By David Lowndes, senior VP for supply chain management, Shire
Outsourcing has the potential of lowering manufacturing costs. However, there remains a fundamental mismatch between the revenue desired on behalf of the sponsor, the margin required by CMOs, the price that insurance is willing to reimburse, and the out-ofpocket expense a patient can afford to pay. No longer can sponsors expect to win via squeezing their suppliers on margins. A significant manufacturing issue resulting from trying to cut costs can interrupt supply, damage a company’s reputation — and most importantly — have negative consequences on the most important person in the entire equation — the patient. Just calculate the contribution to the bottom line for your CMO of each batch it makes for you, and then think about the decisions made daily that impact your product. It gives you a real appreciation for the integrity a majority of our CMOs have when balancing the viability of their business with the needs of ensuring a safe, high-quality, and reliable drug supply. I am not advocating higher margins for CMOs. That is something the market establishes. Notwithstanding, it is clear that negotiating the last dime out of your CMO partner does not help the situation. The truth, though, is that this calculation cannot be balanced simply by paying more. If this were the case, we should move back to manufacturing the product ourselves. The solution is much broader.
As Good As Or Better Than Vertical Integration
So how do we create an outsourcing model that is as good as, or better than, a vertical model without adding unnecessary risk? For the last couple of years I have had responsibility for the supply activities in the specialty pharmaceuticals division of Shire (NASDAQ: SHPG). With the exception of our U.S. distribution center, these activities are built upon a fully outsourced supply chain. Two years ago, Shire was in the final stages of closing its in-house manufacturing capabilities and consolidating these into DSM’s Greenville, NC, contract manufacturing facility. The decision made DSM Shire’s biggest CMO partner and Shire DSM’s biggest client. The question became, “How would we address both the challenges and the opportunities this symbiotic relationship would present?”
Best Practices Of Creating A Symbiotic Relationship
The relationship between your company and your CMO should be founded on a few simple principles. First, the outcome for the patient, in safety, quality, and availability of product cannot be different for either the sponsor or CMO, simply because we have chosen to outsource. Second, in order to achieve the desired outcome, the sponsor and CMO MUST work together as if they are one company. Finally, both the CMO and sponsor have to be accountable according to your own business models.
Think of the cost-of-quality model. The lowest cost of quality is the one that best supports the CMO’s business model. On the other hand, with our accountability to the patient, those that care for them, regulators, and payers, the lowest cost of quality is usually not the best place for us to be, as we have the reputational risk and the higher margin risk. If we do not work to prevent quality issues, the cost of failure will be very high — recalls, batch rejections, poor yields, etc. Typically, our manufacturing and supply contracts allow us to hold our CMOs accountable for their mistakes, and with the margins they make, these costs are very damaging. However, it is not in our best interest to release them from this liability; rather, it is critical to maintain their accountability as this is what drives failure out of their processes. As a sponsor, it suits our business model to be higher up the preventative curve, increasing the cost of quality. Because this additional cost is not something that suits the usual CMO’s business model, we must be willing to provide funding and/ or resources for preventative measures that reduce failure beyond the lowest cost of quality. It is equally critical to the success and longevity of the relationship that we remain accountable for this.
Based on these principles, teams from our two organizations worked together to create more a plant-in-plant approach, not full blown customization of one section of the facility to our needs, but far beyond a person-in-plant approach. Teams focused on people, plant, process, technology, and risk, then built a multilayered joint governance structure to drive toward the performance and outcomes desired by both parties. We have taken patients to our CMO to help share our motivation with the teams that make our products. A compliance index has been implemented and 100% performance achieved. A collaborative approach between our QA functions during batch review has cut the Shire batch-release time from seven days to half a day. On-time delivery has increased notably, and cycle times have been halved across the board. Seven years’ worth of production data for our products has been uploaded into our Discoverent system, and joint teams are using the data together to develop a more QbD approach and to drive process capability. We have worked together to introduce a lab-cell approach, cutting lab-cycle time from 20 days to 2 days. We are delivering on a wide range of collaborative initiatives as if we were one company.
The Integrated Outsourced Supply Chain
If the FDA’s concerns cause me to have sleepless nights, then so they must for those who run CMOs. Add to this the significant improvement in performance achieved with DSM, benefiting both our businesses, and we have the basis for a constructive conversation with other CMO partners, those for whom we are not a big client. Many of these companies have long known that the approach needs to change; they have been squeezed by clients and have felt the increased scrutiny from the agency. What we found was that they were looking for partners who were willing to join them in driving the change.
So we have now embarked on a journey to create the “Integrated Outsourced Supply Chain.” Starting with the supply chain for our biggest product, we are meeting with the supply sites for that product to discuss how we all work together to deliver the safety, quality, and availability of products required by our patients. The same principles apply, so we will do this behaving as if we are one company. This is a difficult concept when the supply chain is fully dual sourced, because CMOs normally compete with each other for work, but within a single product’s supply chain the needs of patients are best served by sharing best practices.
If the benchmark is the vertically integrated supply chain, for our outsourced supply chain to be as effective or better, we need to behave as if we are one company, and we need to make things happen in those vertically integrated supply chains to improve performance. This means that when a lab at one site is struggling with an analytical method that another site’s lab has no issues with, we should be able to get those analysts together to figure out what is going on and resolve it. This is what would be done in a vertically integrated supply chain, and the fact that we have chosen an outsourced model should not prevent us from doing the right thing. Of course, Shire needs to pick up the costs, as this is beyond the preventative measures that make sense for the CMO, and in rare cases we may need to address issues of IP.