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on other continents. Although I am not uncomfortable with this, the higher level of compliance responsibility raises manufacturing costs and margins must reflect this. In my opinion, the increasing dependence of new card:Layout 1 1/31/2013 9:09 AM Page 1 the client on the CMO for compliance is one of the most compelling reasons for clients to look beyond price in negotiations. I don’t expect the tension between CMOs and clients over margins to diminish, let alone disappear. Clients are under constant scrutiny by the financial community. For developing companies, venture capital stresses cost management by executives. For established companies, continued paring of costs is a key component for maintaining revenues in the face of payer pressure on drug prices and loss of exclusivity. Of course this leads to pressure on suppliers. For their part, CMOs must constantly work to develop cost-saving efficiencies. My point is that those who believe that the supplier should accept starvation margins yet have total responsibility for everything are both unrealistic and short-sighted. Approaching contract manufacturing as a commodity service simply can’t work in the context of the virtual model of capital efficiency. The CMO is a vital link in the supply chain.

What I look for are clients who have a partnership orientation. I never expect price negotiations to be easy, but we know what margins are necessary for an ongoing, healthy CMO business. We have learned not to chase potential clients who are focussed mainly or exclusively on price. They typically insist on multiple rounds of quotes with decreasing margins based on quotes from other vendors.

In most of the early and mid-stage projects that we are involved the contracts are not simply cost plus arrangements but involve significant risk sharing. The ideal client is one which is genuinely interested in an appropriate distribution of risk according to individual capacity in a spirit of fairness. Balancing risk sharing relationships is not easy but we have learned a great deal over the past decade. The most satisfying business relationships have been contracts which irrevocably bound Dalton and the client, typically for a period of five years. When difficulties arise, we work through the challenges together because there is no practical option to do otherwise.

An adage heard in some circles is that the North American CMO is doomed to extinction because of offshore competition. I certainly don’t believe it. Dalton is currently making a large capital investment to increase capability and capacity, and we are also making investments to ensure that we will meet future requirements for compliance. The trend toward focused therapies for smaller patient segments should over the long term increase the pool of potential clients for small and mid-size CMOs. I am encouraged to see in my current client base a growing understanding that thin margins are not sustainable. Our goal must be a healthy ecosystem in which all players have the opportunity to prosper as we work together to develop innovative therapies to help humankind.

SRC101

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