Piece by piece

The use of CMOs provides a number of benefits for pharma companies: gaining access to new technology, adding manufacturing capacity, mitigating risk and opening avenues for entering emerging markets. A 2018 survey by BCG revealed that four out of five executives responsible for selecting outside providers of manufacturing and supply services would like to establish strategic partnerships with CMOs. However, choosing and maintaining these relationships can be challenging. The same survey found that only a quarter of the executives felt that the deals struck had been successful relationships.

Partner up

There are ways to improve the chances of a successful collaboration with CMOs. Carefully thinking about which CMO is going to be best suited for a particular situation is key. Companies must also be clear on what they want, create a playbook to use as a template to structure a deal, conduct thorough financial evaluations and identify contingencies to deal with potential problems that may arise. These help to create and maintain a strong relationship that works for both parties.

Successful partnerships can last for decades. When GlaxoSmithKline (GSK) expanded its respiratory franchise in the 1990s to sell moresophisticated delivery devices, it partnered with a CMO to deliver Diskus, a dry-powder asthma inhaler that represented a significant improvement over existing devices. By 2010, 500 million of the devices had been manufactured and today the CMO still supports GSK with the supply of product and ongoing quality improvement activities.

It is not just the greater use of CMOs that is different in the industry today, compared with a couple of decades ago. Previously, external supply functions were virtually non-existent. Instead using CMOs on a decentralised, transactional basis was the norm. Since then, pharma companies have created global external supply organisations in order to streamline the management of CMOs, and other manufacturing materials and services suppliers. As these organisations have developed, executives who run them have come to appreciate the value of making the relationship with CMOs more effective.

This operational shift has occurred in parallel with the change in pharma portfolios from high-volume small molecules to biologics and specialised, often low-volume small molecules, which many companies do not have the capacity to manufacture themselves. CMOs have therefore been increasingly relied upon to provide the required capacity and expertise. Additionally, emerging economies are becoming more demanding in making local manufacturing a prerequisite to granting formulary access or reimbursement. That has resulted in pharma companies seeking out local partnerships as they are considered a more practical, less expensive alternative to building a facility.

Partnering with a CMO allows a pharma company to gain access to new manufacturing technology in a way that is cheaper, easier and faster than building it in-house, as well as being less risky than building it internally before a product has been approved. Products in the pipeline can be crucial to the future of an organisation, so collaborating with a strategic partner, rather than with a traditional supplier, is often the wiser choice.

A strategic partnership may be particularly beneficial for a company that is shifting its portfolio from small molecules to large molecules or that is using new or relatively rare technologies. When Seattle Genetics received accelerated approval of the ADC brentuximab vedotin, the company partnered with a CMO to manufacture the antibody and with another CMO to manufacture the cytotoxic drug. These organisations can also provide access to advanced delivery devices such as dermal patches, inhalers and continuous-release mechanisms. Teva Pharmaceutical, for example, used a CMO to make autoinjectors.

CMOs can also help a company shifting its portfolio away from a product that represents a large portion of revenue that is decreasing in value. If the CMO is manufacturing the older product, the company can concentrate internal capacity on newer, higher-value products. For instance, when esomeprazole, Pfizer’s prescription heartburn treatment, became an over-the-counter medication, the company lacked the technology required to manufacture the delayed-release, enteric-coated tablets marketed as Nexium. Rather than building capacity internally for an older product, Pfizer entered into an agreement with a CMO that had the necessary manufacturing experience.

The reduced risk provided by the use of CMOs is another advantage. The absence of a contingency plan in the event of a natural disaster, an unexpected surge in demand, or another emergency can create major supply disruption. Building extra manufacturing capacity internally for such events is prohibitively expensive, therefore partnering with a CMO is the next best alternative.

The capital costs of a pharma company are also typically lower than those of a CMO, making it easier to undertake major capital investments. However, commercialising extra capacity if the expected volume does not materialise is challenging. A CMO that co-invests with a pharma company can reduce its exposure by marketing excess capacity to other customers.

500 million
The number of drypowder asthma inhaler manufactured by 2010.
GSK

The increased localisation requirements of emerging markets is an attempt to foster their own industry and expertise. One way of satisfying such demands is to partner with either privately owned CMOs, or CMOs owned or operated by public agencies or local governments. Pharma companies benefit by achieving fast-track marketing authorisation in the country and are likely better positioned in formularies and to be approved for public-payer reimbursement.

An example of this occurring successfully is Bristol- Myers Squibb’s expansion of its business in Brazil by signing a technology transfer agreement with a pharmaceutical laboratory run by the Brazilian Ministry of Health. Bristol-Myers Squibb agreed to transfer manufacturing and distribution of the antiretroviral medication atazanavir, marketed as Reyataz, to the CMO and to train its staff in exchange for approval to sell the drug in the country.

It’s complicated

Despite the numerous advantages gained by the use of CMOs, there are a huge number of factors that can derail these strategic partnerships. For example, there may be divergent ideas about how the deal should work, with one party valuing the partnership more than the other or the team in charge lacks the required skills, experience or resources. Discussions about the reasons for using a CMO, what it should cover and how it should be structured financially must begin long before the partnership is in place.

Strategic partnerships are often so complex that the simple contracts used to cover basic manufacturing outsourcing agreements are not sufficient. External supply teams can benefit from an overarching playbook, including contract terms and specifications covering all aspects of the deal. This should clarify the amount of flexibility the company needs in order to make any last-minute changes that might arise within its own operations, while also being mindful that the CMO must have enough wiggle room to meet other client’s needs. Similarly, it should detail the requirements of regulators and the pharma company’s quality assurance team, while recognising the CMO’s need to meet the quality standards of other customers. The playbook should address contingencies.

The use of several financial scenarios can help pharma companies determine the value of potential partnerships versus the cost of keeping manufacturing in-house. Ideally this should entail three types of financial analysis: future volume, direct cost and opportunity cost. To assess future volume, the pharma company should review its long-term plans, estimated future pipeline volume, product demand and the likelihood that new products will be approved by regulators, all of which the CMO must be flexible enough to handle. To evaluate the costs of each type of partnership, the company can analyse minimumguaranteed- volume requirements, cost per batch, fixed costs with maximum number of batches, costs for additional services and volume discounts. Finally, to analyse the costs and risks of using the CMO, the company can incorporate other value measures, such as the opportunity cost of internal capacity for more valuable products, the risk of single sourcing, or the risk of entering a technological area that the company does not have manufacturing experience.

A major barrier to the long-term success of strategic partnerships is anticipated manufacturing volume that fails to materialise. When volumes are insufficient, the company and the CMO may quickly forget the reasons they collaborated in the first place and revert to negotiating purely on price. This can result in mutual mistrust, which can be magnified when there is an inadequate understanding of what the other has to offer. For the pharma company, that might mean not having enough information on the CMO’s services, total capacity, or competing priorities. For the CMO, this might be a lack of realistic estimates of the pharma company’s expected volume.

To avoid such events, both companies should be as transparent as possible about volumes, capacity and costs. Once work is under way, they can use KPIs or similar systems to track progress towards the relevant goals and tie each other’s performance to clearly defined financial outcomes.

Contracts should also cover situations that could change the nature or value of the relationship for one or both parties. For example, a new owner, a change in corporate management or a shift in pipeline or network strategy. In addition, they should also cover potential future conflicts of interest, such as the CMO’s manufacture of competing products or generics, one partner entering the other’s business or major changes in volume or CMO capacity.

Although pharma has been slower than other industries to embrace contract manufacturing, the popularity of this approach is continuing to grow at pace. Establishing strategic partnerships with carefully chosen CMOs through well-structured deals can expand capacity and gain access to novel technologies, leading to improved operating efficiencies and increased market share. Furthermore, these relationships can also provide access to emerging and lucrative new markets. Pharma companies that are not exploring such opportunities risk being left behind.