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The transformation journey of a manufacturing site from big pharma to a stand alone CDMO

There is a time in most peoples’ lives when they have to move from biking with support wheels to biking with 2 wheels. Apart from support, support wheels offer also stability, security and peace of mind. There is not much to worry about, you just have to move your legs and make sure you keep an eye on the road or the park. On top of this, usually a parent is with you to guide you and support you even more, whenever needed. When the time comes to get rid of the two additional wheels, a kind of transformation journey is required. You still continue to do the same thing (biking) but the challenges are many more. You need to adapt to the new reality, start focusing on different things, most important of which is to keep going since now you need to maintain a minimum velocity to stay upright. There is no support anymore when you turn, no guidelines from the parent when to break and this little rock or the sudden blow of wind can make you lose your balance. Let alone the fact that you gradually move away from the safe park and you start biking on the road.

To my eyes, the situation is similar when a pharma company decides to divest a manufacturing site and one fine day, instead of being part of a bigger family, the manufacturing site is left alone. Even if another CDMO acquires the site from the pharma company, it is often the case that it will remain independent with its own financial statements and resources. And although in such situations, during the first years of this transition, the site is protected (revenue protection, product volume protection etc.) this protection period is short. It can be three or four years, but this is not enough in the CDMO environment and the main reason is that in order to fill a site in three to four years you need to start preparing quotations now.

But it’s not only this. There are so many things that need to change in such situations. As it is the case when start biking alone on two wheels, a stand alone CDMO has no support or guidelines anymore from the parent company and no more secured business, and complexity increases dramatically. Instead of having to serve one customer, there is a need to start satisfying many more, instead of worrying about sticking to the production plan, attention to cost and profitability is required and among other things suddenly there is competition!

This means that there are many things that need to change in order to meet the new requirements and number one is the mentality. The mentality of the people working in the manufacturing site. And experience has shown that this is the biggest challenge of all.

Because it is difficult to change the mindset of people and explain that from now on they should be responsible for the profit and not just the cost, that OTIF should be at the same levels as this of the rest of the industry, that prices should be at the same levels as the rest of the industry and at the end of the day customers are those who pay their salaries and not the parent company anymore. From the moment that ownership changes hands, the people in the site need to start a journey; what I call a transformation journey.

But let’s deep into some details to understand the stages of this transformation journey. As mentioned above, one big change is that stand alone CDMOs need to bring in new business. And usually there is a reason that the pharma company decides to get rid of such manufacturing sites. It can just be due to a change in strategy, but it might well also be due to high cost, low utilization level, high investment requirements etc. So, if there is a manufacturing site with low utilization rate and with volume security (or revenue protection) for a predefined period of time, bringing in new business should be the number one priority. But its not only this. If costs are high and the new ownership wants to make profit, bringing in new business is not enough. You need to bring new business at the right price. The price that will allow good amount of new business to come in and at the same time to bring the desirable margin. And in order to do this, you need to know the market that you operate. You need to know what different customers are willing to pay for specific products and you also need to know what competition is offering.

On top of this, quality expectations should match those of your most demanding customer and delivery performance the same. As if this was not enough, as the years go by, the new owners will ask for growth. They will need to understand what is the cash flow, what is the expected profitability for the next 3-5 years, monitor the inventory levels, the working capital etc. They will even reach to a point where they will ask for cost savings! This does not necessarily mean layoffs, but it can mean that procurement department should make market research to find cost savings to raw and packaging materials, by negotiating with current suppliers or changing suppliers. The way of calculating the cost for new RFQs can be improved and the same goes for the pricing strategy and investment management.

Flexibility and customer service is another crucial area of attention. Form the very simple to the most complicated tasks. If competition provides a new quotation in two to three weeks, you cannot provide yours in a month. If a customer wants to split each batch to 5 different SKUs, you cannot afford to decline its request. When there is a failure in a batch and the customer is out of stock, you need to try your best to produce the batch again as soon as possible.

And then, there is contract management. As a stand alone CDMO, you need to make sure that your contracts protect and not harm you. You also need to be aware for contract clauses that enable you and for those that constrain you. And of course the entire organization should review a contract before it is signed and not just the legal team.

For all of the above to take place, new procedures and new tools will most probably be required. New KPIs, new monitoring systems and finally organizational changes cannot be avoided. There are dozens of new needs that have to be addressed and they need to be addressed fast, before existing volumes start moving out of the manufacturing site. And most importantly, all these changes need to be carried out without the support of a parent company. Just like starting biking with two wheels, except the transformation journey of a CDMO often proves to be a much more demanding challenge.