Great questions elicit enlightening answers. Especially when the first come from a wise moderator and the second a seasoned industry veteran.
I recently witnessed all four of those components in a conversation between Brendan Crowley, President, Brendan Crowley Advisors LLC (formerly Corporate Director of Manufacturing Finance, Eli Lilly and Company), and Remo Colarusso, Vice President, Janssen Supply Chain, Johnson & Johnson.
Including this in the middle of their conversation:
Crowley: Focusing specifically on the relationship with third party manufacturers – CMOs let’s say – how would you differentiate a good from an excellent one?
Colarusso: A good relationship is when the third party performs as per contract.
An excellent relationship is when we look beyond the contract, and look further at what we can do for each other. How do we make them better and they make us better? How do we grow each other’s businesses? That’s an excellent relationship, and those are the ones we pursue.
Both Crowley and Colarusso have allowed me to reproduce a (lightly) edited version of more of their conversation at DCAT Week ’18, organized by the Drug, Chemical & Associated Technologies Association (DCAT), as part of its education programs in Manhattan this March).
Rarely do I post Q&A-styled editorials, but this back-and-forth was too good not to be presented as such.
Capacity And Variability
Crowley: How do you set up your supply network, given the complexity and the raw value of your products, and how can you set up to be cost competitive with the fact you have these emerging therapies for low-volume products?
Colarusso: We look at our network via a segmentation strategy. We have certain products that are required in certain markets; other products that might be higher volume; and others that are the new modalities and very important.
We understand there might be scenarios where demand is demand is demand. However, our supply chain response needs to be different depending on the product, its markets and its use. One outcome of that is so rather than building very large facilities, we’re tending to look at how to build smaller, more efficient facilities. How do we keep things simple? How do we ensure we’re maximizing utilization of those facilities?
And as importantly, how do we work together with partners to leverage the entire network and infrastructure in order to meet the overall and individual needs of that network?
Crowley: Do you find when you look at low-volume products that you can put yourself in a position where you can multi-use the building versus a more dedicated facility, which obviously makes it really expensive?
Colarusso: Yes, absolutely. It goes back to the classic manufacturer utilization. The higher you have utilization, the more you can spread your infrastructure costs, and therefore the more competitive your costs. But today you have to figure out how to do that with products that may be very different from each other.
But another important aspect is there’s a certain amount of core capacity we always want to maintain, from a cost competitive perspective, but also from supply reliability, particularly for some new products and modalities where there may be less established expertise elsewhere.
At the same time, we want to make sure we’re working with the right partners to help us with factors beyond that. For example, while demand may be less, there may be higher variability. Therefore, we work with our third parties in an agile way across multiple pharma companies to manage that volume variability.
In Or Out?
Crowley: What are the types of criteria you use when you decide to insource or outsource product?
Colarusso: Like most companies, we have an establiahed set of criteria. But what might be different is a lot of times people focus on the cost, or for bigger companies, on tax impacts. And while that is a consideration, it’s only one. Because if you can’t supply the market, it doesn’t matter how good your cost or how beneficial your tax situation.
We look at a number of things, including where expertise actually resides: First, is it inside or is it outside? Are we the best at that particular expertise? Does someone on the outside have better expertise or at times as important, better capacity to take on this work? That goes into the final determination.
Still, we want that balance where we have some internal core capacity, and externally work with partners to help us with our demand variability. We need to make sure that it’s a good balance. And, of course, always of high quality.
We look at logistics, especially if you go more towards personalized medicine, where getting products in and out of a particular facility to where those patients are becomes increasingly important.
The talent and the skills that are in the particular locale, and the universities that are training those individuals, all these are considerations. We don’t look at it just as a cost model. It’s really more of an overall balance of everything that you need to produce the product – the people, expertise, logistics, and everything else.
Crowley: With the mix of biologics and small molecules today, are there specific considerations when working with a third party CMO that would be different depending on the product?
Colarusso: When I started out in this industry, you had a product on the market for a longer period of time, and a lot of the information was proprietary. Therefore, the manufacturing processes and our methods were also proprietary. That’s not the case anymore.
There are certain aspects of our manufacturing that are becoming highly standardized.
They’re being done all over the world, with a high level of quality and a high level of supply reliability. You’re seeing that not just in the older technologies, but also even in the biologics nowadays.
Therefore, when we are looking at who we work with nowadays, it’s important we take into consideration how broad they are. We don’t necessarily want to work with hundreds and hundreds of external companies. We would prefer to have good but reasonable number of strategic partners we work with, develop strategic partnerships with them, and that requires they have a broad array of capabilities.
So that’s really where we want to go. We’re not always perfect with that. We have a lot of partners that specialize in a small number of areas for us. But our direction is to go with service providers who can do a wide variety of things, so we can leverage the relationship and help each other win.
It’s whoever works best with us on a broader scale, whoever brings outside expertise that we don’t have, and it’s to the point we made earlier, excellent partners versus good partners. Those are the ones we’re most interested in working with over the long-term.