Lessons Learned From Managing CMOs

By George Tyson, CMC and supply chain consultant | January 22, 2014

Do your homework

Most people have a pretty benign picture of Betsy Ross, if they have any picture at all: an earnest woman, sewing our nation’s first flag. But Betsy Ross brings up a much more unpleasant picture for me — she reminds me of my biggest contract negotiation failure ever.

We were sourcing an existing API for a novel controlled-release product, and we had proposals from two manufacturers. Both quoted high prices, but the higher one was a company we’d been dealing with for years, purchasing another API for a commercial product. My sourcing manager and I (I was the head of the Supply Chain group) decided to go pay them a visit.

We flew from California to Philadelphia, and made the short drive the next morning to our potential supplier. We exchanged pleasantries, went on a very detailed tour, and returned to the conference room, ready to discuss business.

This was one of my first experiences in this scenario, and I made sure to come prepared. I knew our history working with this company, and the revenue we already represented to them. I had spoken with our development team to get an idea of commercial volumes, and when they might kick in. And finally, to address the surprisingly high price of the API, I’d dusted off my experience working at a large chemical company, where I’d been exposed to early stage cost estimation tools. Factoring in all the things I didn’t know, but thought I could guess, I had a manufacturing cost for this contractor in my mind.

So I thanked them for the visit, complimented their first-class manufacturing facility, and noted the long history our companies had working together. I expressed confidence in our development product, and how important it could be for both parties. I then suggested that the pricing they’d presented caused us a problem, and that what I’d like to see instead was a price per kilo in a given range (which was 50% more than what I’d calculated but still substantially lower than their quote).

The response was — absolutely not, and the meeting is now over! Within 10 minutes, my sourcing manager and I found ourselves blinking in the bright sunlight outside the plant gate, with hours until our scheduled flight back home. Not one to waste an opportunity, I suggested that we might as well go to the Betsy Ross museum in Philadelphia, where we could at least get something positive out of this darn trip. Upon getting home, we signed an agreement with the other company, and we ended up launching a very successful product with their API.

This story brings me to the first lesson I’ve learned after a long career selecting and managing pharma contractors for development, manufacturing, testing and distribution: know your business. Effective management of outsourced activities is much more complicated than figuring out who is the toughest negotiator — you have to know how this activity fits in with your overall business and strategies, so that you don’t find yourself hung up on issues that aren’t actually important.

For example, we had been purchasing an API from a large, well-respected Japanese company for several years. Year after year, our product, based on a sophisticated formulation of this API, grew, and of course their business grew as well. But one concern was that we were sole-sourcing for this API. And as a courtesy, I met with a broker who told me he could do great things for us.

This broker had figured out who was supplying our API, and he had an idea — he had a Chinese source, and he quoted a price that was little more than half of what we were paying. He laid out his approach to manage his suppliers, effectively serving as their Regulatory department, to be sure that the customers got great quality in addition to attractive pricing.

I was torn. I didn’t like leaving money on the table, but I also realized that this new API source would require substantial formulation and analytical work to demonstrate that its behavior was equivalent in in vitro testing. A quick check told me how tough that would be — our R&D group had the capability to do this work, but they were tapped out working on new products. There was no way I could get them to work on my cost savings project instead.

So I met with my Japanese supplier at our next regularly-scheduled visit. I thanked them for their support of our product. I showed them our forecast for the next three years. But then I told them that I was under pressure, that Chinese suppliers were quoting dramatically lower prices (I did not share the price with them, but I did raise my eyebrows), and suggested that they could do two things that would help this situation: look closely at the market and suggest a new price going forward, and develop an inventory plan that would keep a given supply stored at another one of their site’s warehouses. In turn, I could guarantee them a very high share of our business for a number of years.

It took time, and patience is a virtue when dealing with some companies, but things ended up well for both of us. Their price reduction was over half the previous difference, and we improved our product’s security of supply by having substantial inventory stored at another location at the supplier’s expense. Our researchers got to keep working on new products, and what I gave up — the guaranteed share of the business — effectively cost me nothing. These things came about because I understood our business, and that security of supply was a dominant factor, even more than the cost of goods on this high-margin product.

Which brings me to my second point: know their business. If you don’t make an effort to understand your CMO/CRO and its goals — be they long-term vs. short, what types of products or services they aim for, and how you fit in with their direction — you won’t be as effective as you can be.

When meeting with potential CMOs, I make sure to ask about their strategy. I ask why they are interested in my business. You might assume that the bigger your company, the more attention you will get, but that’s only partially true. Some CMOs use the small firms as an entry point into new technologies and business, and they also understand that early work done for a major pharma company can get snatched away by their internal capabilities once there’s success at, say, Phase II. I also make a point of telling providers that I’ve been in their shoes, as I once ran a facility that manufactured a drug/device for a major European company. When I say, “And I never saw a forecast that was worth a damn!,” it’s guaranteed to get a chuckle.

Be sure to find out how their finances work — when their quarters and years end, for example. You may find that you are relatively indifferent to when a product is delivered, but it’s a big deal for the CMO to make its numbers. You can shift such a delivery earlier or later, building goodwill at no cost to you.

I also try to think of what would make things easier for the CMO. At one point, I’d changed jobs, going from a large company to a small company, but I was sourcing a new API from a company I’d worked with before. We were just getting to the early supply agreement discussion stage when I had a thought. I contacted the contract lawyer I’d partnered with at my earlier firm, and asked if I could, pretty please, have a redacted copy of the supply agreement we’d worked on, so I could give this company familiar language and terms. We both understood what a huge timesaver this could be.

He replied with a sigh — it was e-mail, but I felt the sigh — that he was just too busy to do that. But he could send me the contract, and I could redact it myself! I still get a warm feeling from thinking about this. Not only was this a big help to the project, but he was saying that he could trust me to be professional. (I did not let him down, of course.)

In another case, we were firming up the supply chain for an implantable drug delivery product. One component in particular was critical to its operation, but the amount we used was very small and the cost of the polymer was also fairly low. I wanted to have a supply agreement — I wanted security of supply, but I also knew this would help us if we partnered the product with a larger firm. I wasn’t sure how to proceed, so I invited myself to the upcoming GMP audit of this site.

The company was small, but capable, and the site head was also the owner. He was frank. He told us that we didn’t provide that much business, and an agreement was going to be too much trouble. I replied that this particular product was not that big, indeed, but that we had a burgeoning pipeline of all kinds of polymer-containing products, and this project put him in a good position with us. Plus, I would guarantee annual revenue, and provide a supply agreement that did not exceed two pages(!).

So that’s what we did. We trimmed that supply agreement to the key provisions we wanted (which included change control and last buy provisions), kept it to two pages, guaranteed an annual spend, and signed the thing with little fuss. And when we did indeed partner the product later, this agreement helped strengthen that effort.

Now, neither of these last two examples would have happened if I had not already established a strong working relationship with my company’s attorneys. It can be tempting to avoid talking to them until you have to. They tend to ask questions, most of which leave you scratching your head. But for them to trust you, and work with you, you have to own the business. Know more about the supplier than anybody else. And never, ever, hand your attorney the supplier’s template agreement before you have read it thoroughly, and can bring forward what you think the main risks are.

Once you know your business and you know their business, there’s one more thing: know your role. You are the sponsor’s advocate to the CMO, and the CMO’s advocate to the sponsor.

The first part of this is easy — everybody knows that you represent the company when dealing with the CMO, and that you are looking out for its best interests. But the second part is just as important, and here’s why: any company that outsources activities to a CMO has a very hard time not blaming the CMO for anything wrong that happens. Once bad-mouthing starts, it can be hard to erase, and the relationship is in trouble.

A good friend once remarked, “Like all failures, this was a team effort,” and I find this especially true for working with contractors. The batch campaign can’t start on time? It must be the CMO, can’t be because our folks didn’t meet the deadline for approving the batch record, or we didn’t send the correct MSDS to them, or because we changed the start time with insufficient notice, or because our starting materials arrived after their dock closed, and we didn’t alert them that they were coming. . .

To be effective, you need to be constantly mediating, making sure that the communication lines are open. When there is a failure, get to the root cause. If it is with the CMO, bring it to them. In one case, there was a hand-off problem at the CMO, transferring analytical methods from the research group to the QC group. I was clear that they needed to appoint an overall transition manager, as I didn’t want to see that happen again. If the problem is with your company, you must also address it, but perhaps in a more subtle manner. You might go to the department manager and explain the situation. You don’t need everybody in the company to know who messed up, but what you do need is to make sure it goes better next time.

But these are short-term actions, and it’s the long-term, consistent management practice that will net you the rewards. We had outsourced our finished-goods distribution operations to a CMO, and it was no end of trouble. But my counterpart understood that I wanted this to work, and he had the same goal. The two of us started a weekly chat, outside of the cross-functional team meetings. We brainstormed, gave a heads-up, and developed a comfortable relationship where we both tried to avoid surprises for the other.

In fact, after several years of working together, we both had a sense of what metrics were important in managing the business, and what good performance consisted of. We developed a new contract that focused on those important metrics, and created a cost structure that included not only penalties for subpar performance, but bonuses for performance better than the standard. Many people think that the best tool to get performance in any contract is to build in penalties to cover delays or batch failures. I find that’s hard to make work, mostly due to that shared fault issue mentioned earlier. But a contract that has both the carrot and the stick, that’s worth the extra effort.

But sometimes things just don’t go your way. Our contract formulator had repeated quality issues that worsened since our previous quarterly face-to-face. In frustration, I told them I was flying out to see them, and which day I’d be there. Walking into the room, I was surprised to see the entire plant’s technical staff there — 25 or so of them, and me. Unfazed, I got to work. I told them their quality was bad, and why. I said their training was poor, and gave examples. I said their maintenance was inadequate, and noted the breakdowns. I told them that patients were at risk because of the product shortfalls caused by them.

After I’d said my piece, they thanked me, and I ended up with the head of manufacturing and the site head in the latter’s office, where he said, “That was good. They needed to hear that.” Well, I can’t promise what was on my face, but what was going on in my head was, “Then what the heck are you here for?! ” Things did improve for a while, but even your best efforts can’t turn every CMO around, as history showed.

So my final point is: take the long view. Don’t think of a new contract as a transaction, think of it as a step in a strategy. Choose CMOs that show that they understand this too. Understand that they’ll make mistakes, but that your side will as well. One of my best strategies is to share our company’s plans — not all of them, of course, but the ones that directly affect your CMO. For commercial products, it’s not such a stretch to share sales forecasts, translated into API or units, depending on what they supply. If they’re in a competitive situation, tell them that, but let them see the whole pie as a motivator. For developmental products, share a bit of the clinical strategy. This is especially useful if your clinical plans are in flux, and you find yourself delaying a campaign by six months. Your CMO will take that news much better if they understand that they’re hearing it as soon as possible, and that the decision was not at all capricious.

This is just one more step in getting them to be on your side. I tell them that I want to be their favorite customer, and I mean it. I was on a plant tour, being shown around the API operations in a large facility that we’d been working with for about two years. I asked the two young plant operators, “Do you know what this product does?”  They shook their heads. “This product helps kids concentrate, better than any other. I got a phone call last week. It was a parent I know from Girl Scouts, and she’d heard me talk about what we were working on, and she discussed it with her doctor and got a prescription. Now her young son wants to play with the neighborhood kids instead of sit in his room. She’s so happy, she was in tears on that phone. It’s because of you guys here – you helped make that happen.”

Leaving the control room, the plant engineer’s eyes were shining. “That was really good, what you told them.” I thanked him, but I also thought — we’re all on the same team. I bet, if somebody has to work overtime to cover a shift, they might find a way to make it happen if it’s for this product.

Which brings me back to my first story and point. A couple of years after my dejected visit to the Betsy Ross museum, we developed an arrangement with another CMO for this product, and their pricing was well below the number I’d quoted that had gotten me kicked out of that other plant. So I guess I did know my business there after all — I just couldn’t count on that particular counterpart letting me know!  CP

George Tyson is a CMC and supply chain consultant. He can be reached at gktyson@gmail.com.