What will the impact of our current economic uncertainty be on outsourcing?

1. BIOPHARMACEUTICAL OUTSOURCING
Economic Uncertainty, Job
Insecurity and Outsourcing:
Where are We Now and Where are We Headed?
Scott M. Wheelwright, PhD
President, Strategic Manufacturing Worldwide, Inc.
William Downey, MBA
President, HighTech Business Decisions
T
he pharmaceutical industry faces what may be the most One consequence of this movement has been an increase in the
challenging year in its history in 2009. With industry leaders such number and capabilities of vendors. Not only do we see an increase in
as Steve Burrill describing the financial funding for the industry the number of providers of services such as manufacturing, development,
as having undergone a permanent restructuring, with one IPO in 2008 testing and logistics, but these vendors have been increasing their
and the prospect of none in 2009, and with strong price pressure on
expertise in an effort to set themselves apart from their competition.
pharmaceuticals and biopharmaceuticals, the obstacles to success may
This increase in vendor capability has served to support the decisions
seem overwhelming [1].
of companies involved in product development and original research to
The industry is witnessing a round of consolidation that is
further shift responsibility to vendors, who have become partners rather
integrating pharma and biotech to a greater degree than we have seen
than just suppliers.
in the past. Wyeth, with its strong portfolio in vaccines and other
This is one driver that remains in force under the current economic
biologics, is being acquired by Pfizer, a company that has not been as
situation. We do see companies paring back on projects in order to
successful with biopharmaceuticals. Roche looks set to finally acquire
conserve cash in anticipation of reduced opportunities to raise capital.
all of Genentech. There is talk about Biogen-IDEC coming back into
So, the total number of new products under development has declined
play as a takeover target.
and may continue to do so as companies merge or are acquired. But
And all of us deal with job insecurity. An informal survey of news
companies that have relied on outside help are unlikely to bring these
reports shows large pharmaceutical companies shed 73,000 jobs in 2008
functions in house now, especially if capital spending is required.
while small firms lost 1200 positions. Within the first six weeks of 2009,
Another driver for outsourcing in the past has been cost reduction.
large companies had reduced headcount by another 25,000 and small
Companies look to the increased efficiency of vendors who consolidate
firms by 1400.
multiple projects within a single skilled workforce as a way of reducing
Our Question is What Does All This their expenses. This driver remains fully in force.
We should remember that outsourcing does not necessarily mean
Mean for Outsourcing? offshoring. Companies tend to outsource work to local vendors rather than
to those who are farther away. For one thing, it is easier to communicate
The first thing to look at is the key drivers for outsourcing. For
with partners who share the same culture and time zone. For another, it
several decades, and across many industries, the emphasis has been on
is easier to develop trust with partners we meet with often. Nevertheless,
specialization and core competency: do what you do best and let someone
there are many great vendors who reside overseas and companies have
else do best what you don’t do. Twenty years ago Sun Microsystems
long done business with partners far away.
pioneered this concept when they moved their assembly and packaging to
And with the rise of vendors in lower cost regions, there is a further
vendors so they could concentrate on product design. Many companies
incentive to move some projects and services to foreign locations. The
tout their focus on primary capabilities and depend on key vendors to a
current economic climate can be expected to have both a positive and
great degree in ensuring their success.
negative impact on overseas trade. On the positive side, companies
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Pharmaceutical Outsourcing March | April 2009

2. BIOPHARMACEUTICAL OUTSOURCING
References
will look to gain the maximum value for every dollar they spend, so
the lower cost option will remain attractive. However, companies
1. Burrill & Company, February 2009. http://www.burrillandco.com/
will be conservative when it comes to risk taking, so they will be less
news-349-G_Steven_Burrill_predicts_what’s_ahead_for_biotech_
likely to partner with an untested vendor, especially for technically
in_2009.html
difficult projects.
2. Rich Karlgaard, “Back to the 1970s,” Forbes Magazine,
Another key driver for outsourcing has been the avoidance of capital November 10, 2008.
expenditures. This driver is stronger in our current economic storm.
Some companies that planned to expand through capital projects will cut
projects in order to conserve cash. But if expansion is critical to launching
new products, and if all or most of the development costs have already Scott M. Wheelwright, Ph.D. is a
been incurred, then in this situation expansion is likely to continue, and founder and principal of the
some of this expansion will be through partnerships with vendors.
consulting firm Strategic
Many capital projects that were underway are continuing. Crucell’s
Manufacturing Worldwide, Inc. Dr.
Berna unit is building a vaccine facility in Korea. Lonza is building two
Wheelwright has over twenty years
plants in Singapore, one for Genentech. Novartis is building a major
experience in bringing novel products
influenza vaccine facility in North Carolina and a major biopharmaceutical
to market with work experience that encompasses
plant in Singapore. BMS expects to complete their facility in Massachusetts
pharmaceutical firms and both large and small biotech
this year. Alpha Biologics is just finishing their plant in Malaysia. Intas
is building a new plant in India. And the list goes on. Nonetheless, it companies. Dr. Wheelwright received his Ph.D. in
is not clear whether new projects will be initiated prior to stabilization chemical engineering from the University of California
of the economy. at Berkeley and performed post-doctoral studies at the
Max Planck Institute for Biophysics in Frankfurt,
What Can We Expect to See Going Forward? Germany. He is the author of a book on protein
Clearly, some product development projects will be deferred. Overall, purification and has published numerous articles on
the number of product development programs is likely to decrease. There manufacturing and process development. Dr. Wheelwright
will be fewer people employed by the industry in the short term and there focuses on technology transfer and outsourcing,
will be fewer new products coming to market. The decline in the number
particularly Asia.
of projects may lead to a decline in the amount of work that is outsourced,
particularly for early stage clinical support.
William Downey is president and
On the other hand, there are projects that will continue to move
managing director of HighTech
forward and there is reason to believe that some of the drivers for
Business Decisions, a consulting
outsourcing are stronger now than in the past. This strengthening may
company that specializes in market
lead to increases in the amount of work that is outsourced.
Some companies will be acquired and others will merge to keep research for business-to-business
going. Large companies are expected to use their cash stockpiles to fill biotechnology, pharmaceutical
their pipelines with novel products. In years past we have seen large manufacturing, medical and electronic products.
companies use their manufacturing ability as a lever to bring small
HighTech Business Decisions has been serving the
company products under their wing; such behavior is likely to continue.
biopharmaceutical contract manufacturing industry for
Recessions always lead to mergers and acquisitions as companies
over ten years. Mr. Downey has over 25 years of industry
pool their resources in an effort to weather the storm. But, we should not
experience, and he has held various positions in
forget that many of today’s great companies were started during previous
marketing, sales, strategy and finance functions for both
adverse conditions and we should not be surprised if in ten years some of
private and public companies. Mr. Downey holds a
our leading firms were forged during the current crisis. In reflecting on
the current times, Rich Karlgaard, publisher of Forbes Magazine, lists the Masters in Business Administration from Washington
following firms as originating during the turbulent 70s: Southwest Airlines, University in St. Louis and Bachelors from the University
Apple, Oracle, FedEx, Microsoft and Genentech [2]. of Michigan in Ann Arbor. HighTech Business Decisions
The future of outsourcing is cloudy but not opaque. Company
has recently published its industry report,
management is asking the question, “How do we weather this storm?”
Biopharmaceutical Contract Manufacturing 2007:
Some will choose to postpone projects, others will move projects
Quality, Capacities and Emerging Technologies.
forward, some will outsource less and others outsource more. The
environment will remain fluid and challenging, but opportunities remain
for creative individuals and firms to find ways to offer new benefits in a
changing environment.
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Pharmaceutical Outsourcing March | April 2009