Remember 20 years ago, when Contract Pharma was just starting, and issues were being etched onto stone tablets? Back then many companies were starting to see the growth in need for resources for outsourcing of development chemistry as an opportunity for better margins than fine chemicals, without pharmaceutical risk. Even paint companies tried to add API capacity. There was M&A activity, then demand contracted. Unfortunately, many sponsors suffered, having to quickly find new CDMOs when capacity was mothballed across the industry. A lot has changed! 

Because we are all involved in picking possibly long-term relationships, the reasons behind the changes and the implications for selecting and managing CDMOs is, for me, more than an academic exercise. Possibly fundamental structural changes on both sides of the desk have both short-term and long-term implications for how we approach outsourcing. Larger sponsors are changing how they approach internal R&D, as well as in and out licensing. Smaller companies as a group are now taking on more of the early development risk. The acquirer is sometimes allowing the acquired to continue management of the  programs. Creative structuring of start-ups is both allowing the bigger companies to acquire specific assets rather than entire companies and is also helping to create small company development engines. These are just some of the factors that are quickly changing how we help people manage outsourcing.  

We are seeing more activity in pursuit of orphan indications, 505b2s, fast track designations etc., putting pressure on the need for smaller scale commercial capability and later stage development capabilities earlier in relationships. Small companies formed around spun out assets and whole portfolios is changing how we’re approaching working with CDMOs. Also, in the mix is the increased importance of biologics and “alternative therapies” along with the impact that demand for capacity from generics has on CDMOs.

As you know, many CDMOs started around specific capabilities—e.g. fast early development chemistry, SMB, SDD, high potency—and now there  are possibilities for increased availability of specialized capability. We see more complex, potent and more insoluble molecules possibly requiring complex delivery or smaller scale or all of the above and more. In the past, large sponsors seeded some technology at CDMOs, but large pharma have increased reliance on CDMOs for enabling technology where a CDMO with many projects can better develop and optimize technology than a single sponsor with infrequent utilization, and now we may have deep-pocket investors needing ways to differentiate. Cool.

So, what do we do during a “perfect storm” of fundamental, disruptive structural changes and investor cash consolidating the people and facilities on which we depend?

There are  potentially exciting examples of investing to bring together capabilities with potential to create speed and value within an umbrella of multiple sites. Unfortunately, there are also painful examples of investing to roll-up/buy books of business and consolidate operations with limited benefit to customers and where strong CDMO talent heads for the door. Very little is as it was a couple years ago, and the change is happening faster than ever. Let me allay fears, our practice is not for sale!

So, what are we all to do? Navigating challenging waters calls for plotting a good course, knowing where the rocks are and being prepared for when the fog rolls in and obscures everything we see. I offer here some questions to ask yourself, some strategies to consider and some tips that will hopefully be useful. 

If other industries are a guide, M&A activity may continue. Increasing multiples for CDMOs being acquired is great news for the sellers but we customers have to worry about more pressure on CDMOs to cut costs and find synergy and higher prices. Higher interest rates may increase these pressures. Many Chinese CDMOs are undertaking significant expansions and cross-continent M&A. As in the past, when there’s excess capacity, even the best CMOs can be hungry for business and be more aggressive on pricing. There are some approaches to business terms that can help mitigate some of the risk yet provide a win-win; but understanding the CDMOs financial situation and plans is more important than ever.

So, what are the operational implications? Turn-around time from receipt of RFP to receipt of proposals that can be 3-6 weeks, has remained consistent with some, but has become much slower with others, requiring more effort by the sponsors. Where a CDMO has been acquired, some have needed more time to get technical input, develop the business and technical aspects of the proposal and obtain internal approvals. Some proposals are now being developed elsewhere, sometimes by a centralized corporate proposal group, sometimes located overseas. To manage through this is to do more homework in early screening to understand the CDMOs proposal process. Involving your CMC consultants earlier can help since they may have more experience and contacts within the “new” CDMO.
As always, the process can take longer if your RFP is sparse, causing more CDMO questions and coordination within the CDMO to assemble the right technical team. You may also receive more of a general proposal with which you will have to either spend additional time refining or revising after you accept the proposal.

Seen as ‘administrivia’ to some, it’s more important than ever to have a detailed RFP before you discuss specifics with CDMOs. It will also help avoid filling out project questionnaires from multiple CDMOs which can consume valuable scientist time and position you as a less sophisticated client that the CDMO expects to be more costly to serve and disruptive to their own timelines. 

A detailed RFP does not have to be long. It does require that you really know your technical and business situation, requirements and deliverables and communicate them clearly to the CDMO. A strong technical package for the RFP will also enable a smoother kickoff. Often overlooked is clarity in the RFP on analytical requirements, leading to surprises on all sides and timeline changes. It pays to anticipate what the CDMO will need to generate a proposal and to assess whether you will be someone that will be easy for them to do business with. You are the customer but CDMOs don’t have unlimited ability to support every customer timeline and after all, we are not just buying material or binary data but registration-enabling information for us or for a future partner.

With all the changes, it’s more important than ever to first generate a long list of possible CDMOs and then screen them to a manageable number to receive an RFP. So much has changed so quickly that assumptions and past experience may no longer be valid. It can also be more dangerous than ever to go forward solely on the recommendation of a colleague. A list of CDMO contacts is also a valuable asset that you can use again and again. Go to conferences like Contract Pharma, tap experienced consultants and colleagues in your network. Also try to understand the new entities’ corporate strategy and fit with how you would work with them as you create a long list. Are they investing in people, technology and facilities or are they simply consolidating? What’s the turnover looking like? Are good people leaving? Joining? What are other sponsors that are at similar stage and size as you experiencing? How busy is the CDMO? Can they support markets of interest and your future scale needs? If not, what are their plans? For example, if your plans include Japan, do they have experience with Japan, or will you have to spend to establish that capability together? While getting volume projections from clinical or commercial teams can sometimes be challenging, its often better to make assumptions they can react to than to wait for the “puff of white smoke.” Lastly, do you have a clear picture of your decision criteria and how you will know when it’s time to sign and what cost range to expect when you start the process?

If a CDMO that you believe can be a fit has been acquired recently, expect that the new parent companies’ legal teams are probably not smaller, so more focus on the Ts & Cs early on matters more than ever with newly acquired companies. Of course, there’s always pressure to get started but the devil really is in the operational and business details of what is and isn’t included, so don’t wait too long with the finalists before proceeding with MSA discussions. If you have an MSA in place with a CDMO that is now part of another company, be prepared for the new CDMO to possibly want to update it—did you agree to the unilateral assignment clause in your last MSA? The devil is in the details. 

We get many calls from companies that learned too late that the quality agreement did not include decision rights they expected or had terms that conflicted with the wording in the MSA, and now there is a disagreement. Experienced QA and operational review concurrent with MSA review can help prevent issues, especially with newly acquired sites aligning quality systems with new forms of MSAs coming from the Mothership. Whether working from your MSA or theirs—some CDMOs require theirs—working  from the CDMOs form of quality agreement helps avoid being an exception process for their operators. New corporate EHS may approach categorizing compounds differently than when you worked with the CDMO before, and you may find that they may not now take your program. The new parent may want your program at a “center of excellence” that they acquired, built or are building. This may be good or may be bad, but this also may lead to more interactions to get things done, until the new company hopefully reaches a more settled down state.

CDMOs appear to be trying hard to put in place the new BD structure and processes that can support the new business models but be prepared for some to be bumpy. You may have a new BD contact or one you’ve worked with in the past that was excellent but may need more time to get answers on new capabilities. Bottom line, it’s prudent that you plan for more time for selection. Indeed, it can take time for initial CDAs as it is, and it typically takes longer with the larger companies that may want their form or return significant mark-ups on your form.   

How do you make sure you get the A team in these new waters? Are the excellent people from the last project still there? Has there been attrition? Are the founders who were essential before still involved and do they have clout? Is the acquirer HQ more hands off or more involved? Is that a good thing or not? Has something changed that might make bigger sponsors now get the A team instead of you? 

Regardless, sponsors of successful programs typically budget for the right level of coordination FTEs for ID, selection and oversight. CDMOs may mean well but a decision that they might make in a vacuum, may not be the best one for you. Often when there’s a problem, responsibility is closer to 51% to 49%  than mostly one side or the other.

Sunshine peaking through the clouds?
While there may be some hassles and pain as the industry goes through consolidation, glimmering through the clouds are some exciting potential upsides. Hopefully we will see broader and easier availability of some technologies. We are already seeing initiative to pursue increased availability of harder to find capabilities like beta lactams and hormones, containment/high potency of all scales and stages, more CDMOs offering pre-formulation/characterization, royalty-free capability in improving solubility, particle size and work with difficult APIs, flow chemistry, mAb platforms, serialization, etc. Hopefully all this will also finally enable greater ability for same-same comparisons across CDMOs as the breadth of capabilities under one roof will become more homogenous across CDMOs.

Calm after the storm?
The potential for the new landscape of CDMOs to enable better development options is exciting. But bigger does not work for everyone and the market is already reflecting that. Not all the good CDMOs are being acquired and some of the smaller CDMOs are still go-to places for certain capabilities. Some are investing and some are combining. Already some of the people that did not stay on as they were acquired are joining or starting smaller CDMOs. Some founders who sold are starting another of the same thing. Some good CDMOs in China and India continue to expand and improve, adding western footprints at the back-end of the process, adding a potentially valuable benefit for sponsors.
 
For smaller sponsors to capitalize on the opportunity and manage the challenges calls for some new tools and approaches, and it calls for knowing more than ever what you need and how to buy it.
Having been in calm waters for quite a while, where we knew the landmarks, we’ve now been blown out into the big water. For those who stock their ship appropriately and who are prepared to navigate with the right tools, new and promising destinations may be possible. But it will take hard work and the right crew to get there. 

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Paul Woitach is Managing Partner of Pharmaceutical Advisors LLC, a firm that helps clients plan and manage outsourced R&D while managing infrastructure. Paul helped found the practice in 2001 within Solutia and he was part of the group that acquired the practice from Solutia in 2005. Prior to Solutia, he led a turnaround and sale of divisions as CEO of Immunogenetics (IGI). Before that, he was North American General Manager for scientific instrument leader Mettler Toledo and was a Vice President with Kodak’s $2B Health Imaging Division. Mr. Woitach has served on the Board of Directors of public companies and on the Advisory Board of the Hackensack University Medical Center Life Sciences Institute. He is currently serving on the Board of Directors of the Camille and Henry Dreyfus Foundation, the Montgomery Township Board of Adjustment, and on the Advisory Board of the New Jersey Economic Development Authority Bioscience Center. Mr. Woitach holds an MBA from the William E. Simon School of Business.