By Louis Garguilo, Chief Editor, Outsourced Pharma
The provocative question of the week: Could pharma’s apparent pursuit of deeper relationships in the outsourcing industry limit competition, increase pricing and dampen customer service?
After a period of shared suffering through a global economic malaise, big pharma budget cutbacks and a lack of VC for biotech customers, business in 2014 is good at drug discovery, development and manufacturing providers. You can see it in industry and company earnings reports. In fact, providers seem to be gaining a new (and coveted) centrality in the entire biopharma industry.
The model that providers are proffering to bolster this newfound significance mirrors the increasingly expressed customer demand: Pharma says it wants CRO/CMO/CDMO that act more as partners, and thus form fewer but deeper relationships. In a macro-response to this, the outsourcing industry is experiencing M&A activity and consolidation, which both sides say is necessary to enable deeper customer-client relationships.
Which, at face value, is somewhat perplexing. I haven’t read enough on economics, and examples to the opposite are many, but generally growing demand and importance of a product or service should be cause for an industry to expand, not consolidate. This article visits this subject and then investigates whether pharma will actually be well-served by a deeper customer-relationship model. Finally, we’ll see how one CDMO (Therapure Biopharma Inc.) thinks it’s really all about effectuating a positive client experience.
The Argument for Consolidation
The outsourcing industry appears fragmented to many observers, and some providers lack the comprehensive service offerings or scale for larger client relationships. In a recent discussion with an industry expert, the state of affairs is described as still more like a “cottage industry” than a mature market. Sponsors say managing numerous providers can end up adding time and expense across the board. They want to move to expanded or shared-risk outsourcing models, which can only be enacted with larger providers able to take on that burden.
Providers, for their part, want to “lock in” customers. The uncertainty of transactional, service-by-service deals is not conducive to planning or investment. Purchasing and pricing powers (more on this in a moment) and other economies of scale come into play as well. Providers may become more willing to take on bigger investments in equipment and infrastructure, and assume some shared risk. The constant pursuit of new customer acquisition is more costly than managing key accounts. Providers are thus looking to bolt on services and perform M&A to accomplish all this if necessary.
Is Less More (Customer Service)?
The above are legitimate arguments for consolidation, driven increasingly in the name of client-customer relationships. But what are the core objectives for sponsors in their streamlining of providers, upon whom at the same time they are increasing their reliance? I’d suggest three near the top of any list are to obtain lower pricing, higher productivity and better service.
1. Lower pricing
Providers say keeping sponsor projects in-house through the product lifecycle can save on costs. However, no one should feign surprise that providers are not most excited about extended relationships because they allow them to lower prices for services. Providers feel squeezed on pricing already, and they will have to make further investments in instrumentation, equipment, infrastructure and personnel to meet new requirements from clients. In a recent earnings call, an outsourcing industry leader active on the M&A front said that despite capacity nearing utilization, pricing wouldn’t improve significantly until industry capacity has filled as well. In other words, part of what has kept pricing down for sponsors until now is an expanding industry. Fewer partners with more individual capacity could be an answer to mitigate outsourcing costs, but not if it limits overall market capacity and options. The economics books are really clear on this point.
2. Higher Productivity
This is where it gets most interesting. Frankly, pharma itself should claim some culpability in tamping down outsourcing productivity; it has not walked the talk. Providers of every stripe will tell you pharma stays transactional despite preaching for more involved relationships. Industry guru Jim Miller says, “There is not yet much evidence regarding customer acceptance of the one-stop model; it runs contrary to the way drug manufacture has been sourced traditionally…” Peter Bigelow, president of xCell Strategic Consulting, spent 28 years at big pharma and is a former CEO at Patheon. He says, “We talk about partnering between CMOs and pharma companies, but when you dissect decision-making and their way of going about business on a month-to-month basis, it is very transactional. I don’t think we are very good at all in this industry with creating true and useful partnerships. We end up making decisions that do not take into account the real long-term lifecycle cost of doing business with a CMO.” Perhaps pharma doesn’t need a new relationship model: It just needs to follow through on the relationships it already has with providers in order to gain productivity and better outcomes.
3. Customer Service
The Japanese have a saying that the customer is god. But the roles can get somewhat reversed when a service provider gains too much leverage. When a sponsor commits to a provider, does that increase customer service? Does the preferred provider in turn have his list of preferred customers that benefit from capacity set-aside, the best project managers, increased flexibility and enhanced outcomes? The easy answer is yes, but the proof, as they say, is in the pudding … and each chef is different. Discussion in the industry regarding more intimate relationships could boil down to sponsors looking for, and providers trying to provide, better service via more enlightened customer relationship management. Modern-day CRM includes pricing policies and enacting productivity advancements, and every touch-point between a customer and service provider. If a sponsor thinks a CDMO, for example, has issues with customer service or management, is entering a more involved relationship the way to get an improvement? Again, maybe the solution is to simply improve on current relationships, without pushing for structural changes in the market.
A CDMO RE-Organizes The Client Experience
CRO/CMO/CDMO/CRAMS did not gain center-stage positioning in the drug industry because of a lack of customer service. There are always exceptions, but whether you call it relational or transactional, providers know it is all about understanding customer needs and customer service to gain repeat business. And they act accordingly, day after day.
One that offers a good example is Therapure Biopharma Inc., a privately held CDMO located just outside of Toronto, Canada, specializing in biologics services. Therapure decided that relationships of every kind will materialize if you focus intently on the overall client experience. Just a few years after the company was formed in 2008, it began a “philosophical reorganization to create a client-centric culture,” according to Nick Green, President and CEO of Therapure, “one that ensures the client is at the center of every business decision.” The “redesign” included robust business model reviews, client surveys and operation matrixes. “Ultimately, the key to success was our willingness to align the entire business with the objective of improving the client experience,” said Green.
Green added that rises to the level of learning to say no. “Turning down business isn’t easy, but if you don’t see the right fit, either with the process or the client, in my experience it is best to direct them to a provider which might better serve their needs, and at times help them manage that. It is amazing how many clients remember your integrity and reward you for your honesty at a later date.”
Safa’a Al-Rais, senior director, Venture Management at Therapure, describes six areas in the company’s approach, and here is the point: It doesn’t matter whether it’s transactional, relationship-driven or a full partnership; these guiding principles bring in new and repeat business. The principles may not be unique, but they are worth listing here:
- Sharing our client’s vision and focusing on their needs
- Encouraging accountability and employee empowerment
- Being willing and able to change and adapt
- Emphasizing a team culture (internally and with the client)
- Adopting our clients’ passion for their products
- Valuing patient safety above all else
We started this article on a provocative note, so why not end accordingly: Maybe sponsors should consider reviewing their list of principles for working with providers. The list should help to improve existing relationships, and if new models are necessary, help guide the creation of those without bringing on unintended market consequences.