Sorry, Emre Ozcan says at the start of our call. “I just got out of a very long, busy day.” As global head of strategic healthcare at Merck, he’s currently trying to optimise strategies to fight the spread of COVID-19. Manufacturers are scrambling to maintain supply chains as market after market wobbles or shuts down entirely. It’s a sobering reminder that it’s past time for pharma to learn the art of the strategic manufacturing partnership.
“The CMO landscape in pharma is an amazingly stubborn field when it comes to consolidation – it’s an extremely fragmented field,” Ozcan says.
Unlike other manufacturing sectors, pharma is still very much attached to the fee-for-service model of contract manufacturing. Despite the fact that outsourcing now accounts for 22% of pharmaceutical manufacturing, a 2018 study undertaken by BCG found that only 25% of executives said their strategic partnerships had been successful.
It’s not that there’s anything wrong with the feefor- service model per se. “There are many times where they are required and they are very useful,” says Ozcan.
For products that are low-demand, low-volume, late-stage or only needed in the short term, there’s no need for a more elaborate contract – although it’s still worth investing in the relationship.
“In those cases, you might just say, ‘Look, I want to build a joint performance management framework together. I want to be able to share more data visibility on our procurement costs and so forth,’” says Ozcan.
Time for a partnership
If the accompanying risk of over or under-supply becomes too great, a manufacturer needs more control over production or is looking for access to a new market, it’s time for a new plan. Manufacturers might look at a reserved capacity partnership that guarantees them access to a specific amount of a CMO’s capacity for a prearranged period, or the condo model, in which the manufacturer would take over part of a CMO’s facility.
It is likely that more partners will begin to embrace joint ventures, where both CMOs and manufacturers invest in building or expanding a facility together. It’s useful when dealing with products that are still in development, with no way to know whether it will launch or what demand might look like – particularly products that need sophisticated technology.
This is particularly common in the biologics space, with products such as antibody-drug conjugates or gene therapies.
“A pharma company might feel reluctant to invest in these technologies unless they have quite a largescale portfolio themselves,” Ozcan explains. “This is one exciting area where the companies sit down, share their risks and also share potential revenues.”
One example of a successful case study is the $285 million Sanofi-Lonza joint investment in a large-scale biologics production facility in Visp, Switzerland, which was announced in 2017 and is expected to be operational in 2020. The investment was split equally.
“Sanofi has traditionally had a very large manufacturing footprint, but not in technologies where their research and development department is going, so they especially want to move into the biologics space,” says Ozcan. “What I can see happening a lot more is your development capabilities, especially in manufacturing, becoming a key success factor.”
Lonza, a CMO in the biologics space, will provide the tech and manufacturing knowledge, while Sanofi will take first-use rights for the plant so it can cope with the fluctuating demands it expects during the launch of its monoclonal antibody products. If demand is low, Lonza can market its new capacity elsewhere.
“I haven't seen a lot of such things,” Ozcan says. “I think part of it is because you see big players like Thermofisher moving in this field very quickly, generating new revenue and new capabilities. I expected to see a lot more of it, simply because of the size of the investments required.”
The oncology and immunology field is moving very fast. “It’s getting very crowded, so even if you’re ahead of your competitor by three months in launching a product, it might help you gain double market share,” explains Ozcan. “In this type of setting, I see a lot more of the joint venture-type of thinking.”
The rise of global companies
Also on the horizon is a lean towards more global enterprises – joint investments that will allow a pharma company to access a CMO’s worldwide network. If a company’s only source is a CMO in China and China is shut down, “they are in a tough spot”, says Ozcan. But partnering with a CMO with an international presence at its disposal can significantly de-risk a supply chain. This kind of rigorous risk assessment, combined with complex global supply chains, is already standard in the automobile industry.
“It will probably trigger a lot more consolidation in the pharma market,” Ozcan says. “Then pharma companies might be more willing to add additional premium to what they pay, simply to have access to a global company.”
Ozcan is intrigued by a trend for biopharma companies to morph into “reluctant CMOs” after merger and acquisition activities. Over the past few years, as powerful players like MSD, MAC and Novartis have begun to clear their portfolios of products – where the patent has run out or profits have dropped – the manufacturers they bought out find themselves in the position of a CMO.
However, they end up without the capability to handle the owner’s expectations or the price markups that would normally help shield a CMO from risk. An acquisition can also leave a manufacturer with a four to five year lag before the technology transfer to the owner’s manufacturing sites is complete; that’s plenty of time to end up with unused capacity on sites that manufacture both their own and divested products.
Rethink the future
Some, like Boehringer Ingelheim, have embraced the CMO life and now offer it as a separate capability with the same branding, while Pfizer and Sanofi have set up stand-alone CMOs. Ozcan expects the question of whether to go down the CMO path to become more pressing in the future, especially for biopharma companies keen to innovate. CMOs, on the other hand, are looking to offer more as partners, becoming a ‘one-stop shop’ that takes on more risk and provides a more holistic service, in return for a greater share of the revenue.
The current crisis might have companies suddenly rethinking their standard approach, but Ozcan cautions: do your homework.
“Some CMOs are owned by private equities, some of them are in emerging markets where you might not be able to rely on the quality data, so it makes that due diligence critical,” explains Ozcan. “You need to think ‘Who are you going to be partnering with and why?’”
The “why” is essential and sometimes overlooked, given what Ozcan calls the “mission impossible” of the pharma industry. Those that fail to prioritise might go into a partnership with a checklist of conflicting requirements.
“You’re looking for cost, you’re looking for flexibility, you want access, you want speed, you’re looking for the cherry on the cake,” says Ozcan. “That doesn’t really exist, by and large.”
The right fit
These trade-offs are inevitable so it’s important to be clear on needs and preferences to navigate these effectively. One often-ignored part of the process is finding a CMO that’s the right cultural fit. “One mistake is assuming that all CMOs are the same when it comes to their culture,” says Ozcan. “Some of them are extremely technical and very good at the science of it but they might sometimes lack the business acumen and for some of them it’s the opposite.”
Once an agreement gets off the ground, a manufacturer that is used to using transactional fees for service contracts, doesn’t always understand that its new partner needs extra attention. Since a strategic agreement must be flexible enough to withstand rapidly changing market regulations, price fluctuations and different market access needs, both sides need to keep taking risks to keep the dynamic balanced and the relationship transparent.
Ozcan suggests pharma companies start by sharing their procurement data and merging their raw material needs with the CMO’s, since the higher volumes will mean a better unit price.
“It depends on the biopharma company and the CMO, but one side might have superior quality culture or operational excellence and if they manage to share it with the other side, you could find quite nice savings or prevention of quality issues,” says Ozcan.
Pharma may be a slow-moving beast, but when it comes to contract manufacturing, patience can be a difficult virtue to practice. Before they go any further, Ozcan’s advice to prospective partners is to make sure they know what they’re talking about.
“I think people tend to use the language of strategic partnerships without defining what that means,” Ozcan says. “There is no common standard or definition. It’s an over-used and underdefined concept.”
2020 global life sciences outlook: leveraging opportunities and increasing efficiencies
Accelerating research and development using technology
AI is ushering in a new era of intelligent drug discovery and the trend is likely to continue in 2020. There has been an explosion of AI start-ups and tech giants such as Google have also made advances in AI-driven biochemistry, which are expected to lead to new developments. Pharmaceutical companies are expected to continue to leverage partnerships. Drug approval rates have also witnessed a spike. Fasttracking new drugs is becoming the ‘new normal’, but there are also concerns over quality, safety and costs.
Increasing operational efficiency
The demand for small-volume, personalised medicines is driving operations away from large-scale bulk production to multiproduct facilities. The lens is gradually zooming in on smart factories of the future that may offer digital automation solutions, industrial IoT connectivity and flexible manufacturing processes. With a digitised core, the number of days it takes to release a drug product could potentially be reduced from 100 days to seven.
Data-driven manufacturing is generating more excitement heading into 2020, providing a renewed focus on quality. Companies are being nudged to revisit their approach towards managing the cost of quality and compliance, and businesses are expected to be more agile. With new technologies such as AI and augmented reality, organisations could track productivity in real time, as well as reduce the risk of human error.
Partnering with other players and leveraging outsourcing opportunities are likely to be a huge success factor. Partner expertise could help address manufacturing, supply chain and distribution challenges and key outsourcing areas could be cell therapy manufacturing and big-data capabilities.
