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Designing a new business plan in the Pharma CDMO industry. Are you ready to wait?

There are times in the life of an organization when the reset button needs to be pressed. It might be the period following a crisis or the change of ownership, in the aftermath of an acquisition or maybe when a new operation within the organization is about to start, or just because the growth and/or profitability rate is not on the desirable level. And this is when a new business plan is usually required. The new owners, the new Members of the Board, the new investors or the new CEO want to know what to expect for the next years. And as someone I worked with in the past used to say, it is important to know Who will do What, by When.And this is where the tricky part begins. The strategy and the business plan for the next years need to be structured by people who are familiar with the business. Experience has shown that it is not wise to trust experts from another industry or consultants that are generalists, to build your future. It is easy to say that in the next three to four years figures will explode but especially in the pharmaceutical CDMO industry it is not that simple.This article attempts to explain why and manage expectations of new Investors, Members of the Board or companies willing to start a new integrated CDMO organization within an existing organization. CDMO business is for those who can wait, and the reason is simple. All the effort that a CDMO puts now, all the new proposals it offers to customers, all new business agreed now, will bear fruits gradually in the future. This is because of the long timelines required for transferring in a product to a new manufacturing site and all the uncertainties coming with it. Moreover, before even reaching the transfer in stage, it takes time to prepare a quotation and to get a positive feedback from customers.

So, next time you hear someone building an aggressive business plan in terms of timelines and growth in the pharma CDMO industry, ask for details and look for realistic explanation. Important rewards should be expected at least 5 years later. Let’s see why with an example.

First let’s set some basic assumptions. Usually periods following a crisis, change of ownership, or attempts to set an organization from scratch require a reset. This means that limited or no new business has been agreed at time zero. Therefore, all effort starts now. And effort begins by providing new quotations to customers, wait for their response, and ultimately agreeing some new business. Then, begin the technology transfer, succeed in validation batches, perform stability studies, register to health authorities the new manufacturing site, hoping that everything will go according to plan. Only then the CDMO is ready to start producing the commercial batches.

The below example uses the following basic assumptions:

Target for revenue coming from new business is set to 100. Let’s see by when this target can be reached taking the below assumptions:

  • Each year the CDMO has the resources to submit quotations of 100 worth of revenue
  • Success rate of submitted quotations to customers is set to 20%. This is the average of the CDMO business as experience has shown
  • So, according to this success rate, each year the CDMO can agree 20 worth of revenue from new business
  • Completion time of transfer: 18 months
  • Revenue of new business agreed coming from routine productions will come gradually. In an optimistic scenario: 25% on the first year, 75% on the second year and only in the third year the full agreed revenue will be materialized. This is because in the first year, some limited revenue might be expected from validation activities, in the second year routine productions will not start in the beginning of the year, or not all SKUs will be produced (for a more complex project), and on the third year, assuming that all countries have been registered to health authorities and transfer is successful, full quoted revenue can be expected.
  • For simplicity reasons, no discontinuation of existing products will occur as well as current portfolio will have no fluctuation in the foreseeable future.

The below table shows how agreed revenue from new business will be materialized through the years.

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Due to the reasons described above, revenue will come gradually and as it shown by the table, total target of 100 cannot be expected to be achieved before year 6. Moreover, the total benefit from 5 years effort will come in year 7.

This is an optimistic scenario assuming that everything will go according to plan during the transfer process, and volumes agreed during the quotation phase (and subsequently revenue) will be unchanged. Experience has shown that many of the products that outsourced to CDMOs in the pharma industry are mature products with a tendency to lose market share as years go by. Therefore, it is not strange for CDMOs to see agreements made 5 or 6 years ago to be different than actual picture in terms of annual volumes and thus revenue. Furthermore, exactly because of the nature of the business it is also not strange for CDMOs to experience volume erosion of existing portfolio as years go by.

Nevertheless, the example used here assumes all other parameters to remain the same as in year 1.

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Of course, someone could argue that there are ways to bring the final target closer to year 1. The main two ways to do this is to increase either the number of RFQs (by increasing your resources to prepare and submit offers and your ability to identify more opportunities) or increase the success rate of submitted quotations to customers. The first one would increase your level of submitted quotations and the second one, the level of agreed business.

The first solution requires hiring additional people both within business development dpt. and maybe also in operations. Moreover, a more efficient RFQ management for faster responses can help. It might also require changes in the way of RFQ approach and move from reactive approach to proactive approach in RFQ management. This means that instead of waiting from customers to ask you for a quotation, find ways to provoke quotations requests than waiting to be asked for.

The second solution requires better costing and pricing policies. What the product that is about to be quoted should cost and what the customer is willing to pay for the specific product. Better understanding of what the competition is offering for the specific product types can also increase the success rate. In other words, move from cost plus to market minus approach.

The above example deals with the part of the business plan related to revenue evolution of the business. It has to be translated to EBITDA evolution for the coming years by estimating the Gross Profit of the new business and include any additional expected indirect cost on top (indirect personnel, promotion, exhibition participation etc). Investments down the road need also to be defined according to the adopted Investment Policy.

Summarizing, CDMO’s Top Management needs to comprehend the time parameter of the business, manage investors expectations and rely on a challenging but realistic business plan, based on production technologies and company strategy, developed by hands-on field experts within and outside the organization.

Furthermore, in order to secure successful business plan implementation:

  • Targets have to be set and achievements, towards the targets, to be monitored on monthly basis.
  • Clear Roadmap to be developed and Key Performance Indicators to be established for progress monitoring.
  • Progress toward business plan to be reviewed constantly and adjustments/changes on needed actions to be implemented if necessary, in order to remain aligned with the business plan.

Fuliginous Management Ltd specializes in the pharmaceutical CDMO business and its consultants carry many years of experience in this field. We know what it takes to increase both the level of submitted quotations and the level of agreed business by developing tools, models and processes tailor-made for our customers’ needs. In other words, We know What to do by When in order to make a CDMO succeeding in securing profitable organic growth.

If you are ready to design your next business plan, get in contact and we will build together an ambitious, realistic and achievable business plan that will not need adjustments every year since it will be based on solid assumptions, clear steps, measurable actions and KPIs.

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