A Changing Paradigm for Pharmaceutical Chemical Outsourcing

External development and manufacturing is an important part of pharmaceutical companies’ strategies and directly affects the business models adopted by contract service providers in meeting those needs.The role of pharmaceutical outsourcing, particularly pharmaceutical chemical development and manufacturing, was addressed at the Pharma ChemOutsourcing conference, which was held last month, in Long Branch, New Jersey, and which brought together pharmaceutical companies, CROs, and CMOs to discuss industry trends and perspectives. The central question at the heart of many of the discussions was a fundamental but important one, namely where is the opportunity in pharmaceutical outsourcing, specifically in pharmaceutical chemical development and manufacturing?

The answer to that question as it was discussed reflected many of the larger and well-chronicled trends affecting the pharmaceutical industry, such as generic-drug incursion, declining R&D productivity, and the ongoing need for cost reduction in development and manufacturing. At one level, these pressures make outsourcing an attractive alternative to internal development and manufacturing as a means to reduce fixed cost structures and achieve greater flexibility, which is a plus for CROs and CMOs. On the downside, however, CROs and CMOs face greater competition as pharmaceutical companies, particularly large pharmaceutical companies, seek to reduce their supplier base and partner with strategic, if not preferred, providers as the choices for these potential CROs and CMOs broaden globally.

Part of the dialogue at the conference focused on the strategies that contract service providers should take based on this increased level of competition. Some suggestions offered by pharmaceutical companies were integrated service offerings, higher levels of project management, specialized technical offerings, and other approaches that meet the evolving needs of pharmaceutical companies in realizing their goals for greater flexibility while maintaining reliability and quality of supply. The choices for CROs and CMOs relate to how to adapt their business models either through increased service offerings, partnering with other contract service organizations to achieve a fuller slate of capabilities, and finding opportunity in the globalization of the pharmaceutical contract service industry.

An additional challenge for pharmaceutical companies is how to align their supply chains to meet the changing direction of the industry. According to a recent analysis by the management-consulting firm PwC, many companies have asset bases that are not equipped for more complex manufacturing and distribution processes, different supply chains for a range of products, and shorter product life cycles. The growing importance of emerging markets, new modes of healthcare delivery, live licensing developments, and environmental concerns, are placing pressure on current pharmaceutical supply chain models. Over the next 10 years, PwC asserts that pharmaceutical companies will increasingly have to manage a vast network of service providers in addition to manufacturing and distributing their own products. By 2020, the PwC study concludes that the management of information transfer between the pharmaceutical company, the patient and healthcare provider will be as important as the movement of products. Supply chains must therefore evolve so as to direct and manage this shift, and companies will need to acquire a much deeper understanding of patients and their healthcare needs.

“In a world where outcomes now count for everything, the ability to integrate data, products and services in a coherent business offering that delivers increased value and better understands the needs of the patient is vital,” said Simon Friend, global pharmaceutical and life sciences leader, PwC, in a Feb. 21, 2011, press release. “Companies must now work hard to get closer to their patients as by 2020, there is little doubt that the data behind a product will as valuable as the product itself.”

The global pharmaceutical industry will therefore, need to develop different supply chain models for different product types and patient segments, learn to use their supply chains as a means of market differentiation, all while recognizing the importance of information over product. “The most successful pharma companies will be those that now recognize the underlying value locked in their supply chain and can leverage it as a value and brand differentiator rather than just a cost,” said Steve Arlington, global advisory pharmaceutical and life sciences leader, PwC. Those that recognize information is the currency of the future will be those that go the final mile and stand out by 2020.”

On a quantitative basis, the market research firm Business Communications Company (BCC) recently offered an analysis of the market for contract pharmaceutical manufacturing, research and packaging. In 2011, global pharmaceutical contracting revenues total nearly $218 billion and are expected to reach nearly $361 billion in 2016, increasing at a compound annual growth rate (CAGR) of 10.6%. BCC breaks pharmaceutical contracting into four segments:– contract manufacture of over-the-counter (OTC) drugs and nutraceuticals, contract manufacture of bulk and dosage form drugs, contract research, and contract packaging.

The OTC drug and nutraceutical segment accounted for nearly $128 billion in 2011 and is expected to grow at a CAGR of 10.9% to reach nearly $215 billion in 2016, according to BCC. The bulk and dosage form drug segment held a value of $53.4 billion in 2011 and is expected to increase at a CAGR of 10.1% to reach $86.3 billion in 2016. The research segment was worth $30.2 billion in 2011 and should be worth $50.5 billion in 2016, a CAGR of 10.8%. The packaging segment, worth $6.4 billion in 2011, should be worth $9.3 billion in 2016, a CAGR of 7.8%.