Contract Manufacturing Competition
Are strategic outsourcing plans in development?
By Hussain Mooraj and Fenella Sirkisoon
In the past, contract manufacturing in life sciences has been largely confined to small pharma and biotech companies. Large organizations typically have only used contract manufacturing organizations (CMOs) to meet excess demand beyond their own manufacturing capacities or for packaging needs in particular geographic locations. The latter is intended to ease problems incurred when addressing local regulations, differences in native languages, and approved labels.
Photo courtesy of HollisterStier
In early 2006, we published "How To Add Contract Manufacturing to the Pharma Recipe for DDSN" where we noted that the intensifying pricing and revenue pressures on life sciences companies will need to be offset by faster product launches and better operational efficiencies. We pointed out that the traditional life sciences value chain will need to be transformed into a more networked structure. It should capitalize on manufacturing and supply chain efficiencies through CMOs and by improving its own supply chain capabilities.
With increasing pressure on once-bloated margins, life sciences companies have begun to recognize the need to either excel at in-house manufacturing or farm it out to a firm that can do it better. Leading organizations are embracing this change.
Leaders are on the Road to Damascus
AstraZeneca recently announced plans to outsource its entire drug manufacturing activities within 10 years. David Smith, the company's executive vice president of operations, was quoted in The New York Times as saying, "Manufacturing for AstraZeneca is not a core activity. AstraZeneca is about innovation and brandbuilding . . . There are lots of people and organizations that can manufacture better than we can."
Earlier in 2007, Merck's chief executive officer Dick Clark announced its manufacturing outsourcing plans: "We have made the commitment that we will be outsourcing about 30% of our business." This policy started being put in place last year when Merck entered into a five-year master supply agreement with Patheon. Patheon will be the CMO for three of Merck's new products. This new master service agreement is crafted to accommodate additional products as Merck implements a new strategic plan that heavily uses external manufacturing.
Cost Continues To Drive Strategy
From the 2007 AMR Healthcare Value Chain survey, in which we interviewed 275 companies across the branded, generic, biotech, and medical device manufacturing segments, we noted the use of strategic contract manufacturing was growing at a rapid pace. By 2010, 29% of all manufacturing output is expected to be produced through third parties. The branded manufacturing segment is expected to grow the most in the use of CMOs as a strategic part of the emerging business model.
According to Contract Pharma's 2006 Annual Outsourcing Survey, the top-five factors that contribute to the outsourcing decision among pharmaceutical and biotech firms include quality, timeliness, confidentiality, good manufacturing practice capability, and relationship. These five factors all ranked ahead of cost. However, we see the reality on the ground as being different.
From the AMR Research survey and discussions with executives, it's evident that companies, especially within the medical device segment, are outsourcing manufacturing primarily to save on short-term operating or capital costs.
In Strategic Manufacturing Outsourcing: How To Achieve a Return on Relationship Investment, we note that, while in some cases direct cost savings may be the legitimate primary factor in the decision to outsource, essential to success is a company's commitment to evaluating supplier capability, relationship risk, and lifecycle economics as they relate to the product value proposition. The smart brand owners will apply the analytical and management discipline needed to convert contract manufacturing partnerships into sources of lasting competitive advantage.
Implementing a contract manufacturing strategy involves a business transformation, one that requires substantial change management, analysis, and measurement. Here are some tips and lessons that may help companies as they embark on their strategic manufacturing outsourcing journey:
Align your contract manufacturing strategy with corporate objectives
In our last discussion, Ken Thomas, retired director of supply chain at Eli Lilly, said, "The best practice in life sciences outsourcing is to make sure that a holistic strategy for long-term capacity is in place and solidly linked to the corporate strategy."
AstraZeneca expressed a change in corporate strategy, with its core competencies R&D and marketing. The company has now started to align its manufacturing outsourcing strategy with this new paradigm.
Involve your CMOs early in the game
If manufacturing outsourcing is becoming a strategic part of the emerging business model in your company, then the CMOs have to be on the preclinical team, which allows them the necessary information to develop the product for clinical and commercial supplies. This should be a model of true collaboration where the success and failure of the brand owner and contract manufacturer are closely intertwined.
Determine what to outsource (mature products versus immature products)
Assuming a company doesn't want to outsource all manufacturing, the question of mature versus immature has an answer. The following are some product and process characteristics that should be considered as favorable when developing the strategy:
- High forecast accuracy (very predictable demand)
- High manufacturing process repeatability run in "standard" equipment (very predictable process)
- Simple and reliable analytical lab and quality processes (very predictable quality)
Iron out the data dependencies
Companies need to decide the data they are going to master and what they're handing over to another firm. When we asked companies to identify the most important areas with respect to integration of systems with contract manufacturing partners, quality and compliance information and sharing of planning and forecasting information came up as the top two.