IT Glue Holds Virtual Enterprise TogetherEFFECTIVE OUTSOURCING

By Kathy Pelley and John Postle

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IT Glue Holds Virtual Enterprise Together

Information technology eases dealings with contract organizations

Pharmaceutical and biotechnology companies have undergone tremendous change during the past dozen years. Until recently, with few exceptions, most operated in vertically integrated silos, with each company managing its own research and development, manufacturing, sales, and marketing under one roof.

Today, all that has changed. Biotech and pharma have accepted the compelling economic logic of outsourcing. Nearly every modern-day biopharm company has developed a network of contract research organizations (CROs), contract manufacturing organizations (CMOs), and other service providers to help manage clinical trials, submit regulatory filings to the Food and Drug Administration (FDA), and scale up for commercial production.

Managing a disaggregated enterprise is difficult under any circumstances; it is even more so when human safety, drug efficacy, and hundreds of millions in development costs are at stake. Fortunately, many biopharms realize that savvy managers, well-planned service level agreements (SLAs), and effective use of information technology (IT) can provide the glue that holds the virtual enterprise together-even when IT itself may be outsourced. Shortcomings in any one of these areas can cause the outsourced supply chain to fail.

The CMO Relationship

Consider a sponsoring biopharm's relationship with a CMO. The sponsor must evaluate and select the CMO that best suits its business model and goals, negotiate SLAs that anticipate and avoid problems before they occur, and employ IT to monitor and manage the relationship while ensuring regulatory compliance.

As supply chains get longer and go offshore, sponsors will have to continuously improve upon IT practices to manage the virtual enterprise. Outsourcing sponsors cannot depend on CMOs to establish IT good practices. In the end, the sponsor is responsible for every act of noncompliance that occurs in its supply chain. It is the sponsor's drug and patient-and the FDA will hold the sponsor accountable.

CMOs come in every flavor, from global manufacturers who manage extended supply chains of their own to boutiques making small batches to support clinical trials. Small and mid-sized biopharms with little outsourcing experience and no products on the market may do better outsourcing to an onshore boutique accustomed to supplying CROs with clinical batches. Large sponsors may want to leverage their global footprint and save money by offshoring to a group of related CMOs (see "Offshoring Risks and Rewards," p. 38).

Regardless of the supplier strategy chosen, it is important to winnow prospective CMOs to a manageable list based on their proposals, management experience, references, longevity, and industry track record.

Let's say that three CMOs have made the initial cut and the sponsor's immediate concern is to support clinical trials that have been outsourced to a CRO. One CMO is a boutique that specializes in making and managing batches for clinical trials. The other two are larger and offer clinical support through offshore commercial scale-up, as well as packaging, labeling, radio frequency identification tagging, commercial distribution, post-marketing surveil-lance, adverse event reporting, and other services.

Due diligence is critical. Ultimately, the FDA holds the sponsor responsible for the regulatory compliance of its suppliers. The sponsor must first visit the CMO and conduct a pre-audit walk-through of its manufacturing systems and processes-including IT-because those systems will be used by the sponsor to monitor and manage the CMO while providing an electronic audit trail for the FDA.

At this stage, the sponsor wants to know if the CMO can protect its intellectual property, manufacture sufficient product to support the clinical research organization, comply with the FDA's current Good Manufacturing Practices (cGMPs) and 21 Code of Federal Regulations (CFR) Part 11 regulations, and provide actionable data and reports in an electronic format that can be used to manage the business relationship. For example, the CMO's IT systems must be able to collect and report data on material handling processes, lab analyses of active pharmaceutical ingredients (APIs) and excipients, and the manufacturing controls (including sterilization procedures) that result in the finished product.

The IT Pre-Selection Audit Process

It is far too costly and time-consuming to conduct a complete field audit of each of the CMO finalists. But in most cases, an experienced quality assurance (QA) or quality control (QC) professional can audit enough critical IT systems to identify any weak technology and business processes that must be rectified if a CMO is to be hired. It takes more time to perform a pre-selection audit of a highly automated CMO. Depending on the size of the project being outsourced, a pre-selection audit should, as a rule of thumb, take from two to four days.

Conducting a pre-selection audit is a lot like "managing by walking around." An experienced QA or QC professional can spot a lot of problems just by wandering around the manufacturing floor and noting practices. Is the CMO using a 30-year-old Digital Equipment Corporation PDP 11 computer with no network connection to gather data on its manufacturing systems? Does the company even have a manufacturing execution system? How is manufacturing data shared with the enterprise resource planning system? What kind of IT infrastructure is available on the factory floor? Does everybody have password access to the Pentium server near the loading dock and the forklifts? Are there backup systems in case the server is flattened in an accident?

Some manufacturing environments are so chaotic that a sponsor won't need to interview the plant manager, review documentation, or query an IT system to know that a great deal of remediation and process improvement are going to be necessary.

Of course, the auditor will want to visit the CMO's IT department to interview key personnel and evaluate their expertise in managing IT systems in an FDA-regulated environment. What kinds of electronic reports does the department provide to other sponsors? Has it adopted industry standard data formats? Has it ever failed an FDA inspection? Does the department manage operational systems using QC methodologies like IT infrastructure library (ITIL) or Six Sigma? Or deploy validated and qualified systems using Project Management Institute (PMI) techniques? Is IT staff certified in any of these disciplines? Does the company support continuing education for IT staff? No CMO is going to be perfect, but sponsors should expect a good explanation for the answer to every one of these questions.

Most startups need basic infrastructure and applications until they reach the investigational new drug (IND) phase. Once they get IND approval and begin life as a viable pharma or biotech, data is their product, their most important intellectual property. Clinical trials require the introduction of outside partners such as CROs and CMOs; critical data is then generated and shared in multiple places. Control and protection of the data's integrity is key.

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Once the sponsor has addressed some of the IT-related business processes and IT systems of a prospective CMO, it's time to take a closer look at the company's ability to comply with FDA regulations.

First, of course, the sponsor must evaluate the CMO's approach to computer systems compliance. Does the company understand risk-based analysis and how it determines which systems receive more attention? Does the CMO understand the FDA's predicate rules governing software validation and hardware qualification? Has the company developed standard operating procedures for monitoring servers or other projects involving regulated systems? The sponsor should look at project documentation. It's easy to tell if the CMO really follows standard operating procedures or if everyone simply invents their own solutions on the fly. In the latter case, the CMO must rectify the problem to ensure reliable outcomes.

Offshoring Risks and Rewards

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According to recent Congressional testimony, China is home to between 5,000 and 10,000 drug manufacturing firms, many of them contract manufacturing organizations (CMOs) serving U.S. drug companies. By its own admission, the Food and Drug Administration (FDA) currently lacks the resources, market access, and reciprocal agreements with China's regulatory agencies to inspect these factories. Low wages and favorable exchange rates also make China-and to a lesser degree, India-ideal for drug manufacture.

Some outsourcing consultants say that China enjoys a 60% cost advantage in drug manufacturing. But that figure does not take into account the hidden costs and risk of offshoring. Large companies sponsoring big production runs may achieve significant cost savings and may have the management talent to mitigate risks. But small and mid-sized firms would do well to consider the added costs that come with offshore production.

In the United States, commercial contracts and intellectual property are well protected by the courts. Developing nations may have strong laws on the books, but enforcement can be spotty. In China, strong commercial contracts are based on personal relationships. These require country managers on the ground and frequent visits by senior management. Small and mid-sized biopharms that outsource directly to China-based CMOs should consider the considerable cost of travel and the executive time it will take to establish and maintain profitable relationships. Travel time between New York and Shanghai is at least 24 hours each way when you consider both time in the air and time to recuperate. Several trips a year are required. Additionally, language and cultural gaps may make hiring Chinese nationals advisable.

Because regulatory compliance in China lags behind that found in the United States, companies will increasingly be forced to establish their own monitoring and testing programs. In many cases, sponsors will be required to employ an inspector during each production run by their offshore CMO partner.

Small and mid-sized biopharms determined to explore offshore production should investigate United States-based

It is absolutely critical that the sponsor understand that some CMOs are more efficient than others. One may use 15 kilos of an API to manufacture 8 kilos of a drug, while another will need only 10 kilos to accomplish the same result. The sponsor should insist that the CMO provide detailed data of its past and present production efficiency.

Remember, if the FDA audits the CMO's electronic records or its validation and qualification documentation and procedures, and the company fails, all associated product could be considered adulterated, forcing the sponsor to begin clinical trials anew. At the very least, the pre-selection audit process must make sure that the CMO maintains electronic records of the manufacturing controls and batch handling systems and methods that establish a safe drug-producing environment.

After Your Selection

After a sponsor has evaluated its CMO finalists and selected the best one, it's time to address any shortcomings, establish mandatory SLAs, provide for ongoing monitoring and improvement, and negotiate a contract. While this may seem like the least of a sponsor's IT management worries, it is in fact the most critical work any sponsor will accomplish during an outsourcing engagement. Ironclad SLAs are the only way to ensure that a sponsor will get the services it requires (see, "How to Manage CMO Shortcomings," p. 40).

During these negotiations, the sponsor must identify a CMO's specific shortcomings and insist on a remediation plan that the sponsor can monitor on an ongoing basis. For example, the sponsor may have long ago adopted ITIL and/or Six Sigma best practices, only to find that the CMO is deficient in these processes. The sponsor may insist that the CMO adopt the same industry good practices.

The contract should provide for periodic, unannounced audits by the sponsor for the life of the agreement. In addition, the sponsor should insist on timing ongoing audits prior to specific milestones such as regulatory submissions or product launches. The SLA should state that the CMO must maintain adequate supplies to ensure that clinical trial or other batch quantities are sufficient to meet demand. In addition, the SLA should establish detailed descriptions of the type and frequency of electronic data to be provided to the sponsor. Failure to establish this up front in the SLA often results in sponsors paying extra for electronic reports that should have been part of the basic agreement.

CMOs make their profits by scheduling production runs tightly. Whether manufacturing a batch of 10 kilograms or 10,000 kilograms, the CMO must clean and sterilize its manufacturing line before setting up a production run for another client. This process is expensive and time-consuming. A sponsor that finds itself without enough product to satisfy clinical needs or commercial demand may have to wait weeks and pay severe penalties to schedule another run. It is absolutely critical to understand that some CMOs are more efficient than others. One may use 15 kilos of an API to manufacture 8 kilos of a drug, while another will need only 10 kilos to accomplish the same result. The sponsor should insist that the CMO provide detailed data of its past and present production efficiency. API production and efficiency SLAs must be guaranteed by the CMO.

IT Best Practices Required

Outsourcing came late to biopharmaceuticals because drug makers were not certain they could guarantee regulatory compliance of operations they did not directly control. Managing extended supply chains in compliance with FDA's regulatory regime remains a challenge. But the economic benefits of outsourcing are undeniable.

How to Manage CMO Shortcomings

Outsourcing is attractive because it reduces costs and slashes personnel. Moreover, since most owner-operated batch manufacturing plants sit idle for 50% of the time, according to industry studies, outsourcing greatly improves returns on invested capital. The outsourcer pays only for the production time and equipment it uses, while the other customers share the full cost of the plant, personnel, and equipment.

Unfortunately, outsourcing production to a contract manufacturing organization (CMO) does not immunize the sponsor against Food and Drug Administration (FDA) regulations and enforcement. Managing a virtual enterprise is difficult at best, and it requires exceptional control using information technology (IT) best practices, because problems with FDA inspectors may surface when a CMO fails to document required processes such as software validation, hardware and network qualification, and maintenance of electronic records and audit trails per 21 CFR Part 11.

Outsourcing sponsors can protect themselves from substandard IT practices by insisting that their CMOs agree to service level agreements (SLAs) that require minimum levels of performance. FDA will not transfer responsibility for compliance to the CMO, but the sponsor can enforce the agreement with penalties if the CMO fails to deliver.

Keys to encouraging high performance with SLAs include the following:

• Insist that your CMO is aware of and has implemented good practices such as IT infrastructure library and Six Sigma;

• Enforce continuous improvement via periodic audits by your quality assurance/quality control staff;

• Establish standard operating procedures (SOPs) for validation and qualification for all CMO IT projects;

• Train CMO IT staff in risk-based analysis that meets your own standards and definitions;

• Create a remediation timeline for all substandard systems and practices;

• Establish documentation SOPs so that the CMO's IT staff is interchangeable;

• Agree on financial penalties to be shared by the CMO for failed audits by the FDA, other regulatory bodies, or independent audit bodies; and

• Develop a set of comprehensive change management procedures for the CMO.

As supply chains get longer and go offshore, sponsors will have to continuously improve upon IT practices to manage the virtual enterprise. Outsourcing sponsors cannot depend on CMOs to establish IT good practices. In the end, the sponsor is responsible for every act of noncompliance that occurs in its supply chain. It is the sponsor's drug and patient-and the FDA will hold the sponsor accountable. The recent tragedies surrounding heparin made with adulterated ingredients from China ensure the growth of FDA oversight of outsourcing. The only way to meet FDA's strict expectations of outsourced relationships is for biopharmaceutical sponsors to establish good practices of their own. �

Pelley is director of quality and Postle is vice president of life science enterprise practice at the Court Square Group. Reach them at pelley@courtsquaregroup.com and postle@courtsquaregroup.com or at (413) 746-0054.