P+F-Trend Report on Contract Manufacturing:

Outsourcing Is In

07.12.2006 Criteria for the choice of service provider In many instances, manufacturing no longer belongs to the core competence of a pharmaceutical company. Others can do it, better, more effectively, and, above all, more flexibly. Contract manufacturers – in all sectors – focus on providing a service and earn good money by doing so. How does one become such a specialist, and what decision criteria does an outsourcer use to select a service provider?


Whether a niche product, a new drug, or a blockbuster – there are many reasons for outsourcing production. Numerous pharmaceutical companies have shaken off the burden of production and farmed out manufacturing to a service provider whose core competence will include low production costs. This is one of the principal reasons for a pharmaceutical company to outsource its production because it wishes to offer its products at competitive market prices, particular at the present time which is characterised in Germany by a drastic healthcare reform. Production plant ties up space and personnel; an investment which a pharmaceutical company is often unwilling to make.

Legal Requirements Drive Up Costs

“Cost pressure in the pharmaceutical industry is enormous”, confirms Hans-Dieter de Jager, Head of Business Development Packaging at Schwarz Pharma. He speaks from first-hand experience because Schwarz Pharma is both manufacturing pharmaceutical company and contract manufacturer. Existing capacity is better utilised by undertaking contract production. Another reason for increasing costs is the 14th Amendment of the Federal German Drugs Act, which came into force in the autumn of last year. Alongside changes such as the extension of the definition of manufacturing to include product release and the extension of the definition of the pharmaceutical entrepreneur, the introduction of a “qualified person” is of importance. Accordingly, the holder of a manufacturing licence has to appoint at least one qualified person to be constantly and uninterruptedly available. This qualified person is responsible for compliance with all legal requirements pertaining to drugs, from manufacturing via control to release of each batch immediately prior to placing it on the market. “This is a considerable cost factor for a smaller-size company because such a qualified person can be expensive“, explains Dr. Gerolf Tittel, Managing Director of LAT and Dronania. In addition, this person needs at least one deputy, preferably several, since the law demands a permanent presence. For small companies this results in further cost pressure in the GMP area. Conclusion: In-house production has to be able to bear these increased personnel costs.

More and more pharmaceutical companies see their primary task in the marketing of their products and farm out the production step to a service provider. The reduced vertical range of manufacture also lowers the risks. Outsourcing of production is recommended especially in the case of new drugs, because it is particularly difficult to calculate capacities in the start-up phase. Hardly any pharmaceutical company will undergo an unnecessary risk when the future of a drug is uncertain – all kinds of possibilities are conceivable. An additional factor in the case of some large pharmaceutical companies is the partial persistence of rigid structures – there is a lack of personnel, and particularly of flexibility, the sales department proves to be stumbling block. “In such circumstances a service provider can be a boon, even if it fulfils only a complementary function”, in the experience of Axel Ebbecke, Managing Director of Ebbecke Verfahrenstechnik. For example, if the new product does not fit in with operations flow. In some cases the service provider may even undertake to operate the contractor’s plant.
A crucial characteristic of a service provider is flexibility – frequently a balancing act between plant utilisation and free capacity. This has the aim of assuring ongoing turnover on the one hand and of permitting fast reaction to customer enquiries on the other. Potential customers do not like to be kept waiting for a response but wish to be served promptly.

Competence Is Apparent in Discussions

A fundamental risk for contract manufacturers is to become dependent on just a few customers. In order to retain a customer, an outside contractor has to offer the right price and the right quality. The quality aspects include service and on-time delivery. Once a relationship has been established between the pharmaceutical company and the external contractor, experience shows that price discussions tend to become of secondary importance. Ideally, the customer-supplier relationship is transformed into a strategic partnership in the course of time. Particularly when the customer is convinced of the competence of the contract manufacturer. This competence should already be apparent prior to the awarding of a contract: “Anyone who can demonstrate possession of extensive professional knowledge and does not have to go about laboriously acquiring the necessary information will often already have a head start on the competition”, according to Peter Milde, Head of Sales at Klocke Pharmaservice und Verpackungsservice.

Such competence in discussions gives national contract manufacturer a competitive advantage over the frequently low-priced foreign competition, located particularly in Asia. India, for example, has an international reputation as the country producing the most generic drugs, even though some of the companies in that country are considered to be unreliable. Korea has a good reputation, and China is on the way up. It is not so much the geographical distance that proves to be an impediment: Services such as documentation etc., are often lacking. Such shortcomings will not be offset by dumping prices because what the customer wants is a full service package.
What ultimately counts is the overall package – from this standpoint the contract manufacturer should be an “allrounder”. Advice and support are in demand at all product stages, starting with development and production all the way to packaging and not ceasing with logistics. According to Dr. Tittel: “A customer nowadays expects market consultancy, product consultancy, product development. A ‘general store’ offering only production is assumed to lack competence.” In the past his company also considered whether it would be better to focus on just a few aspects. Today, LAT Analytik offers scientific and pharma-strategic consultancy as well as support in approval procedures; Dronania operates as contract manufacturer. Specialities are phytopharmaceuticals as well as dietary supplements. Martin Holl, Head of Product Upgrading at Rettenmaier, sees great potential in the area of life-science products: “People in the industrialised countries have a high life expectancy; and would like to live an enjoyable life right into old age. This applies above all to countries in which the consumer is financially secure. Ultimately, we also profit from the situation.” In his opinion the life-sciences segment will become considerably more important in the years and decades to come.

Full Service Provider with the Aid ofCooperation Partners

What if the service provider cannot cover all areas of an outsourcing contract, if in the case of certain products it lacks the appropriate expertise or the necessary plant? Then it should not hesitate to assign parts of a contract to partner companies. This is where networking makes sense because on the one hand contract production constrains companies to specialise, while on the other hand there is a wish to offer a full service package. Yet the customer should also be informed about partial outsourcing because this strengthens the basis of trust and hence also the partnership. Recommendation of a competent partner will also be of value to the customer.

A complete service package includes above all the tedious area of documentation because many pharmaceutical companies – and particularly start-up companies – are inadequately informed about the constantly new and changing regulations and are therefore dependent upon the support of the outside contractor. Yet even large manufacturing companies are increasingly outsourcing these administrative tasks, which are associated with horrendous costs.

Conclusion: What makes a good contract manufacturer? A high degree of specialisation in order to act in niche areas, and then – possibly in cooperation with partners – to be able to operate as full service provider.

„The customer wants the complete product including all services”
Hans-Dieter de Jager, Head of Business Development Packaging, Schwarz Pharma
“The pharmaceutical industry is under attack from several directions”
Martin Holl, Head of Product Upgrading, Rettenmaier
“Partly utilised special plant such as leaf drug grinding mills are generally no longer operated by an individual pharmaceutical company”
Axel Ebbecke, Managing Director, Ebbecke Verfahrenstechnik
“Increasing GMP demands and the constant presence of the QP significantly raise cost pressure”
Dr. Gerolf Tittel, Managing Director, LAT and Dronania
“Production is admittedly cheap in Asia, but the service leaves much to be desired”
Peter Milde, Head of Sales, Klocke Pharmaservice und Verpackungsservice

Heftausgabe: Compendium Customer Manufacturing 2006

About the author

Birgit Lind , Editor