Outsourcing of Small Molecules: Dynamics & Challenges - Ravi Raghavan

The outsourcing of technology development and manufacture of small molecules to be formulated eventually as drugs is now a well-established way of operations in the global pharmaceutical industry. Outsourcing is a strategic, not an opportunistic, decision anymore at large and even small pharma companies as it affords an opportunity to leverage specialised skills, not always available internally, at attractive costs, and importantly, frees up resources – manpower and capital – for core activities such as innovation or sales & marketing.

Rise of CDMOs

In response to this demand, several contract development and manufacturing organisations (CDMOs) have sprung up worldwide, including in emerging markets such as India, China, and countries in Eastern Europe, competing with well-entrenched players in North America and Western Europe. Over the last decade, competition in this space has intensified, and margins have plummeted. Old ways of doing business are now becoming less relevant, thanks to fundamental changes that are taking place in the global pharmaceuticals industry.

Complex but still relevant

Despite the strong emergence of biological drugs, small molecules still constitute a considerable chunk of the global pharma market, and new chemical entities (NCEs) still continue to be churned out by innovator companies, of which some make it past regulators to serve therapeutic needs. Traditionally, CDMOs focussed on the large-scale manufacture of blockbuster drugs or drugs whose volumes have expanded following expiry of their patent (i.e. generic drugs). That model is now becoming less important, as newer drugs are nowadays targeting more niche therapeutic targets, and are typically required in smaller volumes.

The complexity of NCEs now emerging from the R&D labs of innovator companies is also increasing – not surprising considering the easy pickings have been had! Manufacture of these structurally complex moieties (and their intermediates) often requires an array of chemical and biochemical technologies including chiral synthesis/separation, biocatalysis, fluorination, phosgenation, asymmetric hydrogenation etc., and not all of these technologies are available at individual CDMOs. There is therefore a need to build partnerships and collaborations amongst CDMOs, so as to present a comprehensive offering to the client.

Shrinking timelines

The timelines in which projects are to be delivered has shrunk considerably in recent years; the idiom “time is money” is perhaps most relevant in the pharma industry. For the CDMO this poses several challenges, including in capital allocation for projects, astute asset management once these assets are created, and managing the considerable working capital requirements. CDMOs need to be prepared for new business, but cannot be keeping assets idle for long in anticipation.

CDMOs need to fine-tune their project management expertise when handling large and complex projects that bring personnel with multi-functional skills and capabilities together. A constant lament in the pharma industry is that CDMOs are often unable to understand the timelines, quality requirements and the regulatory compliance needed, but in their eagerness to grab business are willing to agree to unrealistic timelines for delivery of products and/or services. When things don't go as planned it creates friction in the relationship, which is as much about delivering on the promise as on the technology or the product.

Challenges in technology transfer

When there is transfer of technology from the client to the CDMO things should pan out easier, but here too challenges can crop up. The technology package available, for example, may have been developed and tested at a scale very different from current needs, or based on raw materials that have become difficult to access for a variety of reasons. It could have an environmental footprint that is no longer acceptable, as chemicals regulations are tightening everywhere and compliance with the laws is no longer an option. Just as likely is the possibility that the economics of manufacture has worsened for the technology at hand, which could happen for several of the afore-mentioned reasons. Working around these problems requires time, money and effort, and have the potential to become contentious issues between partners.

Cultural barriers

Much of the CDMO business – especially in the developing economies, India and China – is in the hands of small & medium enterprises (SMEs), very often family-owned and managed. Not all of them have the needed ‘soft’ skills for international project management and subtle cultural and language differences have been known to impair effective communication. The Asian problem of not being able to say a blunt “no” and the tendency to defer bad news to the point where it can no longer be shoved under the carpet is but one manifestation of this cultural gap.

The key to tackling many of the problems that crop up in the CDMO-client relationship is clear, concise and constant communication, in both directions. CDMOs are right in claiming that they often operate in information silos – knowing very little beyond the immediate business at hand. This makes it very difficult for them to contextualise their project in the broader scheme of things. Admittedly, confidentiality concerns do come in the way of full transparency from the client, but the key is to be able to find the right balance between what, how much and when to reveal.

Scaling up for growth

The ability of CDMOs to showcase their ability to scale with the growth opportunity is at the top of the list of concerns amongst pharma companies when it comes to selecting the right outsourcing partner. There is now a growing tendency towards integration of outsourcing activities. Companies are looking to reduce business complexity and eyeing single-source service providers. For CDMOs this poses additional challenges in terms of capital deployment and technology focus, and a fine balance needs to be struck between building diversified capabilities and spreading oneself too thin across the spectrum of offerings needed. Companies need to re-examine their strategic goals and capabilities and plan for the future accordingly.

Business is here to stay!

As the pharma industry has evolved so have the challenges facing their outsourcing partners. But the good news is that the tendency to outsource products and services is now very much integral to the way the US pharma industry – the world’s most important – operates and this is unlikely to change.

Despite the emergence of biological drugs, requiring very different capabilities for development and manufacture, the small molecule CDMO opportunity will continue to expand. But it will not be business as usual. Besides rampant commoditisation in several parts of the industry, CDMOs will need to contend with consolidation and cost-cutting at their customers, driven by mounting price pressures and the need to improve productivity of operations. They will need to adjust to the tendency amongst the pharma industry to core-list a small club of vendors, with whom strategic relationships are built for immediate and long-term requirements. Getting a seat at the discussion table when bidding for projects is becoming a prerogative increasingly given only to a few!

Customers will continue to seek CDMOs that can consistently deliver a high quality of diversified services at competitive prices and in compliance with local regulations and GMP guidelines. Business will come only to companies that can demonstrate their ability to expand and scale-up to meet future needs and have built strong lines of communication that can cross-cultural and language barriers. Differentiation can come from bespoke ‘white glove’ offerings, built with multi-cultural customer relationship teams.

India’s CDMO industry is well placed to build on its success in the last decade. But it must take cognisance of the dynamics in its customer base and proactively prepare for a different future!