategy was to build Aptuit Laurus's development, manufacturing, and informatics capabilities to mirror the capabilities of services offered by Aptuit in North America and Europe (3). 

To what degree preformulation, formulation, and related services will shift to emerging markets remains to be seen. Unlike chemical production for intermediates and APIs, where outsourcing was primarily driven by cost factors, offshoring the clinical supply chain will depend on the related advantages of transferring clinical-trial material supply closer to the sites of clinical trials, and, to a degree, the role that the R&D activities of pharmaceutical companies in emerging markets will play. 

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As emerging markets become increasingly important for the pharmaceutical majors, companies are re-evaluating their outsourcing strategies. This article is part of the 2010 Outsourcing Resources special issue.

Contract R&D and Clinical Materials Outsourcing in Emerging Markets

The contract services industry entered 2010 with hope that the worst was behind it, even if the market didn't return to the robustness of the 2003–2008 period. The industry was happy to bid good riddance to 2009, a year in which funding shortages, mega-mergers, and a loss of confidence in the future led to a sharp drop in research and development spending. The resultant drop in demand for development and manufacturing services brought to a halt an unprecedented period of growth, and pushed several firms to the brink of insolvency (and in some cases, over it). 

PHOTO ILLUSTRATIION, COMSTOCK IMAGES, GETTY IMAGES 

Data from the 2010 edition of the PharmSource-

 Outsourcing Survey indicate that, indeed, the worst may be over for contract research, development, and manufacturing organizations (CROs, CDMOs and CMOs). Respondents to this year's survey from both bio/pharmaceutical companies and service providers are more upbeat than they were a year ago, although their optimism remains constrained. Still, the survey suggests that as bio/pharmaceutical companies continue to respond to a harsher and more complex external environment, service providers are likely to face much more competitive market dynamics. 

The good news from this year's survey is that spending on contract services has stopped declining (see Figure 1). Among bio/pharmaceutical company respondents, 37% said their expenditures would be the same this year as last year and only 8% expected spending to decline. In the 2009 survey, 16% indicated that spending would decline and only 28% expected it to stay even. That leaves more than 50% of respondents expecting some level of spending growth in 2010, but that percentage is down from the 60+% experienced in the 2007 and 2008 surveys. 

Figure 1: How will your contract services spending  change this year? 

While spending has stabilized, demand for contract services has yet to move into high gear. In fact, spending on contract services appears to be growing at or below the rate of overall research and development (R&D) spending (see Figure 2). 

Figure 2: What is the trend in your company regarding outsourcing in your service area? 

Although 46% of bio/pharmaceutical company respondents indicated that external spending is growing at the same rate of total R&D spending, 39% indicated that it is growing more slowly than overall spending. In 2009, only 28% indicated that outsourced spending was growing more slowly than total spending. The slowing of outsourced spending is not surprising, however, considering that the first reaction of most company executives is to preserve existing positions and avoid layoffs. Large staff reductions and wholesale changes in spending patterns tend to come with a radical restructuring or change in corporate strategy. 

Service providers' outlook on 2010 is similar to their outlook in 2009—cautious (see Figure 3). Among CRO and CMO respondents to this year's survey, 75% expect business to be "good" or "very good" throughout 2010, which is about the same percentage reported last year. The share of service providers expecting 2010 to be "not very good" is 23%, which is also the same as last year. This market perspective seems to be more sober than in past years: in 2008, 33% of service-provider respondents expected the year to be "very good" and only 6% expected the year to be "not very good." 

Figure 3: What will business be like for your company this year? 

Still, service providers' guarded view of 2010 is more upbeat at mid-year than it was when the year started. Among, CRO and CMO respondents, 32% said this year's performance is already better than expected, and 47% said performance is as expected. After the difficulties of 2009, service providers went into 2010 with low expectations. 

Outsourcing Survey indicates that service providers have learned to adjust to the new market realities.  

When asked, "How badly do vendors want your business?" 50% of bio/pharmaceutical company respondents said that service providers were anxious for the business and were willing to cut price (see Figure 4). This response is similar to that reported in last year's survey, but substantially higher than the 2006 and 2007 surveys, when only 35% indicated that service providers were willing to cut price. 

Figure 4: How badly do vendors want your business? 

Price competition has always been anathema to CROs and CMOs, but reduced funding for smaller bio/pharmaceutical companies and the increased willingness of global companies to exercise their bargaining power, have forced contract organizations to accept a new reality. 

Current funding challenges among smaller bio/pharmaceutical companies has also forced service providers to refocus their efforts according to client type (see Figure 5). In this year's survey, only 21% of CRO and CMO respondents identified small bio/pharmaceutical companies as their best performing customer segment. That percentage is down from 30% in 2009 and 43% in 2008. 

Figure 5: Which client segment has been the best performing in your company this year? 

The number orf respondents citing specialty pharmaceutical companies as their best performing segment was down as well, while those citing global bio/pharmaceutical companies were about the same. Interestingly, the significance of generic-drug companies jumped significantly, from 7% in 2009 to 17% in 2010. This increase may reflect some change in the outsourcing practices of generic manufacturerss, but also could be a reflection of the reduced activity in other customer segments. 

Perhaps more than ever, CRO and CMO respondents are keenly aware of the long-term risks and challenges to their business. The challenges of 2009 and 2010 seem to have forced service providers to take a more global view and to pay more attention to market trends. 

This change in view is particularly apparent when it comes to competition from offshore service providers (see Figure 6). When asked, "What is the biggest single risk to your business in the next two-to-three years?" 25% of CRO and CMO respondents identified competition from India and China as the biggest risk. That percentage is up from 11% in 2009, and 15% in 2008, and represents the biggest single risk identified by CRO and CMO respondents. 

Figure 6: What is the single biggest risk to your business in the next two to three years? 

Contract organizations' concern is valid. The share of bio/pharmaceutical company respondents indicating that they are actively sourcing service from India and China today grew to 31% in the 2010 survey, up from 26% (see Figure 7). Further, the number of respondents indicating that they had no plans to source from India and China dropped from 51% in 2009 to 41% in 2010, which represents an all-time low for that response in the years we have been asking that question. 

Figure 7: Plans for sourcing in India and China 

Another risk area identified by service providers was overcapacity. In 2010, 17% of survey respondents to the question, "What is the biggest single risk to your business in the next two-to-three years?" indicated that "too much capacity for our services" was the biggest risk. The overcapacity problem really came to the fore in 2009 when demand for services dropped and price-based competition intensified. As major bio/pharmaceutical companies plan to divest more facilities, and many investors still eyeing the contract services industry as a major opportunity, CROs and CMOs are right to place this issue on their radar. 

One area of risk that is of less concern to service providers in 2010 is the threat of declines in R&D spending. The share of CRO and CMO respondents indicating that "reduced funding for early stage companies" is a major threat to their business dropped in half, from 35% in 2009 to 17% in 2010; while those citing "cuts in Big Pharma R&D spending" dropped from 22% in 2009 to 15% in 2010. The stabilization in outsourced R&D spending discussed above supports that reduced concern, at least for the near term. 

Another potential risk of less concern to service providers is supplier consolidation. Only 3% of CRO and CMO respondents in 2010 said that "supplier consolidation by Big Pharma" was a major concern, and at no time in our survey has the number reached 10%. 

However, bio/pharmaceutical company survey respondents did signal that service providers are overlooking a major industry trend (see Figure 8). For 2010, 45% of bio/pharmaceutical company respondents indicated that they have reduced the number of service providers they work with, or plan to do so in the near future. That's the highest share ever in our survey indicating that supplier consolidation is ongoing. More dramatically, the share of respondents indicating that they plan to increase the number of suppliers they work with dropped to just 18% in the 2010. In the 2007 survey, 44% indicated their intention to increase their number of suppliers. 

Figure 8: Please indicate how your company has tried to consolidate its supplier base 

One factor driving supplier consolidation is vendor performance: There is a conviction, generally confirmed by actual industry experience, that working more closely with fewer service providers leads to improved vendor performance and better project outcomes. Our 2010 PharmSource-

 Outsourcing Survey indicates that there continues to be plenty of room for improvement in vendor performance. 

As has been the case every year in the four years we have asked the question, CROs and CMOs rate their performance more highly than do their clients (see Figure 9). The biggest gap continues to be in project management, where 80% of service-provider respondents rate their performance as "excellent" or "good" but only 51% of clients rate them that way. 

Figure 9: Client and contractor views on contractor performance 

One area where the perception gap has closed over the past few years has been in customer service, where client perceptions have improved while service provider self-assessments have become more modest (see also, "Performance Metrics, A CMO Roundtable".)

Bio/pharmaceutical company respondents to our 2010 survey did provide positive signals about 2011 (see Figure 10). Among that group, 70% indicated that they expect their contract-services spending to increase in 2011. That's a big move from one year ago, when only 54% expected the next year's spending to increase. 

Figure 10: How will your contract-services spending change next year? 

This indicator has to be interpreted cautiously, however, because our respondents may not have a clear view of the external factors that can impact their budgets. After all, in our 2009 survey, 69% of respondents expected their 2009 expenditures to increase, 45% by 10% or more; they failed to foresee the financial crisis and the effect it had on slowing R&D spending. 

Service providers are being more cautious in their outlook for next year. Nearly half expect 2011 to be "somewhat better" than 2010, and 29% expect business next year to be similar to 2010. 

 Outsourcing Survey portrays an outsourcing market that continues to mature. Buyers of contract-development services are taking a more sophisticated approach to procuring those services. They are more willing to exercise their leverage over pricing, to venture offshore for lower cost services, and to work more closely with a smaller number of providers. 

For their part, CROs and CMOs seem to be taking a more realistic approach to the market and the changes taking place. They are competing harder for new business and accepting the reality of greater competition from service providers in emerging markets, especially India and China. 

These developments indicate that the contract services industry should continue to thrive and grow in coming years. However, we are unlikely to return to the conditions of 2003–2008, when investment flowed like water into pharmaceutical R&D, and contract service providers had to do little more than answer the telephone to grow their businesses. That period provided fertile ground for CROs and CMOs to flourish, even those with limited capabilities and management skills. The more rigorous environment the industry faces today will lead to an industry of stronger and more skilled companies working in closer collaboration with more capable clients. 

 welcomes manuscripts about subjects pertinent to all aspects of applied research and development, scaleup, and manufacturing technologies for the pharmaceutical industry. Topics include regulatory affairs, contract services, drug-delivery systems, ingredients, formulation, analytical methods and testing, information technology, processing, packaging, validation, and API synthesis. All papers undergo a double-blind peer-review process by members of the 

s Editorial Advisory Board to determine whether they are appropriate for publication. Before they undergo peer-review, papers are first reviewed by the senior editorial staff.  

 also publishes special focused issues each year. Upcoming topics are Ingredients, Analytical Technology, and Drug Delivery. Author guidelines can be found at 

The health of the contract-services industry is improving but the market is signaling tougher competition ahead. This article is part of the 2010 Outsourcing Resources special issue.

Slow Climb Back

Recent regulatory requirements and several supply-chain breaches involving active pharmaceutical  ingredients (APIs) and excipients have heightened the pharmaceutical industry's awareness of and need to increase supply-chain monitoring and control. One outcome has been the growing use of quality agreements among drug-ingredient manufacturers (including custom manufacturers), suppliers, and distributors. Two associations, the Society for Chemical Manufacturers and Affiliates (SOCMA) and the International Pharmaceutical Excipients Council (IPEC), recently developed quality agreement templates that can be used by industry free of charge to help ensure supply-chain quality and to meet regulatory expectations. 

On the following pages, representatives from both organizations discuss the thought process behind their templates, the content that should go into the agreements, and the benefits of using such agreements. SOCMA's templates are designed for manufacturers and users of APIs, and the IPEC templates target suppliers and users of excipients.  

Quality Agreements for Manufacturers and Suppliers of Active Pharmaceutical Ingredients, as recommended by SOCMA's Bulk Pharmaceutical Task Force 

Manufacturers of active pharmaceutical ingredients (APIs) are inundated with customers requesting quality agreements to meet US Food and Drug Administration expectations and requirements. A quality agreement is important for ensuring the integrity and quality of pharmaceutical intermediates, APIs, and other pharmaceutical ingredients in the supply chain. A quality agreement is the best way to ensure compliance with the International Conference on Harmonization (ICH) Q7 

Good Manufacturing Practice Guide for Active Pharmaceutical Ingredients

 guideline, which FDA published as guidance for industry in 2001, to meet regulatory expectations on current good manufacturing practices (CGMPs) and filing requirements (1).  

According to ICH Q7, such an agreement should clarify and define what the GMP manufacturing and filing requirements are and who will be responsible for completing each required activity (1). A quality agreement is a legally binding document that has to be agreed upon by both parties (i.e., sponsor company and supplier or contract manufacturer) and their quality groups. 

The standardized quality agreement approach is crucial for the API manufacturer because it helps to avoid having a different set of requirements and quality-system processes for each customer. The Bulk Pharmaceutical Task Force (BPTF)*, an association of manufacturers of APIs, excipients, and API intermediates, and an affiliate of the Society for Chemical Manufacturers and Affiliates (SOCMA), a US-based trade association representing custom and batch manufacturers, issued two standardized quality agreement templates for the pharmaceutical industry in May and July of 2010. One template is designed for general API manufacturing (i.e., an API producer that manufactures its own products and sells them to multiple customers) and the other template is designed for custom API manufacturing (i.e., a contract manufacturer providing proprietary APIs). This article explains the background and use of these templates. If used properly, these templates provide regulatory-compliant documents that can be used by the API producer and its customer.  

The general API manufacturing agreement template

To achieve a safe and effective drug supply in a global marketplace, ensuring the quality, purity, and security of, and preventing contamination of the API is crucial. Suppliers should use a suitable supplier-qualification process with a drug manufacturer as part of its supplier-approval process. A quality agreement can serve as a key component in this approval process, but the agreement should not take the place of an audit of the manufacturing facility. Quality agreements between drug and API manufacturers are used to help both parties understand and define who is responsible for adhering to certain compliance requirements. Without a quality agreement in place, it is difficult for drug and API manufacturers to meet regulatory requirements and inspectors' expectations. 

Since the adoption of ICH Q7 and recent industry attention on supply-chain integrity, API manufacturers have been inundated with requests from customers to have a quality agreement. ICH Q7 requires agreements for all third-party activities, and today, it is common industry practice for key suppliers to have an executed quality agreement with their drug manufacturers as well. 

A quality agreement typically supplements a supply agreement. In the past, GMP issues were included in the supply agreement, but the quality group was not usually involved in these agreements. This oversight caused a potential situation in which the requirements listed in the supply agreement were not practical, that is, they could not easily be implemented into the supplier's quality system, sometimes leading to noncompliance. The best practice is to have both a supply and a quality agreement in place, with the supply agreement focusing on commercial issues (e.g., the supply template has the requirement to meet specification, and the quality template covers how to handle nonconforming product), and the quality agreement focusing  on GMP and compliance issues (e.g., manufacturing and filing requirements). The quality agreement should clearly state which party is responsible for completing each required activity.  

 If the requirements in quality agreements differ too much between customers or the responsibility of who is doing what constantly changes, there is a high probability that some required activities may be overlooked and that noncompliance is present. A standardized agreement alleviates this problem by placing limits on the variability of the agreement's language. A standardized document also sets the stage for an agreed-to, workable arrangement between the two companies and their quality departments. Another benefit to having a standardized template is time savings—the API manufacturer does not have to create a new agreement for each new project.  

Without a standardized template, a lot of time is often spent on the review and negotiation process, including the involvement of both teams' legal departments, which can cause serious delays and high costs. Such time constraints can also place pressure on both parties to get things completed before the supplier can complete the desired manufacturing. When standardized templates are used, the legal language and concerns need only be reviewed and amended once, when setting up the standardized template within the company. The quality system of the supplier can be designed to easily incorporate the final quality agreement.    

As a legally-binding document, a standardized quality agreement, should contain the following:  

Scope of work to be performed, including manufacturing locations

Clearly defined responsibilities regarding regulatory and filing requirements, including which party will perform the filings 

Change-control and notification requirements

Expectations regarding the use of third parties

Resolution-management procedures should any disagreements arise between the two parties 

Rights of each party (e.g., IP, statement of compliance, client confidentiality)

Contacts for each party, including the individuals responsible for ensuring compliance to the agreement and any changes to the agreement. 

Content of the BPTF Quality Agreement Templates

Both of SOCMA's BPTF Quality Agreement Templates provide guidance for drafting agreements relating to the manufacture and release of APIs regulated by FDA. The templates are based on the collective experience of API industry members as well as the knowledge gained from executing quality agreements with drug manufacturers and reviews of these agreements by FDA inspectors. Specifically, the BPTF Quality Agreement Templates contain the following sections:  

Legalities (e.g., agreement parties, scope, effective date, terms, amendments, survival cause, resolution of quality issues)

Manufacturing location(s), including third parties

Responsibility (a table that addresses key CGMP and filing issues)

Appendix 1: Products covered under the agreement

Appendix 2: Contacts and responsible parties for the agreement

Parties signing the agreement may spend a significant amount of time negotiating the legal language. From a US perspective, common language in this section should be acceptable to both signatories. If there is a conflict between the quality agreement and another agreement that may already be in place (e.g., a supply agreement), it is recommended that the quality agreement prevail to avoid any potential quality concerns. It is important to include this type of language in the supply agreement.   

In the Responsibility section of the BPTF Quality Agreement Template, BPTF provided its recommendations for each requirement such as change control, who will file regulatory documents, and who will manage stability programs. It is expected that a supplier would develop its own recommendations for this section (preassigned checked boxes are included in each section of the template based on best practices and experience) and start the negotiation process with their customer. The goal is to have a minimal number of changes to the document which will help minimize the impact on the supplier's existing processes, procedures, and quality system. 

Change-control requirements tend to vary considerably in quality agreements. The definition of the term "significant," for example, is an important part of a quality agreement. A practical, yet regulatory-compliant model, is needed for change control. The supplier cannot practically notify a customer about every change, however, significant regulatory changes should be reported to the customer and approved. Additionally, it is not feasible for a supplier to have a different change-control and notification standard for each customer. These processes should be standardized.   

Additional considerations for custom API manufacturing

Although the BPTF Quality Templates for general API manufacturing and custom API manufacturing have common elements, quality agreements with custom manufacturing organizations tend to contain more options and are therefore more complex. Again, there is a big advantage to both parties (i.e, the API manufacturer and the custom manufacturer) to keep the same standards for each customer.  

The BPTF Custom Manufacturing Organization Quality Agreement Template provides for key differences betwee custom API manufacturing and routine API manufacturing. In custom contract manufacturing business, each project may have a different customer, and the project may only involve a few batches. The custom template, therefore, incorporates flexibility in CGMP responsibilities and filing requirements. For example, the customer may have developed or own the manufacturing process, in which case the manufacturing process may be transferred from the customer, and the customer may own the intellectual property (IP). In standard manufacturing, on the other hand, the supplier typically has developed and owns the manufacturing process, and thus owns and controls the IP and related drug master file (DMF) for the process. 

If the IP is owned by the customer, the quality agreement needs to reflect that fact. For CMOs, the batch records, analytical method validations, stability, and even the process validation may be the responsibility of the customer rather than the supplier. Additionally, filing requirements such as product-label codes can be submitted by the customer. Using a DMF or chemistry, manufacturing, and controls (CMC) filing information in the drug submission must be defined for custom manufacturing organization. The BPTF Custom Quality Agreement Template accounts for these differences and, in many cases, one just needs to click on the appropriate box when using the templates.  

A standardized quality agreement is crucial for API manufacturers. An API manufacturer cannot use different sets of requirements and quality system processes for each of its customers. BPTF Quality Templates offer a regulatory-compliant quality approach to API producers and their customers. 

*BPTF was organized in 2002 as an affiliate group under SOCMA. BPTF is focused on facilitating CGMP compliance and addressing related CGMP issues that affect chemical manufacturers. The members of BPTF currently include: Albemarle, Ash Stevens, BASF, Chattem Chemicals, Cherokee Pharmaceuticals, Copperhead Chemical Company, ISP Chemicals, Lonza, and SAFC.   

Good Manufacturing Practice Guide for Active Pharmaceutical Ingredients 

To view and download SOCMA's BPTF Quality Agreement Templates in PDF format, visit 

 is chair of the Bulk Pharmaceutical Task Force for the Society for Chemical Manufacturers and Affiliates (SOCMA), a member of the FDA Industry Coalition, and vice-president of quality and environmental, health, and safety for Cherokee Pharmaceuticals LLC, 1835 Market Street, Suite 1100, Philadelphia, PA 19103, tel. 215.988.8986, fax  215.569.1925, 

Quality Agreements for Manufacturers and Suppliers of Excipients, as recommended by IPEC 

Quality agreements are frequently a topic of discussion and sometimes angst in the current regulatory environment, which calls for industry to develop better knowledge of its excipient supply chain. Although not currently a regulatory requirement in the US, quality agreements are viewed by industry and regulators as an effective communication tool between pharmaceutical manufacturers and their excipient suppliers. In many cases, unfortunately, negotiations over the wording of an agreement can take months or years to resolve, sometimes damaging the relationship between the two parties rather than making it stronger. 

To alleviate this problem in the past, pharmaceutical companies tried to design one-size-fits-all quality agreement templates. These templates, while suitably worded by their own legal department, differed from those developed by the legal departments of other pharmaceutical companies and, often, were not appropriate for the excipient supplier. As a result, few quality agreements were actualy put into place.   

Seeing this challenge as an opportunity to improve communications between excipient users and suppliers, the International Pharmaceutical Excipient Council (IPEC) developed the IPEC Quality Agreement Template in June 2009. The guide and template were the result of several years of work by IPEC's Quality Agreement Subcommittee, which was comprised of excipient manufacturders, distributors, and users from IPEC–Americas and IPEC-Europe. IPEC is an international trade association with members representing the pharmaceutical and excipient industries. One of IPEC's goals is to develop and implement voluntary industry guidance that enhances the quality of excipients used in pharmaceutical products. IPEC views the quality agreement as an instrument that creates a quality partnership between two companies. Parties involved in drafting the agreement, therefore, must be flexible. The purpose of the IPEC Quality Agreement is to provide excipient users and suppliers with a common starting point to create their own quality agreements that address fundamental quality issues specific to the manufacture and use of excipients. 

Quality agreements are intended to serve as an agreement between quality departments and should complement—not replace—commercial agreements. A quality agreement should define who is responsible for quality activities and how quality issues will be resolved. By clearly delineating good manufacturing practice (GMP) responsibilities, costly product-quality issues resulting from miscommunication can be reduced or eliminated. 

Representatives of SOCMA and IPEC explain new quality agreement templates and their use for meeting regulatory expectations and securing the pharmaceutical supply chain.

Standardized Quality Agreements

The product mix of pharmaceutical companies' pipelines and commercial drugs is of crucial importance to contract development and manufacturing organizations as they evaluate their service capabilities and tailor them to demand. Market fundamentals are changing. The erosion of the blockbuster-drug model, traditionally supported by small-molecule drugs (i.e., drugs with a molecular weight of < 500 Da), in favor of an increased emphasis on biologic-based development is an important consideration not only for pharmaceutical companies' product strategies, but for contract service providers that offer drug-substance and finished-product manufacturing. Although small-molecule drugs will continue to dominate the overall pharmaceutical market, market growth in small-molecule drugs will contract in the near term. Growth for monoclonal antibodies (mAbs), therapeutic proteins, and vaccines is expected to be strong. 

In 2009, the value of the small-molecules market was $411 billion. The biologics market, on the other hand, was only valued at $124 billion. By 2014, the small-molecule market will contract by $17 billion as a direct result of the 2011 patent cliff and heavy erosion of branded-drug sales caused by generics (1). This large sales decline is the driving force behind the pharmaceutical industry's shift in strategy to focus on high-growth markets such as biologics. mAbs alone will generate an additional $23 billion between 2009 and 2014, thus enticing a growing number of companies to expand in this field with the hope of ensuring long-term growth. In fact, 36 of the top 50 pharmaceutical companies (excluding generics companies) will have a presence in the mAb, therapeutic protein, or vaccines sector by 2014. Currently, 32 of the top 50 companies are now in those sectors. Vaccines will grow at a 5.5% compound annual growth rate (CAGR) between 2009 and 2014, partly because of the emergence of new technologies and the recent commercial success of several novel products such as Pfizer's (New York) pneumococcal vaccine Prevnar and Merck & Co.'s (Whitehouse Station, NJ) human papillomavirus vaccine Gardasil (see Table I).  

Table I: Combined global prescription sales for the top 50 pharmaceutical companies (excluding generic-drug companies) by molecule type (2009â2014).			

More biologic licenses and fewer new molecular entities

				Reflecting the pharmaceutical industry's burgeoning interest in high-growth biologic markets, 27% (seven out of 26) of US Food and Drug Administration new drug approvals in 2009 were for biologic license applications (BLAs). This number represents the highest proportion of biologic approvals since 2003 (2). In fact, the growth in approved BLAs offset the decline in approved new molecular entities (NMEs). Furthermore, the number of US orphan-drug designations has more than doubled in the past decade, from 208 (2000–2002) to 425 (2006–2008) (3). The number of orphan drug approvals grew from 32 to 47, an increase of 47%. In 2009, the European Medicines Agency (EMA) granted orphan status to 103 medicines, the highest number since European orphan-medicines legislation was introduced in 2000 (4).			

Injectable drugs set  to drive market growth 

Despite the current dominance of oral drugs, which typically are associated with small-molecule drug delivery, injectable drugs enjoyed strong growth between 2002 and 2008 at 20.8% CAGR. Injectables will continue to enjoy the fastest growth rate of all delivery mechanisms (i.e., 4.9% CAGR) until 2014, aided by the development of vaccines and mAb therapies which are typically delivered by this mechanism. The loss of patent protection for blockbuster brands such as Pfizer's Lipitor (atorvastatin) and Effexor (venlafaxine), and AstraZeneca's (London) Seroquel (quetiapine) will trigger strong generic-drug competition and sales erosion for oral drugs. 

Secondary-care therapy areas become a priority

Historically, small-molecule drugs dominated therapeutic areas such as cardiovascular and central nervous system (CNS) conditions and contributed to significant sales growth. However, these markets are not only saturated with me-too drugs, but also suffer from rapid market erosion because of the influx of generic drugs after the patent expirations of key brands. For example, in 2009, sales of cardiovascular drugs totaled $99 billion; they are forecast to decline at 2.8% CAGR (2009–2014). The forecast contraction in this market is likely the reason for Pfizer's announcement in September 2008 that the company was ending its research and development (R&D) investment in this therapy area—a landmark move, given the dominance of cardiovascular drugs in Pfizer's portfolio. 

Now pharmaceutical companies are shifting their R&D focus toward developing novel—often biologic—therapies for the treatment of niche indications, which should ensure longer-term growth given biosimilars' minimal impact to date. Examples of target therapy areas are oncology, immunology and inflammation, and endocrine diseases, which are forecast to grow at rates of 5.9%, 4.0%, and 6.3% CAGR, respectively, between 2009 and 2014. 

In 2009, several noteworthy therapies were launched, representing truly novel drugs that target unmet needs. Johnson & Johnson's (New Brunswick, NJ) Stelara (ustekinumab) for plaque psoriasis stands out as a first-in-class agent with efficacy superior to that of traditional therapies. Also, Takeda's (Osaka) Uloric (febuxostat) is the first new treatment for gout in 40 years, and Forest's (New York) Savella (milnacipran) is the first drug indicated solely for fibromyalgia (1). 

In addition, these target markets—oncology, endocrinology, and immunology and inflammation—will experience the highest sales growth and become the principal growth drivers for the top 50 pharmaceutical companies (excluding generic-drug companies), collectively generating an additional $45 billion by 2014. It is therefore expected that an increasing number of companies will focus on these more profitable markets (see Table II). 

Table II: Combined global prescription sales for the top 50 pharmaceutical companies (excluding generic-drug companies) by therapeutic area (2009â2014).			

Factors driving the shift away from the primary-care model 

With cash-strapped payers now scrutinizing drugs' costs and clinical benefits, it is not surprising that the pharmaceutical industry is now focused on biologic therapies in secondary care and niche markets (5). Additional factors that attract pharmaceutical companies toward niche indications include the faster and cheaper R&D process that results from the smaller patient populations and clinical-trial sizes. In addition, several regulatory agencies provide incentives and subsidize R&D in the development of orphan drugs. The agencies offer tax credits, regulatory assistance, and accelerated approval. Also, one of the largest cost-saving factors for companies with a niche product is that large-scale patient and physician marketing through various channels is largely irrelevant. In fact, annual average marketing costs for an orphan drug are seven times lower than those for nonorphan products. Figure 1 summarizes the factors inspiring the shift away from the primary-care blockbuster model toward niche indications. 

Figure 1: Factors inspiring the shift away from the primary-care blockbuster model toward niche indications. (ALL FIGURE ARE COURTESY OF DATAMONITOR GROUP)			

Big Pharma will remain dependent on  small molecules, but biologics will spur growth

The Big Pharma business model essentially was built on small-molecule products, which are relatively inexpensive to develop and manufacture, thus allowing companies to concentrate on fueling growth with an assertive sales and marketing strategy. However, once patent protection is lost, small molecules are easy for generic-drug companies to manufacture. Manufacturers of generic drugs do not have to support large R&D teams and they are able to compete aggressively on price. The resulting commoditization of the small-molecule market has forced the Big Pharma players to seek diversification into areas of high unmet need (e.g., oncology) or, in terms of molecule type, into biologics. The Big Pharma shift to biologics will be led by mAbs, which are forecast to grow by $22.1 billion during 2008–2014 at a 9.5% CAGR, thus making them the biggest growth factor for this sector. Therapeutic proteins also will experience strong growth during 2008–2014, contributing an increase in sales of $9.2 billion at a CAGR of 3.6%. By contrast, small molecules—which accounted for 80.4% of Big Pharma's 2007 sales—will decline by $25.6 billion during 2008–2014. Despite these shifts, Big Pharma will remain dependent on small-molecules, which will account for 71.4% of its sales in 2014. Biologics (i.e., mAbs and therapeutic proteins combined) will account for 21.8% of sales, up 6.7% from 2008 (see Figure 2). 

Figure 2: Molecular-class focus by company type, 2002â2014. mAb is monoclonal antibody, sm is small molecule, TP is therapeutic protein, and Vacc is vaccine.			

At a company level, a clear correlation can be drawn between small molecules and declining sales versus biologics  and sales growth. Of the top 16 Big Pharma companies, only Novartis (Basel), Bayer (Leverkusen, Germany), Merck & Co, and Boehringer Ingelheim (Ridgefield, CT) will see net positive growth from their small-molecule portfolios. By contrast, the remaining 12 companies are forecast to see a net growth in their biologics portfolios.  

Roche (Basel)—primarily through its acquisition of Genentech (South San Francisco, CA)—contributes about 51.4% of the mAb growth for Big Pharma. Aside from Roche, Abbott Laboratories (Abbott Park, IL) also will exhibit strong growth in the mAb sector. Its growth is attributable to its acquisition of Knoll and its licensing of international rights to Synagis and Numax from MedImmune (Gaithersburg, MD). Johnson & Johnson also will exhibit strong growth, spurred by the growth of Simponi (golimumab), Stelara (ustekinumab), and its share of bapineuzumab sales. 

Growth from therapeutic proteins will be spread more evenly across Big Pharma. Sanofi-Aventis (Paris), primarily through insulin analog Lantus; Pfizer, through Enbrel; and Bristol-Myers Squibb (New York), through Orencia and belatacept, will make significant contributions. Novartis also will report growth in therapeutic proteins, primarily attributable to its launch of biosimilar drugs through its generic-drug division Sandoz. However, none of these companies will experience biologics growth remotely close to the level of mAb growth forecast for Roche. 

Midcap companies stick with small molecules

Datamonitor defines a midcap pharmaceutical company as one that has annual prescription sales below $10 billion, derives >50% of sales from biologics, and is not headquartered in Japan. Midcap pharma is entrenched in the small-molecule market and accounts for $46.7 billion or 93.8% of total sales in 2008. This percentage is expected to remain relatively unchanged. Interestingly, Gilead (Foster City, CA), Actelion (Allschwil, Switzerland), and Celgene (Summit, NJ), the strongest performing midcap pharmaceutical companies until 2014, will derive all of their growth from small-molecule sales. However, these companies will expand into other molecule types only at a low level. UCB (Brussels) will expand through the growth of its mAbs Cimzia and epratuzumab, and Allergan (Irvine, CA) through the growth of therapeutic protein Botox. By 2014, mAb and therapeutic proteins will account for 1.7% and 5.9% of midcap pharmaceutical sales, respectively (see Figure 2). 

Therapeutic proteins  dominate, but mAbs gain ground

Biotechnology companies focus primarily on biologics, but from 2008 to 2014, the dominance of therapeutic proteins within the molecular class mix will decline steadily as mAbs gain market share. Nevertheless, therapeutic proteins will remain the dominant molecule type throughout, accounting for 68.0% of 2014 sales. This shift in focus toward mAbs will be spurred by this molecular class's relatively strong growth of $4.4 billion in 2008–2014, which resulted primarily from the launch of Amgen's (Thousand Oaks, CA) Prolia and continued sales growth of Merck KGaA's (Darmstadt, Germany) Erbitux. Interestingly, therapeutic proteins will deliver greater sales growth until 2014 (i.e., $5.2 billion) because of Novo Nordisk's (Bagsvaerd, Denmark) insulin-analog portfolio, which includes NovoRapid, NovoMix, and Levemir. Small-molecule growth will total less than half of that delivered by biologics, at $3.1 billion.  

Biogen Idec has the biggest mAb focus and also the biggest biologics focus; mAbs and therapeutic proteins accounted for 98.9% of its 2008 sales. Novo Nordisk will account for the majority of the peer set's therapeutic-protein sales growth, with an increase of $4.7 billion forecast between 2008 and 2014, to be supported primarily by Genzyme (Cambridge, MA, $1.3 billion). By contrast, declines of $741 million and $221 million are forecast for Biogen Idec and Amgen's therapeutic-protein portfolios, respectively (see Figure 2). 

For the foreseeable future, blockbuster drugs will provide the bulk of sales for the top 50 pharmaceutical companies (excluding generic-drug companies). These drugs generated $344 billion collectively in 2008, representing 66% of prescription sales. However, the outlook for these drugs is less than stellar; 66 drugs with blockbuster status in 2010 will see a sales decline of more than $200 million by 2014, in response to me-too and direct or indirect generic competition. As a result, total forecast sales for blockbusters will decline by 2.1% CAGR from 2009 to 2014. Pfizer will be the hardest hit, with 2014 blockbuster drugs sales forecast to decline by $8.3 billion versus its 2009 level. The Wyeth merger will soften the blow slightly for Pfizer, but the company will remain the most strongly affected in terms of blockbuster expirations and total sales losses over the 2009–2014 period. Bristol-Myers Squibb and sanofi-aventis are also forecast to experience losses of $5.0 billion in blockbuster-drug sales by 2014 versus 2009 because of the generic erosion of blockbuster brands. 

As the industry moves away from the old primary-care blockbuster model toward targeting specialty secondary-care indications, several novel drugs launched in 2009 still have the potential for blockbuster status, including sanofi-aventis's antiarrhythmia agent Multaq (dronedarone), Johnson & Johnson's Simponi (golimumab) indicated for rheumatoid arthritis, and Bristol-Myers Squibb and AstraZeneca's Onglyza (saxagliptin) for the treatment of type 2 diabetes. Nevertheless, entering a multibillion-dollar therapy area cannot guarantee blockbuster status, particularly in today's price-conscious environment.  

Key factors that will be important for determining blockbuster success within the biologic markets include the ability to gain first-mover advantage within a given indication, the subsequent horizontal expansion across disease stages and indications, and the creation of high barriers to competition through the accumulation of clinical safety and efficacy data. In addition, with the increasing cost pressures facing payers, manufacturers will need to demonstrate comprehensive pharmacoeconomic data and drug benefits for these therapies in relation to the disease frequency and severity. They may also need to demonstrate an advantage in comparative effectiveness over existing products. This competitive advantage may be achieved best through coupling drugs with companion diagnostics or creating disease-management solutions. Pharmaceutical companies frequently employ risk-sharing agreements as a means of securing a place on reimbursement lists, thus sharing the risk between the payer and the manufacturer. These schemes also encourage responsible prescribing by healthcare professionals and ensure that resources are not wasted on ineffective treatments. By addressing payer concerns regarding both economic and clinical outcomes, risk-sharing schemes have the potential to change the pricing landscape of high-cost drugs.  

These very factors have led to the dominance of mAb products such as Roche's Avastin (bevacizumab), Herceptin (trastuzumab), and MabThera (rituximab); Abbott's Humira (adalimumab); and Johnson & Johnson and Merck & Co's Remicade (infliximab), which together accrued a 72% share of mAb sales in 2008. However, the market share of these top five brands will fall to 57% in 2014 because of increasing competition from newly launched mAbs. In fact, from 2008 to 2014, the number of mAbs achieving blockbuster status will increase from five to 15. Nine other mAbs will generate sales of more than $500 million in 2014. Overall, the mAbs market will remain healthy. 

Clearly, a paradigm shift is taking place in the pharmaceutical industry, as the small-molecule business model that historically inspired sales growth is replaced by a high-value specialty-biologics model to fend off further sales erosion. As the patent cliff approaches, it will be increasingly important for all pharmaceutical companies to consider putting a biologics strategy in place, either through organic means or through partnerships, to avoid being left behind in this dynamic, competitive environment.  

 is vice-president and global director of research and analysis, healthcare, and 

 is head of company analysis, both at Datamonitor Group, 265 Franklin St., 4th floor, Boston, MA 02110, tel. 617.722.4606, fax 617.523.6993, 

*To whom all correspondence should be addressed. 

 1. R. Whitman, "Pharmaceutical Company Outlook to 2014," (DMHC2591, Datamonitor, London, December 2009). 

 3. Tufts Center for the Study of Drug Development, "US Orphan Product Designations More Than Doubled from 2000–02 to 2006–08," 

www.europharmatoday.com/2010/01/emea-after-highest-year-for-orphan-drug-designations-recommends-four-more-.html

 5. M. Musciacco et al., "Pharmaceutical Key Trends 2010" (DMHC2599, Datamonitor, London, March 2010). 

The authors describe recent market trends and indicate the likely future direction of the pharmaceutical and biopharmaceutical industries. This article is part of the 2010 Outsourcing Resources special issue.

Pharma Market Trends 2010

When I began my career in manufacturing some 35 years ago, I don't remember much talk about supply-chain risk. Yes, we worried that supply could be disrupted, but quite frankly we dealt with those issues as they occurred. Although we strived for "just-in-time" inventories, we generally maintained "just- in-case" inventories and could easily withstand most outages. Most supply chains were regional, and we worried about potential labor-union work stoppages or a delivery truck breaking down 

. Although this description is somewhat oversimplified, supply-chain risk was not as complex or potentially damaging as it is today. 

Besides supply disruption, which has evolved to include risks associated with material scarcity, natural disasters, political instability, and financial collapse, today's corporations must deal with additional significant risks exacerbated by the rapid global transparency of information affecting corporate reputation and even brand image. In this year, alone, we have  seen the disruptive impact of a major earthquake in China, the Icelandic volcano, the Times Square bomb scares, and the Gulf Coast oil spill. The financial effects on supply chains from these incidents is already tens of billions of dollars and will surely be much higher before full resolution and a return to normal operating conditions are achieved. 

The importance of mitigating risk and preserving corporate reputation is underscored by a 2007 study conducted by the global public-relations firm Weber Shandwick in conjunction with the opinion research firm KRC Research, which surveyed 950 business executives worldwide to evaluate reputation risk. The survey found that 63% of a company's market value is attributed to reputation. Nearly nine out of 10 survey respondents concurred that there has been a growing trend of corporate reputation risk. The report cited a 2005 study by the Economic Intelligence Unit, the research arm of 

, which showed that reputation risk is nearly three times greater than the risks from terrorism and natural disasters and surpasses regulatory, human-capital, information-technology, and market risks. Weber Shandwick's corresponding research showed that global media coverage of reputation risk has grown from being practically nonexistent in 1990 to almost daily mentions in 2007.  

Reputational risk is at an all-time high and evident by several recent examples such as recent problems with corporate giants Toyota (i.e., automotive recalls) and British Petroleum (i.e., Gulf Coast oil spill). The question for all responsible executives is: "What is our preparedness to avert preventable risks or respond rapidly to minimize damage should an unpredictable event occur?" 

Despite the importance of mitigating risk, companies may not be sufficiently prepared. Successful risk mitigation in today's complex environment takes a combination of policy, standard processes, technology, strong leadership, and analytical research. 

Five important trends in risk-management preparedness

A comprehensive supply-chain risk-management strategy must involve five key principles: cash-flow management, a balance of low-cost versus low-risk sourcing, strategic-procurement initiatives, incorporation of sustainability practices, and responsible spending. These elements are further detailed below.  

				 With the changing environment of increased regulation, price controls, generic-drug competition, and longer and more expensive research and development cycles, pharmaceutical and biotechnology companies have become much more focused on supply-chain cash-flow management strategies (following the lead of other industries that began implementing these strategies as many as 25 years ago). These strategies consist of a combination of programs that strive to better balance cash inflows versus cash outflows. The supply chain contributes to cash-flow improvement initiatives by reducing inventory and extending payment terms to suppliers. Both strategies, when improperly applied, can and have created increased risk and significant financial consequences that far exceeded the gains. I know of at least one major corporation that mandated 60-day payment terms (from 30 days) when the credit markets were collapsing. This approach seemed almost reckless when considering that for every one million dollars spent with a supplier, a 30-day payment extension only results in a one-time working-capital improvement of $6667 in capital costs (derived from a theoretical savings of 8% × $1 million × 1/12 = $6667). This amount is a very small gain if it also contributes to the financial demise and subsequent closure of a key supplier.  

There is much validity to the idea that the faster cash flows through a supply chain, the less cash is needed to sustain the financial viability of that supply chain. More and more, leading companies are thinking that way. Large corporations such as Syngenta (Basel), Bank of Scotland (Edinburgh), and GlaxoSmithKline (London) are adopting supply-chain financing programs and putting into place technology enablers that allow suppliers to decide when they want to be paid, and of course, at what discount.  

Better balance of low cost versus low risk.

				 Global supply chains have been under development across many industries for the past several decades. Low-cost country sourcing has been on a steady rise for the past 15 years, with corporations leveraging low-cost labor pools for the procurement of goods and services. Most large corporations today have well-defined programs in India and China. As these markets have matured, companies are now sourcing from new low-cost sources located in Eastern Europe and other Asian countries. In general, outsourcing can be risky as evidenced by the issues that Boeing went through with the production of its Dreamliner airplane production, which included major delays, postponed revenue, and lost orders. Massive problems with component deliveries in 2007 led to a two-year delay in aircraft launch and some $2 billion in charges to fix supplier problems (1).  

Outsourcing, combined with low-cost country sourcing, is even riskier. The US Food and Drug Administration's recall of heparin in 2008 due to contamination of lots produced in China is another example. In this heparin recall, the drug was oversulfated as Chinese heparin manufacturers were unethically cutting the medication with chondroitin sulfate to cut down on manufacturing costs. This incident had devastating impacts on those who had chosen to use this Chinese supplier. FDA reported that there were hundreds of serious adverse reactions and scores of deaths among patients that had taken the heparin (2). 

The hard lessons learned from this incident have made it important for companies to reevaluate their low-cost country sourcing strategies. They are evaluating risk versus cost and rebalancing their supply strategies to less riskier profiles.  

Comprehensive strategic-procurement initiatives.

				 One can make a strong case that many supply-chain disruptions and corporate reputation/brand image disasters are preventable, even in the case of natural disasters or other seemingly unpredictable 

-type events. A corporation's procurement organization has the ability to significantly reduce the risk associated with these occurrences by conducting collaborative strategic-sourcing initiatives that ensure their companies are protected from myriad potential risks. Strategic sourcing is a pragmatic and structured procurement process. This process is conducted over several steps and includes: rigorous internal and external analysis; development of multiple strategic options weighted for risk and cost; strategy selection made collaboratively with business stakeholders; well-orchestrated negotiation; and detailed implementation planning, supplier selection, and ongoing supplier management, including continuous-improvement activities. 

Best-practice organizations also use technology to develop solutions to enable the creation, storage, and management of hundreds, if not thousands of risk-management action plans associated with all critical purchased goods and services (see sidebar, "Implementing a risk-mitigation action plan"). 

  Implementing a risk-mitigation action plan			

 As supply complexity and associated risk continues to increase, more companies are recognizing the need to improve their procurement organizations and are engaging third-party assistance to upgrade their strategic sourcing and technology capabilities.  

				 As corporate-reputation and brand-image disasters become more frequent, there are other issues that companies with global supply chains need to address. These broad concerns involve human rights (e.g., child labor, working conditions, unfair pay), global warming, and other environmental impacts. The pharmaceutical and biotechnology industries are also feeling the effects of animal-rights groups that want to ensure the ethical treatment of animals. Nongovernmental organizations (NGOs) play a role in influencing customers, shareholders, and investors. As with most ideologies designed to promote social change, adoption rates by corporations can be classified into three main groups: laggards, followers, and leaders, with the majority of companies acting as followers. 

When it comes to embracing sustainability and green behavior in manufacturing and product specifications, several large corporations such as GlaxoSmithKline (London), Proctor & Gamble (Cincinnati), Diageo (London), and Unilever (London) achieved material cost savings, enhanced brand image, and generated increased demand for their products through innovative changes in primary and secondary packaging components. Examples include reducing corrugated box and cardboard carton-wall gauge, buying board and paper-based components from certified forests, using recycled board and paper, reducing wall thickness of polyethylene containers, and switching to up to 100% recycled polyethylene. These types of changes can reduce the amount of material used, increase the amount of material being recycled, and reduce the overall associated carbon footprint. There is a positive relationship between sustainability and green behavior in enhancing brand image and generating greater sales revenue as a result (3). 

Diagnostic test for supply-chain risk mitigation			

				 The economic meltdown of 2009, the resulting attempts of government bailouts, the many government stimulus programs, and the healthcare overhaul serve to show how the changing environment led to closer examination of corporate spending and has placed an increased emphasis on responsible spending policies and practices. As sales have slumped, more companies have taken a serious look at how to buy goods and services in a way that reduces spending.  

An example from outside the pharmaceutical and biotechnology industries is the luxury expenditure policy, which is imposed on companies receiving funding under the Troubled Asset Relief Program, commonly referred to as TARP or RCP, the federal program under which the US government purchased assets and equity from financial institutions to strengthen the financial sector. The guidelines set limits for entertainment or events, office and facility renovations, aviation or other transportation services, and other similar items, activities, or events. The pharmaceutical and biotechnology industries should take note. A similar scenario is conceivable as the government may take more responsibility for healthcare, and closer scrutiny will be paid to how discretionary budgets are spent. As a result, corporations are reevaluating policies and practices that govern how their goods and services are purchased.  

A simple diagnostic test can assess whether a company is adequately prepared for supply-chain disruptions or mitigating reputational risk. Key questions to consider are: 					

Does a company have a comprehensive supply-chain risk-management program in place?

Does the supply-chain risk-management program have well-documented policies and procedures in place that adequately protect the company against the types of issues that are generating enormous news today (e.g., supply-chain disruptions such as geopolitical instability, natural disasters, financial collapse, inconsistent quality, contamination, and counterfeiting; corporate responsibility such as human rights violations and environmental concerns; and employee responsibility such as fraudulent activities, discrimination, and harassment)?  

Are employees trained and certified in their understanding of these policies on an annual basis?

Is there a systematic process and data-management repository in place to ensure rapid and proactive response to unexpected events? 

Are corporate responsibility and supply-chain risk-management a top priority among the company's senior executives?

The answers to these questions provide insight into whether a company is adequately prepared to mitigate risk in its supply-chain activities.  

The author describes the importance of risk management and offers strategies for risk-management preparedness in supply chains.

Pharmaceutical Technology-08-01-2010

Contract R&D and Clinical Materials Outsourcing in Emerging Markets

Slow Climb Back

Standardized Quality Agreements

Pharma Market Trends 2010

Mitigating Risk in the Supply Chain

It takes a World

Managing Expectations and Deliverables: A CMO Roundtable