Competition Yields Benefits for Pharma Companies Outsourcing API Manufacturing

It’s no surprise that cost savings motivate outsourcing. However, the affordability of an individual company’s services does not necessarily ensure it will win a project ahead of costlier competitors. Strategic outsourcing tends to bring various benefits to the sponsor organization beyond cost savings, including the ability to focus on core competencies, increased productivity, and access to additional or specialized scientific expertise. Nice Insight surveyed buyers of CMO services to identify the motivations for engaging contract manufacturers and results showed that the top three reasons for strategic outsourcing are to improve quality (54%), improve time-to-market (49%), and reduce fixed costs (45%). Beyond probing what motivates these buyers to engage contract manufacturers, the survey asked specifically which products and services respondents acquire from CMOs. Forty-three percent said they purchase small molecule APIs from contract manufacturers and 30% go to them for potent APIs (HPAPI).  While the percentage of respondents who acquire drug product from CMOs (50%) was higher, the large number of innovator pharmaceutical companies that subcontract API production highlights a clear shift from the twentieth century mindset when pharmaceutical companies tended to complete the final stages of API synthesis in-house. As intellectual property protections improved, the necessity for in-house API production became less imperative. Parallel quality control testing indicated that outsourced API met the same standards as in-house product and as a result, CMOs advanced from manufacturing late stage intermediates to active pharmaceutical ingredients. Pretty quickly, the API contract manufacturing market was flooded with excess capacity and companies competing for business that largely precluded differentiation in capabilities.  These issues were compounded by the emergence of low-cost manufacturers in Asia. Yet the result of these problems for CMOs—price erosion—provides an advantage for pharmaceutical innovators. The benefit of outsourcing from low cost labor markets in India and China is not without risk. Offshoring often incurs additional costs ranging from international travel for site visits to IP violations, quality issues, local legal representation and tech transfers – to name just a few. Of course, there are ways to benefit from partnering with businesses in emerging markets while limiting these risks. Working with companies that have a global presence is the preferred method among Nice Insight survey respondents, considering that’s the top five CMOs (as indicated by the company’s project likelihood* score) for small molecule API manufacturing are ones that have facilities in North America, Europe and Asia. Respondents selected BASF, Boehringer Ingelheim, Takeda, Lonza and Novasep (listed from highest to lowest) as the CMOs they are most likely to engage for small molecule API manufacturing. It is worth noting that in addition to global presence, these five companies have several traits in common. Each scored at or above the quality (70%) and reliability (72%) benchmark scores for small molecule API manufacturing.  These two traits are consistently ranked as the most important attributes in the CMO selection process, so it’s no surprise that exceptional performance in these categories translates to an increased likelihood of winning an API manufacturing project. And with the exception of Takeda, these companies were also perceived as more affordable than other CMOs. Interestingly, the outsourcing driver where these companies collectively fell short of the benchmark was innovation—perhaps indicating that when it comes to API manufacturing, there is less emphasis on the need for customized solutions.  And finally, these leading companies for API manufacturing exhibited a trend that frequently emerges from survey data – those with the highest customer awareness scores were the most likely to be considered for a project. Not only does outsourcing API manufacturing support the goal of reducing fixed costs—especially under the current market conditions—it offers access to scientific expertise beyond the talent of in-house staff, which can help to improve quality and reduce time-to-market. So while CMOs have to find ways to differentiate from the competition in order to win business, outsourcers can take advantage of the consequent pricing conditions.
By Kate Hammeke, Director of Marketing Intelligence, Nice Insight
Suggested Reading: Survey Methodology: The Nice Insight Pharmaceutical and Biotechnology Survey is deployed to outsourcing-facing pharmaceutical and biotechnology executives on an annual basis.  The 2012 sample size is 10,036 respondents.  The survey is comprised of 500+ questions and randomly presents ~30 questions to each respondent in order to collect baseline information with respect to customer awareness and customer perceptions on 170 companies that service the drug development cycle.  Over 800 marketing communications, including branding, websites, print advertisements, corporate literature and trade show booths are reviewed by our panel of respondents.  Five levels of awareness from “I’ve never heard of them” to “I’ve worked with them” factor into the overall customer awareness score.  The customer perception score is based on six drivers in outsourcing: Quality, Innovation, Regulatory Track Record, Affordability, Productivity and Reliability.