Value Creation Redefines BioPharma Outsourcing
By Louis Garguilo, Chief Editor, Outsourced Pharma
Am I starting an article on biopharma outsourcing by noting Frederick Engels, co-author (with Karl Marx) of The Communist Manifesto (1848)? Only to point this out: from collectivism to capitalism and its resultant open markets (Adam Smith wrote The Wealth of Nations in 1776), much thought has been devoted to the concept of product “value.” Like with Engels, the notion has mostly been boiled down to a fundamental equation: value = cost/price plus profit.
Many years later, an age of global consumerism – and hyper-competition – broadened that definition substantially. Today, value isn’t merely arrived at by a financial formula. It’s created within the (new and improved) products and services marketed to customers. How is this form of value created? Via a hallmark of our times: innovation.
Modern-day product and service innovation occurs predominately through business synergies, cross-functional organizations, platform strategies, and supply-chain partnerships. Engels’ left side of the equation is now the variable, affecting the right: By creating a new “value proposition” for customers, you can then reduce costs, improve pricing, and raise profitability.
This, I believe, is where outsourcing in the biopharma industry has been trying to go for well over a decade. It’s what we really mean when we talk about more enlightened forms of sponsor-provider partnerships.
Looking For Value Through CMOs
Although not necessarily a wholesale subscriber to my soliloquy above, Mary Kachinsky, VP Strategic Sourcing and Operations at FORMA Therapeutics, understands, and has fostered, this type of value creation in biopharmaceutical outsourcing. Her career includes positions at big (Pfizer), medium (Cubist - now Merck & Co; Genzyme) and small (FORMA) biopharmaceutical companies.
“When sponsors begin to engage at a higher level with providers – and providers in turn with their customers – that’s where creative thinking comes in, and that’s how I define value at our CMOs, and in our supply chain,” Kachinsky explains.
“The point,” she says, “is to first clearly identify what type of value creation you need, so the global search for a service provider becomes a process of identifying those that are fit for that purpose. You should look to fulfill your specific outsourcing requirement, and for help in solving what it is you need to overcome.” Kachinsky suggests looking for technical capability, process development skills, management requirements, and other qualities upon which you can attempt to form an advanced relationship for value creation.
We won’t go into details of her specific RFP process, but for this: “It’s clear that even with a rigorous process, the best RFP score doesn’t always lead to the selection of that CMO. There are intangibles, and subjective discussions that take place, centered on who will make your process, product, or program more valuable.”
That being said, there are ways to clearly measure the effectiveness of that value-creating partner once selected.
KPIs in Value Creation
The value, if you will, that value-creating CMOs bring to sponsors, and ultimately the market and patients, falls under its own set of key performance indicators (KPI).
Kachinsky says traditional KPIs target items such as specific production timelines, and on-time delivery, reliability and quality of goods received. “But when you get to value creation,” she says, “I focus on whether or not we are able to achieve levels of innovation … or if we’ve even been innovative at all.”
She explains: “As partners with the CMO, have we come together to think through whether in fact our overall scientific perspective of the product could be improved, how to make processes more efficient, how to best streamline operations? Did this rise to the level of creating a more marketable product, one more valuable for our patients, and thus for us as a company?”
While this measure starts without looking specifically at dollars and cents, as we alluded to in our opening, improvements in product finances and productivity is the result. “For example,” starts Kachinsky, “At Pfizer I led a P2P [Procure to Pay] process review. It was a Yellow Belt initiative. We started thinking deliberately in terms of value creation and innovation from the beginning, and actually set this out in a process flowchart.” She adds, “That type of thinking did subsequently help us take out costs, and bring in efficiencies.”
Kachinsky also recalls that while at Genzyme, she was challenged by a key intermediate – a specific media with a 52-week lead time to produce. “The process started by obtaining serum from a provider in New Zealand. The challenge was that the serum could only be obtained at a specific time of year; the animals had to be of a specific breed and age,” she explains. She said Genzyme worked closely with the provider, brought in outside expertise, and brainstormed with the scientists and others involved.
“Again – no lie! – we ended up with a multifaceted solution that reduced the lead-time to two weeks. This met all our manufacturing requirements, and provided the flexibility we desired to support our 24/7 manufacturing site.”
In the past, one might have looked at this example solely as a function of lowering raw material lead times, and costs. But you can’t get to the result without first having an environment for innovation. “It required a lot of thinking around value creation applied throughout the entire process,” sums up Kachinsky. “The result was phenomenal.”
The Price Of Value
Kachinsky doesn’t shy away from tackling the costs of creating value. As we all know, innovation isn’t free; in fact, nowadays it acts like a high-priced commodity unto itself.
In an interesting twist, Kachinsky says because more established sponsors can better afford to look for the lowest-cost service provider anywhere in the world, this might actually effectuate a narrower focus on upfront costs for materials and services. In smaller organizations with more financial constraints, “there’s a different awareness of budgets per product.” In that environment, Kachinsky says, “You should drive for broader value creation.”
“Value creation with your partners is where I see the real cost savings occurring. This results in the streamlining of processes, long-term efficiency, and financial gains. It’s not all about what you’re paying upfront.” Kachinsky believes sponsors should strive to find “a select few primary providers, build those relationships, and evolve together to drive costs out.” She adds: “And by the way, we’re all seeing that Big Pharma understands this nowadays as well.”
Since the dawn of commerce (whenever that actually may have been), the costs of production and distribution, pricing power, and profitability, have been the factors in determining an overall measurement of product value. But today we know these variables actually depend first on the concept of value creation, not the other way around. I wonder what Engels would have thought.
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This article is partially based on quotes from the session, Boston To Bangalore: Where in the world do I find my outsourcing partner? at the Outsourced Pharma Conference in Boston, April 20-21, 2016.