From The Editor | September 22, 2016

The Price At My CMO Isn't Right … But How Do I Know?

Source: Outsourced Pharma
Louis Garguilo

By Louis Garguilo, Chief Editor, Outsourced Pharma
Follow Me On Twitter @Louis_Garguilo

The Price At My CMO Isn’t Right … But How Do I Know?

“What we’re doing up here is never done – focusing on that one input in public.” So says the serious moderator of the opening panel at Outsourced Pharma San Diego.

“Instead of focusing on money, you talk openly about ‘value,’” he continues. “Well, what is that? Or it’s all about ‘relationships.’ The industry talks partnership in public, but behind closed doors, aren’t prices and costs closing or breaking outsourcing business deals?”

Perhaps overly provocative for a moderator. Yet, if the goal is to facilitate open discussion among panelists and audience, it might end up a positive ploy.

Understanding Price

Limiting a discussion to pricing and costs doesn’t detract from the importance of other factors in drug development and manufacturing outsourcing (e.g., measurements of value; need for relationships). In fact, we can argue the opposite: Without a clear understanding of how much money should change hands, the other deal factors remain relatively vague.

Unfortunately, that might be our current environment. Here’s the first of two questions answered and recorded real-time (via a mobile app) from the audience during the discussion in San Diego. 

Do you think sponsors understand the costs and pricing models of services at providers?

A. Yes, it’s clear what providers charge overall for projects (2%)

B. Yes, specifics like costs of resources, time in plant, materials, are transparent (6%)

C. No, pricing varies by provider, location, service, etc. (75%)

D. No, outsourcing is more a matter of negotiating to get the best price. (18%)

As you can see, three-quarters of the audience suggest sponsors don’t understand CMO costs or pricing models. Another 18 percent say getting the best price is a matter of negotiating.

So we have to ask: If sponsors don’t understand the costs or the pricing at their CMO, but negotiating is vital to getting the best price, how can that possibly work out?

Then there was this second question.

For sponsors, what do you think is most important in selecting an outsourcing partner?

A. Provider understands sponsors’ business plan/objectives (16%)

B. Sponsor’s budgets, provider’s prices, overall costs (9%)

C. Technical expertise, CMC, quality and regulatory assistance at provider (73%)

D. Facilities/geographic location of provider (2%)

Again we see a majority of about three-quarters, this time placing highest importance on the specific service being outsourced. Only 16 percent say it’s most important to have a mutual understanding of business plans and objectives – the elements related to the partnerships and relationships so often stressed in public discussion.

But focus for a second on that nine percent number for budgets and pricing. It does make sense that what specifically needs to be outsourced – and having it done correctly – trumps the costs. But perhaps at least part of this result is confirming the initial premise of the moderator: we remain reticent to speak publically about the pure financial aspect of outsourcing.

Maybe it’s time to turn to the panelists to give us a hand with some of this.

Keep An Eye On Your Scope

Throughout this discussion, panelists kept coming back to “scope” as a specific element influencing price clarity, and we’ll limit the scope of this article to their advice on this subject.

It started off with a response from Frank Sorgi, President & CEO, FLAG Therapeutics (and former CMO executive):

“Sometimes it's not about money. If you [bio or pharma customer] bring me [CMO] a development project, I can show you the fastest, and in the end, cheapest way to get to your ultimate endpoint. Unfortunately, it probably doesn't fit your current financial means or budget. Customers show up at the CMO doorstep with a certain pot of money, and so both sides need to be milestone driven, and this is defined by project scope.

“However, sponsors must understand this focusing on initial milestones, within defined timeframes, can also make it more expensive down the road. They’re putting off some important studies or services, and working quite sequentially. From this standpoint, how much money sponsors ultimately spend is not the driver, because they actually spend more. It’s this idea of creating the most immediate value by hitting affordable milestones that’s key for their businesses.”

Shawn Comella, CEO of Triclinic Labs added this:

“My kids are tired of me saying ‘contrast is everything.’ Economists would say our outsourcing market is not ‘thick,’ meaning you can't go to a place like Amazon.com and type in polymorph screening to see who has the highest rating, the lowest price and quickest service. But while it requires quite a bit of effort on your [sponsor’s] part, you’re well served by getting comparisons – developing some contrast – not only on the price side, but also with other variables like FDA-inspected or not, highly experienced scientists or not, project management or not? 

“If someone says the price is too high, my usual response is, ‘Compared to what?’ I then often see that scope is a main variable. So with reasonable specs around time and budget, you can find a number of high quality CMOs to gain contrast, and help you better understand price.”

Next up was Kent Pryor, COO, ZZ Biotech:

“Scope helps you both determine and understand price. You may describe a project, but different people hear different things, including what you are not exactly looking for. You can get some wildly differing pricing. So you need to dig into the weeds to determine what you do need, and to judge who is really listening. Go back and refine what the scope is once you get some initial quotes. It's amazing how pricing starts to tighten up once you get the scope of the project aligned among providers.”

From Michael Newman, Founder, President & CEO, Decoy Biosystems:

“I believe it's only after you’ve put out the same protocol and project description to multiple vendors that you really start to get a sense of, ‘How much should I expect to pay for this?’

“Personally, I don't think I've gotten a good sense of this except for the things I've been outsourcing for quite a few years. You need to develop your own internal experience. Before you go and get a quote, it's critical to decide: ‘Do we have the expertise and experience to do this directly with the providers, or do we need some type of consultant?”

We’ll end back with Sorgi:

“There are two ways of putting a scope document out; both have value. One is to itemize the services you need now and get a flat quote for those. That might give you more transparency in terms of what prices are. There are some nuances you lose, though.

“The second way is to say, ‘Here’s where I am today, here’s what I have and don’t have, here's where I want to be in a year. Show me the path you would recommend.’ You can learn a lot from this. You turn the process around, and let them [CMOs] propose the scope of everything needed. There you'll see the biggest variety of prices, and that will help provide another level of clarity for you.”

More clarity on how much money should change hands was what we were after. Perhaps with a little provocation, we got part way there.

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Shawn Comella, CEO | Triclinic Labs; Michael Newman, Founder, President and CEO | Decoy Biosystems; Frank Sorgi, President & CEO | FLAG Therapeutics; Kent Pryor, COO | ZZ Biotech; Louis Garguilo, Chief Editor | OutsourcedPharma.com (notorious Moderator)

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