Offshore Pharmaceutical Manufacturing

“Because things are the way they are, things will not stay the way they are.” - Bertolt Brecht, German poet

Much of my working life is spent attending industry conferences, participating in expert panel discussions, taking in anecdotes after hours, and listening intently to what my clients are saying. About four years ago, I became aware of a change in the dialogue about offshore manufacturing - more talk about bringing business back to western CMOs, and more news about business actually moving back. This has escalated with each passing year. I am not surprised at this development. My reasons are outlined below.

First, we are seeing the normal business cycle that accompanies migration of difficult or demanding manufacturing operations to countries with low labour rates. With time, wages go up, and infrastructure costs increase as the sophistication of the manufacturing increases. This has happened to pharma CMOs in China and India, and their cost advantage is shrinking. At some point the decline in cost differences may no longer justify the added risks inherent in offshore manufacturing. If decision makers come to that conclusion, they may look at two alternatives: 1) bring the manufacturing back to western CMOs, or 2) try to recapture the high cost differential by looking for opportunities in countries with a much less developed pharma industry and low wages, perhaps Russia, Brazil, or Eastern Europe.

Second, there are a host of pragmatic considerations because of other trends in our industry. Regulatory compliance continues to become more stringent, and this will continue. China and India have been working hard to catch up with North American CMOs, but they are not there. Some sponsors appreciate the powerful reality that offshore CMOs are ascending the learning curve on their dime and will become their competitors in the future. Compliance is an even bigger issue as we move toward more complex manufacturing requirements for newer formulation of drugs and therapeutic vaccines, and toward precision medicines linking products with diagnostics. For products that treat smaller populations, there is added incentive to value the superior security of supply and overall reliability provided by western CMOs.

Sponsors are becoming more realistic about the relative price of dosage forms in drug development. The cost of the dosage for an advanced clinical trial program is typically 10 to 25% of the clinical cost. In some trials the cost per patient is upwards of $30,000 so the dosage cost can be an even smaller fraction. Since the fee for an effective trial tends to be accepted as “fixed”, it was natural to try to shave manufacturing budget by going offshore. The potential savings are a small percentage of the total cost. Is it worth the disadvantages of dealing with an offshore vendor, including the added management complexity and business risk?

It is not only offshore CMOs that want contract manufacturing business. Some countries, especially ones in Asia, are willing to make massive investments to get North American drug producers to move all manufacturing there. In one case I know of, an offer was made to a manufacturer of a critical line of drug products to move all Canadian production to a completely new offshore facility built to the specifications of the company. The cost of the facility and infrastructure would be of the order of $350 million. The offer is especially attractive because the company’s current facility will have to be replaced within twenty years. I don’t know what the company will eventually do, but there are good reasons for being wary. The offshore country is politically stable for the present, but the continuing rule of law is not guaranteed. The country does not have a long or substantial history of pharmaceutical manufacturing. What comfort level is there in protection of IP, or in a culture of safety and excellence, or in infrastructure support in the future?

Although the return of contract pharmaceutical manufacturing to North American CMOs is a clear trend, no one expects it to turn into a tsunami. We still need to demonstrate our value every day to our clients. On the other hand, the flight in our industry to offshore manufacturing was an experiment of monumental proportions, and at this point an increasing number of sponsors are being motivated to look at their situation more critically. It is not surprising that many are taking the option of bringing their contract manufacturing back. 

“Maximum return was the maxim to which we returned.” - Mohsin Hamid, novelist

Writen By:
Peter Pekos
President and CEO
Dalton Pharma Services
December 18, 2015