SAFC Supply Solutions (St. Louis)
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An example of a shelf dryer in a facility operated by SAFC Supply Solutions (St. Louis).
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In order to thrive in this dynamic environment, and in some cases just to survive, diagnostics manufacturers are looking at options for increasing their business opportunities while also cutting or containing costs. One of these options is original equipment manufacturer (OEM) product manufacturing or packaging through an arrangement with a contract manufacturer.
The actual size of the diagnostics OEM market is uncertain; however, in theory, it could be equivalent to the IVD market itself. One difficulty in determining this figure is the reluctance of many IVD companies to acknowledge that they are not manufacturing all of their own products, usually due to concern about possible backlash from customers.
Although contract manufacturing has been part of this industry for years, it is now in a high-growth—even what could be called a boom—stage. More and more diagnostics manufacturers are either evaluating the viability of the OEM option or are actively engaged in the process already.
There are many reasons why diagnostics companies make the decision to hand over a product line to a contract manufacturer. They are typically strategic or financial. But, regardless of the reason, the important thing is to know how to enter into an OEM relationship successfully.
In today’s diagnostic marketplace, companies often make the decision to expand into new market segments while wanting, or needing, to maintain a presence in the market segment that is basic for them, perhaps with a product line that generates the lion’s share of revenue for the company. A good example of this situation is provided by the trend among diagnostics companies to want to participate, or be a stake holder in, the rapid growth taking place in the molecular diagnostics, diabetes-care, and point-of-care markets. All three are areas in which the future of diagnostic testing may lie. Yet, such a foresighted manufacturer might nevertheless conclude that it must stay with its traditional market in clinical chemistry.
In many cases, the IVD company does not have the existing plant capacity or the expertise to enter new market segments, or to develop the necessary new product lines while continuing to manufacture its established products. It must then choose from among several basic options, making a decision to:
- Not enter the new market, and instead continue as is.
- Acquire a company in the market into which it wishes to expand, purchasing resources and market share along with the business.
- Expand current capacity by adding onto an existing facility or building a new one.
- Outsource an existing product line to an OEM company through a contract manufacturing arrangement in order to free internal plant capacity for manufacturing the new product line.
If the diagnostics manufacturer elects the fourth option—to outsource a product line to an OEM contract manufacturer—it should clearly establish the criteria for choosing an OEM manufacturer and should have a plan for successfully transferring manufacturing to the OEM company selected. Companies’ development and manufacturing needs and objectives will, naturally, vary with their size. They will also depend on the status of the product in the portfolio or in its life cycle.
Assuming compatibility in the approaches taken by the parties on each side of the table, IVD companies observing seven basic ground rules for commencing and sustaining OEM relationships should have a good chance of enjoying commercial success as a result of deciding to initiate an OEM business agreement.
Establish a Partnership
First and foremost, the IVD company must accept and support the idea of contract manufacturing; all key figures in the company should buy into the approach intellectually and emotionally. In addition, the cultures of the outsourcing company and the contract manufacturing organization must be compatible. Companies with drastically different business cultures are very unlikely to be successful in developing a positive OEM relationship.
Many manufacturing companies are reluctant to let go of product lines for fear of losing proprietary technology or intellectual property (IP). Job security issues, a “we-can-do it-all” mentality, and a persistent attitude that “that’s not how we do it here” are other possible obstacles that can stymie an attempt to win support from certain elements of the business for an OEM relationship. A contract manufacturing arrangement between two companies should be a partnership, with both parties completely understanding the role of the other and how, and in what areas, they must work together.
The decision to contract out manufacturing as a means of expanding plant capacity should be fully endorsed at the executive level. Then the message needs to be communicated throughout the organization. Employees should be reassured about the new opportunities coming to the facility and to them.
The biggest issue for a lot of IVD OEMs regarding the engagement of a contract manufacturing organization is confidentiality. Fear of technology or IP loss to a third party is a legitimate concern. In many cases, a contract manufacturer may be a competitor. Much of the outsourcing company’s market standing and revenue may be derived from a unique or patented technology or IP. The signing of a confidentiality agree- ment is one way to address this concern. Another approach is to decide to outsource the production of only nonsensitive technologies, retaining very confidential technologies for internal manufacture.
Get Organized
The IVD manufacturer should get its house in order before beginning an OEM project. The warning that garbage in means garbage out applies here. The IVD company should make sure that all of its manufacturing, packaging, and quality assurance documents are complete and in the proper format for transfer to a contract manufacturer. An OEM company is going to manufacture exactly what the primary manufacturer asks it to, and exactly in the manner it is told to do it.
Research the Candidates
The IVD company should do plenty of homework on the companies it is considering having contract-manufacture its products, because there are many issues to consider.
Few OEM companies are capable of manufacturing products representing all segments of the IVD market. Most will specialize in one market segment, such as molecular diagnostics or clinical chemistry, some in several. Others may specialize in liquid and dry powder filling or lyophilization. Still others may be packagers who offer no contract manufacturing availability.
The potential OEM contractor should be financially stable. The IVD manufacturer should audit the company thoroughly and arrive at the conviction that the candidate will be able to meet its long-term requirements. The last thing the IVD company wants is to start an OEM relationship and later find that the contractor is unable to continue because of financial instability.
The diagnostics company needs to know whether the prospective OEM manufacturer has experience manufacturing diagnostic products, particularly in the area of interest. Resident expertise in the area of interest is important, too.
The contractor’s facility should have the necessary FDA licenses or ISO certifications to do medical device manufacturing. The depth of the OEM company’s regulatory expertise, its knowledge of FDA and In Vitro Diagnostics Directive requirements for manufacturing IVD devices, and, as needed, its ability to collect data for 510(k) or CE mark purposes or technical files are key factors. The facility’s last FDA inspection revealed a question of whether there is a quality manual available, and how supportive is it in the company’s quality program upper management. Also, the regulatory regime should fully address the possible role of design or manufacturing issues in product recall scenarios.
The contracting company’s manufacturing equipment should satisfy the IVD company’s needs and should be well-maintained. Capacity should be ample and able to grow when the primary manufacturer’s business increases. If flammable or hazardous materials are needed to manufacture the product, the facility should be licensed appropriately. Other things to determine are where the raw materials are sourced, whether a formal, documented employee training program is in place, how fast employees turn over, and how the company deals with customer complaints.
Is the prospective manufacturer equipped to package the product in specified packaging? The level of automation has to be appropriate for the application. If the diagnostics manufacturer needs lyophilization to be performed, the prospective OEM company should have sufficient capability and capacity.
The analytical capabilities of the company being evaluated as an OEM partner should be adequate for testing manufactured products as necessary, and at the specified stages of production and packaging.
If the customer base for the product is global, the contract manufacturer under evaluation has to be able to meet all international needs and requirements. It has to possess the expertise to maintain international compliance, and may have to inventory product and third-party drop-ship it. These things all need to be determined through research.
The geography has to work for the relationship. If the candidate supplier is situated close by the client, or is otherwise readily accessible, then developing and servicing the relationship will likely be easier for both sides than if not.
Finally, the prospective partner should have a verifiable track record of maintaining secrecy.
Look at All Costs
The cost of opting to use a contract manufacturer is an important element of the original decision—and of ultimate success with the OEM relationship. It is extremely important to make sure that the company submitting a bid to do the OEM manufacturing understands exactly what the primary manufacturer’s expectations and requirements are. The bid will reflect what it believes is expected of it.
Capital outlay is typically not a requirement for the IVD company in a contract manufacturing arrange- ment. That company should be aware, however, that the organization that will be doing the contract manufacturing in some cases may have to make a capital investment in order to be able to manufacture or package the products covered by the contract, and will probably expect the OEM to purchase the equipment if it is being brought in for that particular application. If the equipment can be used for other projects as well, the contribution toward the purchase will typically be less.
When evaluating cost estimates, the diagnostics manufacturer should be certain it understands exactly what is included in the quote—whether, for example, it comprises raw materials, labor, testing, and all packaging supplies. More than one company has accepted a bid only to find out later it did not include all of the actual expenditures required of it in getting the product manufactured. Oversights like that can result in serious budget issues.
Sign a Good Contract
A contract should be in place before any work is started. It should detail exactly what the OEM company will do, including time frames and the cost to do such. Milestones, raw material sourcing, regulatory requirements, packaging, and analytical testing should all be covered. An agreement should always feature a clear exit strategy for both parties.
Proceed with Caution
The diagnostics company should move forward cautiously with contract manufacturing. It may want to try OEM manufacturing with one group of products at first, not an entire portfolio. Typically, a mature product line that has been manufactured and tested over an extended period of time will be the best choice for initiating an OEM process. It is generally much easier to transfer manufacturing of a solid, established product line than of a new line that has been produced for a limited time and for which quality testing may be incomplete.
Certainly, the IVD manufacturer should make certain the contracting manufacturing process is working well and meeting all expectations before sending out additional products or product lines. There are a lot of financial ramifications to its OEM decisions.
Communicate Regularly
Finally, the IVD company should stay in close contact with its OEM partner. The OEM company, and the work it performs is an extension of the client company. This is not a traditional vendor-type relationship.
The diagnostics company should be part of the process and involved in all issues. Too many times, companies have contracted out a product line and not maintained sufficient contact with the contract manufacturer. Communication really began only when product delivery was delayed because of unknown or unresolved issues—or worse, the product was ready to ship but did not meet requirements the IVD company thought were mutually well understood.
In today’s marketplace, contract manufacturing represents a viable alternative for diagnostics companies looking to enter new market segments without having to increase their plant capacity or make large capital outlays. Those companies should exercise caution, however, in taking that approach.
Following the seven steps to a successful OEM relationships just outlined should make the OEM process easier and smoother for all the parties involved.
