Biotechnology Focus December 2015/January 2016 - outsourcing report

Compiled by Shawn Lawrence

Outsourcing Report: 2015

Is your outsourcing strategy sound?

Outsourcing, it’s more than a trend in biotech, it’s a means of survival. Companies that provide biotech companies with specialized services ranging from contract research and manufacturing, to legal and regulatory consulting have developed a niche in the industry by helping biotech companies of all sizes to overcome the challenges that bog down their business. This is especially so in Canada, where more and more often companies are employing a virtual business mode.

In this special report, we ask three Canadian biotech C-level executives to weigh in on the keys to enjoying a successful relationship, some of the ins and outs to dealing with outsourcing partners, as well as why outsourcing is integral piece to their collective business plans.

Participating in this special Q&A report are: RepliCel Life Sciences new CEO and president (formerly the company’s VP of business and corporate development) Lee Buckler, Cynapsus Therapeutics president and CEO Anthony Giovinazzo, and Aquinox Pharmaceuticals president and CEO David Main.

Checklist of things to consider when shopping for an outsourcing partner Conduct due diligence on the potential outsourcing partner. Find out who its clients were and are. Contact some of the other clients to see if they were satisfied.

If unfamiliar with the outsourcing process, use a consultant.

Do a site visit. Get familiar with the vendors capability and capacity.

Select a vendor not just on basis of cost but for the right technical fit as well.

Before choosing, have the scientist or project manager spend some time at the vendor site so that they have a chance to fully interact with staff.

December 2015/January 2016 BIOTECHNOLOGY FOCUS

Outsourcing Report:

Is your outsourcing strategy sound?

Checklist of things to consider when discussing the contract Make sure everything is defined in the contractual agreement. Ensure the vendor knows your expectations, and build appropriate clauses in the contract for your protection.

The statement of services should include a listing of personnel, from both the vendor and the sponsor.

Milestones, timelines and deadlines should be clearly stated in detail.

Language should be written into the contract which allows the sponsor to send someone to the site to ensure services provided are in accordance with regulations and protocol.

Have it clearly stated in the contract that services will be audited.

Make certain the agreement specifically addresses exactly what role the sponsor will play and what role the contract service provider will play.

Building flexibility into the contract is important in case something goes wrong and you’re forced to terminate the contract.

Emphasize confidentiality and protection of intellectual property.

It’s important to create a contract that shares goals, risk and rewards.

Respondent#1

David Main

president and CEO, Aquinox Pharmaceuticals velopment. Our general philosophy as a company is that we have internal expertise, but wherever we can find external contractors to do most of the heavy lifting, that’s where we outsource. We find this a more economical and cost effective approach then trying to build up an entire staff to do it ourselves. There probably isn’t an area in our business except maybe the finance/accounting areas where we don’t do some level of outsourcing. It is very much the way of the future in this business, as the days of building extremely large fully integrated companies to do everything in house, I think are gone in the biotech sector.

Q

What factors do you consider important when designing an outsourcing plan or strategy?

The first thing is we make sure that we have the internal expertise to be able to provide the strategy for oversight and management, and then we just go through a process of having multiple contract outsourcing organizations bid on the work. We then try to pick those with the best track record in areas of specialization and expertise that best fit what we’re looking for.

Q Biotechnology Focus: What do you outsource and what role does outsourcing play in your business plan?

David Main: It’s a pretty broad answer in that we try to outsource or partner on virtually all aspects of our business. This includes everything from manufacturing, to regulatory affairs, to clinical deBIOTECHNOLOGY FOCUS December 2015/January 2016

Q What are some of the challenges in finding the right partner to meet your needs?

For the most part, we haven’t had any challenges. This is becoming such a standard part of the pharmaceutical industry these days, and as a result there are a lot of choices out there in terms of partners. It’s a highly competitive field. The biggest challenge is whether or not as a company you have the financial resources to

Outsourcing Report:

Is your outsourcing strategy sound?

always pick the partner you want because there’s a wide spectrum of pricing on some of the outsourcing contractors out there.

Q Does bigger mean better when it comes to choosing a vendor?

It comes down to fit, regardless of size. If we find a smaller contractor that’s been working in a particular area that’s very relevant to what we’re doing, that will probably tip us in their direction more so than a larger contractor.

Q What factors into your decision to go with one vendor over another?

Everything from experience in a given area, good references, cost competitiveness, demonstrative commitment of a team that will be dedicated to the project , and whether or not they compliment us or are a fit in terms of building a strong working relationship.

The personality of the vendor’s team is also important.

Q Are you more likely to go domestic in your vendor selection, or does location not factor into your choice? And why?

We go absolutely as far and wide as we have to, to find the right partner. Location really doesn’t play a major factor in our decision unless there are two potential vendors that we feel are equal, and one might be in a more favourable time zone relative to the project. That might influence us, but in general we just try to find the best partner possible from an overall cost-effectiveness perspective for the project. However, there are some considerations that may keep us away from certain partners or even jurisdictions. For example, when we are going to jurisdictions that are farther afield, we spend a lot of time making sure that we are comfortable with not only quality and the project team, but also the legal, political and economic environment that we will be operating in. All those things are taken into consideration.

Q In terms of the contract itself, what are key terms and loopholes to look for or be wary of?

When we talk about outsourcing, there are just so many different areas, and likewise just so many terms to be mindful of. There are the obvious ones around milestones and financials, but things like legal jurisdictions for disputes, indemnity clauses, acceptance, and time is of the essence, those are some of the key ones that are purely contractual that I think are key terms. One thing to be mindful of is in any kind of contract you always have to anticipate the worst case scenario, or the possibility that you may need to terminate a contract. You need to envision that and decide how

would be the best way to wrap up a contract if you needed to in advance of a project being completed. It’s something that every person should do in any kind of contract, and not just think about how quickly can we do business with this group, but if things don’t go the way we want them to go, how can we effectively and efficiently terminate the relationship.

Q How can you make sure you are getting the most out of your outsourcing partner? How do you monitor that relationship?

There are always people within the company that have direct responsibility for managing the relationship. As part of the whole contracting process, we often work right into the contract what the milestones and metrics for measuring success are going to be and it’s not just budget and overall deliverables, but there are usually milestones that are set along the way. We also try to agree on realistic timelines, and then more recently we’ve been working into our contracts both penalties and bonuses around what we consider realistic timelines.

Q What are some of the metrics you use to measure the success of the relationship?

Staying on budget, staying on time, and having efficient project team meetings between ourselves and the vendor. Another one that is quite important is the number of change orders required.

You want that number to be low. Sometimes both parties try to define the scope of a project as accurately as possible up front, but invariably things happen along the way that neither party anticipated and so you may have to change the scope along the way, but you want to see that happen as little as possible.

Q How do you protect yourself from a breakdown in a sponsor-vendor relationship?

One is contractually, in the sense of making sure that there are clear expectations and not leaving a lot of ambiguity. A second way, which I think is actually more important, is start early with your relationship building. This begins during the whole RFP process, when you’re first seeking bids, you want to meet with their team. Once you’ve selected someone you want to set-up a kick-off meeting. In the contract itself you should also establish well defined communication standards for maintaining the relationship. This usually includes regular project management meetings between the two parties. Our experience has been that vendors are motivated people working at companies that want to be successful just like us, and if you put in the time to build that relationship and make sure that it’s a win-win partnership rather than an adversarial, “You are my supplier,” type of association, odds are there won’t be a breakdown in the relationship.

December 2015/January 2016 BIOTECHNOLOGY FOCUS

Outsourcing Report:

Is your outsourcing strategy sound?

Respondent#2

Lee Buckler

CEO and president, RepliCel Life Sciences our chief scientific officer is employed, and we do a lot of our early stage research in that lab. We use a contract manufacturer for our biologics, and this CMO has tremendous process development capabilities. We also use CROs for the management of our clinical trials, so we don’t have armies of clinical management staff. On the device side, we use contract designers and contract manufacturers. Essentially, we have more consultants and contractors than we do employees. Our reasoning is we aren’t looking to build a multi-generational empire or saddle ourselves with infrastructure; we’re simply looking to play a very important role in bringing key products to market while at the same time creating value for our shareholders. Outsourcing also allows us a lot more flexibility when negotiating strategic collaborations, joint ventures, licensing, and partnerships. Since we aren’t saddled with a tremendous amount of hard infrastructure, it’s easier to turn things off and on much quicker. Geography plays a part here too. We’re located in Vancouver, Canada, and it’s not a cheap place to have infrastructure here, and it has its limitations in terms of talent. If you can wrap your head around managing people virtually, by outsourcing, we’re able to cherry-pick teams to contribute to our projects based on the best available expertise and experience from around the world - not just who happens to be in town. From our regulatory consultants in Boston, our CMOs in Austria and our CROs in Europe, it allows us to bring in top notch people that are more defined by expertise, cost, and experience, rather than by geography.

Q Biotechnology Focus: What do you outsource and what role does outsourcing play in your business plan?

Lee Buckler: We’re a biotech company with three cell-therapy products in development called RCT-01, RCS-01, and RCH-01, and we are also developing an injection device for delivery of our RCH-01 and RCS-01 products. Our whole business is driven by a couple of philosophical views. One, we consider ourselves an R&D licensing shop, so we don’t aspire to take any products to market.

Second, we want to create high-value assets through to mid-level clinical development and then position these assets into the hands of co-development and licensing partners. With this philosophy, we try to minimize the amount of infrastructure and obligations we have and keep things as flexible as possible - focusing solely on our products. Essentially we are a virtual company, and we outsource almost everything. For starters, we have a contract research agreement with the University of British Columbia, where BIOTECHNOLOGY FOCUS December 2015/January 2016

Q What factors do you consider important when you are designing an outsourcing plan or strategy?

That depends on whether you’re talking about vendor selection or managing the outsourcing strategy. Regarding selection, it’s really about who you think has the best expertise and experience and is a good corporate fit. When it comes to management, when you’re so heavily dependent on outsourcing key components, you have to be prepared to do a little more plane time and also find online tools that you can use to help you stay in touch with your vendors.

Q

What are some of the key factors when you go through the vendor selection process? How do you balance the desire to pick the best vs. someone you trust? What’s more important to you?

It really depends. In our case, our contract manufacturer came to

Outsourcing Report:

Is your outsourcing strategy sound?

us rather serendipitously through relationships, and as we started to engage them, that relationship just continued to grow and solidify. I’m almost convinced it wouldn’t have been the party we would’ve chosen to if we’d gone the RFP route, but it’s the perfect fit for us right now because it grew organically through relationships. When you’re starting out cold, you don’t have any of those relationships or preferences, and you’re doing just an RFP kind of process. For the most part, the people who rise to the top and get on the short list, have the basic expertise, and they all have the alleged experience. They probably don’t differ so much in terms of cost, but cost does become an important differentiator. But at the end of the day, it’s who you think is the best. Also, while I’m not a fan of calling these conceptual relationships partnerships because it is just a fee-for-service kind of relationship, but it feels a lot like a partnership because they’re so embedded in everything you’re doing, and so the fit factor becomes really important. Also, especially in our field which is relatively new – cell-based therapeutics – there is a lot of young and small players. What I’ve seen and experienced on both sides of the equation, is this factor that when you have to justify a really big contract, like manufacturing for instance, to your Board, and it’s someone they’ve never heard of, there’s a comfort level that comes with an entity that’s well-established and proven - even if they’re more expensive - because the risk of them disappearing on you, or not being able to meet their obligations, is perceived to be less.

Q When you design a contract with your

taking place even while you have product in clinical testing. So we’re still learning a tremendous amount about these products, how to manufacture them, the costs of goods and the technologies that are critical to them. So to some people, particularly those with more complicated products where the science is still really evolving, I feel that in order to develop their product optimally, they need to be really close to it, much closer than a contract manufacturer allows them to be. There’s still a lot of unsolved manufacturing being done in cell therapy because it’s not just about economics and you’re not just leveraging standardized procedures, technologies and tools, you’re iterating constantly.

Therefore, people have a desire to be close to that iteration, to drive it, to see it, and feel it every morning when they get into the plant. For us, it’s a little different. All of our products are innovative but also in a way, more innovative because of their simplicity than a lot the gene modified cell-therapy products out there today.

We don’t gene modify our cell products or differentiate our cells.

We’re not working with a stem cell. Our technology is a simple cell expansion play, and we’re investing heavily in different kinds of bioreactors, cell expansion technologies and media formulations to optimize our products, but that science and technology is arguably less complicated than what a lot of people in the industry are doing. For us, with the kind of products we’re developing, it’s arguable that it’s easier to do it without outsourcing partners. Other companies just might not feel comfortable at the same stage.

Q How can you make sure you are getting the most

outsourcing vendors, what are some of the key terms to look for within that contract?

out of your outsourcing partner? How do you monitor that relationship?

For small companies like us, any type of risk sharing is an important discussion to have. Exit or flexibility clauses also become an important consideration because to be successful at what we’re doing; we have to be nimble. We can’t lock into multi-year contracts with a lot of take or pay obligations and no exits. At our stage of development, we need partners that can, to some extent, be flexible. Now, they have a business to run too, so that’s a tension you have to balance.

Like I said earlier, I think you have to be prepared to spend more time on a plane because real-time, face-to-face interaction, and being on site, matters in maintaining a connection to your vendor.

You also have to spend more time on the web, and on the phone, than in the boardroom - in terms of project management. If you’re sloppy and you’re not constantly talking with your vendors, there are a lot of things that can just slip through the cracks. One of the other things we did was embed a person in our CMO’s plant.

This helps to alleviate some of the need to be there; we feel like we know what’s going on because we have a person there full time. Not every contract manufacturer allows that, but we have a relationship that allows it, and it’s become pretty critical to us because it’s someone we know and trust, and at the end of the day, we know is working for us. If it was a contract manufacturer a couple of hours away from us, it might not be as important, but it’s a long flight and on another continent. I think it’s also important to make sure you have external people available to come in, do inspections and audits, on an as needed or on a regular basis, to keep people honest and to be assured that things are going well.

Q As a cell-based therapeutics company, you mention that many potential outsourcing partners in your space are very young. As such, are there challenges in this space to finding a partner that aligns to your needs?

One of the overriding considerations in our field that really dictates whether or not they use a contract manufacturer is that there’s still a lot of process, product and manufacturing optimization that’s

December 2015/January 2016 BIOTECHNOLOGY FOCUS

Outsourcing Report:

Is your outsourcing strategy sound?

Respondent#3

Anthony Giovinazzo

president and CEO, Cynapsus Therapeutics There are very good CROs both in Canada and in the U.S. that can perform chemistry analysis, from a lead optimization and delivery technologies standpoint.

Q

What factors do you consider when designing your outsourcing strategy?

Q Biotechnology Focus: What do you outsource and what role does outsourcing play in your business plan?

Anthony Giovinazzo: In the companies I’ve been involved in which include my current company Cynapsus Therapeutics, prior companies Cervelo Pharmaceuticals Inc. and Cita NeuroPharmaceuticals Inc., I’ve always employed an outsourcing model. This involves identifying those elements of the value chain that you can in-fact rely on partners to outsource to because they are experts in a particular area. In addition, they are more current on the latest technologies and processes associated with their particular area of expertise, and they will cost it out on marginal basis rather than a start-up or mid-sized company trying to build all of those elements. The specific areas that you outsource depends on where you are in terms of being very small and pre-clinical versus clinical or even a commercial stage company. In my own experience, it’s been in areas such as manufacturing and lab-based analysis.

BIOTECHNOLOGY FOCUS December 2015/January 2016

The way I have done it, for example, is that we’ve outsourced manufacturing at Cynapsus, by hiring an excellent chief scientific officer and executive vice president of chemistry, manufacturing and controls (CMC) to manage the relationship. He comes with a background in large pharma, multiple products launched in multiple countries on a simultaneous basis, and the process is a pretty standard one. You have to sit down as a company and make a list of the technical and business aspects that are critical to you in that particular area. For example, in our case it’s CMC , clinical and pre-clinical laboratory work. And once you have defined the technical and business terms, you then assign a waiting list and the priorities to those aspects. Sometimes you can’t get them all, but there are certain aspects that are critical and important, and once you’ve done that, then you seek to find organizations that have those requisite capabilities and skills, and you evaluate them either through a process of a request for proposals (RFP), or on an individual basis, where you approach them and ask for quotations and proposals. What we tend to do, from our experience, is that we like to enter what’s called an ‘umbrella agreement,’ and once we’ve done that, we then go into specific work orders on very specific pieces of various puzzles that we’re trying to solve with the organization. To summarize, we internally evaluate what the technical and business aspects are, then we put together a RFP and approach several organizations that are the most likely to be able to supply us with the requisite skills. Timing for us is critical, so we’re looking for organizations that have flexibility, that have a sense of urgency and apply that on a very acute basis. We pride ourselves on being able to get things done quickly, and we need partners that do that as well. We then evaluate those proposals and select the organization we feel is the most appropriate. It doesn’t stop there though, because then you have to sit down and insure that there’s alignment on the specific projects as well as the timing associated with those projects. One additional element that we associate very importantly with that process is that

Outsourcing Report:

Is your outsourcing strategy sound?

the members of our team that are involved in that particular area, be it manufacturing, preclinical or clinical, must have an intimate relationship in terms of the negotiation of the terms, conditions and execution plan. This includes having a process in place for identifying red flags early and as well as defined solutions, should something go wrong. One of the practices that we employ in that respect is a design of experiments approach. You break the various pieces down into sub-parts, and you design experiments for those sub-parts that will result in an answer that will help you go to the next stage, and then again to the next stage and so on.

Q What are some of the challenges in finding the right partner to meet your needs?

You have to be willing to go through a process of identifying more than one service provider or capable organization and evaluating their strengths and weaknesses. A second element is you have to have someone from your team that’s a very good project manager, who has the respect and commitment of the people on the other side of the fence. That’s not trivial. You need to make sure there is no conflict of personalities, no conflict of timelines, and ensure that you have that organized well. The way it works best is that we have the right person on our team that can manage the project and have open dialogue with the organization that is supplying us with the outsourcing service, such that there is a real joint commitment, a shared approach to success and solving problems.

Q How can you make sure you are getting the most out of your outsourcing partner? How do you monitor that relationship?

Let me start by adding to that question. Earlier I said that the internal person has to be very experienced, and must be able to oversee things from a project management point of view very well.

That person must have an ability to establish a relationship with the service organization. But one of the things we require is more than just site visits. You conduct a site evaluation obviously at the very beginning before signing any contracts, but it doesn’t stop there. One of the elements we insist on is that our people have continuous ability to visit the site on various aspects of the design of experiments and the successful completion of that design of experiments. We try not to be too pesky or in their hair too often, but it’s important for us to be there frequently, in some cases on a monthly basis. It’s about ensuring things are going in the right direction, and also, in all fairness to the outsourcing organization, to have access to someone that has responsibility, authority and accountability to ensure things go well, so that if there are questions that need to be answered, they are done so in a timely fashion.

Q When choosing a vendor, does size or location of the outsourcing partner factor into your decision?

I have never put restrictions on geographic location. It’s nice to have people around the corner, but many times you can’t. What is critical for us is that the alignment on timing, quality of work, problem solving, that the service provider is responsive to our needs in terms of an overall plan or timeline and the very design of experiments. In terms of size, again, no limitations. In some cases we work with huge global manufacturing companies, in others we work with niche players that have a very specific capability.

The underlying theme in both cases is to do it right, if you have a clear rapport and open dialogue with the vendors, you are on the right track.

Q What are some of the metrics you use to measure the success of the relationship?

We use both positive and negative metrics. Completing work on a timely basis, identifying problems early and the ability to supply solutions to problems as opposed to waiting for us to create a solution are all positives. When you have a win-win situation, the counter party is very interested in what you are doing and interested in gaining more work. On the negative side, we look for whether or not there are large numbers of change orders and whether or not there’s this bait-and-switch attitude. We’re always prepared to make a change of supplier or vendor if things are not going as expected.

Q How do you protect yourself from a breakdown in a sponsor-vendor relationship?

Our preference is to try to anticipate various scenarios in the very beginning, not to be ignorant of it, but ensure from the very start you have the right partners. Obviously, sometimes you can’t predict how things will go, so you do your best to protect yourself through agreements that first respect your intellectual property, and second give you the ability to terminate agreements within a reasonable time without a significant cost associated with termination. We do this by having clauses included in an agreement that calls for arbitration if there are insurmountable differences that need to be reviewed and agreed to, as well as adequate insurance coverage.

To see this story online visit www.biotechnologyfocus.ca/outsourcing-report-2015-isyour-outsourcing-strategy-sound/ December 2015/January 2016 BIOTECHNOLOGY FOCUS

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