With the cost burden on healthcare budgets increasing in Western countries, the pharmaceutical and biotech industries were not exempt from the growing offshoring trend that has been observed over the past ten years in most industries. Generic companies especially have massively outsourced their manufacturing needs to India and Eastern Asia. Innovating companies too, but to a lesser extent. This article will look into the pros and cons of offshoring versus maintaining production locally.
Innovative vs. Generic products
The first distinction to be made is between the highly cost competitive generic and low margin over-the-counter (OTC) products, and the innovative pharmaceutical products. From when the generic industry soared in the 80s and 90s, China and India have always been powerhouses when it comes to manufacturing non-patented or off-patented pharmaceutical ingredients.
Driven by cost reduction initiatives by Western governments, the 2000s saw an exponential increase in the number of fully integrated companies flourishing in India and in Eastern Asian countries like China, South Korea and Singapore. These companies have developed generic dossiers and offered them to Western generic companies willing to penetrate their own market. These same Western generic companies have simply outsourced their domestic manufacturing to emerging countries too. India and China were obviously the big beneficiaries of this major industry trend, while OTC and private labels products have followed suit.
Driven by cost reduction initiatives in sourcing, but much more conservative in its approach due to intellectual property protection, innovation companies also came to these emerging countries progressively. First, the Big Pharma companies launched joint ventures in jurisdictions like China, dealing with Contract Manufacturing Organizations (CMOs) especially, while maintaining a strong oversight over them. Typically, the “man-in-the-plant” model was the most successful, meaning that after due diligence, including compliance acceptance from corporate auditors, CMOs would welcome on site temporary employees from the sponsor company.
This approach is still widely used even today by medium and large biotech companies, as well as by Big Pharma companies, especially those that have biosimilars or biological products manufactured abroad.
For specialty and small pharma companies, the narrative is quite different. Despite the fact that offshoring is an attractive strategy for lowering technology transfer costs and decreasing the cost of goods (COGs), there are multiple aspects to take into consideration before making the big jump into these markets.
First of all, transferring an early stage drug, like one in Phase 1 or 2 clinical trials–or a product that is non-optimized, not sufficiently characterized, or with a lack of process understanding to an offshore supplier, will certainly worsen all the challenges typically observed during this critical manufacturing scale-up stage. It is more advisable to invest money to better develop and optimize your process upfront and locally. Moreover, sponsors should avoid relying on their offshore CMO to do it for them, as it likely won’t bring the anticipated savings, and in the end, it will take longer.
Secondly, one should think twice about offshoring certain legacy products, as older products are often more equipment and process dependent, therefore even harder to replicate in non-Western countries where machinery brands defer on top of having to revamp the process.
The attractiveness of offshoring
The four key opportunities for offshoring include high volume products, technology transfers with a significant Capital Expenditure (CapEx), joint-ventures and when internal resources are internally available.
High volume products are particularly suited for offshoring, as savings will cumulate and provide a better return on investment. Likewise, offshoring is a good outsourcing choice when there is a need to invest significantly in equipment and infrastructure. Building up a plant from scratch will be financially much more advantageous for the sponsor willing to accept the risk of offshoring.
Multinational pharma companies have already adopted the joint-venture model, doing so a couple of decades ago. Availability of internal resources is a strong asset to ease offshoring too, as it allows to support strong local oversight like a “man-in-the-plant” model, when possible. It also helps diligently in managing suppliers of offshored products, especially with the sponsor’s technology transfer team members and documentation compliance personnel.
The downside of offshoring
On the opposite side of the ledger, offshoring comes with its own set of distinct challenges. Amongst them, we can mention communication, cultural differences, the underestimated oversight costs, the difficulty to source some materials in emerging countries and finally, compliance issues, a hot topic these days.
In regards to communications between sponsors and offshore service providers, project managers will tell you that teleconference calls with contract manufacturers in India and China often end with the sentence: “Could you please send me an email to confirm,” which between the lines often means: “The line was not good or we could not hear you properly and we would like to have the request written to make sure we understand the ask.” The efficacy of project calls is very low in such cases. Another point to add is that the rapidity at which the email exchanges are executed in North America is not the norm elsewhere in the world.
There is no intent here to list all the possible cultural differences between the sponsor and the vendor in such off-shoring relationships, but rather only to name a few, such as suppliers in Asia, for example, will rarely argue and say “no” to your requests, leaving you with the understanding that all will be executed as discussed. Unfortunately, that is not always the case. Also, auditing a site during a prearranged visit won’t necessarily give you the day-to-day portrait of the way the site is operated the majority of the time.
Despite the fact that anticipated savings might not always be there, it is important to account for the cost to the sponsor of the oversight either from the beginning during the technology transfer or during routine production with documentation review.
In the case of transferring products developed and/or launched domestically, the sourcing of the ingredients and components may unexpectedly be complicated if, for example, a high proportion of North American suppliers are involved. This is especially true for narcotics, active ingredients requiring permits and some packaging components with proprietary molds.
Last, but not the least, from a compliance point of view, Health Canada is relying on the European agency’s (EMEA) and the FDA’s site inspection reports. And over the past few years, there have been an unprecedented number of warning letters and import alerts issued by the FDA from manufacturing sites located in India and China.
Compliance has constantly been driven upwards over the years with the regulatory space becoming more and more stringent. A CMO successfully passing a Pre-Approval Inspection or an EMEA first approval inspection, but subsequently not maintaining sufficient quality standards for the next inspection, could be the source of product disruption for the sponsor. In these circumstances, more resources for periodic site inspections will have to be considered.
Opportunities for domestic outsourcing
Domestic outsourcing offers many benefits to sponsors, such as better site and information access, an advantageous exchange rate, easier agreement execution and the ability to closely manage the project. First, easy accessibility to the facility and the possibility to reach the sponsor’s counterparts to discuss technical or supply challenges is essential particularly in the early phases of the product transfer where multiple challenges can occur right up to validation.
In terms of currency, with the history of the exchange rate in Canada, for outsourcing needs Canada remains competitive with Europe and the U.S. That could weigh in the balance on top of reducing transportation costs and risks associated with it, like temperature excursions for example.
Regarding agreements, supply agreements are typically quicker to execute domestically, and it helps that by being in the same jurisdiction, you are more likely to share the same business practices. Lastly, on the project management front, all project managers will tell you that working within the same timezone and speaking the same language will ease the communication flow between the sponsor and the CMO, especially during technical and project discussions. Communication is key during site change and technology transfer projects.
Limitations to the made in Canada model
While manufacturing locally is often preferred, it is not always possible because of the lack of local innovation, higher cost of goods and also a lack of manufacturing capacity.
The lack of available technology or infrastructure for new projects is particularly true for biologics and specialized dosage forms like inhalants or injectors, to name a few. Depending on the type of product, its complexity and volumes, the Canadian CMO marketplace being relatively small, domestic outsourcing might simply be impossible to achieve, and expected price targets impossible to meet due to higher COGs. The Canadian contract manufacturing market is also limited by the number of true players in this space, and it is likely that many kinds of products cannot be outsourced domestically given the projected sales.
Recommendations for offshoring
What drives the decision to offshore may vary from one company to another. However, once preliminary discussions have been completed, including technical assessment and quotes, compliance of the site will have to be confirmed by a state-of-the-art quality audit from the sponsor. It is highly recommended to target the shortest return visit possible as per sponsor’s Standard Operating Procedures (SOPs).
I’d also advise that no firm orders should be placed before the audit report has been issued and observations / recommendations have all been addressed.
There has been multiple projects that have worked successfully in the context of offshoring, but to ensure your success, I would suggest having one or several local employees trained by the sponsor, or, for which compliance and audit skills were already confirmed by the sponsor.
Also, a local project manager proficient in English and with extensive international experience is a “must” to keep moving the technology transfer forward, on budget and in a timely fashion. Moreover, time differences can and should be used to the sponsor’s advantage.
I personally have always loved to have our investors or upper management witness the production of their product at any time. For troubleshooting, coordinating a manufacturing schedule is sometimes challenging and, domestically, it remains feasible, otherwise, with the distance, offshored products will require the presence of the sponsor for several weeks.
In summary, there are many factors to take into account when making the decision to offshore the manufacturing of a product and for outsourcing domestically. Companies should carefully weigh all available options knowing that offshoring is usually the right solution for reducing costs and addressing a lack of capacity, but it also requires enough internal resources from the sponsor to keep a proper oversight on the execution of the outsourced activities.
About the Author
Anthony Grenier is an Independent Pharmaceutical Consultant at Technology Transfer & Outsourcing Solutions. Previously he was Manager, Technology Transfer and Sourcing at Paladin Labs. In his current role he assists small and virtual pharma companies in finding the right CMO for their clinical or commercial manufacturing needs. He can be reached at firstname.lastname@example.org.
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