Realize the potential of outsourcing in pharmaceutical packaging
By Robert Carr, Director of Commercial Finance, Packaging Services, and
Akan Oton, Director of Business Development, Product Ventures, Catalent Pharma Solutions
Faced with rising costs and profit pressures, pharmaceutical and biotechnology companies are seeking new ways to sustain growth in a dramatically changing industry. Increasing patent expirations, an uncertain political environment, and pressures from managed care, consumers, and governments to lower prices are the industry’s primary challenges. To spur growth, consolidation and product in-licensing appear to be the strategies of choice for large pharmaceuticals. Many have completed acquisitions of biotechnology and specialty companies to compensate for shrinking pipelines. Multinational generic companies are facing pressures as well, with price and market access under threat. To address this, large generics are pursuing acquisitions in order to build scale to counter the buying power of large retailers like Walgreens and Walmart, and also to ensure preferred access.
Competition in the global healthcare industry has never been greater. Considering that it takes 10 to 15 years to develop a new prescription drug, with the average cost exceeding $1.5 billion,¹ accelerating development and streamlining the supply chain are critical to the industry’s success. As a result, managers are pressured to cut costs, speed time to market, and meet new industry regulations.
What can companies do to stay afloat in this dynamic industry landscape? While there are numerous options, many companies are reevaluating their approach to outsourcing, and leveraging its advantages as a valuable new driver of growth. Contracting non-core functions, such as packaging, is becoming an important industry strategy for managing rapid change and creating a more cost-efficient, flexible infrastructure. Increasingly, firms find that the functionality, brand awareness, and consumer preference benefits that packaging provides can best be achieved by a skilled outsource partner.
Contract Pharma’s 2008 Outsourcing Survey reports that 62% of pharma/biotech companies plan to spend up to 10% more next year on outsourcing, and nearly a quarter plan to spend more than 20%.²
The Value of Strategic Outsourcing: Decision Drivers
One major advantage of outsourcing functions such as packaging is cost avoidance, particularly when specialized equipment and expertise are required. By using the supplier’s infrastructure, a company avoids capital outlays, which can be used more efficiently for other purposes. Outsourcing is also a scalable resource that allows flexibility to better manage fluctuations in demand at critical lifecycle points, such as at product launch. The external resources can then be scaled back or redeployed, improving time efficiencies. By eliminating the need to reallocate internal resources to adjust to changes in demand, companies can focus more on brand enhancement and commercial success.
Other key benefits of outsourcing the packaging function, particularly to a major service provider, are gaining access to specialized services, new capabilities and innovations, process excellence and world-class expertise, as well as reducing the in-house regulatory burden. Leading providers with highly experienced staffs frequently introduce new and better methods, advancing manufacturing quality and efficiency to a new level. Many firms discover that providers can also serve as consultants, allowing the pharmaceutical firm to improve their internal operations as well.
Another important benefit of outsourcing packaging is that it enables companies to respond quickly and efficiently to new industry needs and requirements, such as more-stringent quality or regulatory requirements. Heightened requirements for intellectual property protection and anticounterfeiting measures call for specialized packaging technologies and expertise. New formulations and novel dosage forms, such as thin-film strips and biologics, also require unique types of packaging. Both branded and generic companies are increasingly seeking specialized packaging forms, such as compliance-enhancing, child-resistant, and senior-friendly packaging.
Considering the importance of packaging to commercial success, choosing a highly experienced, reputable packaging contractor is essential.
Why Do Companies Outsource?
In practice, the outsource decision is greatly influenced by a company’s market and business strategy. The larger the company, the more likely it outsources noncore elements of its business in order to focus on core competencies. That is the major reason why “big pharma” (70%) outsources, and 44% of the reason small and mid-tier companies outsource.² Outsourcing functions such as packaging enables industry companies of all types to optimize the use of existing resources.
Big pharma outsources to increase efficiency and productivity to drive bottom-line growth. Smaller firms use outsourcing as an efficient way to gain needed resources without incurring capital expense. For generic and biotech companies, one-third of their outsourcing activity is tactical and driven by a temporary lack of capacity.²
Because most generic, specialty, and biotech firms are small, virtual companies with limited or no package manufacturing capabilities, it is far more efficient for them to partner with a large, reputable outsourcer with considerable capabilities and experience.
Generic. Historically, generic companies have rarely outsourced packaging. Today, in addition to contracting with service providers for overflow work, such as for a product launch, they are increasingly seeking specialty capabilities, such as compliance-enhancing packaging.
Specialty Pharma. Most specialty pharma and biotech companies are regionally located and have limited packaging capabilities. Generally, they are smaller companies, without global operations, that out-license product rights in regions they do not operate in. Often they produce a drug in one region and use contract packaging manufacturers in one or more other regions to avoid capital expenses.
Biotech. Because of the specialized nature of their business, biotech companies have more demanding packaging needs. They utilize contract package manufacturers for their unique packaging requirements, such as vial and syringe labeling, refrigeration, frozen-product packaging and automated kit assembly for injectables.
Contract packagers serving biotech firms must have considerable infrastructure, including temperature controls and monitoring, adequate capacity to store refrigerated products, and a high level of organizational competence, quality and cGMP. For biotechnology firms, the contractor’s regulatory expertise and technology applications are always important considerations. Given the high value of biologics, smaller biotech companies, whose future may rest on the success of one or two drugs, generally choose from a small set of service providers they know from experience or reputation, and whom they trust.
New as well as standard offerings from progressive contract packagers and printed component vendors are not only providing a means of achieving greater cost and time efficiencies, but are allowing immediate access to a broad range of specialized services, technologies, and expertise.
Anticounterfeiting and IP Protection. Looming and frequently changing requirements to prevent counterfeiting are prompting companies to consider outsourcing packaging services in order to acquire specialized capabilities as well as minimize investment risks owing to changing requirements. California’s recently amended e-Pedigree law will prompt some companies to modify near-term investment plans because of the implementation delay from 2011 to 2015. Additionally, U.S. and European legislation will require some form of track-and-trace technology implementation, adding further need for pharmaceutical companies to have ready access to these specialized services.
Compliance Enhancement. Pharmaceutical firms are increasingly recognizing that they can, in fact, increase drug utilization and, in turn, sales through the selection of appropriate packaging. So-called compliance-enhancing packaging helps patients take their prescription medicines more regularly. This specialized type of packaging is particularly beneficial for patients on multiple medications, taking frequent or titrated doses, or on weekly or monthly regimens.
Compliance packaging is primarily blister units or cards with designs that visually indicate when to take the medication. The packaging should meet stringent child-resistant requirements while being adult friendly.
Unique Requirements. New formulations and drug-delivery systems require specialized packaging, which is often outsourced. Companies are increasingly using topical delivery applications with precise, controlled dosing.
From Transactional to Strategic
In recent years, large pharma companies have been evaluating a more aggressive, strategic approach to outsourcing. They are realizing the value of transitioning from tactical, purely cost- or time-driven transactions to more permanent, strategic relationships, particularly in packaging. Instead of contracting with many suppliers, supply-chain managers are moving toward developing “partnerships” with a few major full-service contractors for multiple functions.
Today, nearly three quarters of pharma and biotech companies describe their relationship with a contract service provider as a partnership, up from 66% last year. About half describe their outsourcing model as strategic and use only 1-5 vendors.²
Strategic partnerships enable companies to realize the cost-savings of larger scale as well as access innovations, capabilities and expertise. Working with a small number of contractors also simplifies management of the supply chain.
Structuring the Relationship
Manufacturers are partnering with contract packagers in new and increasingly complex ways other than the traditional fee-for-service model where price is often the only decision criteria used to select a partner.
Here are a few examples of more alternative models that are employed in the industry.
Strategic alliances are typically formed when manufacturers realize that managing multiple vendors and frequent supplier changes may in fact lead to lower quality and misaligned incentives with partners.
Risk sharing is a partnering strategy typically used when a large amount of capital is involved or licensing of intellectual property from the partner. Both the company and the service provider fund a portion of the capital with the benefits shared by both parties.
Adopting a plant-within-a-plant approach allows the manufacturer to maintain control of the assets and infrastructure, but the contractor takes control of a portion of the plant. The contractor may provide its own staff and specialized equipment. This structure enables greater integration of the manufacturer’s supply chain with that of the contract packaging firm and allows for the delivery of additional services.
Strategic Outsourcing: What Lies Ahead
The benefits of forging stronger, more integrated alliances with fewer suppliers are clear. Strategic partnerships are a promising solution to address pharma’s problems: reducing costs, expanding innovation and pipelines, boosting efficiencies, and maintaining growth.
Careful choice of a contractor and outsourcing structure is critical to a successful long-term partnership. After establishing outsourcing needs and criteria, choose an outsourced packaging manufacturer with considerable experience and capabilities in your area, a good reputation and financial stability, global resources if needed, the flexibility to adapt to market changes, an integrated network, and an affordable price. Effective partnerships require commitment, trust, and clear, transparent communications, as well as clearly defined goals, roles and priorities.
Until recently, pharma and biotech companies have been hesitant to enter into strategic, risk-sharing alliances with contract manufacturers because the industry is fraught with risk and regulations. But while caution persists, as manufacturers increasingly work with a few leading full-service contractors in more synergistic, integrated relationships, they are realizing the substantial value of strategic outsourcing to spur their future growth.
1. Tufts University Center for the Study of Drug Development study (year 2005 dollars). Pharmaceutical Research and Manufacturers of America, Pharmaceutical Industry Profile 2008, March 2008
2. 4th Annual Outsourcing Survey. Contract Pharma, May 2008.