The Quiet Case For Trusting CDMO Pricing
By Louis Garguilo, Chief Editor, Outsourced Pharma
“Given the type of industry we are a part of, with so much forward risk, my overall philosophy is not to necessarily get stuck on pricing, particularly at the time of scale-ups, or ramp-ups to approval and launch.”
So says a veteran of both commercially successful and emerging biotechs start-ups, although he quickly adds, “I don’t broadcast this externally, or even internally – quote me anonymously!”
I’ll abide; he continues:
“I really believe if your RFP process has been carefully constructed, the price a CDMO quotes you for clinical or commercial supply will be accurate.”
This is no theoretical pronouncement of irrational price insensitivity. Nor an implication sponsors shouldn’t ask questions, seek clarifications, negotiate on points.
Or come off as price pushovers. (We’ll deal with that in a moment.)
Rather, it’s an approach to external partners without an inherently skeptical attitude regarding their pricing.
The recommendation here is to focus on areas such as immediate (and future) capacity and production scheduling; capabilities and quality, regulatory, and CMC overall; and on securing a long-term manufacturing relationship.
So consider:
- How much of your contracting with an external developer and manufacturer gets focused on and taken up by money?
- How productive is that time spent, and what has been the effect on relationships?
Yes, The Price Is Right
“I'm just not going to start out as a customer deemed difficult on pricing,” our outsourcing pro continues.
“When you look at a typical launch – and this has happened to me many times – it is you, the customer, who is never fully accurate, in terms of the scope of work needed, timing, and especially the volumes negotiated with your CDMO.”
Which means CDMOs are always at risk, and must build that into their initial pricing.
Notice the word “initial” and also, or course, circumstances matter. No deal, as we say, is the same.
In fact, that was where our outsourcing professional went next:
(a) Should your product launch be at hand or with actual commercial approval; and
(b) you have successfully identified a second supplier (as you should have in most all cases); then
(c) the “leverage game” starts to change your equation and you can now be more challenging on costs; but
(d) even then your approach should include a positive attitude and “partnering strategy”
Understand that in a supply agreement, your CDMO is looking for the long-term margins it needs to stay profitable throughout the relationship; should not be looking to shave off every penny you can.
That’s the attitude that can easily backfire on a relationship.
Not Quite Dale Carnegie
How then can you discover the most equitable pricing for supply agreements?
Here’s a novel, thought: Ask your CDMO.
- What exactly are our main cost drivers?
- Is it our core process, raw materials, equipment we occupy, labor, and/or other components?
- How can we work together towards mitigating some of these factors?
Importantly if you need to focus more on pricing, consider continuous productivity improvements.
See if you can agree to implement ‘mini projects’ for valuable changes. Offer your engineering/quality professionals to help investigate opportunities to mitigate or reduce costs for both companies.
“But again,” iterates our outsourcing pro, “when you start out with a focus on final price, you set the wrong tone in terms of what the ultimate objective is. It should be to receive a reliable supply of a safe medicine for patient populations.”
We aren’t looking to qualify for the Dale Carnegie method, but this is described to me as “an applied humanistic strategy tying both sides into something well beyond the hard economic facts of outsourcing development and manufacturing.”
“The science and technology, disease profiles, patient backgrounds, and the business opportunity, when relayed together with heartfelt charisma, intrigues people.”
OK, so maybe we are trending Dale Carnegie.
Although business is business, “there’s the intrigue of human spirit in what we are trying to accomplish – treat a disease afflicting real people. That should be a northstar in everyone’s mind.”
Let me again interject – because I worry about it – these are not puffs of rhetorical cotton candy. My conversation partner knows the business of external supply chains, and has been successful at development programs and commercial launches.
He says, "I do tell my team, ‘We have to understand our CDMO is running a business.’
“If we are dysfunctional, or irrational, it impacts their ability to make money – let alone our own chances of success. It’s imperative we obtain a mutual understanding of what both companies need to achieve as organizations.”
Escalating Outsourcing Challenges
The above carries through the entire outsourcing relationship. However, a relationship-minded attitude doesn’t mean, for example, those involved with day-to-day activities should consider escalation a dirty word.
With the right attitude, presenting issues to higher authorities for help can end up deepening the relationship, as well as offering a better chance of overcoming whatever the challenges are.
“Management teams don’t want to wait until an ObR [FDA's Question-based Review] to understand there’s a productivity issue, or one side or the other has been unhappy about something for months.”
At times, that “something” may be less scientific, and more personal.
“I’ve always hired consultants,” says our pharma veteran. “Once, a consultant did not emulate the behavioral aspects we expected from members of our organization.”
“I ensured the management team at our service provider knew I was aware of this, and I was managing that behavioral aspect. I assured them, ‘We see the same thing you do. I'm working on it; it’ll be resolved one way or another.’”
I didn’t learn which way that went before he moved me to another example, this one an equipment-related discussion with a CDMO.
It seems a particular “workhorse” piece of equipment, located at a single location of a CDMO, was critical to produce a commercial product.
“The CDMO stuck to their original commitment to not take in any more work on that line until they could get a second line fully operational. We in turn committed to a certain number of batches into the future.
“That helped both of us get past capacity challenges – and cost considerations. The negotiations did not drag out, and that helped the relationship.”
When it’s not all about money, it can be about the relationship. And when it’s mostly about the relationship, it may actually lower costs and optimize your outsourcing.