Strategies for Becoming a Preferred Provider

A contract-service provider roundtable, featuring Albemarle, Baxter, DPT, Pfizer CentreSource, Dr. Reddy's, SAFC, and Vetter. Read this and other preferred organization articles in this special issue.
Feb 01, 2011
Volume 2011 Supplement, Issue 2

This article is part of a special issue on Preferred Providers.

This special supplement to Pharmaceutical Technology acknowledges the growing emphasis throughout the pharmaceutical outsourcing arena on being a strategic, or preferred, provider. We gathered input from leading contract-service providers to understand the drivers behind this trend and how it's affecting outsourcing. Participants include: David DeCuir, director of fine chemistry R&D at Albemarle; Brik Eyre, general manager of Baxter's BioPharma Solutions business; Paul Josephs, vice-president of sales and marketing at DPT; Hans Engels, president of DSM Pharmaceuticals; Michael J. Kosko, president of Pfizer CentreSource (PCS); R. Ananthanarayanan, president of Pharmaceutical Services and Active Ingredients (PSAI) at Dr. Reddy's; Mark Cassidy, vice-president of SAFC Contract Manufacturing Services; and Peter Soelkner, managing director of Vetter Pharma International GmbH.

Drivers behind supplier consolidation

PharmTech: There seems to be an overall trend in recent years by pharmaceutical companies to consolidate their supplier base (i.e., to work with fewer and more strategic suppliers). Have you observed this trend, and if so, what factors are driving the change? Are large pharmaceutical companies primarily pursuing this business model or is it prevalent among smaller drug companies as well?

David DeCuir, director of fine chemistry R&D at Albemarle
DeCuir (Albemarle): Yes, we have observed this trend, or at least have heard major pharma companies talk about this. I believe it has to do with difficulty of cultivating working relationships with multiple suppliers. In addition, there is always a learning curve when working with new suppliers and some pharma companies are on a very tight production schedule. We see it mostly from larger pharma, although many smaller companies continue to work with just a few suppliers because occasionally, they lack the staffing to find and develop new suppliers and may be unwilling to devote extra resources if their needs are being met.

Brik Eyre, general manager of Baxter's BioPharma Solutions business
Eyre (Baxter): We're in the midst of a great deal of change in the global economy. Pharmaceutical companies are assessing the effectiveness of their strategies with limited resources, while still achieving the commercialization objectives for their pipeline. Regardless of the company size, use of external resources has long been embraced as an effective strategy to gain efficiency and flexibility, but we have seen a shift from the utilization of service providers to the integration of service providers. In the past, utilization of external vendors was driven by the perception that service providers were essentially interchangeable. This perception is why so many pharmaceutical companies maintained ties with a large number of service providers for long periods of time. Coupling the economic crisis with the increased scrutiny on oversight of partners, managing multiple suppliers proves to be a costly and complex task that is no longer viable. Therefore, the adoption of supplier management standards and increased need of a broader set of services from a consolidated set of strategic partners is occurring.

Within the sterile drug-manufacturing marketplace, in particular, manufacturing is capital intensive. As a result, many companies have chosen to access this competency by partnering with a supplier that has a demonstrated track record within the specialized manufacturing process to avoid investments in this aspect of commercialization. This is especially true of certain types of molecules, such as cytotoxics or highly potent compounds, which have considerable containment and safety standards. In addition, by selectively partnering with a supplier with a broad portfolio of solutions, companies gain access to a range of options across a product's life cycle.

In our experience, there continues to be an understanding that external partnerships provide the most value when objectives are clearly understood and aligned. This allows the service provider to elucidate the objectives of the partner and provide tailored and applicable solutions. This mindset dictates a closer working relationship so that the most value is provided to each party. Because of this increased commitment, the logical extension of this philosophy has been a reduction in the number of relationships maintained among pharmaceutical companies and their partners.

Paul Josephs, vice-president of sales and marketing at DPT
Josephs (DPT): We have observed the trend of pharmaceutical companies consolidating their supplier base, primarily due to mergers among major pharmaceutical companies. In many cases, the mergers led to an initial growth of the supplier base. Since that situation is unsustainable, there is a conscious effort to reduce the supplier base down to a manageable level and use preferred suppliers. Increased pressure in the industry to reduce costs and lower overhead has also factored into consolidation.

Although the true preferred-provider relationship concept has been talked about for several years, it's really taken off in the past one to two years. I would say large pharmaceutical companies are driving the trend because they have more products to leverage. Smaller companies are more concerned with finding an expert with regard to a certain technology.

Hans Engels, president of DSM Pharmaceuticals
Engels (DSM): Consolidation of vendors is a definite Big Pharma trend and the reasons behind it are the drive for efficiency and more leverage for the big pharmaceutical firms to get things done in a way that they desire (e.g., approach to quality and compliance and additional cost leverage). The typical approach is to reduce the number of suppliers by 50% or more. An unsolved challenge of this consolidation goal as a result of mergers and acquisitions is how to handle new products with an established manufacturing base.

Michael J. Kosko, president of Pfizer CentreSource (PCS)
Kosko (PCS): Pfizer CentreSource has seen a strong trend during the past few years toward pharmaceutical companies reducing their number of vendors, and our business development colleagues have seen this trend apply to both large and small pharmaceutical companies with locations in the US, Europe, and Asia. One factor driving the approach is industry consolidation. Acquisitions have brought together companies with different sourcing philosophies and supply chains. Efficiently managing these merged organizations going forward requires that this issue be addressed. Additional drivers for vendor consolidation include the pursuit of improved performance in the areas of supply, quality, and service as well as cost.

R. Ananthanarayanan, president of Pharmaceutical Services and Active Ingredients (PSAI) at Dr. Reddy's Laboratories
Ananthanarayanan (Dr. Reddy's): We have observed a strong trend, particularly among mid- to large-sized pharmaceutical companies to consolidate their supplier base and to work with more strategic suppliers. From our interaction with customers and with the industry, one of the significant reasons for the consolidation is to incorporate an outsourcing strategy that creates a more intimate relationship with the supplier. This allows the pharmaceutical company to understand the suppliers' operations in a more detailed way, influence how the operations are being run, and enhance cost effectiveness along the way. Other organizations that are less strategic in their outsourcing efforts are reducing the number of suppliers that they work with as a mean of controlling their own internal resources, such as staff to manage suppliers and tighter control of their spend. While this is not a new concept, over the past couple of years, the effectiveness of the pharma organizations to execute against this kind of strategy has evolved.

Mark Cassidy, vice-president of SAFC Contract Manufacturing Services
Cassidy (SAFC): In recent years, SAFC has definitely observed a trend for medium and large pharmaceutical companies to consolidate their supplier base and move toward identifying and selecting strategic vendors. There are certainly cost savings in managing and working with fewer suppliers. Also, the trend for many companies is to take more of a partnership approach with suppliers, as opposed to basic outsourcing of activities. To achieve better results and efficiencies, selecting vendors that will fit into the strategic partnership model is an important factor in the overall program. For example, when outsourcing GMP active pharmaceutical ingredient manufacturing, it becomes much more efficient to have two or three strategic contract manufacturing organizations (CMOs) already identified, with master service agreements, clearer expectations, communication standards, and relationships in place to complete the work more quickly and efficiently.

Peter Soelkner, managing director of Vetter Pharma International GmbH
Soelkner (Vetter): We have noticed that strategic partnerships have become even more important for pharmaceutical and biotech companies. They are increasingly interested in working with partners in long-term and strategic projects and have begun setting up programs to assess and choose preferred suppliers. In the process, manufacturers are continuously screening suppliers, creating databases, and using electronic bidding with the goal of creating a base of two or three qualified service providers. They also evaluate existing suppliers with scorecards and key performance indicators, such as adherence to cycle time, supply-plan adherence, or compliant-closure adherence.

Several factors have led to this development. First, a number of product patents will be expiring in the coming years. This is exacerbated by the fact that the pipelines of many companies are simply unable to compensate for this loss. They are trying to find a solution by acquiring or merging with other companies. Competitive pressure is increasing as well, leading many companies to look for growth in the emerging pharmaceutical markets. For the established markets of the US, Europe, and Japan, growth is expected to continue. Therefore, to take advantage of opportunities and savings potential, manufacturers are banking on preferred suppliers. Even the smaller biotech firms and start-ups are increasingly recognizing the advantages of strategic partnerships. For them, what's more important are CMOs that are able to support them in the development of new products. This level of cooperation and partnering allows a more seamless transfer to commercial manufacturing after products have passed clinical studies.

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