Contract Manufacturing in the Pharmaceutical Industry - Essay Example

Contract Manufacturing in the Pharmaceutical Industry Abstract This essay looks into the process of contract manufacturing, especially in context to the growth of this outsourcing industry in recent years. The introduction aims to place an understanding of the general concept and its implementation across various industry sectors, prior to a defined analysis of its application in the pharmaceutical industry. This analysis allows for a debate on the benefits and pitfalls that contract manufacturing could have for a firm in the pharmaceutical industry. The essay concludes with the writer aiming to allow for the amalgamation of theoretical concept with practical implementation, in order to give a final argument on the topic. Introduction Since the 1990s, the issue of outsourcing has been highly debatable, especially in terms of its benefits to a country’s economy and the welfare of the population. The basic principles of business economics demands that an entity tries to manufacture goods or provide services at the lowest possible cost to itself, while benefitting from the gain in net revenue after sale or completion of service. For this reason alone, the concept of outsourcing is hard to concretely define (Goddard & Ajami, 2008). The sceptics of the process see it as a migration of tasks performed by local workforce to a workforce in another country, where the tasks can be performed at a lower overall cost to the organization. But Scholte (2005) defines it as a process of international economic integration, where the strengths of two national economies combine to benefit each other. The reasoning that underlines this definition is that outsourcing allows an entity to place its focus on the things that it is stronger or better at, while delegating the tasks and/or responsibilities that are costing it time and resources from the primary tasks, to another entity that is stronger on those accounts. This means that each entity can now focus on the core tasks which come within their strengths, and thus, benefit the final outcome for both. Thus, to put it in economic terms, the process of outsourcing provides comparative advantage to each entity in some way or form. The process of contract manufacturing is similar to that of outsourcing, in recent years being more associated with the pharmaceutical industry specifically (Gassman et al, 2008). It relates to a working agreement that is reached between two organizations, whereby one becomes the manufacturing arm of the complete process. This means that the client organization hands over the entire process of sourcing raw materials, hiring labour, producing the goods, as well as the ordering and shipment tasks, to the partner organization, allowing it to focus on other activities within its industry sector. On general terms, the process of contract manufacturing is a form of outsourcing, as it encompasses the basic principles of handing out the tasks that an organization does not want to focus on, or would like to cut costs on. However, with contract manufacturing, the organization is able to diminish its outlay and involvement from the more laborious processes, allowing it to focus on more future-intensive tasks that are part of its industry sector. The last decade has seen outsourcing expand from the institutional level to the individual level, with more and more work flowing out from the developed nations and stronger economies, to the developing ones (Grosse & Kujawa, 1995). The projections for contract manufacturing see double-digit growth in the industry segment, as more large institutions look to take advantage of cost-savings and skilled labour by partnering with organizations that are able to offer completion of the activities at the desired quality levels. The technology industry is one of the front-runners in this process. Analysis The term contract manufacturing organization (CMO) is linked to the pharmaceutical industry, with the organization providing services at various levels; from drug development through to the complete manufacturing of the final product (Bamfield, 2003). Over the years, the process has further expanded into the distribution and sale of the product, allowing for the client organization to remain more focused on other core activities in line with drug progression. Historically, the pharmaceutical industry has been using the services of external organizations in two roles: research and manufacturing. In most cases, both roles were independent of each other with certain organizations utilised for research purposes and referred to as contract research organizations (CROs), while others had agreements formed with for the manufacturing of the drug and referred to as contract manufacturing organizations (CMOs) (Gad, 2003). It is pertinent to note that the business dynamics of the pharmaceutical industry is quite different to that of most other industry sectors of product categories. This is of importance when understanding the complexity of outsourcing in the overall supply chain system of the drug research and development industry. For the pharmaceutical industry, the process of drug development is quite time-consuming. Add to that the high cost involved in the research and approval process, as well as the high-quality manufacturing practices that must be observed, it is quite normal for most projections to be of long-term (Harrill et al, 1999). The key reasoning behind this fact is that most drug products produced by a pharmaceutical firm are expected to yield profit a decade or two after initial conception. This means that when the firm initially comes up with a certain idea and patents it, the process requires it to register the initial development of the drug, undertake tests to ensure its applicability especially if for human consumption, undertake clinical tests, ensure adherence to policies, await approval from regulatory authority, begin or licence manufacture, establish distribution channels and supplier network, market the drug and begin supply. All these steps are cost-bearing for the firm involved, and hence, any pharmaceutical firm is normally working on several projects at the same time with varying completion goals (Higgins & Rodriguez, 2006). The nature of the business means that certain projects might fail at any stage, be it when seeking approval from regulatory authorities or during clinical trials. The only time when revenue is generated from the product is when sale commences, and so, there is quite a bit of time that is taken for the drug to end up being profitable for the firm. Couple the above process with the strong competitive nature that exists within the pharmaceutical industry and one can understand why the emergence of CMOs has evolved into a separate industry of its own. In fact, the last few years has seen a complete service being offered by the outsourced entities, referring them to as contract development and manufacturing organizations (CDMOs). These organizations are developed to provide an end-to-end continuity in the process that is reliant on efficiency and in some cases, centred on a specific product or technology (Jones, 2002). The mainstay in the pharmaceutical industry is the drug patent that figures as the key asset for any drug company. This patent allows the company several years to be the main developer and supplier of a particular drug, giving it a form of monopolistic control on that segment of the market. However, recent figures from the US reveal several of the patents due to expire within the coming years, opening up the application of the basic drug content to the industry, and allowing several small manufacturers to begin developing the same drug at a fraction of the cost (Ramanathan, 2009). For the principle firm, this could result in a loss of market share, as well as a significant loss of revenue, and profit, from the respective product. Hence, lowering the costs involved in the overall processes provides the firm a better chance of securing more positive returns in the time it has complete control over the manufacture of a certain drug product. A key factor for the growth of the CMO industry is the increased focus of pharmaceutical firms towards its shareholders and their appetite for growth, especially in terms of profit generated (Nash & Wachter, 2003). While the traditional outlook has been towards the research and development, sales and marketing, the response towards ensuring that growth is met without any further significant outlay by the firm is resulting in the increased interest in outsourcing, and thus, pushing more of the workflow in the supply chain towards the CMOs. The constant threat to large pharmaceutical firms from generics is an added factor that plays a part in the rise of CMOs. Furthermore, the exhaustive usage of in-house resources to produce products that seem to be possessing diminishing timelines in terms of market growth and acceptance, are further factors that have propelled firms to reach agreements with other organizations to complete these tasks. Estimates believe that the R&D outsourced market worldwide was around $24.9 billion by 2007; 50% of the total R&D market in the pharmaceutical industry (Ramanathan, 2009). While debate over the value of outsourcing these processes remains rather intensive, it is hard to ignore the principle reasoning which propels a large part of the pharmaceutical industry to undertake the procedure. Estimates place the reduction of overall costs at around 35% due to the outsourcing of R&D, as well as manufacturing processes. This means that the discovery and development of the drug, as well as its manufacture becomes cheaper for the firm, while the overall process is quickened as the CMO is more focused on its activities being its core line of business, and can devote further time to effective and efficient task completion. Another benefit that the usage of CMOs has brought for the pharmaceutical industry has been the ability to minimise investments into the process, with the partner organization responsible for the associated costs of manufacturing or development, as per the agreement reached with the client firm (Piachaud, 2004). This is rather important to the pharmaceutical firm, keeping in mind the high cost of research and development that is involved in the drug manufacturing process, especially in terms of regulatory approvals and testing processes. By outsourcing such activities, the overall cost to the firm for a specific product or process can be reduced significantly, allowing it to use the capital to prop up the core activity that is still performed in-house. This could be the marketing of the product, or ground-breaking research to find cures for various ailments, instead of the incremental improvements to the products already developed and in production. Furthermore, the implementation of outsourcing and utilisation of CMOs provides a new market dimension to the pharmaceutical firm; an international market to promote its product in and thereby, increase sales and revenue. There is also the reduction of regulatory processes in various countries, which allow the firms to by-pass home country procedures, and adhere to the policies of the host country, which are in most cases rather relaxed when compared. This factor is true to the pharmaceutical firms that are based in the US and Europe, prompting their increased interest in outsourcing to CMOs in India and China, where the drugs manufactured are not as highly regulated or costly. Additionally, the firm is also able to begin sale of the product in the local market without the strings of import policies or screening for approval, giving it immediate access to a new stream of revenue. Over the last decade, the emergence of a strong and developing economy in India and China has allowed several industries access to countries that account for almost 40% of the world population (Kobayashi-Hilary, 2004). Add to it the availability of a skilled workforce at much lower costs compared to the West, and the enticement that propelled the technology firms to outsource to the countries can be understood from the perspective of the other industry sectors. India, in general, has managed to impress the developed world with a quick uptake of new technology and establishment of more westernized systems that have helped integrate the policies of the client firms with rather ease, and allow it to deliver results in an effective manner. Additionally, both countries have provided companies the ease of investing in the economy, as well as the entrance to a local consumer market that was once protected from the outside influence. This liberalisation means that pharmaceutical firms can now establish research centres, as well as manufacturing units that can supply the drug product in a quicker turnaround time, and complete the process in significantly lower costs. The regulatory environment in China and India has also relaxed to a great degree, providing an avenue for pharmaceutical firms to invest in clinical research in the countries by establishing international-standard units. This has helped with a quicker push towards the marketing of new drugs that could have been under greater scrutiny due to the stringent regulations that govern the developed world, and force firms to phase the introduction of new products over several years. Despite the growth in the CMOs, the industry did experience a slow take-up in the initial years. Two of the concerns that were most detrimental to the idea being implemented across the board by the pharmaceutical industry, especially in context to India and China, were the question marks over quality and infrastructure (Kumar, 2006). While there was little doubt over the skilled workforce that existed in both economies that could easily undertake the technical tasks that were involved in the biotechnology research that was involved in the development of drugs, the quality standards in the local economy differed to those that were critical for the developed nations, a home economy for most of the pharmaceutical firms. This meant that significant attention was paid to ensure that proper management was put in place from the start, in order to reduce any development risks or delays, and ease the complicated relationship that was to be in place between the firm and the CMO. Also, the infrastructure that existed in the nations was below par to what was deemed as the minimum acceptable standards for many major players in the pharmaceutical industry. However, with increased interest in investments in the local industry, governments in both countries as well as others in the region took steps to invest and improve the facilities that were available to the contracting partners, in a bid to entice further foreign investment. Compared to other industry sectors, including the highly innovative technology sector, the pharmaceutical industry had to be more careful with outsourcing activities at the onset of the move from local production to companies that specialised in some for bio-engineering or large scale manufacturing. This was due to the nature of the product that was being developed. The focus that remains critical to the survival of any company of the pharmaceutical industry is the quality of the drug and its acceptance by the consumer, especially for the long-term. Each step in the pharmaceutical supply chain requires standards and quality to be of the optimum, since the end-product is the resultant of each of this process. The initial move to outsource clinical research to CROs meant a big move on part of pharmaceutical firms (Kumar, 2006). Clinical research was the phase of drug development that allowed firms to perform tests on the feasibility of a particular product for human consumption and this process was vital in understanding the readiness and effectiveness of the product. Results from the research are used to seek regulatory approval for the product prior to its large-scale production. With increasing costs of these tests, as well as the risks involved due to the failures that could be experienced, pharmaceutical firms saw the CROs as the ideal opportunity to reduce their exposure to cost and risks. With time, the CROs were further developed to CMOs, in order to continue the process within the same local facility. This eased the process of information transfer, as well as created a sufficient knowledge pool within the local resources that were being utilised, allowing for future progression to be easier. Alternatively, some pharmaceutical firms employed different organizations as CROs and CMOs, in order for each to focus on their specific strengths, without hindering from the quality that was expected from the product / process. Conclusion The concept of outsourcing in the pharmaceutical industry dates back a couple of decades, making it a relatively new ideology that is under practice. Although it began with the transfer of research services to external providers, it has developed in time to a more complex format, with single service organizations today providing a complete solution to pharmaceutical firms; from the development of the drug to the commercial manufacture (Howells, 1999). The rise of contract development and manufacturing organizations (CDMOs) can be adjudicated as a response to the high level of competition that exists within the industry. With the large amount of capital that is invested in the successful implementation of any drug into the economy or market, each firm is adamant of monopolising the use of its product, or gaining a dominant foothold on the market in order to make higher overall profits (Piachaud, 2002). Additionally, CDMOs are providers that have a specific technological focus that could prove a vital strength in terms of ensuring the implementation of high-quality processes that would benefit the client organization with the development of its product. By utilising the expertise of the CDMOs, a pharmaceutical firm can reduce the high cost that is normally involved, and be in a better position to compete with the generic producers of a certain drug, without compromising on quality. The reduced overhead of managing technical resources, by outsourcing to a CDMO ensures that a pharmaceutical firm can remain focused on its core competencies or high-value projects, without the need to add to its infrastructure or human resources in order to ensure that current and future business remain viable in parallel (Piachaud, 2004). Apart from simply considering the partnerships with CDMOs as a tactical plot for pharmaceutical firms, the trend in the industry is to think of them as strategic alliances that allow the firm an additional strength in terms of infrastructure as well as an entrance to a new market for their products. So, in addition to reducing costs on running projects, the firm is able to generate revenue from a new market for its already established products. However, the partnership is not a complete rosy story since there can be issues with regards to the control, quality, accountability and security. As the process is outsourced to an external organization, the pharmaceutical firm is no longer in direct control over the timing and placement of the processes that are involved, instead relying on the partner CDMO or CMO to ensure delivery of the goals at the specified time. While the partnership is based on the factor of quality being delivered, there is the risk that the desired quality standards might not be achieved by the partner organization, due to various reasons. This means that the pharmaceutical firm while reducing costs undertakes an overall risk with the partnership with the outsourced manufacturer. The key pitfall for a pharmaceutical firm in relation to the outsourcing to CMOs is the security of knowledge or information that the firm transfers to the organization or that which is gained from completing research processes as designed by the firm (Reepmeyer, 2006). The issue of intellectual property (IP) and its protection is debated at various levels across the world and has become a thorn in the business dealings, especially for India and China. The cases of information being misused by organizations to produce competing products or selling to competitors, as well violation of patent rights, gives the pharmaceutical firm enough to think about prior to shifting processes to an outsourced organization. For the industry, the data gathered is the vital component in competing with other firms, as patents registered with regulatory authorities provide a certain number of years that give the firm a monopoly over the production of the said product. Hence, the release of this data to a competitor means a significant loss in not just revenue, but also the overall profitability that the company has forecasted to achieve. This loss means less capital for future investments into infrastructure and research. When looking at theoretical models that can be used to outline the outsourcing system employed by firms in the pharmaceutical industry, we can see a reliance on the cost-benefits and market entry forming the basis for decisions. The model undertakes the division between research processes that form the initial stage of the overall pharmaceutical industry, followed by development and manufacturing, with further introduction of sales and delivery of finished goods. In context of the recent financial downturn, the emphasis on reduction in costs has become ever more important to the pharmaceutical industry, especially when seen in the light of shareholders who view on the growth in revenue and profit has become clearer. This has seen the market for CROs, CMOs and CDMOs become in-demand, and the rise in revenue generated by these organizations due to the services they offer for pharmaceutical firms at reduced cost. The main focus in taking the route is ensuring that where costs can be reduced, there is no reduction in quality and service, as well the risk to information and data can be managed in order to ensure the dominance of the firm in the industry. References Bamfield, P. 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