The Future of Contract Manufacturing

What is the role of CMOs in the 21st century?

By Hans Engels and Michael Brookman
DSM PharmaceuticalClarus Information

It is commonly accepted that the Contract ManufacturingOrganization (CMO) segment in the pharmaceutical supply chain will significantly grow in the near future. However, it is unlikely that this growth will be a linear extrapolation of the present structure. Today, the CMO industry is highly fragmented and even the largest CMOs are still small in the context of the total pharma manufacturing capacity demand. Existing CMOs are not able to absorb the production volume that will come their way if Large Pharma follows through on their published strategy of outsourcing as much as 30% of their production needs. The highly fragmented CMO industry makes it very difficult to manage the future volumes, due to the resulting high number of interfaces. Additionally, in spite of efforts from all parties, contracts and relationships remain predominantly tactical. This makes it nearly impossible for the smaller CMO players to develop a coherent business plan with sufficient confidence to ensure acceptable returns on investment in the mid- and long term.

The CMO industry must take the initiative and work with pharma companies (large and mid-size) on sustainable business models in support of the major changes the pharmaceutical manufacturing industry is facing.

The History and Future of Pharmaceutical Supply Sourcing

Best sourcing practice in the pharmaceutical business model can be described as in Fig. 1; an issue is identified — such as a new technical challenge, capacity expansion, or new compliance requirements — and the best possible resources are employed to provide a solution, i.e. specialists are hired, a facility is built, or equipment is purchased. This method can be labeled as the “engineering controlled” method. The “engineering” method ensures that the company is in full control and the issue is typically resolved satisfactorily. The consequences are overcapacity and underutilization of facilities and resources, leading to high cost and high capital requirements. Many of the manufacturing and supply chain problems that the pharma industry is presently facing are rooted in the use of this approach. Other industries have avoided the inherent problems of the engineering approach by using the purchasing method. Though engineering and manufacturing skills are still the core of both models, the purchasing method incorporates a problem-solving approach that assesses the options throughout an entire pre-established network to make the best business decision considering long- and short-term supply success and profitability.

Figure 1: Engineering driven vs. Purchasing driven

The progress in the outsourcing/networking adaptation can be segmented according to Bernstein, 2008 in the following stages:

1.Capacity augmentation (purely tactical/local sourcing)

2.Value realization

3.Strategic supplier management

4.Global supplier management

According to the same source, only financial institutions have fully adopted the final stage. The automotive industry is approaching global sourcing and consumer products are at the strategic supplier management stage.

Figure 2: Sourcing adaptation for different industries

We applied the outsourcing/net-working stage definitions to the recent and future ambition levels in the pharma industry in Fig. 3. There is an estimated range of plus/minus two to three years for different companies.

Until 2002, CMOs were hired by local pharma entities and used to cover capacity peaks and dilute cost. This model was not sustainable, highlighted by the fact that many CMOs ran into GMP compliance problems, impacting the core of their pharma sponsors. Pharma quality assurance leaders started to scrutinize the CMOs and the purchasing teams became aware of “lost opportunities.” The value CMOs can have was recognized

Figure 3: Evolution of pharma supply chain sourcing

and a pure purchasing approach was adopted (c.2005). Pharma continues to recognize that a pure purchasing approach does not support the desired longevity of the relationship, i.e. the cost and risk when the CMO exits, and strategic supplier management with the appropriate organizational structure was/is implemented (2010). Some large and mid-size pharma companies are much further along in this process than others. However, it is safe to say that no company has reached maturity in this process.


In the future, pharma companies will have established networks, consisting of their own and CMO facilities. There will be no significant difference between their internally developed option and the CMO facility, and a given contract will be awarded to the best fit, which should provide the highest security of supply and the optimum return on investment. In the not too distant future, networks from different companies will overlap and the purchasing departments will have an even greater network to find the best fit for a given challenge. The big task will be to create and operate these networks. Since complete central coordination will become impossible, elements of “self controlling” networks will have to be developed and applied.

Figure 4: Future facility networks

Present and Future Challenges

The pharmaceutical industry is in a phase where past and present success models are obsolete or at least in question. The foundation of the industry will be redefined due to new business opportunities, eroding success models and mandatory challenges.

Major opportunities are developing in emerging markets such as Asia, South America and Africa. These markets require new business models and capabilities to ensure success in these very diverse territories.

Eroding success models also drive the need for change:

•The expiration of the Blockbuster Model forces a new approach to product pipeline strategies

•Dwindling R&D productivity forces a new approach to the selection of therapeutic target areas and the sourcing of product innovation.

•Mergers and acquisitions require new skills to harvest fully and fast the desired synergies

•Aggressive generic intrusion requires new business models to harvest the maximum from the product invention.

Mandatory challenges are created by:

•Efforts to control health care costs

•Stronger emphasis on pharmacoeconomics

•Increased expectations from investors to ensure sufficient access to capital

•Internationalization of regulations


The list is mind spinning and could go on and on. In any case, these drivers will create new realities for the CMO industry as well. The anticipation and adaptation of the effect of these trends will be a key success factor for CMOs and a significant competitive advantage.

The CMO industry is by its nature not the change driver. However, the industry must support and accelerate required changes where possible by creating new business opportunities that lead to mutual benefits among the major parties: patient – health care providers – pharma industry – CMOs.

Future challenges, opportunities and differentiators are crystallizing now. Some of the challenges are not new, but were never appropriately dealt with in the past; other existing challenges will grow from today’s minor nuisances to the differentiators in the future.

Key Success Factors

There will be no major change in the hierarchy of the key success factors (KSFs) for the CMO industry (Fig. 5)

Figure 5: Hierarchy of main success factors for CMOs

The major elements of the Security of Supply KSF are continuous on-time delivery performance, continuous improvements to make processes more reliable, and strong and consistent quality and compliance performance. Often forgotten is the importance of mid- and long-term financial stability, since this is the foundation for sustainability.

The Cost KSF is considering the typical “batch cost,” and cost for other services like tech transfers and product specific capital investments, and continuous cost improvements that will minimize the total (network) cost. It will be important for CMOs to understand their role in the supply chain better to be able to contribute to supply chain cost improvements in a more comprehensive manner.

Transparency is presently an undervalued KSF and will become increasingly important, driven by expanded networking. Major supporting elements for this KSF are the relationship governance model, communication processes and automated and realtime access to all relevant data. The objective is to have full transparency of all relevant activities leading to improved partnerships and greater competitive advantages in the pharmaceutical market.

Supply Chain Management

The pharmaceutical supply chain is probably the most complex supply chain compared to any industry, due to tight global and regional controls, the multitude of products and SKUs and the structure of the end-user market. Presently, the supply chain is not actively managed, therefore known and perceived risks are mitigated by building inventories at many levels in the chain. It often happens that the safety inventories are built at the wrong place in the chain and are irrelevant if a supply interruption takes place in an unanticipated area.

Figure 6: Simplified manufacturing supply chain for a sterile product

Fig. 6 is a simplified model of the first and second level of a manufacturing supply chain for a sterile product. It is very common that the filling process is built redundant, because it is seen as the most critical step in the chain. This assessment is justified with historical knowledge. In reality, this process step — if well executed — is a low-risk element. The risks contributed by other elements are often not recognized or underappreciated; e.g. the supply chain is seriously interrupted when the stopper or vial supply is disrupted. Especially for biotech products, the manufacturing of the API has higher risks then the filling. However, it is very typical that the filling and not the API manufacturing is built redundantly.

Presently the supply chain is managed predominantly manually: point-to-point, resulting in significantly underestimated risks for product availability and very high operating working capital (inventory) cost to mitigate the real and perceived risks. Truly integrated supply chain planning and maintenance will be necessary in the future. Realtime data to support these systems have to be provided by all elements in the chain.

However, supply chain stress could be avoided if demand forecasting could be improved. To build and apply innovative tools that will provide demand forecasts with less fluctuation will be another challenge for the near future. The integrated analysis of a wider customer pool — more and diverse markets — will be a major supporting element.

The future of the pharma industry is bright, but will have a different shade than in the past. The details of the future structure of the industry remain unclear, but key transformation elements are crystallizing. Tight focus on investment and working capital will be a major driver for a complete overhaul of the supply chain, leading to larger, more complex networks. CMOs will play a major role in the effort to reduce capital employed. Even though the CMO industry cannot create the new world, it needs to be a transition agent and facilitator.

Hans Engels is chief executive officer of DSM Pharmaceutical Inc.
Michael Brookman is chief executive officer of Clarus Information. Mr. Engels can be reached at hans.engels@dsm.com. Mr. Brookman can be reached at mbrookman@mbicapital.com.