Contract Manufacturing Strategies: Market developments, technology transfer and key success factors

Executive Summary 10
The contract manufacturing market 10
CMO industry analysis 11
Manufacturing strategies in the biopharmaceutical industry 12
Managing contract manufacturing 13
India and China – emerging outsourcing markets 14

Chapter 1 The contract manufacturing market 18
Summary 18
Introduction 19
Overview of the global contract manufacturing market 20
Current market drivers 22
The expansion of the biopharmaceutical contract manufacturing market 22
The reorganization of pharmaceutical production 25
Case Study – Pharma manufacturing site close-down 26
Growth in Offshoring - Asian CMOs becoming a global force 27
Current market restraints 30
Fewer new drug approvals 30
The threat of overcapacity 32
Increased competiton – low barriers to entry 35
Conclusions 37

Chapter 2 CMO industry analysis 40
Summary 40
Introduction to biopharmaceutical manufacturing 41
The stages of pharmaceutical development 41
Primary manufacturing 43
Secondary manufacturing 43
Structure of the CMO industry 46
Size of contract manufacturing organizations 47
Does size really matter? 49
CMO business models – evolving over time 50
The advent of biopharmaceutical contract manufacturing 51
CMOs focusing on early drug development stages 53
The emerging full-service CMO business model 56
Examples of CMO service offerings 59
Lonza Group Ltd. 60
Patheon Inc. 61
Siegfried Group 63
CMO Industry Outlook 64

Chapter 3 Manufacturing strategies in the biopharmaceutical industry 68
Summary 68
Introduction 69
Strategic options for manufacturing 70
Vertical integration – The business model of the past 71
Drivers of vertical integration 73
Benefits of vertical integration 73
The deconstruction into a fragmented industry structure 74
The shift towards outsourcing 75
The make vs. buy decision 79
Factors influencing the make vs. buy decision 79
Mixed sourcing models 82
The sale and leaseback model 83
Examples of recent sale and leaseback deals 84
The potential downsides of outsourcing 85
Transaction costs of outsourcing 85
Drivers of hidden costs in outsourcing 87
Efficiency, effectiveness and flexibility, all in one outsourcing project? 87
Outsourcing manufacturing is like buying commodities 88
The need for a comprehensive contract 88
Contracts do not matter 89
CMOs are insurance companies 89
The project is not the client’s problem anymore 90
The first failure should be the last attempt 90
Conclusions 92

Chapter 4 Managing contract manufacturing 96
Summary 96
Introduction 97
Key factors in selecting and managing a CMO 98
Sourcing CMO partners 99
Defining the goals of outsourcing 100
Writing a Request for Proposal 101
The site visit – a critical step 102
The Selection 102
Managing the CMO relationship 105
Technology transfer and scale-up 105
The Design of Experiments (DOE) used for the scale-up process 106
Challenges of the technology transfer process 107
The importance of engineering runs 107
Ensuring regulatory compliance 108
The definition of responsibilities 109
The importance of change control in contract manufacturing 112
The Annual Product Review and other ways to ensure compliance 112
Due Diligence – common pitfalls and how to mitigate the risks 113
Avoiding faulty contracts and contractors 114
Case Study – Pharmaceutical companies caught out by Inyx collapse 115
Due diligence from a CMO perspective 116
Risk management in the outsourced relationship 118
The business risk 118
The technical risk 118
The CMO Relationship – A lifecycle model 120
Stage 1 - Aligning relationship strategy with long-term business needs 120
Stage 2 - Employing a structured evaluation and selection process 121
Stage 3 – Building working relationships 122
Stage 4 – Technology transfer and scale-up 122
Stage 5 – Ongoing operations 123
Stage 6 – Changes over time 123
Awarding preferred provider status 124

Chapter 5 India and China – Emerging outsourcing markets 130
Summary 130
Introduction 131
Contract Manufacturing in India 134
Size of the Indian CMO market 135
Patent situation and implications for foreign direct investment 137
Challenges in current patent law 138
India as a preferred offshoring destination 139
The new, integrated business model of Indian CMOs 141
Challenges facing the CRAMS business model 143
Expansion strategies of India’s major contract manufacturing organizations 144
Conclusions 146
Contract manufacturing in China 147
Drivers of the Chinese contract manufacturing market 149
Challenges of the Chinese contract manufacturing market 150
China’s regulatory framework 151
Intellectual property protection 153
Counterfeit drugs 154
Case Study – China’s Heparin producers 155
China’s major contract manufacturing organizations 157
CMOs offering finished drugs services 158
Biopharmaceutical contract manufacturing in China 159
Conclusions 159

Chapter 6 Appendix 162
Bibliography 162
Index 164

List of Figures
Figure 1.1: Size of the global contract manufacturing market, 2002-2011e 20
Figure 1.2: Structure of the pharmaceutical API market, 2007 21
Figure 1.3: Structure of the pharmaceutical API market, 2006 22
Figure 1.4: Size of the contract biomanufacturing market, 2000-2008e 24
Figure 1.5: Contract manufacturing providers across the service chain, India 28
Figure 1.6: FDA approvals for NDAs and NBEs, 2000-2007 31
Figure 1.7: Captial expenditures of top 15 pharma companies, 2004-2007 33
Figure 2.8: Drug development and relevant milestones during the pharmaceutical manufacturing process 42
Figure 2.9: Lonza’s life science platform 61
Figure 2.10: Siegfried’s pipeline in 2006 64
Figure 3.11: Change in pharmaceutical industry structure over time 70
Figure 3.12: Categorization of varying degrees of integration 72
Figure 3.13: Percentage of manufacturing output produced through CMOs, 2007 and 2010e 78
Figure 3.14: Business objectives for moving to contract manufacturing 79
Figure 3.15: Considerations influencing the make vs. buy decision 81
Figure 4.16: Critical success factors for the manufacture of an early phase product 98
Figure 4.17: Stages 1 – 6 of the CMO lifecycle 120
Figure 4.18: Percentage of outsourcing dollars spent on preferred providers*(2007) 125
Figure 4.19: How many preferred providers do you utilize?*(2007) 126
Figure 5.20: Assessment of API manufacturing costs by region, 2005 133
Figure 5.21: Size of India’s contract manufacturing market 2005-2010e 136
Figure 5.22: Global outsourcing expenditure and segmentation of contracted services, 2005 and 2010e 143
Figure 5.23: Size of China’s API Industry, 2005 and 2010e 148

List of Tables
Table 1.1: Big pharma ongoing or recently completed manufacturing projects 34
Table 1.2: New entrants in the pharmaceutical CMO market 35
Table 2.3: Key characteristics of biotechnological and chemical API manufacturing (figures indicative only) 45
Table 2.4: Summary of services offered by contract manufacturing organizations 46
Table 2.5: Structure of the CMO industry 47
Table 2.6: Mammalian cell culture capacity in the biopharmaceutical industry 52
Table 2.7: Comparison of in-house production vs. outsourcing 56
Table 2.8: Pros and cons of the ‘one-stop shop’ concept 57
Table 3.9: Challenges for the pharmaceutical industry 69
Table 3.10: The benefits of outsourcing 76
Table 3.11: Examples of transaction costs 87
Table 3.12: Drivers of hidden costs in outsourcing 91
Table 4.13: Typical steps of an outsourced project 104
Table 4.14: Definition of responsibilities for main quality areas 110
Table 4.15: Risk-mitigation tactics for pharmaceutical companies 119
Table 5.16: Selected contract manufacturing/ research deals in India as of July 2007 140
Table 5.17: Strategic options for Indian pharmaceutical companies 142