There has been a real growth in partnerships between pharmaceutical companies and contract manufacturers in recent years. Big pharma companies want to focus on their core in-house expertise: discovering and developing new drugs, and marketing them to physicians and patients. Outsourcing arrangements allow big pharma companies to balance capacity and fixed costs and to work with trusted partners to add specific niche activities and specialized capabilities they cannot or choose not to do in-house.
Outsourced providers fill a range of needs for pharma companies. This might be creating specific novel formulations such as tablets with controlled or modified release, advanced glass-free aseptic filling, specific forms of inhalation product development or developing oral dosage forms for difficult-to-formulate products that overcome bioavailability or solubility issues, or those that assist with patient adherence. It might also be creating capacity in a particular form of manufacturing that the company has neither the desire nor the money to invest in. Catalent, for example, offers a wide range of such innovative technologies, from our proprietary OSDrC® OptiDose™ and many forms of softgels including OptiGel® formulations to fast-dissolving tablets.
This drive to outsource has, over the years, led pharma companies to set up outsourcing arrangements with an unwieldy number of different partners. Sustaining 200 or 300 relationships is impractical in a world of increasing regulatory complexity and more rigorous compliance requirements. There is a widely stated desire towards using fewer, larger outsourcing partners that offer a broad range of capabilities. Focusing on fewer, bigger, and better suppliers has the potential to reduce complexity, cost, and risk.
Shifting complexity to fewer suppliers that have the infrastructure and proven track record to manage that complexity just makes sense. At a big strategic partner like Catalent, which works across many geographies, and broadly across the drug development and manufacturing lifecycle, managing complexity has become a core competency. We have some 2500 different customers who outsource a total of 7000 products to us, sold in 80 different markets, and we make almost a quarter of a million shipments every year. We typically host more than 500 customer audits every year—and a further 50-plus from the regulators. On the supply side, we have to manage 12000 raw material SKUs from 9000 suppliers.
Every client company wants the best possible service and is rightly concerned that all goes well with its own products. Reliability and predictability of supply is priority number one at Catalent. Achieving this objective not only requires excellence in execution, but also a relationship with the client that is well managed and well maintained. Our experience is that the recipe for success is not overly complicated, but it takes work, commitment, and a level of trust from both parties to make it work. A quick overview of the basics is below:
Get the Contract Right
Right at the outset, it is important to negotiate contracts carefully so that they work for both parties. In the negotiations, our sales team will be sitting opposite the client’s procurement people, and the main issues on the table are pricing, terms, and fee structures. There is a broad assumption that everything else simply works in the background. This may be reasonable, but it certainly does not give a holistic picture of everything that needs to work in the relationship if the arrangement is going to be sustainable.
Sustainability from the contract development and manufacturing organization’s (CDMO’s) point of view means generating a sufficient margin so that we can continue to reinvest in our business, whether that is in capability, capacity, or compliance. While the customer’s procurement group will tell us that the pricing is too high in one breath, in the next they may express concerns that we should be reinvesting in our business to ensure we continue to provide the levels of quality and compliance for which they are looking.
The priorities of the clients’ supply chain and quality groups are rather different, not least because their internal goals are very different. They don’t have a singular focus on driving down price. Rather, they are more concerned that they get the right products in the right quality with the right documentation, made in a facility that meets all inspection requirements. A meeting between their quality team and ours rarely involves discussions about cost. They will talk to us about what they want us to do from a QA point of view, which might be investing in the fabric of the facility, or new HVAC or water purification systems. They want to know all about our operating procedures. They want to know how many QA professionals we have, and whether that number is sufficient. This dialogue is very important, but it is somewhat contradictory to the dialogue that we’re having with the same client’s procurement team, which is responsible for inking the deal.
Fundamentally, we are setting up a supply chain, and at the end of that supply chain there is a patient who needs a medication. What we are trying to do is ensure that the patient gets that medication at the quality level that they expect, when they need it—not just one time, but every time. Creating a sustained source of reliable supply requires a depth of infrastructure and maturity of management systems, such as maintaining health and safety programs, having robust plans for business continuity, crisis management, and security hosting quality audits by a variety regulators, etc. Yet there is a tendency to look at CDMO–client relationships in bits and pieces, with the quality team talking to the quality team, supply chain people talking to supply chain people, and, of course, the procurement people doing business, negotiating with the sales team.
A Necessary Framework
What I advocate a client should do, assuming they have chosen the right partner up front, is put a framework in place where everything is present— but present in the right context. Otherwise, there is the risk that without the bigger picture, everyone will walk away unhappy, and the relationship will soon become strained. This is not healthy for the customer, for the contractor, or, ultimately, the patient.
So how can a framework be put in place that creates the right level of transparency? Clearly the contractual and financial terms are important and must be documented, but there also needs to be a very specific quality agreement in place, alongside a shared set of metrics developed by both sides. This allows us to measure how the relationship is developing, and what’s changing—whether that’s in the marketplace or in the supply base. A contract signed a decade ago may have been good at the time, but things change. Drugs come off patent and volumes go up or down, the prices of critical raw materials can vary, and the regulatory environment evolves.
Pharma companies also expand their markets, which can add further challenges. It may seem simple, but every time a customer tells us they want to launch a product into new markets in, say, Africa, the Middle East, or Eastern Europe, a dozen new regulators may show up wanting to audit our facility. And that costs us time and money, and we would anticipate that this cost burden should be covered by the customer.
Because products are not static through their lifecycle, it is important to have a governance committee for each customer relationship. It enables us to reassess the situation as things change, and make sure the contract, and the way the relationship is managed, evolves along with the product and the market. Simply putting a contract in place and walking away to let it run may work just fine for a little while, but as things evolve, it can create points of disagreement.
These governance committees should be cross-functional, across quality, supply chain, procurement, and sales. They will talk about how the relationship is going, what future demand looks like and whether volumes are going up or down, and does the pricing structure that’s in place still make sense. If this is done on a regular basis, it can head off all sorts of issues before they arise.
We have found that this works best if the governance committee has a couple of tiers to it. One tier happens very tactically at the plant where the manufacture is carried out, with our local team meeting with the client’s team that manages the drug’s procurement and distribution. This should happen at a high frequency—monthly at a minimum. That should be augmented with a more executive layer above that with authority to change contracts in terms of pricing, terms and conditions. This should meet quarterly, or perhaps twice a year, to ensure everything is on track and whether any interventions are required.
For those very big clients, for whom we manufacture multiple products at multiple sites, we also have a very senior level committee that might meet once a year. That will include senior people from both sides and is more about how the relationship is working out than tactical performance. Are we creating value in a way that makes sense? Are the teams behaving in a way that’s aligned with our expectations? How can we create more value together? The job of these senior leaders is to assure that the spirit of the dialogues in the boardroom filter down to behaviour at an operational level.
The formula seems simple, but the magic is in the execution. Do all the homework up front, put the structure in place, establish the cadence, and stick to it—and keep talking. Assure that the contractual framework is maintained and expectations are clear. Both sides need to work to ensure they remain fair and appropriate.
Keeping Quality High
With the pharmaceutical products we make being shipped to more than 80 countries, all of our sites are, rightly, heavily audited by many diff erent regulatory bodies. To manage this, we have developed a single, global quality management system (QMS) that complies with all of the highest standards of any of the regulators with which we interact. Having a single standard system across the company is extremely important as it allows us to follow our own procedures to the letter.
This can create some tension with big pharma clients, however. They all have their own internal quality systems which they often want us to follow. We push back very hard on that, telling them that our own procedures are how we ensure compliance, even though they may be diff erent from their in-house methods. Procedural consistency is key to sustaining the highest levels of compliance, whether for line clearance, documenting deviations, or even gowning. If we had diff erent operating procedures for each client, everything would rapidly descend into chaos. Switching from one company’s standards to another each day—or even more than once a day—would dramatically increase the risk of error. The complexity would become unmanageable, and with frequently changing documentation and procedures, there is no way people could realistically be expected to keep up.
Yet customers can still fail to comprehend that our goal is to comply with all of the required regulations, and that we have a regulatory track record from clients and regulators around the world that shows our quality system meets, if not exceeds, all of their demands. Indeed, in the 12 months since September 2013, Catalent has hosted 52 inspections from various regulators, both US-based and overseas, and almost half of them were passed with zero observations. The rest contained no critical observations, and none resulted in any regulatory action.
It’s not that we don’t think their procedures are good or make no sense; it’s just that adding customization does not improve compliance—it does the exact opposite. Increasing complexity almost always increases risk. We need to continue to sensitize our customers to the fact that we need to work to our own standards because, in the end, it is good for them. It’s been a tough message to get across, and we are still working on it.
Finally, outsourced providers have been frequently cited in the recent dialogues around drug shortages. There has been a lot of discussion in both the trade and popular press about shortages of critical drugs, and the conclusion of the regulators is, in many cases, that the plants where they are manufactured had drifted out of compliance. This is true, but I would not say it is the root cause—it is usually rooted somewhere in economics. The manufacturer likely did not deliberately choose to do something that puts patients at risk, but with reimbursements going down and the costs of maintaining quality and compliance going up, at some point the math stops working, and it becomes economically unviable to make the necessary investments, however important the product may be.
When the FDA, or any regulator, shuts down a noncompliant plant, or a manufacturer makes that decision themselves, there are likely economic drivers in the background. There needs to be a wider discussion about drug pricing and the need for continued investment, and how these two diametrically opposite drivers can both be met.
Steve Leonard has served as Catalent’s Senior Vice President of Global Operations since June 2009. Previously, Mr. Leonard was most recently General Manager of Global Operations for GE Healthcare’s Medical Diagnostics business, responsible for more than 10 sites in Europe, Asia, and the Americas. Earlier assignments in his 22 years at GE included a variety of leadership roles, with responsibility for areas such as plant management, global sourcing and supply chain, global product quality, and global operations. Mr. Leonard received his BS degree in Mechanical Engineering from Drexel University.