CEO s AND THE COMPLEXITIES OF OUTSOURCING

CEOs AND THE COMPLEXITIES OF OUTSOURCING

CONTENTS

4Are You Outsourcing Your Future?

7 How Involved Should Biopharma CEOs Be In Outsourcing Activities?

10 Surprise! CEOs Select CDMOs

FROM THE EDITOR

Decisions on the strategies and implementation of drug development and manufacturing outsourcing have never been so important to the overall health and direction of both emerging and established biopharma organizations. CEOs today need to take on a higher degree of leadership in making these decisions. To outsource or not, how much, where and when, have be-come existential questions of survival, and keys to success (or failure). Chief Editor Louis Garguilo looks into how the C-Suite can navigate the complexities involved.

LOUIS GARGUILOChief Editor, Outsourced Pharma

ABOUT THE AUTHOR

Louis Garguilo is chief editor and conference chair for Outsourced Pharma, and a contributing editor to Life Science Leader magazine. He stud-ied public relations and journalism at Syracuse University (and holds a Master’s in English), and has 30+ years of international experience in business communications and development positions.

Louis spent a decade at a global pharmaceutical contract research, development and manufacturing organization; served under the governor of New York in the state’s economic development agency, as liaison to the pharmaceutical/biotechnology industry; was chief strategic officer for an e-learning software company; and spent most of the ‘80s and ‘90s in Japan as an educator, author, and business communications con-sultant, including for the Osaka Medical Center for Cancer and Cardiovascular Diseases.

In the beginning, there was the work.

Contracts for “pairs of hands,” and specific, more mundane development and manufacturing activities and operations. Pharma would never let “IP or trade secrets” outside the walls of its garden.

Eons passed. Evolution took hold. Biotechnology emerged from the primordial pharmaceutical soup.

Today drug development and manufacturing outsourcing is a ubiquitous business-enabling activity to gain entrée to advanced technologies and capabilities.

Those same capabilities upon which your programs and overall organization are centered.

Are you, then, outsourcing your future?

RESOURCES, PROCESSES, PRIORITIES

Most readers are familiar with Clayton M. Christensen’s (now classic) “Innovator” series of books, starting with the seminal, “The Innovator’s Dilemma.”

Perhaps fewer of you have read an earlier work of his, “How Will You Measure Your Life?”

Within that book published in 2011, Christensen devotes some time to the theme of understanding your capabilities, and, surprisingly, specifically to the subject of outsourcing.

He writes that first you need to understand the actual concept of capabilities, and then which will be critical to your own future, so that you know which are “important to keep in-house and those that matter less.”

How do you make these determinations?

Christensen says “the factors that determine what a company can and cannot do – its capabilities – fall into one of three buckets: resources, processes, and priorities.”

These capabilities are actually “dynamic and built over time,” but the most tangible of the three is resources.

Resources include “people, equipment, technology, product designs, brands, information, cash, and relationships with suppliers, distributors, and customers.” (emphasis mine.)

ARE YOU OUTSOURCING YOUR FUTURE?

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Louis GarguiloChief Editor, Outsourced Pharma

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Organizations create value as employees “transform these resources into products and services of greater worth.”

The ways in which your employees “interact, coordinate, communicate, and make decisions are known as processes,” and this of course includes the ways that products are developed and made.

However, unlike resources, Christensen points out, “processes can’t be seen on a balance sheet,” yet they drive the future successes of your entire organization.

Finally, the capability he deems most important, is an organization’s priorities.

“This set of factors,” he says of priorities in the collective, “defines how a company makes decisions,” and to some degree, “employees at every level make prioritization decisions.”

How well the priorities are disseminated, how clear they are, and how well understood determine whether individual priorities of employees are in sync with the overall organization’s.

WE OUTSOURCE ALL THREE

Certainly true of many industries – think no further than semiconductors for a recent prime example – in biopharma we “outsource” all three of our capabilities to what a few years ago would be to an unimaginable level.

Including priorities, which if not conveyed to CDMOs, for example, can end up with costly miscommunications and wasted time.

In fact, increasingly we strive for “true partnerships,” “close relationships,” and thoughts of CDMOs as “uninterrupted extensions of our company.”

What do those terms effectuate?

They further drive (or enable) the virtual model.

All of this, much more so than when Christensen first pointed this out a decade ago, is encouraged by “financiers, consultants, and academics – they see how quickly and easily they can reap the benefits of outsourcing.”

What is not measured, though, is “the cost of losing the capabilities that they forgo in doing so.”

The effect can be chilling:

You end up outsourcing to start your organization and quickly get your drug or therapy concepts into actual play, but end up beholden to that activity because in a theoretical sense you don’t own those capabilities.

“In theory,” some readers may be thinking.

That’s correct, and as Christensen points out, this theory of capabilities gives you and excellent framework to further determine when and what outsourcing makes sense, and when it does not.

CDMO COMPETITION?

Christensen ends by describing what he believes are the two most important considerations here:

First, take a dynamic view of your suppliers’ capabilities.

Assume they will change. Focus not on current capabilities, but what they are striving to become.

Next, figure out what capabilities you will absolutely need to succeed in your future. These, Christensen believes, “must stay in-house.” (Emphasis his.)

Which brings us to the main point in all this for Christensen.

First, as the supplier – in our case your CDMO – generates the capacities to handle your new technologies, it can also use them to serve your competitors.

But even more so, as seen in other industries, the supplier can become your competitor.

Christensen cites the example of the former Dell computer company, once the leading PC seller in the world.

Dell eventually outsourced all components of its PCs to a main service provider that decided it had acquired all the capabilities, and thus started building its on PCs. These competed directly with, and undercut, Dell’s own sales – to the point Dell exited the business.

Perhaps that scenario sounds farfetched in our industry.

In fact, reading this editorial in Outsourced Pharma might sound a bit surreal. (The editor does feel a bit out of place at this creation.)

Nonetheless, all sides must be considered in order to accurately consider any one side.

Could you, in fact, outsource so much you lose your main assets – your unique platform; advancing knowledgebase; competitive edge; new-product development chemistry (or biology) that makes yours an organization that can compete and win in the future?

Is it possible to outsource so much, but maintain enough at the same time?

To date, we’ve decades of positive proof you can.

Outsourcing has positively driven the biopharma industry – and long ago even brought Big Pharma into the realm.

It is our business model.

Yet, take another moment or two: Are you outsourcing your future?

Certainly worth considering.

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Louis GarguiloChief Editor, Outsourced Pharma

When outsourcing drug development and manufacturing, how involved should the CEOs of emerging biopharma be in the requisite day-to-day activities and processes?

Now that’s a good question.

James Mackay, CEO of Aristea Therapeutics, and independent board member to emerging biopharma, says when he’s advising new CEOs, he answers by first informing them “at some point along the way, normally something in your CMC activities becomes problematic.”

And thus: “The CEO is likely to be the ultimate decision-maker on more activities related to outsourcing than they might expect.”

Mackay, who earlier in his career at AstraZeneca helped guide six drugs to commercial approval, outlined the role of an independent board member for emerging biopharma in our earlier conversation.

Here he’ll turn specifically to our leading question.

CEO IN THE WEEDS

For an example of “normal” but “problematic CMC challenges” that can pop up for a CEO, Mackay uses his own situation at Aristea, where he is “living and breathing this right now.”

He describes the attempted nano-milling of an intermediate that “works beautifully on small scale, but not so well moving to large scale.”

CEO-level concern? Mackay thinks so.

But first, he says, it’s important – even at “virtual” start-ups – the CEO has at least a core team in place. That team can include an independent advisor suggesting approaches to the challenge; consultants and SMEs, who in this case, for example, can help the CEO better understand particle-size distribution, impacts of adjusting speeds, or the time of milling.

HOW INVOLVED SHOULD BIOPHARMA CEOS BE IN OUTSOURCING ACTIVITIES?

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James MackayCEO, Aristea Therapeutics

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Next, as Mackay puts it, the CEO must recognize the people at the CDMO know their equipment and technology better than anybody. “They’ve seen more projects than we have,” he says. “Working with them as part of your team is critical.”

“Nonetheless,” he continues, “in the middle of all these resources, as CEO I must be highly engaged.”

So while CEOs will have other activities on their minds – and calendar – they should also serve as Chief Outsourcing Officer. How an outsourcing impasse is resolved is a vital leadership decision.

In fact, insists Mackay, that leadership starts much before there’s a challenge with something like a spray-drying scale-up at a CDMO.

It starts at company formation.

It requires a nuanced conception of the style and substance of the new company’s outsourcing model – and the resultant search for enabling partners.

The emerging biopharma CEO starts his decision tree with:

“How will we approach outsourcing?”

“Which service providers will best enable that strategy?”

Says Mackay:

“When as an independent board member I am advising the CEO, I relate my own experience by making it clear I’ve always talked one-to-one with my counterpart at the provider we’re considering, so they understand the way we want to work together, and to create that ability to communicate at the top of the two organizations.

“Sometimes you will have to get up to that level to get some decisions made or resources released.”

BUT KEEP YOUR HEAD UP

The above, though, comes with a caution:

All this outsourcing preparation from the outset, and day-to-day involvement, is done in service of the ultimate goal of commercial success.

“Although I’m a development guy by training, I’ve always been in that commercial interface,” says Mackay. “My colleagues in AstraZeneca used to describe me as the most commercial development leader we ever had!”

Mackay learned that as you design your program, if you are not thinking about that end goal, chances are you will not design the program appropriately.

“You should be thinking about regulatory approval; the market, even what the payer’s going to want; then how to build that into your clinical program,” he says.

“This is an area I’ve found I can add the most value in San Diego,” he adds. “Although we now have companies who have gone commercial – Acadia, Neurocrine, and GW, for example – historically San Diego companies don’t take their drugs through to market. So helping CEOs focus on that future point, and then think back about what needs to be in the program, is valuable.”

OUTSOURCING ADVICE WRAPPED UP

Here’s our CEO checklist, as provided by an independent board professional:

• Start with a vision of ultimate commercial success. Work backwards to what you’ll need at each step of the way to attain it

• Define your outsourcing needs, style, and method. Select service providers that best meet those parameters.

• Stay involved in the day-to-day outsourcing process and decision-making

Mackay says the mindset is to take your program through to commercialization, even if that ultimately is never going to happen, for example due to an acquisition by a strategic pharma. “It’s still the way to think about it.”

This ensures the organization makes the right decisions at the right time “for the development of the product.”

It also positions you for a deal with a strategic partner should that materialize.

“A larger pharma company will look at your program and say, ‘These guys have been thinking about this in the right way.’

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“When we started up Aristea,” explains Mackay, “the first meeting we ever had with our CMC consultants was to talk about the ultimate commercialization of the product. What would that look like? What are the indications, the size of the supply chain we’ll need?

“We worked back from that. It doesn’t mean your initial CDMO has to be the one that’s going to commercially supply the product. In our case, we didn’t do that. However, we knew how we were going to transition the development program.

“We went with a more niche CDMO to begin with here in San Diego, with the ability to respond more rapidly than the bigger players. It was part of the overall plan, piece by piece.”

And day to day, with an eye towards the ultimate goal of commercialization. The role of a CEO at a biopharma in 2021.

Louis GarguiloChief Editor, Outsourced Pharma

Our recent editorial, “How Involved Should Biopharma CEOs Be In Outsourcing Activities?,” drew a fair amount of attention.

New CEOs might have been surprised to learn they’ll be so involved with CDMO selection, and what (at first blush) appear more mundane, day-to-day outsourcing decisions.

The veteran executives most likely thought: “Yes, been there, done that.”

The overall message of that editorial:

“At some point along the way, normally something in your CMC activities becomes problematic,” and thus:

“The CEO is likely to be the ultimate decision-maker on more activities related to outsourcing than they might expect.”

Now, we have more data to wrap around these assertions of involvement at the executive level.

It derives from “CDMO Outsourcing Models,” a report from my colleagues at ISR Reports. The data derives from market research and a survey of professionals whose biopharma organizations outsource manufacturing.

EXECUTIVE OUTSOURCING

According to the report, “Executive Management holds the largest amount of influence over CDMO selection for both development (26%) and commercial (24%) manufacturing activities.”

When analyzed by size, for “non-large” biopharma organizations that influence moves to 33% for development, and 29% for commercial.

And regardless of outsourcing stage, the executives “tend to be the main influencers.”

SURPRISE! CEOS SELECT CDMOS

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If these numbers surprise at all, I’d assert they surprise to the low side, based on (the more anecdotal) evidence I’ve received from numerous executive conversations over the past year.

Not to mention biopharma organizations becoming and remaining leaner – or more-or-less virtual – precluding the few executives at the organization to be more involved in all decisions.

Or the fact that VC, private equity and other finance partners invest understanding that emerging biopharma will rely on outsourcing, and thus need outsource-experienced executives running their start-ups.

Another data point in the ISR report would also seem to add to involvement by the C-suite:

“Almost three-quarters (73%) of respondents indicated the company they work for has a formal budget allocated to CDMO selection.”

This, on the other hand, surprised to the upside – but now I think about it, I’m not sure why it should have.

As these pages have expressed countless times, perhaps nothing that follows is more important than initially identifying the right CDMO partner. Putting that importance in dollars and cents should become more routine.

And when “formal budgets” need approving, CEOs step in, ask hard questions, and their involvement again increases overall.

COMMON CONSULTING

And speak of (at least my) surprises, ISR reports nearly half of respondents confirmed the company they work for uses consultants to help guide their CDMO selection process.

When analyzed by company size, the data show consultant use is more common at small companies than large ones.

Particularly when considering the diversity of organization among biopharma today, I’d already been thinking when we wrap up 2021, it might be labeled: “The Year Of The Consultant.”

Again, more anecdotally (but certainly from the front lines), most every conversation I’ve had with biopharma professionals the past 12 months or so point to a heavy reliance on consultants on most all matters of outsourcing – and particularly with selecting CDMOs.

On the other side, every consultant I’ve asked, ‘How’s business?” has let out a mixed sigh of delight and exhaustion. Business, they say, has never been better.

Maybe that’s simply because, well, we all seem busier today. Surely some of this still has to do with the pandemic.

But also because there simply are more biopharma start-ups (think cell-and-gene therapy), and the downsizing (or virtualization) of emerging biopharma overall. (see: Market Mash: Bigger CDMOs, Smaller Biopharma Customers)

We don’t have a base from which to judge how much of an increase we’ve seen in consultant involvement in CDMO selection over, say, 2018 or 2019, but I’ll risk the assumption it is an appreciable jump.

And to walk this out further: it would not be a surprise if that percentage continues to rise.

ALL TOGETHER NOW

Outsourcing is the rule in biopharma. Perhaps we normalized this best as the title of a recent Outsourced Pharma Live:

Can You NOT Outsource?

The answer was “probably not,” but you sure can “hybrid.”

That is, if there’s an identifiable new model uncovered here at Outsourced Pharma, it’s the “buy-then-build,” or interestingly, reverse “build-then-buy” approach, particularly at emerging advanced-therapy organizations (for example, see: Advice For Cell-Therapy Biopharma: Strategic Building, Tactical Outsourcing)

To back that up, we find this in the intro to the ISR report:

“ISR continues to find that a combination of outsourcing models along with in-house manufacturing is more of the norm.”

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Therefore:

Somebody has to set and overlook the strategic integration of in-house development and manufacturing with external activities in those realms.

Somebody needs to identify for investors and other stakeholders how that strategy is the wisest to fulfill the mission of the company – wisest as in the most bang for the buck.

Somebody must explain why the development and manufacturing partner the organization selected is the best fit for that mission, and be close enough to understand on an ongoing basis what’s taking place at that external partner.

Those somebodies are CEOs.

They’ll need assistance of course. It’ll come from the other experienced internal management at the organization.

And they’ll have experienced consultants to add insight and perspective.

ABOUT US

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