They Messed Up and Left...: Business Strategy

By George Ntortas

This is a fictitious story about the mess that was created in a pharmaceutical CDMO, when an unrealistic business plan was asked to be delivered. 

 

It is inspired by events observed in different companies in the contract manufacturing industry, and it provides key lessons around different strategic topics that CDMOs have to deal with.

• Language: English
• Publisher: George Ntortas
• Release date: Jul 28, 2023
• ISBN: 9798223758259

George Ntortas

George Ntortas is a consultant in the Pharmaceutical CDMO industry having started his CDMO journey back in 2006. He has worked in several positions within the industry and since 2019, he supports CDMOs and pharmaceutical companies cooperating with CDMOs. He does this by being a partner in Fuliginous Management Consulting.

Book preview

Written by George Ntortas

Text editing: Kyriakos Kansos

Cover image: pexels-monstera-7794439

Copyright © [2023] [George Ntortas]

1st edition 2023, All Rights Reserved.

No part of this work may be reproduced, copied, or transmitted in any way or by any means without permission in writing from the author.

Disclaimer:  This is a fanciful story inspired by events observed in different companies in the contract manufacturing industry and could happen again in the future in other companies in the same industry. Any similarity to actual persons is coincidental.

Contents

Introduction

Part I

Chapter 1: The future is bright, the experts said it. The Business Plan of €70 million EBITDA

Chapter 2: The unknown limit of how many customers is enough to kick out.

Chapter 3: Profitability improvement and recharges. The perfect combination.

Chapter 4: EBITDA killed Contribution in RFQs. The King is dead. Long live the King!

Chapter 5: The army of people increasing the overheads.

Chapter 6: Sites are P&L responsible.

Chapter 7: The committee of the Wise men.

Chapter 8: Customer Service is here to solve customers’ issues, where is customer service?

Part 9: F**k the contracts.

Chapter 10: This shitty team should go out and sell.

Chapter 11: I have to go now. Me too!

Part II

Lessons Learned. Creating a Business Plan in the Pharmaceutical CDMO Industry.

Lessons Learned. It all comes down to People.

Lessons Learned. Providing a Price in the Pharmaceutical CDMO Industry

Lessons Learned. (Not) Knowing your competition in the Pharmaceutical CDMO environment.

Lessons Learned. The Long Transition from Family to Private Equity Owned CDMO.

Lessons Learned. Measuring Profitability. Not that Straightforward.

Lessons Learned. Master Data Management. Neglected but Necessary.

Getting the thoughts together – Conclusion

Introduction

This is a Novel about a CDMO in the pharmaceutical industry that went through a major change process based on a business plan that was created without the contribution of field industry experts.

It is a fanciful story inspired by events observed in different companies in the contract manufacturing market and could happen again in the future in other companies in the same industry.

Through it, we attempt first to explain why the pharmaceutical CDMO industry is different from other industries (even within pharma sector) and secondly what can go wrong if non-industry specific experts prepare a business plan for a CDMO, based on unrealistic assumptions, or on assumptions that might be applicable to other type of industries. Finally, we share some insights on the difficulties faced by people used to work for a specific business model (for example family business) and suddenly they find themselves working for a different model (for example private equity owners). There is no good or bad ownership model, they are just different, each one having its own objectives and therefore different requirements from the employees that are asked to deliver results.

What is common (and important) between the different CDMOs observed, is that they were in transition between different business models and therefore a business plan had to be created that would reassure the new owners that the business is viable, they could capture its full potential and they would be able to sell their asset in the next 5 to 7 years.

A second similarity between the different CDMOs observed was the pressure of the top management in each company to deliver results and meet an aggressive business plan. Because it is not a secret that business plans are meant to be aggressive in situations like this, and the reason is that investors in these cases did not have a long-term horizon, expecting extraordinary results quite fast.

The second part of the book attempts to derive some lessons from the story and touches on different topics which in our opinion people involved in strategy development of a CDMO should pay particular attention to. Lessons about business plan creation, pricing strategy, profitability measurement and others, give some food for thought to people responsible for growing the CDMO business.

Best practices and practices to be avoided are described in the second part of the book, keeping always in mind that pharmaceutical CDMO business is very different than other type of businesses even in the same industry.

Trying to apply practices of other industries in a CDMO, or having similar expectations when it comes to revenue and profitability is destined to fail.

Last but not least, people are important. Asking people to deliver unrealistic results, change their mindset overnight and start transforming the company from family to private equity owned one, does not work.

Part I

Chapter 1: The future is bright, the experts said it. The Business Plan of €70 million EBITDA

Our story begins in 2017 when a family owned pharmaceutical CDMO with headquarters in Central Europe and producing mainly traditional product forms, had decided to move to capital equity ownership. It was a positive EBITDA company and the reason that its owner decided to sell it was because his descendants did not want to follow the steps of their father, who created the company 40 years ago. Therefore, the father and owner of the company did not have many options than to retire and sell the company to a private equity fund.

And as it is common in situations like this, the capital equity firm that was about to acquire the family business, called some external consultants to have their say about the strategy to be followed and create a 5 years business plan. The problem was that the consultants hired, although experienced in other M&As in the past, they did not have the hands-on expertise needed in the CDMO industry of the pharmaceutical sector.

The second problem was that the specific CDMO had a reputation for providing low prices to their customers. This was well known to the private equity fund and so there was a feeling that if we can increase the price levels, stop producing some negative profitability products, and modernize a bit the organization, its value will be increased. Moreover, the pricing strategy of the CDMO all these years, was mainly based on contribution margin. Therefore, profitability was measured not using gross profit or EBITDA, but contribution margin. And this was one of the reasons why price levels provided to customers were considered low.

So, the guidelines to the consultants were direct and straightforward. This CDMO does not have a production cost issue, it has a pricing issue. So, there is no need to visit the manufacturing sites, just take a look at the corporate functions and build the strategy. And please pay specific attention to Business Development and Purchasing departments. And this is what the management consultants did. They spent two months in the head offices of the CDMO and focused their attention to the corporate functions.

Long office hours, endless meetings, dozens of excel files, and the result was just great! A more than one hundred and thirty pages’ study and a more than one hundred pages new 5 years’ business plan were ready!

The Normalized cash EBITDA of the CDMO could fly from €16mio EBITDA as budgeted for 2017, to €70 million in just 5 years. The experts sized a potential EBITDA upside of a great significance by 2021.

How? Very simple by approaching big pharma not yet in the CDMO’s portfolio, by finding additional opportunities among mid-sized pharma, by expanding in other geographies and technologies by saving in raw and packaging material cost and the list goes on including other cost out initiatives of central management such as centralization of OPEX.

And of course, some "enablers" would support further the success story that was about to evolve in front of our eyes. A new pricing process, a new team to review current contracts and get the most out of them, a new market intelligence team, new systems and tools, etc.

Finally, there were also some other ideas for an additional boost of EBITDA. Improve profitability levels by increasing existing and future prices and discontinuing loss making products no matter their level of sales.

So, the solution was clear. Don’t change anything in the efficiency and the cost structure of the manufacturing sites, follow the above,