In today’s ever-changing pharmaceutical contract manufacturing market, drug marketers are becoming increasingly keen on aligning themselves with a contract manufacturing organization (CMO) that offers a complete end-to-end solution for their supply chain. Known more commonly as a “turnkey” relationship, these types of relationships can enhance the partnership between the marketer and the CMO. Two of the key benefits of a turnkey relationship are convenience and customer service. A pure turnkey offering is as carefree as it is rare, allowing the customer simply to provide the CMO with the requirements and, in due time, receive a finished product ready for immediate distribution.

To truly become a turnkey provider, a CMO must perform the delicate balancing act of growing its suite of core capabilities without sacrificing quality. For a variety of reasons — changing business relationships, employee attrition — these competencies tend to shuffle over time. A worthwhile CMO is one that has steadily accumulated capabilities without any dropoff in the service level of any one of its offerings.

But it isn’t enough merely to possess these capabilities. A CMO claiming to be turnkey must have the wherewithal to apply these competencies to fit the specific needs of a wide range of customers. In other words, without integration, turnkey service is an abstract notion rather than a tangible accomplishment.

Both vertical and horizontal integration are necessary to client servicing that is truly turnkey. With vertical integration a CMO may internalize some or all steps in the manufacturing of a product. For example, a CMO specializing in bottle filling might decide that — for purposes of both economics and client convenience — it will bring bottle making into its portfolio of competencies. This is an example of backwards integration. If the company also decided to internalize logistics, warehousing or shipping for the customer, that would be an example of forward integration. Both backward and forward integration are subcategories of vertical integration.
Horizontal, or lateral, integration is used to expand a CMO’s reach into a market with a current technology, skillset, asset, or core competency. Examples of this are plentiful. A CMO may already possess world-class quality systems in order to produce and package over-the-counter (OTC) products. These quality systems, scaled in the appropriate direction, may be very applicable for medical device, or pharma products. Another example of horizontal integration would be when a CMO leverages knowledge of a distinct technology into a product form that utilizes the same distinct technology as well as an additional technology. For example, a CMO may leverage this competency to horizontally integrate from powders into other technologies, such as tableting.

But though the options are seemingly limitless, a CMO can’t be all things to all people. A well-developed strategy and vision for what services a CMO should offer is critical. As a CMO grows into more competencies, it must use discretion and prevent over-commitment of resources.

At some point, the quantity of competencies affects the competency of competencies and — to any proud, reputable CMO — this puts its reputation at risk. Because reputation is so critical to CMOs, oftentimes you will find CMOs that specialize in certain technologies and capabilities but not in others. Here’s the hard fact: The contract manufacturing of pharmaceuticals is one of the most quality-controlled and quality-demanded fields of service in the world. Your best bet is to do what you do best and expand outward — but not so far outward that you stray from your true forté.

In his popular 2001 book Good to Great: Why Some Companies Make the Leap . . . and Others Don’t, Jim Collins describes the “Hedgehog” concept, which is based on the common-sense argument that there is a limit to what one person or company can be “best” at. A company can be good at a lot of things, but invariably won’t be great at things outside of their true areas of specialty. Factoring in the demands of the pharma industry when compared to other fields, a sober moral is this: Don’t be good at 20 things — be great at three or four.

When a potential customer assesses a CMO, he is naturally looking for the hallmark competencies relevant to his particular manufacturing process. These competencies are, of course, weighed against those on a short list of other candidate CMOs or in-house alternatives. A turnkey solution is often desired, but rare is the situation where a 100% turnkey process is possible (or even wanted). Many customers want to internalize some of the project inputs where they themselves possess certain competencies. It is important for the CMO to be able to integrate the customer’s competencies (and, often, make up for customer limitations) into its portfolio efficiently and effectively.

The following is a list of competencies most often desired by pharma manufacturing customers. Though by no means exhaustive, this list provides insight into many of the common CMO turnkey competencies.

1. Horizontal Integration (HI)
HI was defined earlier. It is a critical competency in the early stages of conversation with a potential customer. However, prior to any discussions, a CMO may not even be noticed or contacted unless a customer sees that the CMO is already at least partially in the business of what the customer is attempting. For example, it is rare that a customer, desiring the launch of an Rx drug, would select a CMO that has no prior history in Rx. The risk in the mind of the customer is oftentimes too great. For example, a substantial barrier for HI would occur when a CMO expands from topical and OTC powders into Rx powders. Such a situation is difficult but not impossible. If the relationship with the customer is strong and the CMO is strategically committed to expanding its offering, other competencies can be integrated that outweigh the potential risks.

Other examples of HI that are feasible from a powder-filling CMO might include production of tablets and capsules. A plastics or molding CMO may horizontally integrate from consumer disposables to class I and class II medical devices. Again, this all depends on the CMO’s strategy, its willingness to take risks, and how well each decision leverages its core competencies. 

2. Vertical Integration (VI)
VI was defined earlier. It is a critical component when marketing the competencies of a CMO to a potential customer.
Packaging is a competency that fits well within VI. A customer in need of powder filling into a bottle is usually delighted to learn the CMO could also produce the bottles itself. Cost structures from multiple CMOs can be consolidated into an improved cost structure at a single CMO, thereby offering the customer price advantages in certain cases. Added benefits include reduced lead times and lower freight charges.

3. Freight
Freight cost reduction could be considered a favorable consequence of VI but is separated here to provide some additional detail. To continue the above example of vertically integrating bottle production, there is nothing worse for freight than shipping empty bottles. It is essentially the shipment of air, which is costly and inefficient. Colocation of both bottle production and filling is ideal for eliminating this cost. However, bottle production is a skill not many possess and even fewer pharma CMOs possess. CMOs must realize the risk of acquiring this skillset and making it one of their core competencies.

4. Engineering
The other aspect of freight is managing shipment of raw materials, work in process product/components, and finished goods. Customers may not want to handle freight themselves, so part of a turnkey offering is to provide this for the customer. Internal resources are then required at the CMO in order to manage logistics.

Almost any example of vertical or horizontal integration requires strong competence in engineering. A customer must be confident that the CMO is capable of manufacturing its product . . . but there is much more in the process leading up to production. If the project scope is a transfer of technology or a new product, there is a significant requirement for competent engineering. A transfer may require a discontinuation of a process and/or equipment and a restart at the new CMO location. A transfer may also require a startup of acquired equipment in which equipment vendors must be managed. The marketability of a CMO’s engineering ability will be much more succinct if the CMO has a previous history of working with the technology or products. If, on the other hand, the technology is new to the CMO, chances are the decision by the customer to proceed will be based on other factors such as availability of capacity and strength of relationship. Specifically, a CMO’s track record for execution, its depth of knowledge across a wide range of technical skills, and its ability to communicate well to the customer are all competencies that make the CMO turnkey approach possible.

5. Warehousing
Warehousing can also be a favorable consequence of VI. Requirements for testing of both finished goods and raw materials have expanded over the years. Product must be segregated and held while waiting for test results. This increases the need for warehouse space and warehouse management by the CMO in order to accommodate this customer requirement. Warehousing as a part of the initial marketing plan pitched to the customer is almost essential.

6. Raw Material Management
As a CMO grows, it will find itself dealing with more raw materials and more raw material suppliers. At a certain level of production, it may become more efficient for the CMO to manage the customer’s raw materials; for some small companies, management by the CMO is desired from Day 1. The CMO may have better buying power than the customer if the CMO can buy in volume because of its combined business with other customers. This part of a turnkey offering, as with the others, requires CMO resources. Staff with strategic purchasing and negotiating experience are then required to manage suppliers and keep inventories at sufficient levels.
For many products, the cost structure can be dominated by materials. Proper management of raw materials is sometimes the only way to address issues of cost.

7. Validation Services
If a CMO intends to work in areas governed by the FDA, an expertise in validation is required. A medical or pharmaceutical CMO cannot be competitive without a core competency of validation services. A validation — whether for product, process, equipment, etc. — must be thorough but efficient. This area can be the bottleneck and single greatest contributor to late project delivery. It also can be the source of a regulatory violation such as a 483 or product recall. A CMO could pay the price if an integration move into this area is unsuccessful.

8. Analytical and Micro Lab Services
As mentioned before, testing is a major customer requirement that is ever-expanding. As finished goods wait in the warehouse for test results prior to shipping, the costs continue to add up. Time is money. Onsite laboratory capabilities are desired and sometimes required by the customer, as this reduces lead times for materials, increases turn times in the warehouse, and is often less expensive than outside labs that specialize solely in testing. The supply complexity is reduced and provides the CMO with more overall control of the supply chain. However, the capital and resource investment to obtain onsite lab testing is significant. The marketability is usually there, but a CMO needs to make sure it fits the strategy.

9. Fixed Overhead Absorption
One thing is for sure: fixed overhead spread out over a few products is more costly than fixed overhead spread over many products. A potential new customer placing its product with a CMO who has other customers may, in all likelihood, find a better price with that CMO because fixed OH allocation may be more favorable. Vertical and horizontal integration provide for more products and processes across a consolidated cost structure. Resources and fixed overhead can be spread further, providing the best overall cost value for all customers.

Some or all of these competencies may be required for a turnkey solution, depending on the CMO’s strategy and what makes sense for specific opportunities. In the end, much may depend on the trust and relationship established between CMO and customer. However, overreaching by obtaining too many competencies too quickly — which is usually an attempt to suit the needs of a specific, highly-desired customer — devalues the meaning of “core” in core competency and can result not only in setback but disaster. A turnkey strategy must be established.

In Alice in Wonderland, Alice asks the Cheshire Cat an all-important question:

“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where . . .” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.

Market dynamics such as competition, growth in demand of certain products, availability of capacity, and operational risks must all be thoroughly understood before a strategy can be determined. If one doesn’t know where they want to go, they could end up anywhere . . . usually a place where they never wanted to be in the first place.

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Bryan Cox is a plant manager at Pharma Tech Industries, a pharmaceutical CMO providing powder-based products to more than a dozen clients in two cGMP facilities located in Royston, GA and Union, MO. He can be reached at bcox@pharma-tech.com.