1. 26 Monographic special issue WHO is WHO in Custom synthesis/CROs & CMOs - Chimica Oggi - Chemistry Today - vol. 33(5) September/October 2015
KEYWORDS: Supply chain solutions, Pharma Supply Chain, CDMO, CMO, outsourcing, Strategic Partnership, Contract Manufacturing,
Added Value, Managing Supply Chain, Business Partnership. Detlef Behrens, Aesica, Pharmaceuticals, Aesica Pharmaceuticals,
CDMO, CMO, partner, consultant, innovation, outsourcing, supply chain solutions, productivity excellence, customer relationship.
Abstract The way in which pharma companies evaluate the work of their CMO suppliers is changing fast and the
approach called the value proposition is becoming much more important. It sets out to generate best
value for the customer and achieves this through a range of practices including open book calculations, the buying of capacity,
much greater visibility and effective supply chain management. The approach entails very close strategic partnering and ultimately
changes the relationship between pharma clients and their customers from that of “cost-cutter” to “customer of choice”.
The new approach to contract services:
co-creating better value and the shift
from cost-cutter to customer of choice
Pharmaceutical companies are starting to reevaluate how
they operate with CMOs. There is a growing appreciation
that they need to adopt a new approach to how they value
the work of contract manufacturers. This has strong
implications for the market as it is set to radically change the
way in which CMOs and their pharma customers work
together. To achieve what are being termed the new “value
propositions”, a new mindset with fresh strategic thinking is
fast evolving. This new strategic approach, which forward
looking CMOs are increasingly putting into practice, is
already proving successful in enabling the complex and
varied demands of the pharma sector to be met head on.
Indeed, the CMOs that will survive and flourish are those that
are responding rigorously to the challenges in the market and
which are offering this new value focused solution. As this
new approach expands and pharma customers come to
appreciate the extent to which it meets their needs in full, so
they will increasingly expect their CMO suppliers to provide it
as a matter of course. The value proposition is emerging as
the most effective way for CMOs to work with their customers.
Those that can’t adapt to it are in danger of falling by the
way side.
Background: The demands of pharma on CMOs driving the
need for a radically new strategic approach
Pharma companies have an increasingly complex set of
needs which CMOs must satisfy. Critical factors range from
capacity, specialized capabilities, IP ownership and
protection, market presence/access, and costs (See Table 1).
They also include quality, EHS, financial stability, cost
efficiency, better communication, effective reporting
structures capable of coping with differing languages,
locations and cultures, operational excellence and the
requirement that CMOs have sourcing departments in place.
Furthermore, full regulatory compliance at site facilities, the
high level of QA demanded and the increasing expectation
that CMOs carry out their own audits are equally as critical.
Flexibility and adaptability are a strong requirement,
especially the ability to change the scope and parameters of
a project whilst it is in progress. At the same time, CMOs are
tasked with ensuring that all activities are completed in full
DETLEF BEHRENS
Aesica Pharmaceuticals Ltd,
Q5 Quorum Business Park,
Newcastle upon Tyne, NE12 8BS,
United Kingdom
Detlef Behrens
Table 1. Value drivers for outsourcing (1).

2. 27Monographic special issue WHO is WHO in Custom synthesis/CROs & CMOs - Chimica Oggi - Chemistry Today - vol. 33(5) September/October 2015
look to define and extract the maximum benefit from
suppliers that directly contributes to the goals of the pharma
companies concerned across the entirety of the value chain.
Such effective collaboration provides the go ahead CMOs
with a significant competitive advantage. By
de-commoditizing the discussion and focusing instead on
actual value creation, the relationship between the supplier
and the pharma client moves from that of “cost-cutter” to
“customer of choice”.
Using CMO resources doesn´t mean that pharma customers
don´t require their own internal skills. Pharma companies
contract out the activity, but not the accountability. It is the
customers’ name on the product and patients and regulators
will hold the customer accountable for its quality and
efficiency.
The essence of co-creating value
It is highly important that customers move away from simply
giving an indication that cost is their sole overarching reason
for outsourcing. They should give the CMO of choice a
detailed analysis of all the factors that drove them to make
the decision to outsource the specific work concerned, and
precisely what they expect to be achieved. Only this open
communication will allow the CMO to prepare a compelling
offer, covering the full needs of the customer. If they only
communicate costs as the key driver, the CMO will give the
lowest possible price by cutting out additional options to
support the customer concerned. In the case of having
supply issues or quality issues, the needs of the customer
won´t be covered in such a price driven proposal. The
argument that is often put out there is that CMOs will try to
overprice and in such cases will focus solely on cost. But we
do have a market price – and both contractual parties are
aware of this. Every CMO has to quote within a range that
falls around this market price – too low prices would classify
the CMO as too risky and too high prices are too expensive
and would exclude the CMO from business.
CMOs that have applied this new approach are now actively
offering their customers something much more valuable than
the traditional service model and, as a consequence, they
are set to retain them.
The value proposition in practice
Some specific examples of the impact of embracing the
value proposition are outlined below.
Customers are starting to change their approach and are
now buying capacity. Instead of outsourcing a specified
product to a service provider, they might buy a certain
capacity from the CDMO supplier which they then use to
manufacture their pharma products. The capacity is
determined by the demand that pharma companies,
together with their contract suppliers, identify as the need.
The purchased capacity is used solely to develop and
manufacture the customers’ products. This efficient way of
operating provides the flexibility that capacity can later be
acquired, if the demand for the product increases and
consequently further development is required.
For development projects, such models are well established.
Under these so-called FTE models, customers are buying
capacity/manpower for their development projects.
and in line with the original critical timelines.
Moreover, very precise and often unique expertise is called
for to implement individual projects. As a consequence,
tailored resources, including technical teams, project
managers and dedicated staff, possessing very specific skill
sets and equipment are essential. Without this capability,
customers have no certainty that CMOs can handle the
bespoke technologies involved.
Another highly important factor is the scale of cost
competitiveness. Whilst pharma companies are under
constant market pressure to bear down on costs, it is crucial
that CMOs and their customers engage and partner closely
enough together so that each has a clear appreciation of
what is reasonable and viable pricing for the carrying out of
high quality services to the standard and timescale
expected.
Pharma is also looking for CMOs that provide innovation.
Indeed, innovation sourcing has emerged as a key industry
trend. E&Y stated, during the Productivity in Pharma Think
Tank in October 2014 (2), that all business models fall into
three fundamental categories:
- Operational Excellence
- Customer Intimacy
- Product Leadership
Innovation in each category has a different meaning and
consequently a different requirement to satisfy pharma's
needs. With operational excellence, the innovation sourcing
focus is on supplier relationship management, category
management, multi-vendor management and commodity
procurement. In the case of customer intimacy, the focus is
on outsourcing, co-sourcing, crowd sourcing, internal
funding, and business capabilities. For product leadership,
the focus is on open innovation, incubators and co-creation.
The answer
New value proposition strategies serve as a strong solution to
many pressing challenges faced by CMOs that have been
outlined above.
The value proposition
The value proposition approach involves a truly radical shift in
how CDMOs and their customers interact with each other. At
its heart, is an appreciation that the simple offer of services is
not in itself a value creation. It represents an entirely new way
of assessing results and determining how the supplier works
with the customer. It starts all projects and contracts with one
overarching and guiding question: what needs to be done to
generate best value for the pharma client.
The first essential ingredient is for customers and suppliers to
work much more closely together. This involves forging strong
strategic partnerships. Such partnering provides the
necessary foundation through which CMOs can identify a
coherent plan of action and strategy that will add real value
for the customer. Such partnerships will invariably entail a
major culture change. But the result is that CMOs will become
more of a complete partner in the process of strategic
decision making and will be recognized for their full capacity
as both a business peer and as an advisor.
CMOs need to work as value creators. This means working
closely with pharmaceutical companies, who in turn should

3. 28 Monographic special issue WHO is WHO in Custom synthesis/CROs & CMOs - Chimica Oggi - Chemistry Today - vol. 33(5) September/October 2015
This can enable On Time In Full (OTIF) service delivery whilst
preventing out of stock situations from emerging. If
properly executed, ERP is a system that enables highly
effective management of stock and financial flows. This
approach provides extensive visibility to identify and iron
out problems at an early stage so that appropriate
remedies can be enacted in time. Taking the experience
of Aesica as one example, data shows that the company,
which applied ERP in partnership with its customers, went
on to achieve 100% OTIF for clients across the globe, with
zero out of stock situations occurring. This solution serves as
an effective strategy both for life cycle management and
for the efficient manufacturing of products, meeting
demand in full.
Access to a customer’s own ERP system, enables CMOs
to fine tune and align customer demand with the CMO’s
specific manufacturing capacity. This type of effective
planning results in significantly less short term delivery
date changes and a much more robust supply chain at
the customer’s site without out-of-stock situations
emerging.
Piramal Pharma Solutions presented such an approach (4)
in 2011 during Procure on Healthcare. This is usually a model
which is not made public by the customers – as a great
deal of trust is required for CMOS to be granted the access
concerned. Supplier management relationship is one of the
often used acronyms for value creation. Nevertheless
approaches described in this article, with their long term
value creation, will require taking a step ahead into
strategic alignment.
The Beyond Group, a research and advisory firm founded
by procurement executives from large pharma
companies, have developed a trading relationship
model that clearly focuses on value creation throughout
the entire supply chain (5). This approach helps to move
away from the CMO/customer focus, towards a focus on
the final end user´s needs – usually, in the case of
pharma, the patient. As soon as the CMO is part of the
full trading cascade (Figure 1), the opportunity of
creating value for the customer and the patient can be
enabled.
As timelines during development projects are fundamental,
such models will give customers the ideal option to create
maximum flexibility within their supply chains. As they have a
strong resource of people at the CMO that they can utilize,
they can shift their focus onto priority projects. There are
limited methods for transferring these experiences from
development into commercial scale co-operations. Roche,
however, demonstrated how this approach can be applied
to achieve this goal (3). During the 2014 Pharma Integrates
conference in London, UK, Roche focused on one of its key
products which had an unpredictable demand, Roche
decided to buy a certain amount of capacity at the
selected CMO for the product specific equipment train. The
key challenge that faced Roche was that the company
went through multiple phases without there being any
demand for the specific product concerned. A solution was
found. In order to utilize the blocked capacity at the CMO
and to keep skilled personnel permanently trained on the
specific Roche product, the pharma company placed
further products with the CMO for work that involved using
the exact same manufacturing processes. This gave Roche
the security of short term available capacity and access to
staff dedicated and constantly on hand to service its product
manufacturing needs. This solution and approach is the only
option that ensures that volumes of a key product can be
ramped up at short notice in line with market demand.
Open book calculations are a further example of added
value service provision. The price of pharma products is
often on a permanent downward trajectory, whereas
manufacturing costs are constantly increasing. To address
this factor, new transparent ways of sharing data between
customers and suppliers should be developed and put to
effective use. Both partners need to be in the best position
possible to react fast to the market and fluctuating price
changes. They need a system in place that provides
efficient oversight and monitoring of costs that gives them
an accurate overview of how the costs concerned are
being incurred and calculated. The solution lies in open
book calculations, which provide the CMO with a full view
of its client’s costs and accounts in relation to the relevant
products, and the customer with full sight of the suppliers
accounting arrangements for the work being carried out.
This ensures that they both have a realistic understanding of
where adjustments might be made, and just how much
flexibility there really is to leverage. By utilizing this
approach, both partners in the strategic alignment are best
placed to make adjustments in response to sudden
changes in market pricing.
Unfortunately, the open book calculation normally means
full transparency of manufacturing costs by the CMO, but
not at the customer level.
With the publicly listed reference prices of generics in the
US, this model can be easily adopted here. Real value
creation can get generated if this approach is used for
patented products as well. But this would require a
dramatic mind set change at the customer level which
won´t happen in the short term.
Full visibility and effective supply chain management is a
further example of value enhancement. CMOs can manage
the supply chains more effectively for their customers
through the use of Enterprise Resource Planning (ERP).
Figure 1. The Trading Relationship Canvas (5).

4. REFERENCES AND FURTHER READING
1. Detlef Behrens, How can a CMO support clients in being more
efficient in developing new drugs – large Pharma versus Biotech,
Presentation at 10th International Drug Discovery Science and
Technology Conference 11th November 2012, Nanjing, China
2. Kristian Grgurevic, How to source innovativeness – Challenging
the conventional wisdom about sourcing and innovation,
Presentation at Productivity in Pharma Congress, Barcelona , 9th
October 2014
3. Giles Breault, Sammy Rashed, Thilo Jaeckel, Detlef Behrens –
Beyond Procurement – the next steps towards Productivity
Excellence, Presentation at Pharma Integrates Conference,
London, 24th November 2013
4. Detlef Behrens, Case Study Workshop – Outsourcing of
Manufacturing – using a strategic partnership approach to
create a global supply chain solution, Presentation at
ProcureCon Pharma 2012, 29th February 2012
5. Giles Breault, Sammy Rashed, Beyond supplier relationship
management co-creating value through strategic alignment,
Chimica Oggi – Chemistry Today, vol. 31(6) November/
December, 11-14, 2013
CONCLUSION
Change in the market place has created a situation where
the traditional strategies between suppliers and pharma
companies has failed to deliver the outcomes and results
that the customer demands. Consequently, a new highly
successful approach has been developed and
implemented by forward looking CMOs, which is the
co-creation of value formed through effective strategic
partnerships. By focusing on the concept of value, new
strategies and solutions have been developed, through
close alignment between suppliers and customers, which
are proven to ensure that the formulation, development
and manufacturing needs of pharmaceutical companies
are met in full. These include open book calculations,
visibility, effective supply chain management and buying
capacity. Focus should be on the total cost of ownership
and not only on manufacturing prices. Such initiatives
contribute strongly to pharmaceutical companies
maintaining a solid share of the market.
29Monographic special issue WHO is WHO in Custom synthesis/CROs & CMOs - Chimica Oggi - Chemistry Today - vol. 33(5) September/October 2015