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Dear Pharma Veterans. This series of Blogs is a summary view of Pharma Business in Pakistan. It is a series spread over several parts covering the entire spectrum of Pharma business.
Pharma Business – OPERATIONS – MANUFACTURING
Manufacturing II – Contractual
Contract Manufacturing has gained popularity in the last decade or so. There are two variants.
Toll Manufacturing is a DRAP regulated variant of contract manufacturing. It is allowed only between two manufacturing companies. There is a laid down policy and procedure which is applied to toll manufacturing cases. The situations justifying Toll Manufacturing may be any of the following.
- One manufacturing company wants to renovate, or more appropriately do the plant BMR (Balancing, Modernization, Renovation) which would disrupt some manufacturing operations. The company can apply to DRAP for permission of toll manufacturing from the other company for the period during which disruption would occur. Both companies would submit required documents. DRAP shall review and grant permission.
- One manufacturing company wants to add dedicated section for Ceph or hormones etc. and will seek DRAP permission to get products toll manufactured from another company during this time.
- A manufacturing companies can apply for new registrations based upon toll manufacturing from the other company. This provision is available only for products manufactured in dedicated sections; not general ones. For example, one company may apply sterile products registration (injections) on this basis. The registration is granted on the understanding that the company applying for new registration shall establish its own manufacturing area for these products in 36 months.
- A foreign company can apply for toll manufacturing of their products from a local manufacturer. Such approval may or may not be time-bound
DRAP reviews the genuineness of request of applicant, the contract manufacturing company’s capability and spare capacity and may grant the request.
Both models are permissible in toll manufacturing. The contract giver provides all materials to contract receiver and pay agreed toll manufacturing charges. Or the contract giver asks the contract receiver to arrange all materials by itself and provide finished product at agreed price. The later model is probably favored more by DRAP as it gives greater ownership and responsibility of quality to the toll manufacturer.
Contract Manufacturing for Marketing
This is the second variant in which a manufacturing and/or marketing company acquires products which are already registered with another manufacturer but not marketed as yet. This model was initially adopted by startup marketing companies who did not have manufacturing facility for finance or other reasons. They would not be able to get products registered from DRAP. So, they went around and found products of their interest, took these and got into business. Whether they would go into their own manufacturing would depend upon the level of success they had in building their business.
Later, this model was also adopted by several large manufacturing companies. The reason was that it drastically reduced the go-to-market time. These companies literally piled product upon product and quickly built business.
There are several sub-variations in this model which need not be discussed here. However, DRAP does not officially endorse this model.
Challenges in Contract Manufacturing
Contract manufacturing has its own set of challenges which are different from own manufacturing. The important ones may be identified as follows.
Materials Availability – Pharma manufacturing is a highly regulated activity. All materials coming in for production have to be tested and released by the Quality Control. Approval of new sources or materials is also routed through QC. If the contract giver has taken the responsibility to provide materials, it has to wait for QC releases or rejections which do come at times. The process is divided in two places and therefore takes extra time. This factor should be added to the suppliers’ lead times.
Logistics – I would include all other matters related to material procurement under Logistics. Starting from the bank documents such as LC or BC to shipping to ADC clearance to Port clearance, anything may be delayed. Murphy’s law says, ‘if anything can go wrong, it will’ and of course it does; not once but repeatedly. The contract giver cannot control all factors, but can only follow up, request and wait.
Prices – If the contract manufacturer is arranging materials and charging you at actual, the price control is lost. If the contract manufacturer is giving finished product at a fixed price, the profitability will be split and reduced. Many years back, when the contract manufacturing had just begun, the contract manufacturers were keen to offer products at less prices as it brought guaranteed bulk business. Things have changed over the years. From a ‘buyers’ market’, it has changed to somewhat ‘sellers’ market’, with all its attending issues.
Priority – There is no way the priority could be enforced in contract/toll manufacturing model. Either it is their own business which may come first, or it may be other contract giver/marketer which may take precedence. In one extreme case, the contract giver was keeping 180 days stock to avoid shortage for any reason. This is most certainly excessive, but experience dictates that at least a 90 days stock must be carried. It may be a challenge in itself to build the stock in the first place.
Cost – There is a cost to carrying additional stocks. Actually, the cushion has to be built in both materials and finished products. Inventory is a huge cost anyway even under normal circumstances. Extra stocks are an unavoidable burden and reduce already compressed profitability further.
Quality – Fortunately, quality is not a common problem. But it can become one at times, if the contract manufacturer does not comply with the required standards. As mentioned earlier, Pharma business is regulated at all stages. Production is among the most regulated activities. Usually, quality issues are not created deliberately. These may happen due to lapses in real time documentation and non-adherence to data integrity principles. In contract manufacturing, the responsibility of quality lies with the manufacturer, and rightly so. Having said that, the contract giver should also be watching over the quality.