7 CEOs Say Outsourcing Advancing … On Swirling Currents (Part 1)
By Louis Garguilo, Chief Editor, Outsourced Pharma
How’s it going in the global BioPharma outsourcing industry? I reached out to 7 CEOs at global CROs/CDMOs for start-of-the-year trends from the trenches – or at least the frontlines. The executives provided their thoughts on these two questions:
- What trends are you experiencing at this moment?
- How are you addressing them?
In this two-part report, we’ll hear from chief executives at: AAI Pharma Services/Cambridge Major, Aptuit, Charles River, Cobra Biologics, Pharmatek Laboratories, Piramal, and WuXi.
The Starting Point
Foremost, there’s no dispute among our group regarding the continuing increase in outsourcing across discovery, development and manufacturing. Not only is there an increase in activity overall at clients, but much of BioPharma’s planning now comes predicated on a higher utilization of outsourcing services.
No surprise here: It’s been amply reported the outsourcing industry is pushing towards revenues and profitability not seen since the circa-2008 zeniths. But it’s always good to receive confirmation that a market continues to grow. Things change fast in our world.
Most of our CEOs also mentioned the rising tide for biotechs generally and biologics/biosimilars specifically. We’ll get into this subject in part two of this article.
Last year we saw jockeying for position among providers to offer enhanced and expanded capabilities and services. M&A and capital investments, according to our CEOs, will march on in 2015. But there is a twist.
Providers For Sale, Or Partnerships Still Prevail?
Some of our chief executives see a convergence of factors arriving at a potential directional change in the BioPharma outsourcing industry. They see accumulating pressures on pharma to bring one segment back in-house: commercial-product (and other) supply-chain operations.
Timothy Scott, President, Pharmatek Laboratories, Inc., sums it up this way. “If the outsourcing pendulum swings all the way back, and the pharma industry continues to show growth, we may see pharma companies purchasing their development and manufacturing vendors.”
Pressures are building from various quarters. For example, global regulatory agencies are trying to effect improved supply-chain management and quality control oversight to lessen drug shortages. They’re also concerned about the entry of more biologics and biosimilars into the healthcare market.
There are internal pressures as well. Manufacturers face stiffening price competition, more scrutiny on pricing policies, and the need for raised productivity and profitability across global operations. Supply-chain and quality disruptions obliterate profits, and nowadays add to already heightened scrutiny from regulatory agencies, healthcare intermediaries and patients.
BioPharma may also feel the need to re-align talent that once resided within its walls, but has been acquired by service providers as a result of years of downsizing. And “service providers” now more than ever come with unique and advanced technologies, platforms and equipment … and in some cases their own products.
We just witnessed a powerful example of this in Pfizer’s acquisition of Hospira. The recently released CPhI Worldwide report quotes a market-watcher as saying there’s the potential for more Big Pharma acquisition of CDMOs, “which would give full control over the supply chain and reverse the huge outsourcing trend of recent years.”
That could be somewhat overstated, but it does appear in just a few short years, global market forces – perhaps including the urge to merge among service providers themselves– is lending energy now to a force for acquiring of service providers by sponsors.
But let’s be clear: It’s not that CDMO consolidation itself is on the wane. “Consolidation has been the buzzword in the CMO industry,” says Vivek Sharma, CEO, Pharma Solutions, Piramal Enterprises Ltd. “You have Patheon acquiring DSM and Gallus Biopharma, AMRI acquiring Cedarburg and OsoBio, Huntingdon acquiring Harlan, and PRA acquiring RPS. The consolidation wave has been driven by the desire to either offer end-to-end solutions, or to enter new and attractive market segments. Our most recent acquisition of Coldstream Laboratories is part of our strategy to provide end-to-end solutions.”
For any substantial reversal to where BioPharma outsources less by taking more of the supply chain internal, the original motives for increased outsourcing have to be overcome. BioPharma has to think long and hard about, in effect, re-acquiring the people and facilities painstakingly released during past years. While gaining closer supply-chain control on the one hand, on the other acquiring outside providers returns manufacturers to an era of more fixed assets, capital expenditures and other financial burdens. BioPharma loses the flexibility it sought and effectively gained the past decade.
Sharma of Piramal isn’t convinced this is a major directional change. “We find clients are looking to identify preferred CMO partners that can invest, innovate, and provide differentiated solutions to challenging chemistries.” In other words, BioPharma wants its “partners” to take on the added expenditures. Many CRO/CDMO are willing to do so if in the bargain they benefit from the stronger sponsor-provider partnerships.
Discovering More Is Better
Looking at this from the discovery-service side for a moment, we can add the Charles River acquisition of Argenta and BioFocus to Sharma’s list of M&A above. Jim Foster, Chairman, President and Chief Executive Officer of Charles River, is taking on the challenge for stronger partnerships. To keep up with biotech clients most specifically, he says, “We’ll continue to enhance our portfolio through acquisitions that provide a more significant value proposition for clients, and the prospect for us to build larger, longer-term, truly strategic relationships.”
And Aptuit CEO Jonathan Goldman sees the effectuation of this much discussed subject of deeper provider-sponsor partnerships. “While the market for outsourcing is strengthening overall, we’ve found increasing demands by sponsors for scientific and regulatory success from CROs in the pre-IND phase. This is a change from the status quo of component-based outsourcing for disparate parts of a program of discovery or development. We’re addressing this by providing integrated services and operational solutions “under one roof,” and innovative business models such as risk share against performance and success outcomes.”
So the discovery, or pre-clinical service providers, are making investments for, experiencing and betting on further strategic relationships – customer-provider, not customer buying provider – to fulfill the needs of pharma, and growing biotech.
Part 1 Analysis
Our CEOs are telling us a few things. On the discovery side, while we all knew biotech is growing again, we’re seeing that to meet this demand and more complicated needs, new and expanding services at providers are necessary. Biotech is gaining in influence at service providers.
At the same time, pharma continues to look for more comprehensive outsourcing relationships. Both of these (biotech and pharma needs) point to more consolidation – and investments – for the purpose of expanding capabilities, technologies and services. Although already a current we have been swimming in, it could prove even stronger and faster than we expected.
But perhaps it’ll be most interesting to see if the growing pressures on BioPharma for increased supply-chain control hold sway over expanding outsourcing models and their flexibility in non-fixed assets and fungible costs. While there are some mitigating factors, such as the adoption of single-use and new technologies delivering higher productivity and flexibility, mostly the challenges would be the same. Will in-house control lower costs and raise profitability? Perhaps nobody has the answer to that yet, but it is one that will determine whether this is indeed a powerful trend or just a prevailing discussion.
And a point yet to be raised: What are the real benefits for suppliers and service providers to allow themselves to be sold to BioPharma?
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(EDITOR’S NOTE: Our discussion, including thoughts on burgeoning biotechs and biologics, continues in Part 2 of “7 CEOs Say Outsourcing Advancing … On Swirling Currents"