Vendor Consolidation - CMO way

There has been a continuous trend of shutting down or selling out production facilities by the big pharma companies in order to improve the overall utilization rate affected by the patent expirations. This has led to the increased reliance of pharma companies on external manufacturing. Further, the patent cliff between 2014 and 2018 is estimated to be close to USD 180 billion, thus giving an indication of the potential of the increase in supplier base that pharma companies would need to manage over the next 5 – 10 years.
This whitepaper evaluates the opportunities in global supply base for API and Formulation contract manufacturing for a new supplier engagement model to tackle this challenge and attain a leaner supply base. The new model promotes that API and Formulation manufacturing can be outsourced to a single supplier for a particular drug product as there exist suppliers with such capabilities and a trend to attain capabilities across the pharma value chain in onset in the market. The new model has the potential to reduce the overall supply base to one–fourth of its current size over time as compared to the one-half potential of the model currently followed.
Even though, the new model poses slightly higher degree of risks in comparison to the traditional model, it also paves the way for more strategic relationship with the suppliers as a result of having a leaner supply base. This model could be highly adopted coming years as the pharma companies evaluate the challenges faced and befits reaped with it.
Problem Statement
The global pharmaceutical companies have been battling to keep up their profit margins since long and have adopted different strategies for revenue improvement and cost reduction. Over the past 10 years Big Pharma has lost more than USD 170 Billion to the patent expiration which has drastically increased the generic competition and largely impacted the capacity utilization rates of the big pharma companies. Reacting to this, pharma companies have laid off multiple production facilities to improve their overall utilization.
Novartis has sold 20 production facilities since 2010. In the last year, the program has delivered USD 2.8 billion in savings for Novartis. Continuing with this strategy, the most recent target for manufacturing cuts, has been its Suffern, NY, plant which produces Diovan for the U.S. Diovan went off patent in 2012 and hence it would not require the same levels of production. The plant is expected to complete the shutdown process in 2016.
Sanofi, Pfizer, Merck, Astrazeneca, Boehringer Ingelhiem have all sold multiple facilities in the past years and increased their reliance on contract manufacturing. Hence, managing the overall supplier base has become more and more complex for the big pharma companies and would continue to be. Further, big pharma companies are now looking at a vision to reduce their supplier base to the farthest possible extent and only have strategic relationship with the suppliers. Recently, at the International conference, ex director of a Top 5 big pharma company commented that any company would like to manage a supplier base of 10 suppliers rather than working with 400 suppliers. In view of this, spend consolidation and thus supplier consolidation looks to be the key to trim and manage the growing supplier base. However, given the growing opportunities in the market, a much more efficient consolidation model could be viable as compared to the traditional consolidation model adopted by the pharma companies which could be achieved by new engagement strategies with the suppliers.