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External Manufacturing Network of Pharma companies without own-manufacturing facilities

“…do we work for our company’s benefit as well or just for the benefit of all other parts of the supply chain industry…?”

Commercial Pharma Companies

Out of a sample of 320 pharma companies operating in Europe and listed in our database, more than 120 do not have own-manufacturing activity, focusing mainly in commercializing products. The vast majority of these Commercial Pharma Companies (CPCs) market traditional technology products that face increased competition in the market.

Not having manufacturing capabilities CPCs rely exclusively on their External Manufacturing Network for having their products ready for sale.

How External Manufacturing Network looks today in CPCs?

The products that CPCs market, come from in-licensing, product acquisitions or own product development. In-licensing seems to be preferred to the other two models since it allows fast market entry, limited initial investment and manageable risk for the first years of product commercialization. On the other hand it lags behind the other two in product Gross Profit (GP) margin, flexibility in future product changes and manufacturer selection as well as in the company’s valuation for the future.

For all three models, at the time of the deal/decision the Gross Profit of the product is supporting the business case and this is usually the case for a number of years. As time passes, product commercialization cost as well as product supply cost increase (supplier price increase requests, additional requirements from authorities, …). On the contrary prices stay flat or decrease resulting, after a period of time, to product Gross Profit shrinkage well below the product category market average. This is the time when stockholders question themselves:

“…do we work for our company’s benefit as well or just for the benefit of all other parts of the supply chain industry…?”

The drop in GP, at a point in time, raises question marks if it really makes financial sense to keep commercializing the product and also creates unpleasant thoughts about the survival of the company in the future. These concerns oblige CPCs to escape forward by introducing new products with better GP (than the existing ones) in order to keep an acceptable EBITDA for the company. This is a non-ending cycle since the new products GP will again shrink after a period of time.

Unavoidably, the increase in the number of products of a CPCs leads in adding new suppliers in the list that subsequently increases complexity and administration cost. Also risk management becomes more and more an important parameter for the business going forward.

After examining a number of products (917 products for which information could be found online) of a relatively small sample of CPCs (20), the three major findings are:

Diffusing a given business to a big number of suppliers deteriorates CPC’s weight per supplier. This may lead to limited attention from supplier’s side towards the CPC.

Having a big number of suppliers for products of the same product technology could make the loss of opportunity more intensive since potential synergies are also not obtained.

Using suppliers for which contract manufacturing is not a core business may lead to limited flexibility, less competitiveness for the product and higher risk for being in a position to find a new home urgently at a point in time.

The External Manufacturing Network situation, as described above, seems to be mainly a result of the combination of three factors:

  • All attention of the company is given to increase the top line without really managing the cost
  • In-licensing model
  • No organized effort in optimizing existing suppliers network

Does this mean that CPCs should stop focusing in top line growth and in in-licensing? Definitely not! This should continue according to the company’s strategy. At the same time though network optimization should take place and an Outsourcing strategy has to be established to support a sustainable growth.

 Does External Manufacturing Network optimization worth the effort and investment?

So, if there is important value to be gained in suppliers’ network evaluation and subsequent optimization, why such a project is not one of the top priorities in the CPCs?

The main reasons are:

The potential benefit is not clear due to lack of benchmarking information. A business case cannot easily be created based on cost / benefit analysis. This creates hesitation in occupying resources and initiates a project with unknown outcome.

There are uncertainties related to potential product transfer difficulties that could not be foreseen from the beginning. This is true with old product files with vague process descriptions and for which a transfer process could trigger additional requirements by the authorities.

Fear to spoil the relationship with current suppliers is involved. Good relationship with suppliers is of high importance and there is a fear that “difficult” discussions would harm the relationship especially if some other products remain with the suppliers.

Contracts include obligations or clauses that limit CPC freedom to select supplier of choice. This is usually the case with in-licensed products.

Supply portfolio risk evaluation is not performed and thus related risk is not realized.

Suppliers’ network evaluation and optimization program, addressing the uncertainties mentioned above, could deliver a number of important benefits:

– External manufacturing annual spend reduction between, indicatively, 10% and 15%

– External manufacturing network risk management and risk mitigation

-Lower internal cost for efficiently managing suppliers

-Increase company’s weight on fewer preferred suppliers

The answer to the question in the title of the paragraph is YES if it is based on solid business cases that take into consideration real market assumptions.

 What should be done and how?

The most decisive step is the thorough evaluation of products and suppliers.

-Product Price benchmarking would define products with higher price than market average.

-Analysis of product category GP and comparison to market average would indicate areas of attention.

-Product restrictions due to contract clauses should be taken into consideration.

-Supplier evaluation based on criteria according to company’s strategy would show preferred or high risk suppliers.

Combining the outcome of the above analysis, a number of product bundles would be identified as business cases either due to high price / low GP or because of high risk suppliers.

Cost / benefit evaluation of the business cases, based on clear assumptions according to market standards, will rank them according to expected overall benefit and define the action plan and priorities going forward.

In the implementation phase, assumptions should be tested and, if necessary, modifications of the business case should be done before proceeding with the change implementation.

As companies grow it is inevitable that new products and suppliers will be added to the list. Having a clear outsourcing strategy and running a product and network review, within specified intervals, is the recipe for achieving and keeping an optimized External Manufacturing Network.

 

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