When Outsourcing Goes Astray

Outsourcing is well entrenched in pharma’s business models and is a relationship that dates back to the very beginning of the pharma industry. Though some raw materials can be manufactured in house, the vast majority has always been purchased from third parties. And in the last 30 years there has been a surge in the use of outsourcing for all sorts of activities other than ingredients supply. Today, anything and everything can be outsourced including research, development, clinical trials, manufacturing, supply chain, regulatory affairs, business development and more. In fact, I have worked as a consultant at companies where there are barely any permanent staff members. Even the oversight of the contract manufacturing organization (CMO) was outsourced to a third party (me!).

Outsourcing is so common that regulatory bodies have written it into their regulations and guidances (1), and there are conferences and entire magazines dedicated to the topic. I too have spoken and written about outsourcing on numerous occasions. In general, most people focus on the themes of best practice and ensuring success (2-4), and almost all articles assume that if you plan well then everything will go well. But when does life ever go according to plan? As Robert Burns wrote in ‘To the Mouse’ – “The best laid schemes o’mice an’ men, gang aft a-gley”, which, when translated and simplified, means that even the best plans often go awry. In other words, you should always assume that something will go wrong – and have a Plan B.

What can go wrong? There are basically two types of outsourcing failures. The first type of failure is choosing the wrong contractor – perhaps incorrect assumptions were made, or the data collected were incomplete or wrong (see ‘The CMO Checklist’). The second type of failure occurs after the work begins. Usually it is because something changes, such as a loss of expertise from the contractor company due to staff attrition. In other cases, regulatory incidents may occur that change a “good” CMO into a less than stellar one. When something goes wrong in your outsourcing provider, it is usually out of your control – so much so that you may not learn about them until it’s too late. The key is to be constantly aware of the situation and to look for telltale signs. With any luck, due diligence activities will flag up warnings and either eliminate the organization from consideration, or at least allow you to put in place a mechanism to prevent those warning signs from becoming a problem. Sometimes everything goes smoothly and it is only later that problems manifest themselves. But with lessons learned, you will be able modify your due diligence system to prevent its recurrence next time.

Learning from mistakes

I’ve worked in or with a number of organizations and mistakes do happen. For example, I was part of a company that had a very rich pipeline and we wanted to develop more products than we had staff or facilities for, so we decided to outsource the development of one of the products. We performed due diligence with a new player in the space and they impressed in all meetings and presentations. Upper management had clearly done development before and the facilities were new with new staff. The contract was signed and we were off! Within a few months, however, it became clear that the development team at the bench were totally inexperienced. And we were locked into a contract where we were paying them to develop our product – but teaching them how to do it, at our expense. We were lucky that the contract was well written and so after the minimal period we exited. Clearly, the due diligence in the site visit left much to be desired.

In another example, a newly approved product looked like it would take off, but we had limited capacity and needed extra – and fast. We identified a potential CMO and approached them. The “expensive suits” in upper management met with their equivalents at the potential CMO. (Note that no real hands-on technical people were involved – a mistake). The suits returned with a declaration that technology transfer, process validation, manufacturing of qualification batches, amendments to the filing, and an inspection could all be completed, in time for us to get the product onto the market with the second source within 18 months.

Our technical people already knew that the CMO did not run processes the same way that we did and that technology transfer is not that easy (we had already done it from clinical to the commercial facility). The internal estimate was closer to 36 months. Management’s response was that we needed to be “Can do” people. We met them half way and became “Can try” people. Eventually, everything was completed in 35 months. In this case, not selecting the right people for the CMO visit and accepting an unrealistic timeline really thwarted our chances of bringing on a second source in the time we needed. As the saying goes, “if it sounds too good to be true, it probably is”. But first you have to have the right knowledge to recognize a pipedream.

Beware of change

In my next example, both due diligence and contracts worked well. Many people believe that if due diligence is done well and that contracts and quality agreements are well executed, then nothing can go wrong. But I work with clients who can testify first hand that this is not true.

Sometimes something changes. Perhaps a company is bought out and the staff realize that they have a new owner whose strategy is not aligned. Or the parent company could fall on hard financial times followed by belt tightening. Sometimes, the parent company changes its business model and the CMO is suddenly not the main thrust of the company. What happens then? Firstly, funding decreases, so the company refocuses how they operate. Staff are laid off. And, it is often the “wrong” people that are let go. In many cases “institutional knowledge” disappears overnight and the quality systems and compliance suffer – and the downward spiral ensues. This does not necessarily manifest immediately. It may take several inspections or incidents to surface. But once they are in the regulatory bad books, it takes a lot of effort to extricate themselves.

Earlier in my career, we had outsourced a component of one of our kits and were dependent on a well-known supplier. As a quality professional, I tracked the performance of the CMO routinely. Everything was going well until I called my counterpart at the plant only to find that the phone had been disconnected. I tried the plant manager and found the same thing. I was immediately concerned. Such reorganization is often symptomatic of a major issue in the company. And I was right – the CMO had been subjected to a long inspection by the FDA and it had not gone well. Although our Quality Agreement called for notification in the case of an inspection, we were not notified. The inspection resulted in a severe warning letter that took a few years to lift. And we were thankful that we had a second supplier.

Damage control

How can we prevent such problems from happening – or at least control the damage? In most cases, the deviation of a contractor is not, contrary to belief, something that happens overnight. It takes time to get into regulators’ bad books. It can seem to happen abruptly but that usually because subtle warning signs have been missed.

The key to success in outsourcing is to be attentive to the status of your contractor. Your CMO may be a standalone company or a division of a bigger one. You need to keep tabs on the owner and look for signs of change throughout the company, such as not meeting financial quarterly targets, failure to get approval of a new drug, excessive recalls (even from other divisions) and bad inspections at other sites. In other words, look for the stability and health of the parent and all the siblings. You should also look for changes in business direction that may signal a change in focus or divestiture of assets.

At the more local level, your ongoing communication with the CMO can tell you a lot. A change in attention to detail or an unusually slow response to a question is a red flag. And changes in heads of quality or manufacturing may signal some issues at the plant – these people are usually the first to go when a significant issue occurs.

Of course, the obvious place to look for signs of potential problems in your contractor is the results of the routine annual GMP audit. Most people know to look at the audit – and it can certainly bring previously unnoticed issues to light, such as a rash of repeat deviations, or a higher than normal lot rejection rate. However, many problems are easily recognized and can be picked up much sooner than waiting for the annual audit by tracking company performance using key performance indicators.

Plan B

When outsourcing does go awry, you’ll be pleased that you’ve already carefully considered Plan B, such as a second source to fall back on. If you don’t have a second source then it’s worth qualifying one fast, just in case. One of my main tasks with clients is to line up a second source. To this end, networking and sharing experience is very important, while of course respecting confidentiality. When one of my clients has a problem with a CMO, I routinely ask colleagues in my LinkedIn network for their recommendations for replacement CMOs. And I also ask who we should stay away from. In most cases, my client is not the only person working with that particular CMO and I do sometimes find our CMO on a “not recommended” list. Mostly, I choose safely by going for the regular players on the “recommended” list, but sometimes a new player emerges. But you should remember that these lists can be rapidly changeable and what is recommended today may not be recommended tomorrow.

If you do run into trouble, you should try to work with your CMO to resolve the issue, but you also need to be realistic. How much can you pressure a CMO to change their ways? If you command 50 percent or more of their work or revenue, then you might be able to influence the outcome. But if you are a small player with 10 percent then your chances are small. Remember that the contractor is caught between a rock and a hard place since they will have many clients. But all is not lost. If you know some of the other clients, you might be able to work together to leverage your combined influence. And ultimately this should benefit the CMO too by keeping them out of regulators’ bad books. But don’t forget to plan for  a plan B.

Peter Calcott is President of Calcott Consulting LLC, CA, USA.