Lack Of Preparedness By CMO’s Imperils Pharma Manufacturers

Somethings Gotta GiveEverywhere I traveled this fall I had conversations with people from drug manufacturers who told me their top concern right now is that their contract manufacturers (CMOs) or contract packagers (CPOs) are not taking the actions necessary to be prepared to meet the approaching serialization mandates in the U.S., the E.U. and elsewhere on time.  This threatens the manufacturer’s ability to be ready for those deadlines and they are grasping for something they can do now to fix the situation before it gets too late…if it isn’t too late already.

Virtual manufacturers are particularly at the mercy of their contract partners in this regard because all of their products are packaged by one or more contract partners, but it is a characteristic of our modern supply chain that nearly all drug manufacturers make use of one or more CMO/CPOs for some percentage of their packaging requirements.  That’s what makes this situation a problem for almost everyone in the industry.  Of course, the exact percentage for each manufacturer varies widely.

I have touched on this before (see “Should You Off-Load Your DSCSA Obligations To Your Contract Partners?”), but this problem is so widespread that it appears that it is not really a “choice” by manufacturers to off-load their legal obligations.  I am told there are thousands of smaller CMO/CPOs.  A significant number are in business solely to manufacture and package a single drug, or multiple drugs for a single manufacturer.  Many of these are apparently small organizations that are operating on a shoestring with no long term capital accumulation in anticipation of significant packaging line upgrades…the kind that are necessary to meet new regulatory requirements like serialization.  And they are not paying any attention to new regulatory requirements because they do not have anyone on staff to do that.  These organizations expect their clients—the “manufacturers” who own the drug registrations and who market the drug(s)—to monitor for those things.

Certainly, there are larger CMO/CPOs who are on the leading edge of preparedness, but their total packaging volume does not likely represent a very high percentage of the volume that is performed by all CMO/CPOs out there.


So what will happen when a serialization deadline for a given market arrives and a CMO/CPO is incapable of applying the necessary serial number in the required data carrier?  The deadline in the U.S. market is November 27, 2017 (see “Pharma Industry Attention Returns to Serialization”).  The deadline in the E.U. market will be sometime in early 2019 (see “Insufficient Transitional Measures Doom The FMD-EUDA”).  These two markets represent well over half of the world sales volume for pharmaceuticals by dollar value.

If a pharma manufacturer is unable to properly serialize their drug packages for a given market on their deadline because their contract partner is unable to fulfill that task for them, then two things are likely to happen:

  1. The registration-holder (this term is used in some markets to refer to “manufacturers”, importers and sometimes repackagers) will be unable to continue selling the non-serialized product(s) in that market without risking fines and potentially other penalties. In the United States, it is only this threat that would cause the manufacturer to decide to stop selling.  Because their customers will still be able to legally buy non-serialized products, the demand for their non-serialized product will still exist, which could potentially cause some manufacturers to risk ignoring the deadline.  It also gives the U.S. FDA a “cushion” of 12 months to potentially invoke “selective enforcement” before that gets more complex due to the next DSCSA deadline (for repackagers) (see “An Open Letter To The FDA, EMA and ANVISA, RE: Who Are You Going To Punish?”).  But in other markets, like the European Union and Brazil, the registration-holder’s customer will also be under a separate, simultaneous regulatory requirement to only buy properly serialized products.  That will cause demand for legitimate, non-serialized product to drop to zero (except for grandfathered product, see “Will Manufacturers Be Able To Grandfather Products In Their DC And 3PL?”).  Of course, as I pointed out recently, this “big bang” approach results in some problems that regulators must anticipate (“Insufficient Transitional Measures Doom The FMD-EUDA”).
  2. The other thing that will happen is that the CMO/CPO that is incapable of meeting the deadline with the needed technology changes in place will see their business end for products destined for that market. It is one thing for a CMO/CPO to lose business targeted for the South Korea or Saudi Arabia markets.  Those are very small.  Most might not even detect that loss on their revenue.  But the loss of all U.S. or E.U. targeted business will likely be hard for a CMO/CPO to weather for very long considering these pharma markets dwarf almost all others.  And there is the potential for some ugly lawsuits for breach of contract against these organizations as their clients attempt to compensate for their unintended loss of business and greatly elevated risk.

So it is easy to put the blame on the CMO/CPOs who are too small, and/or too “low-budget”, to deploy the necessary equipment and software integrated with their existing systems to meet these deadlines—or to even recognize that they should do that.  But the truth is, in many cases, the pharma manufacturers who contract with these shoestring CMO/CPO operations only have themselves to “blame”.  They have benefited from the low contract prices these companies were able to offer precisely because they were not setting aside capital for this type of major upgrade, and did not employ anyone to monitor for new regulatory requirements like this.  You could argue that everyone should have anticipated serialization mandates back when your current contract was written, but if they had, your costs under that contract would have gone up as a result.


You may disagree with all of that, but I think you will agree that this situation is untenable.  If the regulatory deadlines are going to stick, something has to change.  Should drug registration-holders pay all, or part, of the costs to upgrade their CMO/CPO’s packaging lines so that they are able to fulfill the coming serialization regulations in the U.S. and the E.U. on their behalf?  What if the contract partner packages drugs for multiple clients on the same packaging line(s)?  How complex would the negotiations be between the three or more companies to decide who pays how much, and then what the fees would be for each client for future serialized packaging orders?

On a different but related topic, what if some drug manufacturers decide to give up on their low-budget CMO/CPOs in the next few years and move their contracts to one of the larger, well-prepared CMO/CPOs?  Do those CMO/CPOs have the capacity to take on all that new business?  With the big increase in demand that would cause for the services those well-prepared CMO/CPO offer, wouldn’t their prices go up for everyone?  If they don’t have enough capacity to meet the demand, who gets serviced and who does not?

I don’t know the answers to most of these questions, but we now have less than two years to find out.


One thought on “Lack Of Preparedness By CMO’s Imperils Pharma Manufacturers”

  1. Dirk, thank you for starting a discussion on CMO/CPO readiness, sadly the situation is worse than you suspect.

    We are working with several global pharmaceutical companies that work with >500 CMO/CPOs where less than a handful are ready for serialization. The rate of on-boarding of CMOs for these companies is about 10/year (their numbers) and the self-imposed deadline is 6 months ahead of the Nov 2017 DQSA requirement. So they have 15 months to on-board 500 CMOs at a rate of 10/year – you do the math!

    One of the challenges is a lack of clear communication from the Registration Holder (RH); often they will send out a survey saying “are you ready for serialization” instead of giving guidance in the 4 key areas.

    Another challenge that neither the RHs or the CMO understands is that 21 of the Top-30 global pharmaceutical companies have complex, non-standard CMO integration requirements (data, choreography and workflow); meaning that if you are a CMO you will potentially need a solution for each of these. The industry norm for each integration project is 9 months and a CMO can’t execute more than a couple of these in parallel.

    Lastly there is the problem that we recognize from CA ePedigree days; that equipment upgrades and experienced resources will become increasingly hard to find as the deadlines approach.

    That’s just a summary of some of the issues, in practice there is yet another layer of complexity. I live this subject and am very nervous about the task ahead.


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