Global pharmaceutical giant Pfizer Inc. said in its most recent stockholders report that it expects to operate fewer than 48 manufacturing sites of its own by the end of this year; down from 93 in 2003. In addition, company officials say they hope to boost outsourcing from about 15 percent currently to as much as 30 percent or more in the next several years. And Pfizer isn’t alone. In fact, most of the Big 10 pharmaceutical companies – from Merck and Bristol-Myers Squibb to Johnson & Johnson to Procter & Gamble – have announced similar plans to shutter company-owned manufacturing sites in favor of external manufacturing. As a result, pharmaceutical-company spending on worldwide outsourcing is expected to increase more than 50 percent from an estimated $120 billion in 2006 to $185 billion in 2010.

While large pharmaceutical companies’ quest to free up capital by divesting themselves of hard assets represents perhaps the most significant driver behind increased pharmaceutical contract manufacturing, it’s only one of the many reasons why more brand owners are looking to outsource drug production.

“Pharmaceutical companies today want to focus more on their strengths, which are developing and marketing products,” reports Raymond Baribeau, senior director of sales and marketing for Saint-Hubert, Quebec-based Confab Laboratories. In today’s ultra-competitive marketplace, he explains, only the best of the best new drugs make it onto the shelves, making every step along the way critically important. But it’s virtually impossible for one company to be good at everything. So why not give the job of actually producing products to a company that specializes in pharmaceutical manufacturing, allowing brand owners the opportunity to concentrate on what they do best.

In fact, adds marketing manager Julie Karlson of West St. Paul, Minn.-based Tapemark, the pharmaceutical industry is home to several “virtual” companies that don’t do any manufacturing themselves. In this day and age, she continues, “It’s not unusual for one company to develop a new drug, another to market it, and yet another to manufacture it.”

Even if pharmaceutical companies have their own internal manufacturing operations, they may not have the ability to produce every product in their portfolio in-house. For example, few companies have the equipment and/or the expertise to manufacture, say, soft gelatin capsules or dissolvable film, two newer dose forms that could help extend the lifecycle of a mature brand. “And not every pharmaceutical company is equipped to manufacture cytotoxins or biologics, especially in higher-volumes,” says product manager Darren Hieber of Baxter BioPharma Solutions, Bloomington, Ind.

“In general,” explains Cornell Stamoran, vice president of strategic planning and corporate development at Somerset, N.J.-based Catalent Pharma Solutions, “the simpler the dose form, the less likely it’ll be outsourced. The more complex the dose form and the more specialized the manufacturing or handling, the more likely it’ll be outsourced.”

Sometimes, however, the issue isn’t complexity but proprietary technology. As a result, some of the most widely recognized brands in the marketplace – from Claritin Redi-Tabs to Advil Liqui-Gels – are actually produced by contract manufacturers using patented technologies they developed themselves.

In other cases, a lack of capacity leads brand owners to contract manufacturing. Instead of using limited internal capacity for “dying” brands or brands about to come off patent, explains Tapemark’s national sales manager Steve Larsen, “Pharmaceutical companies may decide to reserve internal capacity primarily for new products” with more upside potential. But sometimes brand owners take the opposite approach, opting to outsource production of new drugs until they determine whether or not they’re going to fly – and whether or not they should invest in the equipment necessary to manufacture them in-house.

Other times, it’s all about speed-to-market, which is often slowed by regulatory requirements. As a result, brand owners sometimes turn to contract manufacturers that already have certain approvals in place. For example, recalls Tom O’Toole, director of sales at Fort Lauderdale, Fla.-based Kirk Pharmaceuticals, “We were able to produce Merck’s new Simply Sleep 25mg diphenhydramine capsule in just three months because we already had the proper tooling, the stability tests, the equipment validation, etc. If they had done it themselves,” he adds, “it probably would’ve taken nine months,” and the window of opportunity might have closed.

Similarly, says Hieber, rather than pursuing approvals on their own, pharmaceutical companies sometimes seek contract manufacturers already endorsed by the regulatory agencies of whatever foreign countries they’re looking to sell products in.

A Breed Apart



Contract manufacturers of pharmaceuticals differ from contract manufacturers of non-pharmaceuticals in several ways. First of all, they tend to specialize in pharmaceutical manufacturing, rarely branching out into non-pharmaceuticals except where products are closely related (medical devices, cosmetics, packaging, etc.). Second, because they’re so highly regulated, top quality is always the number-one priority. But perhaps the most significant difference is in the relationships pharmaceutical contract manufacturers forge with their brand owner customers.

“On the non-pharma side,” says Stamoran, “the contract manufacturer may change from purchase order to purchase; so you tend to see much shorter relationships with customers.”

But because it costs so much both in terms of dollars and cents and time to get a new vendor qualified by the FDA, pharmaceutical companies are looking for deeper, more long-term relationships with their manufacturers. In fact, 74 percent of respondents to Contract Pharma magazine’s 2008 Outsourcing Survey said they would use the word “partnership” to describe their relationship with a contract service provider, up from 66 percent last year.

In pharmaceuticals, explains Confab’s Baribeau, “The stakes are very high, especially if you’re a big-name company. So your relationship with your contract manufacturers has to be very, very close. There has to be a lot of transparency, and you have to work closely with them to achieve a common goal. It’s not a competition,” he says, “it’s a collaboration that helps ensure the survival of both companies in a hectic economy.” As result, many pharmaceutical companies concentrate a significant portion of their total outsourcing spend on “preferred” or “strategic” vendors with whom they’ve partnered in the past.

Although it’s still far from universal, another trend among pharmaceutical companies is growing demand for turnkey manufacturing, with the contract manufacturer doing everything from research and development to procurement of raw materials to distribution.

“It’s definitely moving in that direction,” Baribeau says, but right now, brand owner expectations are all over the map. “Some come to us with nothing more than an idea, and leave the rest to us,” he explains. “But others supply all the formulations and packaging materials and just want a conversion cost for the finished product.”

“We want the opportunity to do turnkey,” adds Michael Weiner, director of contract manufacturing for Hartland, Wis.-based Triad Pharmaceuticals, underscoring the fact that contract manufacturers are typically “experts” in whatever they produce. “Don’t underutilize us and our strengths.”

What else do brand owners expect from their external manufacturing partners?

Quality is Job One

“Quality is the ante to get into the game,” answers Ryan Gladieux, global category manager for pharmaceuticals at London-based Rexam Plastic Packaging. “If a company like Pfizer audits you and you’re not close, they won’t do business with you. End of story.” But what exactly constitutes quality? The FDA sets cGMPs, of course, but, according to manufacturers, that’s really just a starting point.

“The FDA establishes minimum standards,” explains Catalent’s Stamoran. “But our customers typically establish much higher standards. On the prescription side in particular, where risk minimization is key, they generally expect us to adhere to the same or higher standards than they do [in their own manufacturing facilities].”

Basically, continues Baribeau, “You find out what the customer expects and then meet those expectations.” The problem is that those expectations tend to vary from company to company, making it difficult for contract manufacturers to satisfy the needs of several different customers simultaneously. “Companies attach different importances to different areas,” he explains. “So you have to be flexible. You don’t have to have all of the technologies in place already. But you have to be able to get them if the client wants.” He adds, “It’s not so much a case of, ‘If you build it, they will come,’ as it is, ‘If you’re willing and have the capacity to build it – and if they’re willing to contribute – they’ll come.’”

Still, there are some basic steps manufacturers can take in advance to attract the attention of potential customers. For example, says Triad’s Weiner, “The FDA doesn’t require ISO certification, but in pharmaceutical manufacturing, a lot of companies want you to have it.”

Supply-chain integrity also is very important to pharmaceutical companies, adds Stamoran. “Tolerances aren’t at the pallet level – the Wal-Mart standard – but at the individual package level. So it requires a whole different level of complexity.” Although pharmaceuticals currently carry a batch number that indicates where and when it was manufactured, newer technology takes track and trace a step further, even indicating where raw materials were sourced.

Similarly, more and more brand owners are seeking contract manufacturers with tools designed to help prevent counterfeiting, including specialized inks, holograms and a more high-tech solution, radio frequency identification (RFID). Although RFID currently is used only by the makers of the two most-counterfeited drugs on the market, Viagra and Oxycontin, manufacturers say its use is likely to expand, though cost remains a significant barrier.

The Issues

One of the biggest issues facing pharmaceutical contract manufacturers is rapidly escalating costs. Thanks to a weakening dollar combined with the high cost of fuel, reports Kirk Pharmaceuticals’ O’Toole, “The cost of certain raw goods from China and India have jumped 25 to 30 percent over just the past six months.” But it’s not just ingredients imported from abroad.

“Everything is going up,” Weiner says. “We’re seeing it in components, in packaging, in shipping. The stability of pricing just isn’t what it used to be.” As a result, pharmaceutical manufacturers have become leery of multi-year contracts that lock them in to prices that could go through the roof overnight. In fact, one manufacturer said that instead of pursuing the five- to seven-year contracts it preferred in the past, it’s now looking for three- to four-year agreements.

“We’re still looking for long-term relationships,” says Weiner. “Now, however, the customer has to agree that if raw material prices escalate beyond a certain point, they’ll be willing to revisit pricing.”

“Often,” Rexam’s Gladieux says, “a Big 10 pharma company will go to a contract manufacturer fifty-times smaller than it and make them sign an agreement not to pass on their price increases – because Wal-Mart won’t let the pharmaceutical companies do it to them.” They can get away with it, he says, because, even if one contract manufacturer refuses, there’s always another that won’t. Other than Catalent, Patheon and a handful of other big players, continues Gladieux, the pharmaceutical contract manufacturing industry is populated mostly by small- to mid-size companies that simply don’t have the pricing power to go head to head with Big Pharma. But even the pharmaceutical companies are starting to recognize the disadvantages associated with manufacturer fragmentation.

“They’re frustrated by their inability to find contract manufacturers with national or international footprints,” says Phil Yates, a senior advisor with New York City-based BSMB, which manages a private equity fund that invests in contract manufacturers and supports growth through acquisition. To get what they need, he continues, “Pharmaceutical companies have to have multiple relationships and separate contracts with many different companies,” which takes considerably more time and money than dealing with just a few strategic partners. As a result, “customers are very interested in seeing this market consolidate,” Yates says.

By working with a smaller number of larger vendors, says Stamoran, “Pharmaceutical companies can negotiate better prices and better services and really build more strategic relationships.” They’ll also spend a lot less time and money qualifying new vendors. And if their contract manufacturer partners have multiple locations, they can put a big dent in shipping costs as well.

For their part, contract manufacturers will have to offer not just larger facilities capable of handling big orders and multiple locations to help cut down on shipping costs, but a much broader array of services. “Customers will look more at the diversity of [contract manufacturers’] filling lines,” with the goal of consolidating manufacturing at a handful of facilities that do it all, Gladieux says. “They want one-stop shopping – contract manufacturers that can do liquids, powders, dry dose, tablets, caplets and maybe even sterile injectables,” he adds.

In fact, adds Weiner, unless they’ve got a truly unique dose form or a patented process not available elsewhere, “I think the more specialized companies will find it a lot tougher” to stay in business post-consolidation.

Ironically, the demand for bigger companies with broader capabilities has actually resulted in some overcapacity. “For a contract manufacturer to be able to offer a pharmaceutical company lifecycle management – the ability to produce a drug in different forms as it moves through various stages – is a pretty big value proposition,” explains one manufacturer. “So you’re seeing more companies not historically in, say, pre-filled syringes, now putting in pre-filled syringe lines, which is increasing overall capacity.”

According to Jane Williams, senior vice president of sales and marketing for Baltimore-based ANI Pharmaceuticals, the situation is exacerbated by a dearth of new products coming to market combined with an increase in approvals for generic versions of products whose patents are about to expire. “Add that to the opening up of world markets,” she says, “and you’ve got excess capacity.”

But given recent reports about the safety of goods manufactured abroad, are U.S. pharmaceutical companies still using foreign manufacturers to the same degree they did in the past?

There’s No Place Like Home

Of respondents to Contract Pharma’s 2008 Outsourcing Survey looking to outsource production, manufacturing or packaging, a whopping 71 percent said they definitely or probably would not outsource a project to Asia, including India and China, in the next year vs. only 14 percent that said they definitely would.

According to figures released during Congressional hearings last November, although an estimated 40 percent of all drugs sold in the United States are currently manufactured abroad, the FDA inspects fewer than 7 percent of the foreign manufacturing sites under its purview each year. And it examines less than 1 percent of incoming drug shipments – an even smaller percentage of which are actually sampled and tested. That means the onus for ensuring the safety and reliability of drugs manufactured abroad falls almost exclusively on brand owners themselves. But when a product is being manufactured halfway around the world, overseeing production can be a challenge.

“Having physical access to your contract manufacturer goes a long way, particularly when you’re just developing or launching a new product,” explains Weiner. “There are costs associated with travel time, translation, etc. Also, if key components are manufactured in the U.S., it doesn’t make sense to ship them to another part of the world.” And therein may lie the real reason brand owners are cutting back on off-shore contract manufacturing.

“The cheap labor costs we’ve seen outside the U.S. are becoming a lot less appealing because of rising transportation costs,” which are approaching 20 to 30 percent of total costs, Baribeau says.

Unfortunately, says one manufacturer, decisions about contract manufacturing too often come down to price. Even on the pharmaceutical side, “Brand owners sometimes try to commoditize what we do,” as if one contract manufacturer can make a given product as good as the next. But that’s simply not the case.