OO utsourcing, thepractice of hiring anoutside company toperform specificbusiness tasks, is

hardly unique to biotech. Fromfreelancers who go to the copy shoprather than buy a photocopier tosmall businesses of all sorts thatcontract out for payroll services tolarge pharmaceutical companies thathire contract research organizations(CROs) to run their clinical trials,outsourcing is a business model thatworks for all sorts of companies inall sorts of businesses.

But it’s taken a long time for thebiotechnology industry to embraceoutsourcing, despite years of talkabout the “virtual biotechcompany.” Early attempts atcreating a contract manufacturingindustry for biotech failed for anumber of reasons: regulatoryproblems, scientific problems, animmature industry, and a generalnaiveté about how long and difficultit would be to bring biotechproducts from discovery to market.

REGULATORY ROADBLOCKS

Back when biotech was young, inthe early 1980s, the development ofreliable tests for biological activitycould not keep up with thedevelopment of recombinantproteins. It took another decade ormore for analytical methods to catchup with therapeutic breakthroughs

and be able to adequatelycharacterize proteins and peptides.Under the “well-characterizedbiologics” paradigm now, significantprocess changes still requireretesting in the clinic, but manylesser changes do not.

But until analytical assays weresensitive and precise enough toreliably tell therapeutic proteinsfrom their similar but nonefficacious— or immunogenic — counterparts,the process by which a protein orpeptide was made was the only

available way to ensure its safety andefficacy: When we do exactly thesethings, we get this result in vitro, inanimal models, or in the clinic.Because no one had a reliable wayto demonstrate that the sameprotein made a different way wastherapeutically equivalent to theoriginal, all process changesrequired new proof of efficacy. TheFDA’s attitude was strictly that “theprocess is the product.” If youwanted to change your process afteryour product had been through aclinical trial, you had to conduct anew clinical trial, a prohibitivelyexpensive proposition.

Scientists at the US Food andDrug Administration’s Center forBiologics Evaluation and Research(CBER) couldn’t characterizetherapeutic proteins and peptidesany better than anyone else, butthey were charged with protectingthe public health and ensuring thatanything sold to people would be assafe and effective as the label said itwas. So the agency required drugsponsors to submit a ProductLicense Application (PLA)describing the product and itseffects as well as an EstablishmentLicense Application (ELA)describing the process used to makethe product — including whomanufactured it, how, and where —to receive approval to market abiologic. Furthermore, CBERdecreed that the manufacturer

C H A P T E R ONE

The history of outsourcing inbiotechnology parallels the history ofthe industry itself. Technology (such asthe bacteria study being done above)and regulations are the key.PALL CORPORATION (WWW.PALL.COM)

6 BioProcess International SEPTEMBER 2003 SUPPLEMENT

The Birth of Biotech OutsourcingA Rough Beginning Leaves Few Survivors

Christina Prier Steffy

would always hold the ELA and thatthe ELA and PLA would always beawarded to the same company.

One practical upshot of that wasto effectively forbid contractmanufacturing. The ELA covered allmaterials made for clinical trials andbeyond (with good manufacturingpractices, GMPs, covering productsin the later stages), so any companythat contracted out for itsmanufacturing after phase II trialslost the future right to manufactureits product in its own facility. Not ahappy thought, but it was areasonable regulation given thelimitations of the science at thattime.

In 1983, the FDA published anotice in the Federal Register titled“Licensing of a BiologicalMonoclonal Antibody ProductPrepared by HybridomaTechnology.” In it, the agencyannounced that “any biologicalmonoclonal antibody productprepared by hybridoma technologythat is intended for in vivo use orfor in vitro testing of a licensedbiological product is a biologicalproduct” (1). That meant thatanyone working with monoclonalantibodies (MAbs) at any stage ofproduction had to be licensed bythe FDA. So

after the initial development of ahybridoma cell line anymanufacturing process for thepreparation of a monoclonalantibody . . . must be performedat an establishment holding anapproved license to manufacturethe product. In those instanceswhere the licensed manufacturerof the final product intends toobtain partially processedmonoclonal antibody fromanother establishment, that secondestablishment and its partiallyprocessed monoclonal antibodyalso must be licensed. (1)

If you had developed a MAb andwanted a contractor to grow thecells so you could purify it yourself,the contractor would hold its ownlicense to make your product.

WALL STREET SPARKS IDEAS

In those early days, not muchmanufacturing was going onanyway. Biotech products were stillvery much in the discovery and earlydevelopment phases, and no oneknew exactly how manufacturingwould play out when productsfinally got to that stage. But thatdidn’t stop lots of people — withlots of money — from being excitedabout the prospect.

At the time, monoclonalantibodies was the big buzzword.The hype was that MAbs wouldrevolutionize medicine over thecoming five years: a cure for cancer,a cure for Parkinson’s, a cure forAlzheimer’s! You name it, MAbswere the answer. No one hadmanufactured them at a commercialor even clinical scale before, so noone knew the best way to do it. Buteveryone was sure that ultimatelylots of capacity would be necessary.

About that time, Wall Street hadits first big love affair with biotech.The first group of contractmanufacturing organizations(CMOs) — Damon Biotech,Invitron, Celltech, Varex,BioResponse — were started inthose flush times. “If you had a

PhD and could spell ‘biotech,’ youcould raise $30 million,” saysBrandon Price, vice president ofBiomanufacturing Services, CardinalHealth. As we’ve seen in every stockbubble since then — from telecomto the dotcoms — when investorsare willing to throw big bucks afterany business plan with the rightbuzzword, lots of people will writebusiness plans with that buzzword

SEPTEMBER 2003 BioProcess International 7SUPPLEMENT

CONTRACT RESEARCH JUST GROWS AND GROWS

The story of contract manufacturing is dramatic and interesting: Anindustry is created, then dies and is recreated. The story of contractresearch in biotech is much less dramatic. Before the birth ofbiotechnology, no one had ever made recombinant products, and noone knew how to produce them. Big pharma made most of its ownproducts, and even the work it contracted out didn’t really translate.But biotech wasn’t around for the birth of the contract researchindustry. Classical pharmaceutical makers used contract laboratoriesand clinical trials providers long before biotech was born. And thecontract research organizations (CROs) that provided those services forbig pharma were perfectly capable of working for biotech companies.

Biotechnology has certainly contributed to the growth of contractlaboratories. But steady growth, with only a normal amount ofconsolidation from time to time, doesn’t make for compelling drama.

The same is largely true for CROs that perform clinical trials. Bigpharma has been contracting out at least some of its clinical trialssince well before biotech companies had products in the clinic. Whenit was time to move biotech products into the clinic, those companiesthat chose not to do the trials themselves simply hired companies thatalready existed to do the work.

Monoclonalantibodies was thecatch phrase . . .Everyone was surethat lots ofCCAAPPAACCIITTYYwould be needed . . . But no oneknew what itwould CCOOSSTT tomake MAbs at alarge scale.

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and spend all the money they canget.

No one knew what it would costto make MAbs at a large scale. “Atthat time, people thought a grammight cost $100,000 and thatcompanies would need tens of

grams or even kilograms to meet themarket demand,” says Price.

The business plans for the firstbatch of CMOs went something likethis: MAbs are going to revolutionizemedicine! Here at XYZ Company, wehave a proprietary technology toproduce MAbs more efficiently and

safely than anyone else. We’ll developour technology, sell it to biotechcompanies, and get rich! (It’sinteresting to note that in thosedays, CMOs weren’t sellingcapabilities, knowledge, orexperience — the three thingscontractors sell today. Those earlyCMOs were selling technologies,which are much more limited evenwhen they work.)

While those technologies werebeing developed, people in the frontoffices started trying to figure outhow to sell them. It didn’t take longfor someone to come up with thebright idea of getting biotechcompanies to pay a small fee to useXYZ Company’s great technology tomake their MAbs for preclinicalmaterials and early-stage clinical trials.

The process defines the product,went the reasoning. Therefore, if weget them to use our technology forearly materials, even if we have todo the work ourselves to prove itwill be cost effective, they’ll have tobuy the technology from us whenthey build their own facilities to dophase III trials. “Many contractorsin those days provided processdevelopment and technologytransfer activities free of charge (orfor a minimal charge) to get whatthey thought was the ‘long-termbusiness’ and future majorcommercial contracts,” says SandraFox, president of HighTechBusiness Decisions.

It wasn’t bad reasoning,necessarily, but it was based onsome faulty ideas. The first in manycases was that XYZ Company’sproprietary technology would work.Everything else about biotech wasso exciting that manufacturingdevelopers wanted their science tobe exciting, too. Some of the ideaswere more “spiffy” than practical.One company, for example, decidedthe best way to manufacture MAbswas in the lymphathic fluid of cattle.So in its manufacturing facility, itactually had a bunch of cows that it“milked” using tubes in their lymphnodes. The company then tried togrow recombinant cells in the fluid.

8 BioProcess International SEPTEMBER 2003 SUPPLEMENT

BUT WHAT ABOUT THE REST OF THE WORLD?

Some of you are probably thinking, This is a nice story about the birthof contract manufacturing in the United States, but what about the restof the world? This is a global industry!

And you’re right, biotechnology is a global industry. But in the earlyand mid-1980s, this global industry was largely located in the UnitedStates. Academic research breakthroughs were happening in theUnited Kingdom and elsewhere, but the vast majority of thecommercialization of biotechnology was happening in the UnitedStates. “Unless your company had captive manufacturing, most NorthAmerican, UK, and European companies had to seek contractmanufacturing in North America,” says Iain Crowder, strategy managerat Avecia Biotechnology. “Hence I believe that the contracting sector isa truly international market.”

Of course, one of the major players in (and a rare survivor of) the earlydays of contract manufacturing — Celltech — was located in theUnited Kingdom. “From a manufacturing point of view, Celltech wasthe only story in Europe at that time,” says Roger Lias, vice president ofKBI BioPharma and formerly of Lonza Biologics’ CMO site inPortsmouth, NH.

Celltech was founded in 1980 and had the UK’s National EnterpriseBoard as its major shareholder. Originally, the company was activethroughout the field of biotechnology, but in 1987 it sold off someperipheral businesses and focused on the discovery, development, andmanufacture of novel therapeutics. It originally built manufacturingfacilities for its own products. Its first facilities used airlift bioreactorsinstead of the stirred bioreactors more commonly used today.

After Celltech had the facilities, management realized that itsmanufacturing expertise would be valuable to third parties, and theystarted to sell that. “I don’t think they started to sell excess capacity,”says Lias. “They saw it as a revenue-generating prospect.” Andgenerate revenue it did.

In 1990, as the rest of the biotech contract manufacturing industry wascollapsing, Celltech divided itself into two largely separateorganizations: Celltech Therapeutics, which continued the company’sown research and development work; and Celltech Biologics, whichcontinued as a contract manufacturer. Celltech Biologics manufacturedproducts for Celltech Therapeutics, but “we did a good job of keepingthe companies separate,” says Lias.

In 1996, after building the New Hampshire facility among otherdevelopments, Celltech Biologics was sold to Lonza. CelltechTherapeutics continues its work as a research and development company.

10 BioProcess International SEPTEMBER 2003 SUPPLEMENT

Even technologies (such asmicro-encapsulation and spin-filtration) that worked at small scaleswithout obvious problems, didn’tturn out to be scalable. Many earlyCMOs went bankrupt simplybecause of technology that wouldnot work or could not be scaled up.

A second problem was theassumption that early biotechcompanies wanted outside vendorsto show them how to make theirproducts. In those days, very fewbiotech companies were well-organized, publicly traded entitieswith clearly delineated departmentsand preapproved SOPs for everypiece of work. Instead, they wererun by scientists heady with the joyof discovering new things. Manywere quite sure that when the timecame to manufacture their productin bulk, they would be just ascapable of doing that as discoverywork. But few companies weredealing with those issues yet,anyway. When your company’s onlyproduct is still in the laboratory,hiring a contractor to manufacture itin bulk isn’t high on your list ofpriorities.

And that was another problemwith this first attempt at creating acontract manufacturing industry forbiotech: No one in the biotechindustry really had any idea what itmeant to manufacture a product

according to GMPs or exactly howlong and expensive it would be totake an exciting scientificbreakthrough to market. Neitherthe CMOs offering their spiffytechnologies nor the biotechcompanies who wanted to do itthemselves had realistic expectationsabout the work they were doing.

People at the CMOs whothought they could work for free oron a small margin to get biotechcompanies hooked on theirtechnologies grossly underestimatedhow much regulatory compliancewould cost even when making phase I materials. They werecounting on big, long-termcommercial orders coming in whenthe biotech companies needed tobuy those technologies to build theirown facilities. But even when CMOscharged fees, they didn’t cover costs,and the payoff was much fartheraway and less certain than the peoplein the front-office — and theirinvestors — expected. “When thebig contracts did not materialize,they realized they had cash flowproblems and a business model thatcould not be sustained,” says Fox.

“In those days, many people inbiotech expected to move from theirinitial discovery to an InvestigationalNew Drug application (IND) in ayear,” says Price. “They figuredclinical trials would take anothertwo years, and then they expectedimmediate FDA approval.”

We smile now, but at the time

scientists (and investors) seriouslybelieved companies could move abiologic therapeutic to market inthree years. In reality, of course, theprocess usually takes 10–15 yearsand costs hundreds of millions ofdollars more than people expectedin the 1980s.

THE BUBBLE BURSTS

With such unrealistic expectations,failure was inevitable. It took onlytwo high-profile, late-stage clinicalfailures for the bottom to drop outof the MAb market. The Wall-Streetbubble burst, and biotech hit its firstbig funding trough. Since then, themarkets have gone up and downoften enough for industry veteransto take it in stride, or at least knowhow to plan for the next bigdrought. But when investors headedon to the next big thing in the late1980s, many biotech companies —including almost all of the originalgroup of CMOs — went bankruptor were absorbed into larger entities.

What made the survivors differentfrom the rest? Scalable technology, aworkable expression system, andenough paying customers to pay thebills. In the heyday of the first batchof CMOs, many people scoffed atstainless steel bioreactors. Theyweren’t “sexy.” They weren’tinteresting. They weren’t exciting.

True. But a process that workedin a 10-L bioreactor could be scaledup to work in a 100-L tank.Eventually, that same process could

An important lesson learned: Biotechnologies must be scalable to be economical.MILLIPORE CORPORATION (WWW.MILLIPORE.COM)

No one in thebiotech industryreally had any ideawhat it meant tomanufacture aproduct accordingto GMPs or exactlyhow long andEEXXPPEENNSSIIVVEE itwould be to takean excitingscientificbreakthrough tomarket.

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be scaled up to a 1,000-L tank.Today some fermentation processesrun in 10,000-L tanks. A scalableprocess turns out to be — surprise!— an economic process. And aneconomic process brings down thecost of goods, which pushes up theprofit margin, enlarging the bottomline. And investors, it’s turned out,are much more interested in acompany’s bottom line than in thesexiness of its technology. “Peopleused to say that Celltech wasn’t sexybecause they were using stainless-steel bioreactors instead of all theother cute technologies that wereout there,” says Price. “But in theend, the engineers won.”

The engineers at Celltech wonwith more than just stainless steel.While other companiesexperimented with growing cells incow lymphatic fluid or mouseblood, Celltech and Genentechpatented an expression system that’sstill one of the best in the industry.And from those first forays into

contract manufacturing, Celltechsold its knowledge, capacity, andexperience rather than itstechnology. (See the “What Aboutthe Rest of the World?” sidebar.)

Celltech wasn’t the only survivorof those early days of contractmanufacturing in biotech, although itwas certainly the most prominent.Each survivor had a workable,scalable technology and acommitment to selling not productsbut services. Outsourcing contractorsare service providers, not productvendors. Companies that understoodthat were in the best position tobenefit when the stock marketcorrection was over and conditionswere right for a new contractmanufacturing industry to grow.

REFERENCE1 Licensing of a Biological Monoclonal

Antibody Product Prepared by HybridomaTechnology. Fed. Regist. 1983, 48 (214);50,795–50,796. ��

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