Squeezing CDMOs Dry? One Big Pharma VP Says Enough Is Enough
By Louis Garguilo, Chief Editor, Outsourced Pharma
A Big Pharma supply-chain VP is battling in the ring of outsourcing ideas … and she’s in the CDMO’s corner.
She’s fighting sponsors who don’t recognize supply-chain inefficiencies fall hard on their external partners.
For someone who worked at a CDMO and for a decade-plus has been writing about how to optimize outsourcing, speaking to Lynn Cinelli, long-time Merck supply chain executive and recent Vice President Global Biologics Supply Chain, Bristol Myers Squibb, is like a breath of fresh pharma air.
We recently spoke about unwanted variability inserted into what overall I’ll call unfortunate forecasting, which skews orders for materials and products, and the timing of production campaigns.
“Sure, it's cheaper for me to run an annual campaign, or a campaign every two years,” she says.
“Procurement’s incentive is to get PPV [purchase price variance] – and they can show that – if I have a longer run and two-or-three years supply.
“But I'd rather pay for more frequent campaigns, so as true demand does go up or down for patients – truly for patients – I’m better positioned to match that more accurate end-demand versus guessing.”
Because, she says, guessing is what Pharma keeps doing. “The more we aggregate we are pulling forward future demand, and just guessing multiple years out.”
“My lead time in biologics is about two to three years, and it's the same for capacity. Many of my suppliers are minimum take-or-pay, five years out.
“And by definition I know that's going to be wrong.”
“We need to change that paradigm to a win-win, sustainable partnership. That type of contractual arrangement is going to work best for both parties in the long run.
“That's the crux of where we're at right now – trying to figure out how to do this better, how to share and manage expectations of our suppliers in a better way.”
The Need To (Price) Squeeze
I mention to Cinelli that, for example and although there certainly are exceptions, API (or the middle of the processing chain) is normally something like 50%-80% of the total cost, but profit margins for a CDMO are nominal.
“Right?” says Cinelli. “So ask why we are outsourcing to begin with. In general, it's because it’s not worth capital investment for the agility I need.”
Somehow, though, “we’ve become anchored to a certain price in the industry that drives a race to the bottom.”
For years, that race sent Pharma to the lowest price denominators, e.g., China and India.
“We’ve created this price base,” Cinelli says. “We treat everything like a commodity – earlier and earlier in the supply chain. It’s a competition – we’re pitting one or two CMOs against each other.”
Instead, she says, it should first be about quality, then supply-chain integrity, and more accurate and flexible forecasting and production managing.
“In our industry,” she iterates, “it has to be quality first. But if you're pushing a supplier so hard that they're going to cut corners, eventually you're in trouble.”
“And we've seen that happen to external partners we’ve worked with. It’s what happened to the generics industry, to the point they are not making a reasonable margin to keep quality high and a contributing factor to drug shortages.”
Lower Prices, Worse Outcomes?
“A couple of things have blown my mind recently as I’ve seriously reflected on all this,” Cinelli says.
One of those mind-altering subjects is payment terms.
At Big Pharma, Cinelli explains, consultants bring “their standard cashflow playbook for pushing on payment periods,” so payables to the CDMO are delayed and recievables come in faster.
By instinct, CDMOs start with the stance they’d love to bring in today’s and tomorrow’s business from a Merck or a BMS, two orgnizations Cinelli has worked at.
“The CDMOs start with, ‘So fine, you want your money; we have to defer our bills and manage payment terms? We’ll absorb it based on the hopes for more work in the future.”
These consultants extoll the saving as exercising beneficial to leverage at Big Pharma.
However, what happens when that CDMO has a choice between two orders when considering their financial health?
Are they going to bend over backwards for the Big Pharma order, or work more closely with that biotech customer order that doesn't have that kind of financial impact?
Cinelli believes that even though she is the bigger customer, “the responsiveness benefit may go to the smaller company.”
So be wary of hidden costs. “Our finance is patting themselves on the back as they saved X amount of cash,” says Cinelli.
“But there’s a loss that doesn't show up on the books, right?
“We've impacted free cashflow for the company, but the hidden costs are what my team and I have lost in the timing of a full shipment of material. The CDMO stops prioritizing for us.
“In a period where we see more volatility – COVID, tariffs, BIOSECURE Act fears, or other supply constraints – that type of behavior is going to hurt Big Pharma and they may not even realize it.”
When you muscle your CDMO, it creates a benefit on your books, “but no true benefit ever in terms of the quality or the potential timing of the product.”
Unfortunately, she says, “CDMOs today are still “getting squeezed and squeezed on margins.”
“When they know if they ship to their smaller biotech customer they get paid in 30 days, versus our terms of 90, guess what their conscious choice will be?”
“My key point is we need to be very thoughtful on how we operate, because the longer we stretch these paradigms, the more we may face the total impact of our decisions,” Cinelli says.
Sponsor strategies for advantage are not only shortsighted, “but they're not actions in the spirit of what we ultimately want to happen.”
“You want the CDMO to be a sustainable, successful company, and reliable partner,” she concludes, and aligned strategic priorities command a premium.
“When the next supply-chain challenge presents itself – like a Panama Canal situation or a natural disaster – there will be a pecking order.
"Someone at the CDMO is going to make the better choice for their business.”