Magazine Article | March 1, 2016

CMOs And Pharma Sponsors: Who's The Rhino And Who's The Tickbird?

Source: Life Science Leader

By Sue Wollowiz, President, Wollowitz Associates LLC

The rhinoceros and the tickbird have a symbiotic relationship. The tickbird eats insects off the rhino, providing food for himself and insect control for his or her host. But would you say that the tickbird and rhino have the same needs and wants? Does the rhino want a nest on his or her back, and does the tickbird want to go swimming?

Biotechnology and pharmaceutical sponsors and outsourcing service providers are in the same type of relationship, if not on the same savannah. The relationship is symbiotic — to a far greater extent than a mere mouthful of insects. But the fact is the sponsor and the service provider also want and need different things from the relationship. They agree on what a sponsor wants from a service provider, but what the service provider wants for itself is a rarer focus of discussion. Let’s start from the side less discussed.

Mid-last year, I read an interview with Samsung BioLogics’ President and CEO, Tae Han Kim, at OutsourcedPharma. com. Kim took the unusual step of talking about what a CMO business needs, from a business perspective, to be world class. “I define the CMO champion as having the largest, top-quality manufacturing capacity, the largest revenue, and the greatest profit,” Kim said. While some might disagree with his comments, they were honest: For a CMO business to be viable, it needs to operate at high capacity, it needs reasonable operating margins, it wants return customers so there is less marketing spend required, and preferably long-term agreements with sponsors to stabilize finances. But does a sponsor select a CMO because it has the largest revenue and the greatest profit margins? Probably as much as a CMO would provide quotations only to those sponsors with the largest sales volume.

What sponsors want out of CMOs — should want out of CMOs, or how they should rate CMOs — is the subject of an article once per month in some periodical or in some blog, authored by people on both sides of the fence. Are CEO Kim’s the universal traits that make a CMO “world class”?

In my experience, what becomes important in an outsourcing relationship is how to ensure the two parties effectively contribute to the business goals of each company. This is easy when the goals are aligned, but often they are not, and it becomes more challenging if the parties’ measures of success for even the same activities differ. While on-time batch release or a successful FDA audit may represent shared business goals, there are surrounding and various other activities that require compromise to get to business successes for both parties.

Two of the most challenging areas are in production scheduling and managing scope changes. While both parties want on-time delivery of ordered goods, the desirable delivery schedules are not always aligned. Sponsors are frustrated by long lead times and elongated production schedules, by back orders on raw material inventory, and a seemingly inability of CMOs to be more flexible and accommodate schedule change requests. For example, the inability to obtain material on time may be costing the sponsor in lost revenue, in extra costs for back-up options, or in marketing losses even before production starts. On the other side, the production facility tries to schedule six months to a year out so that it can more efficiently plan personnel and equipment needs to lower its costs and raise operating margins. To accommodate the sponsors’ schedule changes for whatever reasons, CMOs have to maintain idle capacity, perhaps expand to a seven-day week to then shorten a production run, take on the expense of storing larger inventories of raw materials, and mess up the queue for analytical work.

"What becomes important in an outsourcing relationship is how to ensure the two parties effectively contribute to the business goals of each company."

Moreover, where production is all about scheduling, development projects are more about scope and flexibility. Sponsors need flexibility to make scope changes in requested project activities as data is obtained and analyzed. Results obtained in the sponsors’ facilities or the CMOs can narrow, expand, or refocus the subsequent activities required to move the project along. Results from safety, pharmacology, clinical trials, or marketing assessments can impact the scope of activities at the CMO. Flexibility may also mean speed of progress needed, changes in batch sizes, amount of testing required, etc. It may mean changes in process or formulation definitions that call for less frequently used equipment, and at a variety of operating scales, e.g., for isolation and drying, purification, granulation, or testing. Oh, and of course, through it all the sponsors will demand their project remains prioritized over competing activities at the CMO.

Having been on the side of the sponsor, I know that all the above are not necessarily evidence of spoiled behavior. Rather, the behaviors and requests are the result of the real-world timeline pressures that require making decisions — and often providing project guidance — with less information than desirable. It is a constant struggle to identify what needs to be evaluated in the current phase of activity and what could drag the project out. With breakthrough designations and fasttrack status trending in the pharma business today, flexibility and responsiveness on the part of the CMO are even more important for the sponsor to achieve its business needs.

This is understood by the CMO, but this flexibility comes with costs to them, as mentioned above. What are the CMO’s needs then? It starts with an understanding by sponsors this will mean more personnel time in managing increased internal and intercompany communications, scope changes, and scheduling regardless of whether it results in the CMO asking for additional fees or not. To provide this additional manufacturing responsiveness, it also means the CMO has to somehow maintain an even more flexible or open (idle) capacity in both labs and production areas. Interestingly, it is the CMOs that operate at very high capacity with great efficiency of personnel and equipment (i.e., the most successful CMOs) that might be less responsive to the customer who is dealing with uncertainties and incomplete knowledge on their own end. All of this harkens back to all of those articles we mentioned dealing with the subject of “what the customer wants”! There is still a lot to uncover in getting to a fully mutual sponsor-provider relationship.

Finally, let’s all face it, our business is cyclic. Supply and demand says that the service providers will spend a lot more time worrying about accommodating the customer in dry years, but less in “wet” years. The most recent era of a favorable economy, and such things as new therapeutic technologies, may be providing the CMOs with more work and filled capacity, but at the same time take away from the ability to add this layer of flexibility sponsors now need. But as with the rhino and the tickbird, living in the same environment but having very different needs for survival, sponsors and providers rely on each other to thrive. And by the way, are we sure which is the rhino and which the tickbird?