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Feature Articles : Dec 1, 2009 ( )
Finding the Right Outsourcing Balance
Guidelines on Deciding which Chemistry Development Programs to Off-Shore!--h2>
Presenters and attendees at the “ChemOutsourcing” conference held recently in Long Branch, NJ, vigorously debated what should be outsourced and what should remain in-house. This quandary is faced by most companies when they consider outsourcing chemistry development programs. Firms also need to sort out what should remain close to home and what can be off-shored.
“We outsource everything,” said Ving Lee, Ph.D., co-founder and senior vp of R&D for Limerick Biopharma, a virtual company. Most of the work occurs in North America and Europe, he added. “We don’t off-shore much to Asia because of the communications issue and the time-zone difference. We have to ensure that the movement between the biological and chemical side of a project is seamless, so we take advantage of time zones throughout the world.”
For companies like Limerick, outsourcing is a way to focus on core competencies, hiring outside expertise for everything else. As-needed expertise is the foundation of virtual companies, keeping quality high and helping them focus on core competencies, despite tight budgets. Yet, outsourcing is not a panacea.
Scott Zook, senior director, CMC API development at Neurocrine Biosciences, advised companies to understand what they are outsourcing and why, as well as the ramifications of the outsourcing decision. “Outsourcing adds a different facet to the deliverable because you are relying on your outsourcing partner to deliver materials on your behalf.”
Because the chemical industry is a mature environment, the challenge, Zook suggested, is to identify companies that specialize in your area of interest. “API manufacturers can, theoretically, make any chemical,” he observed, so the differentiators become timing, costs, their regulatory authority track record, and whether there are unresolved statements of deficiencies. Beyond that, the decision rests upon the contractor’s ability to fit the needs and corporate culture of the outsourcing firm.
Regarding what to outsource, companies often keep discovery activities in-house to ensure both speed and confidentiality. Development, however, is a logical candidate for outsourcing and off-shoring because the need for speed is less critical, according to Bhaskar Venepalli, Ph.D., president of CiVentiChem.
Start-up Anacor Pharmaceuticals off-shores its early development work to China and India, according to Umar Hayat, Ph.D., senior manager of chemistry, manufacturing, and controls. The reason, he said, is costs. “Very often, management watches expenses, and time and quality are hidden issues that are difficult to see.”
“We have to get over the concept that off-shoring is a panacea,” Dr. Lee stressed. “Many companies look at costs, but FTE costs alone are of limited relevance,” emphasized Peter Meltzer, M.D., president and CEO at Organix. The personnel costs for off-shore work may be substantially less than in North America or Europe, but they reflect only one factor in the true cost of off-shoring. For example, the (FTE) costs in China may be half of those in the U.S., but the level of expertise assigned to the project may vary considerably.
Typically, in the U.S., a development team consists of several Ph.D.-level scientists and a highly experienced Ph.D.-level team leader. All team members contribute intellectually as well as at the lab bench. But in Asia and parts of Latin America, team members may be reluctant to question the team leader.
Likewise, Dr. Hayat added, scientists are unlikely to participate in discussions when their senior executives are present. “Consequently, resolving scientific problems and developing value-added intellectual property is less effective. A Ph.D.-level team is generally two to three times more productive than a less qualified team,” Dr. Meltzer added.
China and India have not yet attained the level of routine quality expected by U.S. firms, but they are working quickly to improve quality and to deliver product that meets FDA standards, Dr. Hayat said. “The trend toward off-shoring is stabilizing,” as companies consider issues other than costs. That said, those issues are nearly 50 percent resolved,” so off-shoring may be poised for a rebound.
The cost of long-distance management is another issue that generally is underestimated, at least initially, Dr. Meltzer said. “Remote management incurs extensive travel costs and the associated costs of lost time. Management of less-qualified teams may also require day-to-day oversight, problem solving, and attention to minor problems that generally do not occur with a highly qualified CRO team.”
Additional components of the true costs of off-shoring include flexibility, import/export regulations, responsiveness, and intellectual-property (IP) concerns. “Personally, I think we will see a shift back to the U.S.,” Dr. Lee said, as companies identify the total costs of off-shoring. That prediction mirrors a shift that is already occurring in other industries. Increasingly, U.S. and European manufacturers are beginning to work closer to home in a trend known as near-shoring.
There are several reasons for the shift, but American companies must add one more. As Dr. Lee reasoned, the U.S. dollar will be low for a long time. “Currency fluctuations are wiping out the savings of going to China and India. Their costs are ratcheting up, too,” he pointed out. He also speculated that with U.S. unemployment at a 26-year high, there will be increasing pressure by the U.S. government to keep more jobs in the U.S.
The retention and protection of IP is one of the most important considerations for companies outsourcing confidential projects. Controlling IP is critical when CRO scientists are participating in discovery projects or are developing new chemical processes, Dr. Meltzer said. “Therefore, there must be cultural as well as corporate acceptance of the sensitivity of IP, and a legal mechanism for assuring confidentiality of IP in the CROs.” Most importantly, the national legal system should have a history of supporting patent rights. Be aware that the understanding of IP varies in nations where the concept is relatively new.
IP considerations affect not only what materials or processes a company is willing or able to move into certain nations, but also the filing of any eventual patents. The latter tends to be overlooked, Dr. Lee observed, but “the relative protection afforded by various nations’ patent strategies must be considered.”
Additionally, employees change jobs, Dr. Lee said. “In the U.S., IP is protected under nondisclosure agreements, but that may be different abroad.” In cultures in which loyalty is given to individuals rather than to companies, maintaining confidentiality could be problematic.
Anacor addresses the issue by taking only the first several steps of a process abroad. “We don’t give all the information to Asia, because IP is our biggest concern,” Dr. Hayat explains.
“One has to be careful to consider the regulatory environment. Import/export processes plus regulatory hurdles may make off-shoring not economically viable. That’s something not everyone is aware of,” Dr. Lee pointed out. Neurocrine Biosciences resolves that by working with knowledgeable brokers willing to locate and audit potential sources to help maintain quality. Ensuring quality is becoming the most significant challenge throughout the industry, supplanting even speed and cost of development, Zook said.
Overseas development comes with trade-offs. Although personnel costs may be less in Asia, logistical issues such as shipping times and clearing customs may significantly slow development and alter the timing of downstream activities. As an example, one executive is awaiting a chemical shipment that already is one month late. Dr. Hayat mitigates the consequences of such delays by coordinating the second stage to begin only once the initial stage is well along or actually in hand.
Depending upon where the CRO is situated, importing needed reagents or materials may cause delays. As Dr. Venepalli said, in the U.S., reagents and starting materials can be obtained within a few days, but “outside the U.S., the reagent availability isn’t there.” The lack of particular materials, then, may require an express shipment, further escalating costs and possibly delaying projects.
Speed is not only a factor of transit time, but also of customs clearance. Often, Dr. Lee said, regulations governing the import of small amounts of chemicals pose hurdles. “One compound, made in India, could not be allowed in a certain country. It had to be brought into the U.S., made compliant with U.S. regulations, and then shipped out,” further delaying commercialization.
Time differences may also affect the off-shoring decision. For example, a company in San Francisco would have to phone at 5 pm to reach China at 8 am the next day. The same company phoning India would have to phone after 8 pm to reach an Indian company at 8:30 am the next day.
The computer industry has found that. while such differences allowed projects to proceed around the clock, questions resulted in a lost day waiting for the other team to return to the office. And, as many have pointed out, the best and brightest rarely choose to work nights. Additionally, travel time and language issues add other burdens.
To minimize such challenges, Dr. Venepalli, who has offices in the U.S. and India, recommends outsourcing to an organization in the home country that also has offices abroad to manage that work.
“Many virtual companies work with one or two outsourcing firms. For them, timing may be more of an issue than cost. In that case, it may be better to keep the project in their home country.”
There are times, however, when off-shoring makes sense. For example, when seeking to enter a new geographic market, to access expertise not readily available in the home country, and to access new sources of international financing, off-shoring can be vital.
Regardless of where the CRO is based, exceptional communication between the CRO and the client is one of the most important issues to ensure a project’s success, Dr. Meltzer said. He wasn’t talking about language, but about the reporting mechanisms that already are part of the CRO’s culture. “You want open lines of communications that allow the client company to have full knowledge of the ongoing status of the project, the emergence of any problems, potential solutions or alternate pathways, and the possible effects on timelines and deliveries.”
The ability for client scientists to talk or meet with CRO scientists is particularly important in integrated projects conducted simultaneously by the CRO and the client. “Communication is the sine qua non (essential ingredient) of a good relationship.”
Sidebar: Mesothelial Cell Research
CROs are generally not known for running their own research projects. But ZenBio, working under a phase II SBIR NIH grant, reports that company scientists are studying reciprocal signaling between human mesothelial cells and visceral adipocytes.
“Our objective is to develop a new system for discovery in metabolic disease, dyslipidemia, and complications related to obesity,” says Peter Pieraccini, president and CEO. “Traditionally, research in these areas has been focused on either adipocytes themselves or the neurological aspects of obesity, while mesothelial cells have been largely overlooked.”
Peritoneal mesothelial cells are the attachment points for metastasizing ovarian cancer cells, thus making them a potential target for cancer therapeutics. Peritoneal mesothelial cells from the omentum and the mesentery may also have effects on liver function, given their proximity to the hepatic portal vein. Visceral adipose tissue is the “bad fat” known to be associated with poor obesity outcomes.
Mesothelial cells are highly active. They secrete factors that can have local and systemic effects on several medical indications, from cancer to metabolic diseases. These cells appear to be a catalyst in the functioning of visceral adipocytes, as they produce an assortment of inflammatory cytokines and other soluble factors that influence adipogenesis and lipid metabolism.
“ZenBio is finding a new target for researchers in the metabolic disease arena,” continues Pieraccini. “Ultimately, what we discover will be used to make well-characterized human primary mesothelial cells available to researchers."
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