The decision to design and build a new facility or expand an existing one almost always comes down to the business drivers of additional revenue and market share. For the biopharmaceutical industry, aligning capital expenditure (CAPEX) decisions with business strategy can help rationalize whether to make products in-house or to outsource their manufacture to a contract manufacturing organization (CMO).
Manufacturers face one of the most unpredictable planning environments in any industry due to the uncertainty around the success of potential drug candidates during clinical trials, definition of market size and share for candidate drugs, performance of the manufacturing process (e.g., in terms of yields and ranges for improvements to existing processes), and obtaining licensing approvals. Waiting for full confidence in the success and development of candidate drugs before installing capacity could prolong time to market and therefore lead to losses in revenue.
The expenditure budget, cost of drug development, and speed to market required constrain the amount of capital that can be allocated to manufacturing within a specific time period [10]. This, together with the high investment for biopharmaceutical facilities, makes the strategic planning process for these high-value products a formidable task. Each company must ascertain how much capacity it needs and in what time frame to better define its strategy for securing the infrastructure needed, be it outlaying their own capital for new buildings, retrofitting existing ones, or outsourcing production to contract manufacturing organizations (CMOs).
A multitude of unforeseen circumstances can skew capacity forecasts. Some of these could include reports of a serious adverse event, slow enrolment in clinical trials, sale of a parent company that is developing the drug, an unusually successful marketing strategy, provider motives and incentives, final cost to the patient, willingness for a payer or pharmacy benefit manager to reimburse the cost of a drug, a change in raw material availability, availability of new therapeutic alternatives, or new regulatory legislation.
In a Nature Reviews Drug Discovery study from 2013, investigators concluded that more than 60% of companies miss their demand forecasts by at least 40% [12]. A significant number of companies were also overly optimistic by more than 160% of the actual peak revenues that a product could generate. Even up to six years post-launch, forecasts were still found to be off the mark by as much as 45%. The researchers found that demand for oncology drugs was most commonly underestimated, most likely because of the additional indications for which these drugs earned approval by the FDA after initial launch. This demand underestimation is an important finding considering the large number of biologic, immune-oncology therapeutics (with various proposed indications) that are currently in the pipeline. The authors found that analyst forecasts for generic therapies were also markedly off-target.
Including post-approval R&D costs, as well as costs associated with unsuccessful projects, the estimate for the average out-of-pocket cost to develop a new compound was found to be $2,870 million (in 2013 U.S. dollars), according to an analysis by DiMasi et al. that appeared in the May 2016 issue of the Journal of Health Economics. Even though there have been slight methodological differences in DiMasi et al.’s studies since 2003 (when the authors began looking at the cost of bringing a drug to market), his cost of development has still increased substantially since 2003. Additionally, per the authors of the study, “clinical success rates are substantially lower for the studies focused on more recent periods”. Thus, because failure rates have increased and the cost of developing a drug has also increased so markedly, it is increasingly difficult to accurately predict the demand for a drug.
Indeed, many industry experts agree that predicting capacity will become even more problematic for pharmaceutical manufacturers in the future because of market access issues. In Europe, because physicians seem to be more accepting of biosimilars, market penetration forecasts may be a bit clearer. But in the United States, physician acceptance and prescribing practices (as well as the interchangeability status of a biosimilar) may make launch and capacity predictions increasingly challenging.
When considering the capacity expansion of an existing facility or the construction of a new facility, a manufacturer typically doesn’t consider a single product in isolation: the firm is usually developing a portfolio of products, and may have a portfolio of capacity investment projects [6]. Firms generally commit to building or acquiring production capacity early enough in the trial process to ensure that this capacity will be ready at the time that the drug receives final approval. Of course, there is no guarantee that a new drug will pass all of the required phases of clinical trials, and in fact most drugs fail to show effectiveness at Phase II and Phase III of clinical studies. Indeed, the overall probability of a drug achieving clinical and regulatory approval is only 8%.
Thus, by committing to building or investing in a facility without carefully assessing the appropriate level of evidence that a drug will pass the required clinical trials, and by not updating this decision as information becomes available, the firm may be taking on excessive investment risk. Firms have a limited window of exclusive sales rights for any drug before generic drug makers enter the market and drive down prices, and this is typically the firm’s primary opportunity to recover enormous initial investment costs. The sooner production can start, the sooner revenue streams can be acquired and losses recovered. There is therefore a paradox, whereby investment decisions for facility planning need to be taken early enough to coincide with production readiness with success in the clinic. However, there is the very real risk that a candidate drug will not pass the required clinical trials, in which case the manufacturing firm could be taking excessive risk.
There are certain mitigation strategies that can be considered, however. In the case of MAbs, firms may develop production processes based on a platform approach. In this way, if one candidate drug fails in the clinic, another candidate within the portfolio, if successful, could still be implemented in the new facility without wholescale modification to the design and setup. Investment risk is therefore spread over many similar products. Several recent streams of research focus on strategies such as capacity procurement contracts, capacity pooling, and capacity outsourcing to mitigate capacity demand risk. For established biopharmaceutical manufacturers with an already existing global network of manufacturing sites, consolidation of capacity may ease the burden on investment. For instance, optimization of the campaign strategies within different sites could free enough capacity to meet the manufacturing demands of the new candidates.
Although biopharmaceutical firms do often outsource some of their production, the cost and time involved with preparing contract manufacturing facilities for new products is significant. The use of CMOs can be helpful when there are fluctuating capacity and demand conditions. This is notable in the mid to late phases of the clinic where the risk of drug failure is still high enough to be a barrier to significant investment to in-house production needs. Utilization of existing CMO capacity removes the requirement for investment needed to establish in-house manufacturing capability. Furthermore, an operating staff and the scientific knowledge base already exist at the CMO.
The disadvantages of outsourcing mostly stem from the intimate knowledge a CMO will gain around the product and process for manufacture. Moreover, there is always a substantial risk that technology transfer from the parent company to the CMO will not be successful immediately. Conversely, if a CMO has its own proprietary manufacturing platform, a biopharma company cannot easily transfer the process back in-house or to another CMO. If the contract manufacturing agreement does not give the sponsor a license to this technology solely for the continued production of this specific biologic drug, the manufacturing process will have to be partially redesigned, which is not feasible from a time and cost perspective. In addition, many biopharmaceutical firms are concerned about the intellectual property implications of outsourcing manufacturing, particularly because there is a good deal of ambiguity about the nature of intellectual property in biotechnology. It should be noted, however, that there any many longstanding relationships between CMO and parent drug development companies, some of which have their own in-house capacity. In some cases, therefore, the significant ends justify the means.
The risks and stakes for being wrong are high whichever path (insourcing or outsourcing) is undertaken. The impact of overbuilding is most easily quantified because it involves specific costs. These include large capital investments that result in little return, supporting idle facilities with continued overhead, selling or leasing excess capacity not directly part of the manufacturing business, and likely the eventual sale of facilities at a loss. The risks due to underbuilding can be just as great, but they are often harder to quantify because they involve not only lost revenues, but also impacts on intangibles, such as from lost sales; from share gains by the competition affecting long-term sales; from reduced patient survival rates through inability to meet; from delays in expansion of product lines, which can lead to reduced market share; from delays in bringing product to market if clinical capacity is constrained; from lower profitability when outside manufacturing sources must be used to meet demand; and from long-term impact on company reputation and brand equity.
Before committing on a path forward a company may wish to evaluate the necessary requirements for a capacity expansion either for an existing infrastructure or new build. This could take place during a conceptual design study, whereby a preliminary cost estimation and project execution schedule could be generated. This will allow the company to make a more informed decision when comparing alternative strategies (e.g., outsourcing with a CMO). To undertake any facility design, however, a basic input would be the exact capacity output required from the facility at launch and potential future expansion as market penetration increases. This will determine the overarching requirements of production and thus allow estimation of infrastructure sizing.
Project definition for a new facility is intricately dependent on capacity and operational models. Required output demand of the facility over its lifetime is the key input to the facility design process. To meet the demand required, the facility will need to support a manufacturing process capable of achieving these targets. At this point in the overall project, the manufacturing process may not be wholly established. Technical data will be supplied from the process development or technical transfer groups, who would have established the process design and scale up.
