Outlook 2011

Beginning a new year merits examination of the key events of the past year and assessing what may come in the year ahead. Pharmaceutical Technology spoke with industry executives to gain their views on the crucial issues shaping pharmaceutical manufacturing and the supply chain. Participating in the roundtable were: Tony Maddaluna, president of Pfizer Global Manufacturing (New York); Wynn Bailey, partner in the life-science advisory practice at PricewaterhouseCoopers (PwC, New York); Guy Villax, CEO of the contract manufacturing organization (CMO) Hovione (Lisbon); and James Hamby, vice-president of business development at the CMO Ash Stevens (Detroit).

Illustration by Dan Ward. Images by Lauren Burke/Getty Images

2010 in review

PharmTech: Looking back on 2010, what were the most important issues for the bio/pharmaceutical industry as a whole and for manufacturing specifically?

Maddaluna (Pfizer): As the industry moves away from vendor relationships and toward strategic partnerships, there is a greater emphasis on partnering with external suppliers to achieve strategic business goals. Investment in new technologies is on the rise. The industry is moving toward strategic collaboration in both research and manufacturing and is strongly focused on partnering closely with global regulatory agencies. All of these trends reflect an industry-wide awareness of the need to demonstrate stakeholder value. A number of factors are currently in play, and their combined impact will carry forward as the industry continues to evolve in response to current and emerging challenges. Chief among key issues affecting pharmaceutical manufacturing are supply-chain security, increased regulatory attention, overcapacity, and shifting demand as products go off patent.

Figure 1: From left, James Hamby, vice-president of business development at Ash Stevens; Guy Villax, CEO of Hovione; Tony Maddaluna, president of Pfizer Global Manufacturing; and Wynn Bailey, partner in the life-science advisory practice at PricewaterhouseCoopers.

Bailey (PwC): Understanding larger industry issues and macro-level business drivers is the right place to start for effective supply-chain executives, and we see several big-picture things happening that have significant implications for bio/pharma supply organizations.

First, companies are struggling with volume declines associated with weak pipelines, increasing generic competition, and price pressure from government and private buyers. For supply organizations, this heightens the need to create lean and adaptive cost structures that can preserve and improve gross margins at all points in a product's life cycle.

Second, the decline of the blockbuster and the emergence of ever smaller patient and market segments means that supply organizations have to build and manage multiple supply chains in parallel—each with unique product, channel, customer, and patient attributes—but all responsive from the end-customer back to the pharmaceutical company.

Third, shorter product life cycles create an even greater need to optimize economics during market exclusivity and to differentiate products at all stages of their life cycle. For supply organizations, this highlights the need to create more seamless alignment of activities not only across supply-chain functions, but between the supply chain and sister groups that touch all aspects of the product life cycle (research and development [R&D] and new product introductions most obviously).

Finally, heightened public and regulatory attention to risk and quality (and severe consequences for failure to act accordingly) means that supply organizations need to have robust risk-assessment and risk-management capabilities and practices that cover the entire extended supply chain (from your suppliers' suppliers all the way through to end customers).

Villax (Hovione): Intense global competition and excess capacity is eroding prices in early-phase materials. Profound restructuring at Big Pharma is making outsourcing a genuine strategic option for a large portion of development and manufacturing activities. These companies have high standards, and this demand will create a shortage of quality CMO capacity. Also, expect regulatory agencies' enforcement attitude to swing to the other extreme—not so long ago they ignored the risks of globalization and hid their head in the sand; now they are "furious" and the pendulum has swung. Expect strong enforcement action in all three major regions; expect a flight to quality suppliers.

Hamby (Ash Stevens): Big Pharma is outsourcing more development work to contract manufacturers to cut costs and increase efficiencies. Early-stage start-ups typically out of universities or started by ex-pharmaceutical professionals are struggling to raise funding for R&D, preclinical, and early-phase drug development. Early-stage biotech companies are having to rely more on government and nonprofit organizations (e.g., Leukemia and Lymphoma Society) sources of funding. Consequently, it is taking longer for compounds developed by these groups to reach the clinic, and limited funding is contributing to a decline in the number of early-stage start-ups.

The real concern is where drug R&D is going to come from in the future. Big Pharma is cutting R&D. Venture capitalists and private investors are looking for shorter-term and later-stage investments. Initial public offerings are only for companies close to market or with marketed drugs. Academic institutions are not designed to develop drugs. The question is where the long-term drug research and discovery is going to come from in the future. China is investing heavily in biotech R&D and will likely be one of the key innovator countries for future pharmaceutical breakthroughs.

Manufacturing networks

PharmTech: Many companies have had to adjust their manufacturing networks because of mergers/acquisitions or shifting product mix and demand. What are the critical success factors and metrics in configuring a manufacturing network?

Maddaluna (Pfizer): Quality and compliance are always going to be the overarching criteria for success and that will never change. That said, the challenge is to create an optimally lean, optimally efficient, optimally cost-effective network while building capabilities for the future and ensuring quality and compliance. We do this by managing capacity and utilization of capital investments, reducing complexity across the network, optimizing the network to allow for effective implementation of operational excellence, and managing cost while at the same time adding value to the network. Pfizer's evaluation process examines multiple factors and is designed to ensure a thorough and informed evaluation of the plant value to the network and to Pfizer's strategic business goals. In other words, does the plant optimize the efficiency and effectiveness of the internal/external global network?

Bailey (PwC: ) First, create clearly articulated and broadly agreed goals for what you want to accomplish. What's the relative priority across potentially competing goals (i.e., lowest cost, lowest risk, highest reliability)?

Second, make sure to work from a good fact set. In our experience, companies typically have a poor understanding of true product cost. This happens for at least two reasons: costs often are allocated according to what's easy to measure (e.g., square footage) as opposed to true drivers, and some costs are never allocated at all (e.g., idle equipment). As a result, there are often significant hidden cross-subsidies (e.g., high-volume products subsidize low-volume products) that result in a distorted picture.

Third, make decisions that optimize overall network performance rather than individual site performance. This sounds obvious, but we see all the time that plants operate as mini-businesses and do things to optimize the performance of their business (e.g., pricing contract-manufacturing deals to cover marginal cost only) that detract from the overall performance of the network. Getting at this is as much a culture/incentives issue as it is a data issue.

Manufacturing performance

PharmTech: We often hear the phrase "operational excellence" as a goal for a company's manufacturing activities. How do you define operational excellence?

Maddaluna (Pfizer): Operational excellence is all about optimizing output while reducing input—streamlining our internal and external processes (across laboratory, packaging, manufacturing, and all other areas) to deliver a quality and compliant product. OEE (i.e., operational excellence plus effectiveness) is our measure of success.

Bailey (PwC): This may not sound particularly insightful, but it's powerful. Operational excellence can be defined as achieving the key quantitative and qualitative metrics that are required by a supply-chain organization's three key stakeholders: meeting the needs of the business for assurance of supply and competitive total delivered cost; meeting the needs of regulators for assured quality and effective risk management; and meeting the needs of society for responsible corporate citizenship (e.g., as it relates to environmental issues). This framework may look different in practice based on any particular company's particular situation, but it can be the starting point for a powerful and integrated cascade of performance metrics.

Villax (Hovione): The industry as a whole is still looking for what it means; we are a good 20 years away from the Toyota way. For our industry to start comprehending what operational excellence is, it needs to cease being in denial and defending its poor record by blaming FDA and regulatory handcuffs. Our industry is at Sigma Two or Three. Operational excellence is a matter of measuring to allow managing. It is a matter of developing a problem-solving mindset, so that deviations are truly tackled and root causes are confronted and fixed before the next batch. It is a matter of adopting methodologies and using them well and systematically. A good indicator of how well are we doing in terms of operational excellence is measuring how many of our people know and use things such as 8D [a problem-solving methodology for product and process improvement], failure modes and effects analysis (FMEA), 5S [a workplace organization methodology], single-minute exchange of die (SMED), overall equipment effectiveness (OEE), and statistical process control (SPC). However before you have operational excellence, you need to have a genuine quality culture in the company across all areas and up and down the hierarchy; this is rare. At the start, you need quality which Henry Ford said was "doing it right when no one is looking."

Hamby (Ash Stevens): Operational excellence at all levels is central to the success of a quality contract pharmaceutical manufacturing company. CMOs generally possess a track record for consistently delivering quality APIs on schedule and on budget as well as possessing an excellent regulatory inspection history and strong environmental, health, and safety program. Quality encompasses a number of tangible and intangible attributes. In general, quality refers to the ability to deliver API that meets all specifications and is compliant with all regulations. In reality, quality goes beyond this definition. Quality CMOs share the same goals as their sponsor clients and are equally committed to the goals of the project as the sponsor. Communication and relationship building are more difficult to assess, but nonetheless, are important. A quality CMO fosters communicative and active relationships, timely communicates problems or delays, and rapidly adjusts to and resolves technical issues.

External manufacturing

PharmTech: From an industry view, how do you think contract or external manufacturing

has evolved in a pharmaceutical company's manufacturing strategy?

Maddaluna (Pfizer): The "make what you sell; sell what you make" model is a thing of the past—the industry has adopted a globally competitive cost manufacturing model that incorporates contract manufacturing as a strategic business tool. Pfizer's ability to extend the manufacturing network to encompass an external-supplier network provides access to a broad range of suppliers and technologies that facilitate the success of its business units. For Pfizer, key factors for keeping manufacturing in-house include the need to:

• Codevelop and launch new products jointly with research

• Improve processes and extract value throughout the product's life cycle

• Ensure quality/compliance

• Perform difficult processes, implement unique technologies, and support business goals with greater efficiency and effectiveness than third parties

• Operate in a given country due to commercial requirements.

Bailey (PwC): It's obvious that contract manufacturing is playing an increasingly important role in the manufacturing strategies of pharmaceutical and biotech companies. There are many reasons for this, including the emergence of a growing and highly capable contract manufacturing market, and pharma's interest in turning fixed costs into variable costs. Increasingly, the question being posed by top corporate management—CEOs, CFOs and other assorted Os—is why they should be making anything in-house. In response, leading supply organizations have redefined their mission and mindset around supply management rather than manufacturing. Companies that do a good job around contract manufacturing do five things particularly well:

First, they link the contract-manufacturing strategies to their broader business strategies and manufacturing-network strategies. Second, they have a well-defined and commonly understood operating

model that defaults to a "center-led" approach for managing most contract manufacturing relationships. Third, they have standardized enablers (processes, key performance indicators, scorecards, and relationship-management frameworks). Fourth, they use the full array of tools at their disposal to manage the economics of contract-manufacturing relationships. Fifth, they have robust and effective risk-management plans in place, supported by an anticipatory analytic environment rather than a reactive firefighting environment.

Villax (Hovione): Outsourcing ceases to be just a buzzword, an opportunistic option or a tactical decision when Big Pharma starts measuring cost properly. When shareholders press for performance and finance has run out of options, it starts addressing cost, and given the uncertainty of the pipelines and the high costs of execution, it is clear that Big Pharma makes a far better deal when it ceases to develop and manufacture in-house. Doing otherwise represents a very high capital expense cost and a very high operating cost because Big Pharma will inevitably operate to very low occupancy rates. Time has come for finance to cause Big Pharma organizations to take these tough decisions. By 2020, Big Pharma won't have vessels bigger than 20 L, except if tax savings remain available at certain key locations.

Hamby (Ash Stevens): The outsourcing of drug-substance development and manufacturing continues to grow. Large pharmaceutical companies have a number of manufacturing options available to them. Many large companies are building or have manufacturing facilitates in countries where labor cost are less expensive than Western countries such as in Asia. This allows them to take advantage of the labor arbitrage while controlling quality. Most Big Pharma companies have in-house manufacturing capabilities and facilities as well.

Big Pharma has varying philosophies and strategies regarding which projects and intermediates are outsourced to contract manufacturers. Some prefer to outsource lower priority projects to relieve pipeline congestion and increase development capacity or outsource projects with challenging chemistry. Big Pharma is becoming more comfortable with outsourcing manufacturing services and working with outside manufacturing vendors. Some companies such as Eli Lilly are moving to a completely outsourced manufacturing model. Other successful large pharmaceutical companies will likely follow suit. Large pharma and many larger biotechs typically maintain a list of preferred manufacturing vendors they have previously vetted for work. A contract manufacturer may be assigned challenging or lower priority projects initially to assess its abilities before being fully vetted to work on important CGMP manufacturing projects. Large pharmaceutical companies maintain metrics on vendors as a way to measure and track their performance.

Emerging markets

PharmTech: Emerging markets play an important role in the growth strategies of many pharmaceutical companies. How do you see manufacturing evolving to serve emerging markets?

Maddaluna (Pfizer): Different markets have different business needs, and it's important to fully understand the scope of those needs as well as the pharmaceutical company's specific business goals within that market. What does "presence in the market" mean specific to a pharmaceutical company's business goal of manufacturing versus getting products to customers within that market? There are different business requirements for different markets, and the industry has adopted a number of models in response—for example, partnership, capital investment, and expanding existing operations.

Bailey (PwC): Emerging markets are of course a challenge for pharma companies that have been traditionally focused on developed markets but that are now universally moving fast to build business in geographies that promise growth. One of the implications for pharma supply-chain organizations is that they will be supplying far greater ranges of products specifically tailored for specific markets. Pharma can take a cue from the medical-device industry in this regard, which has a headstart in designing and manufacturing products specifically for people living in the developing economies. Examples include companies such as Freeplay Energy, which has developed fetal heart-rate monitors and pulse oximeters driven by human power and designed to cope with harsh conditions. Similarly, cardiologists at India's Care Hospitals have designed inexpensive heart-valve replacements, thereby minimizing the number of disposable parts to keep costs down. Pharma can learn from such role models.

Biologics

PharmTech: Many pharmaceutical companies are intensifying their product development in biopharmaceuticals. With that change also come changes in manufacturing requirements. How do you think these changes affect the pharmaceutical manufacturing model?

Maddaluna (Pfizer): For Pfizer, staying competitive means staying ahead of the curb, anticipating change and being positioned to respond strategically and with agility to the changes and challenges of the evolving global pharmaceutical industry.Adapting to changes in manufacturing requirements requires balancing capital investment against control—in other words, ensuring the same level of Pfizer quality across our internal and external operations. Our external operations absolutely have to be run like our internal operations with the same processes, procedures, and policies in place externally as we have internally.

Bailey (PwC): The shift to biotech is a good example of the challenges facing traditionally chemical-based pharma companies. There are others too, for example, the growing complexity of product components that might include a companion diagnostic, a device, data-collection and transmission capability, and a service wrapper.

One recent example is a miniature digestible chip developed by Proteus Biomedical that can be attached to a conventional oral medicine, and that can send back data. The chip sends a signal to a sensing device worn on the skin, which records the time the medicine is ingested as well as measurements for certain vital signs. The information is then forwarded wirelessly to the patient's doctor. Novartis is currently testing the chip on patients taking its blood pressure treatment Diovan, and reports that compliance increased from 30% to 80% in six months. This further reinforces the move away from the "one-stop in-house shop" model and the move towards supply organizations whose primary role is not manufacturing, but rather the coordination of the activities of many networked entities to deliver a product that drives measurable clinical outcomes for the patient.

Quality by design

PharmTech: FDA's quality-by-design (QbD) initiative has created a science- and risk-based approach in pharmaceutical development and manufacturing. How has QbD changed or might it change the model for pharmaceutical manufacturing? What role do you think continuous manufacturing will play?

Maddaluna (Pfizer): We focus strongly on codevelopment with our research and pharmaceutical science groups and that won't change. That said, small-molecule (chemical synthesis) products and large-molecule (biopharmaceutical) products are distinct. We'll continue to follow the same codevelopment process for small and large molecules, but in parallel. Continuous manufacturing will play a role in terms of delivering cost, high quality, and efficient operations.

Bailey (PwC): QbD presents a real opportunity for companies to achieve dramatic improvement on the front end of the product life cycle by reducing process development and scale-up time and further down the road by reducing ongoing manufacturing costs. This is especially true for more complex molecules and dosage forms, where QbD can be a tool for reducing risk, time-to-market, and costs.

Process analytical technology (PAT)-enabled continuous manufacturing will ultimately allow significant reductions in manufacturing cost. We see companies making more progress in chemical API manufacture than in drug product or biotech API manufacture. However, we believe the pace of adoption will continue to accelerate for two primary reasons: the regulatory environment (which has historically insisted on batch testing) is becoming more supportive of process analysis and real-time release; and the economics are catching up to the industry.

Because of the high gross margins the industry has historically enjoyed, pharma has not had to worry obsessively about efficiency. But in what other industry would top management tolerate 30% asset utilization rates or one-to-two month manufacturing cycles when cycles measured in days are possible? The need to create lean and adaptive cost structures will inevitably force companies to adopt continuous manufacturing technologies. This is an attractive future, and there are challenges to getting there, but the challenges aren't primarily technical. Continuous processing and real-time release are well-established in other sectors, including chemicals and food and beverage. Rather the more significant challenges relate to culture, mindset, and change management. For example, pharma companies tend to work with "manufacturing islands, split in unit operations" where every unit of operation is more or less independent from an integration point of view. Changing to an integrated approach, which is standard in many other industries, is a big step for pharma.

Villax (Hovione): FDA has made it abundantly clear that QbD is the future. This drives the need to bring development and manufacture much closer than in the past, to achieve far greater depth of regulatory and scientific knowledge, and for bigger up-front budgets. Moreover, QbD is the key to operational excellence; otherwise continuous-improvement implementation is seriously handicapped. Continuous manufacture is just another tool in your kit; like "horses for courses," it sometimes comes in handy. Going forward, expect the breadth of technologies that are available to solve problems to expand dramatically, making it virtually impossible for Big Pharma to have them all in-house. So new technologies will be another reason to outsource; this will make technology-rich CMOs materially differentiated.

Into the future

PharmTech: What will be the top issues shaping the environment for pharmaceutical manufacturing in 2011?

Maddaluna (Pfizer): A greater degree of flexibility to respond to market needs. More strategic collaboration between research and manufacturing. A more streamlined process of regulatory interaction and a heightened focus on partnering with global regulatory agencies. Rising interest in new technologies; that said, contract manufacturing will continue to have its place, generally for high-volume products with multiple steps. Greater emphasis on external partnerships to enable strategic business goals. Growth across multiple business requirements and environments—emerging markets, established products, and large molecules, for example.

Bailey (PwC): The top items are:

• Quality management (read the headlines).

• Cost management—healthcare reformin the US will absolutely up the ante on the need for pharma companies to operate efficiently, and compared to other industries, pharma manufacturing is significantly inefficient.

• Flexibility and adaptability—building a supply organization that will meet the needs of the business as the business model changes. For example, the ability to scale up gradually as opposed to in a big-bang fashion as the adoption of a live-license product-approval framework drives a much longer timeframe between launch and peak sales of a product.

• Differentiated supply models—the needs of emerging markets are different than the needs of established markets. Most drug companies are moving aggressively into the "established-products" market but are trying to do so with the traditional pharma supply model.

• Role definition—in a world of more complicated products of which traditional pharmaceuticals may be one component (i.e., diagnostic, therapy, feedback loop, service wrapper all in one), what is the role of the pharmaceutical company's supply-chain organization? How is it changing? What does that mean for the kinds of skills we need and the kinds of partners we need?

Villax (Hovione): Size and global footprint will matter, so expect consolidation. As Big Pharma outsources strategically, expect shortage of quality capacity. Intense regulatory oversight will impose new rules on how you manage your suppliers and your manufacturing, and how you prepare filings. CMOs will need to graduate to Big Pharma's level of technical, scientific, and regulatory sophistication. Tougher technical problems will have to be solved faster and at a lower budget by new technologies.