William Downey , President, HighTech Business Decisions03.06.15
Over the past two years, the change in prices for biopharmaceutical contract manufacturing services has been mixed. For mammalian cell culture production, prices for small-scale projects have dropped, while prices for medium-scale projects have increased. In addition, the prices charged by CMOs for ancillary services, e.g., process development, have also increased over the past two years. In the near-term, biotechnology companies expect to pay higher prices for raw materials, consumables, analytical and other consultative-type services. The expectation of higher prices for consultative-type services is consistent with the trends we have seen with FTE rates charged by CMOs for process development services.
The information and analysis for this article comes from HighTech Business Decisions’ latest report, “Biopharmaceutical Contract Manufacturing: Best Practices Pricing Study 2013/2014.” This report is based on primary research from 27 respondents at pharmaceutical and biotechnology companies (“Users”) who outsource some or all of the production of biopharmaceuticals, and from 18 biopharmaceutical contract manufacturing organizations (CMOs). All respondents in this study are senior-level executives or scientists. This study focuses solely on biopharmaceutical manufacturing sold on a fee-for-service basis by CMOs. For purposes of our study, HighTech Business Decisions defines biopharmaceuticals as complex molecular structures created through the genetic manipulation of living cells or organisms used for therapeutics, diagnostics or vaccines. The respondent companies participating in this study are located in North America, Europe and Asia.
Recent Price Changes
Based on the observations from the respondents in our study, overall prices for biopharmaceutical contract manufacturing services show an upward trend. While a plurality of respondents observed stable prices over the past two years, more respondents reported higher prices versus lower prices. In total, 49% of the respondents in our study report stable prices, 31% of the respondents report higher prices, and 20% of the respondents report lower prices (Table I). For this analysis, we define stable prices as changes of 3% or less. We assume small price changes result from either currency fluctuations or general economy-wide inflation levels—not necessarily specific industry price changes. Further analysis of observed price changes by the two respondent groups, shows that Users observed more price increases than did CMOs.
Highlighting the differences in observed price changes between Users and CMOs, 52% of the Users observed stable prices, while 44% of the CMOs observed stable prices. Furthermore, 37% of the Users observed higher prices over the past two years, while just 22% of the CMOs observed higher prices over the same time period. Conversely, only 11% of the Users observed lower prices compared to 33% of the CMOs who observed lower prices. While the observations between Users and CMOs are different, these differences are not significant, based on the chi-square test for independence between the Users and CMOs. The chi-square test for independence shows a p-value of 0.17; therefore, we cannot reject the null hypothesis for independence. Thus, while there are some differences between Users’ and CMOs’ price observations, these differences are not significant.
Although the two respondent groups’ observations regarding overall price changes are statistically similar, the observation of lower prices shows a significant difference between the two groups. Only 11% of the Users observed lower prices, while 33% of the CMOs observed lower prices over the past two years. The CMO respondent group was three times more likely to observe lower prices than the User respondent group. This difference is significant, as can be seen by the adjusted residual of 1.83, which is most likely the result of different project scales and product phases between Users and CMOs.
Several respondents gave specific examples or details about their price observations. A few respondents mentioned lower prices are associated with either new CMOs, or CMOs using single-use technologies. Other respondents noted that greater demand for contract manufacturing services has resulted in higher prices. Similarly, other respondents note that consolidation and mergers have reduced excess capacity; thereby lessening the need to offer steep discounts in an effort to fill unused capacity.
A few insightful comments from the biomanufacturing directors regarding the price changes for contract manufacturing services are given here:
GMP Production Price Changes
The mixed observations about changes in prices observed by the two respondent groups can also be seen in the change in prices for mammalian cell culture production. From our current and past studies we collected detailed price information from both the Users and the CMOs for GMP manufacturing in order to evaluate current industry pricing. From our quantitative analysis of pricing, the per-batch prices for mammalian cell culture have declined for small-scale production and increased for medium-scale production over the past two years (Figure 1).
The average per-batch price for small-scale mammalian cell culture production is down 8% from two years ago. While over the same period, the average per-batch price for medium-scale production is up 21% over the same time period. And the average price for large-scale production has stayed relatively flat; it is up 1%. As noted earlier, the lower prices for small-scale mammalian cell culture production most likely results from new CMOs entering the market coupled with the adoption of single-use technologies at these smaller scales. The higher batch prices for medium-scale production most likely results from consolidations and adjustments in industry capacity to better match supply with demand.
FTE Rates
Besides production prices, the respondents in this study also provided the annual FTE rates for the various consultative-type services provided by CMOs. These rates are for services using staffs in functions such as process development, manufacturing, quality, regulatory support, and project management. From the CMOs’ inputs, annual FTE rates for process development services range from less than $100,000 to greater than $400,000. The average annual FTE rate charged by CMOs for process development is $248,000, which is an increase of 19% from two years ago. This large increase in average FTE rates results from the distribution of FTE rates being more positively skewed in 2013 compared to 2011. From our analysis, there are fewer CMOs charging for process development services at the lowest FTE rate category, and more CMOs are charging at higher rate categories. As an example, in 2013, 75% of the CMOs charged an FTE rate of $350,000 or less, while in 2011, 78% of the CMOs charged an FTE rate of $300,000 or less.
Future Expectations
In addition to providing details about current prices paid for contract manufacturing services, the respondents from the pharmaceutical and biotechnology companies in our study also discussed their expectations about future price changes. Over the next two to three years, a majority of Users expect higher prices. The reasons for higher prices include higher demand for contract manufacturing services, greater regulatory and quality requirements being placed on CMOs, and general inflationary pressures.
They expect higher demand over the next few years to increase industry capacity utilization rates and thus reduce excess supply.
Currently, slightly more than half the Users (52%) are now experiencing higher prices or seeing proposed price increases from their CMOs. Additionally, about one-fifth of the Users (18%) expect to see higher prices in certain services and lower prices for other services offered by their CMOs, while approximately one-quarter (26%) of the Users expect stable prices in the future.
In addition to sharing their expectations about future price changes, the Users also provided details about specific products or services that they expect to see future price changes (Figure 2). The Users expect to pay higher prices for raw materials and consultative-type services. They specifically mention higher prices for raw materials and consumables, stability and release testing, analytical services and technology transfer. Higher prices for raw materials and consumables were mentioned most often by the Users, while higher prices for consultative-type services correspond to the higher average FTE rates reported by the CMOs. On the other hand, the Users have a mixed outlook for changes in manufacturing prices. In this case, more Users expect to see lower prices than higher prices.
Below are comments from both pharmaceutical and biotechnology companies and CMO respondents regarding their future price expectations:
Analysis
An interesting observation can be seen from the changes in prices for both production and consultative-type services offered by CMOs. First, the lower prices for small-scale production and the expected higher costs for raw materials and consumables suggest that the benefits from adopting single-use production technologies will not accrue to the CMO itself. But rather the financial benefits of adopting single-use technologies will accrue to either the CMO’s supplier or client. The lower upfront capital cost of single-use production reduces the barriers of entry for new CMOs. As noted by a few respondents, there are more CMOs entering the market using disposable technologies. The lower entry barrier results in a more intensely competitive market creating greater price competition and lower margins for those CMOs that cannot effectively differentiate its service offerings. Thus we see lower prices for small-scale production where single-use technologies are being adopted. In addition, expected price increases for consumables and raw materials shows that larger raw material suppliers are also able to derive some of the financial benefits of using disposable technologies from their CMO customers. This is most likely the result of the limited bargaining power that smaller CMOs have with its raw material suppliers.
The other observation pertains to higher FTE rates. The rates paid by the Users for consultative-type services have remained flat over the past two years, however, we see that average rates being charged by CMOs increasing dramatically over the past two years. The average rates are increasing because fewer CMOs charge rates at the lowest tier. These higher rates most likely reflect the narrowing salary differences between geographic areas.
Summary
The market for biopharmaceutical contract manufacturing services is dynamic, and prices are both increasing and decreasing. Smaller-scale production prices have dropped over the past year, while mid-scale production prices have increased from two years ago. In addition, consultative-type service prices are continuing to increase. Some of these increases are the result of higher wage inflation in emerging markets compared to the wage inflation in developed markets. Overall, the pharmaceutical and biotechnology companies expect to pay higher prices for raw materials and consumables, and consultative-type services in the future.
William Downey, is president of HighTech Business Decisions—a market research and consulting firm that serves the pharmaceutical and biotechnology industry. HighTech Business Decisions closely follows and reports on the biopharmaceutical contract manufacturing industry with both private and public industry reports. Mr. Downey has published a number of articles covering various issues facing the biopharmaceutical contract manufacturing industry. Before joining HighTech Business Decisions, Mr. Downey held various executive positions in technical product marketing, strategic planning and finance at both public and private companies.
The information and analysis for this article comes from HighTech Business Decisions’ latest report, “Biopharmaceutical Contract Manufacturing: Best Practices Pricing Study 2013/2014.” This report is based on primary research from 27 respondents at pharmaceutical and biotechnology companies (“Users”) who outsource some or all of the production of biopharmaceuticals, and from 18 biopharmaceutical contract manufacturing organizations (CMOs). All respondents in this study are senior-level executives or scientists. This study focuses solely on biopharmaceutical manufacturing sold on a fee-for-service basis by CMOs. For purposes of our study, HighTech Business Decisions defines biopharmaceuticals as complex molecular structures created through the genetic manipulation of living cells or organisms used for therapeutics, diagnostics or vaccines. The respondent companies participating in this study are located in North America, Europe and Asia.
Recent Price Changes
Based on the observations from the respondents in our study, overall prices for biopharmaceutical contract manufacturing services show an upward trend. While a plurality of respondents observed stable prices over the past two years, more respondents reported higher prices versus lower prices. In total, 49% of the respondents in our study report stable prices, 31% of the respondents report higher prices, and 20% of the respondents report lower prices (Table I). For this analysis, we define stable prices as changes of 3% or less. We assume small price changes result from either currency fluctuations or general economy-wide inflation levels—not necessarily specific industry price changes. Further analysis of observed price changes by the two respondent groups, shows that Users observed more price increases than did CMOs.
Highlighting the differences in observed price changes between Users and CMOs, 52% of the Users observed stable prices, while 44% of the CMOs observed stable prices. Furthermore, 37% of the Users observed higher prices over the past two years, while just 22% of the CMOs observed higher prices over the same time period. Conversely, only 11% of the Users observed lower prices compared to 33% of the CMOs who observed lower prices. While the observations between Users and CMOs are different, these differences are not significant, based on the chi-square test for independence between the Users and CMOs. The chi-square test for independence shows a p-value of 0.17; therefore, we cannot reject the null hypothesis for independence. Thus, while there are some differences between Users’ and CMOs’ price observations, these differences are not significant.
Although the two respondent groups’ observations regarding overall price changes are statistically similar, the observation of lower prices shows a significant difference between the two groups. Only 11% of the Users observed lower prices, while 33% of the CMOs observed lower prices over the past two years. The CMO respondent group was three times more likely to observe lower prices than the User respondent group. This difference is significant, as can be seen by the adjusted residual of 1.83, which is most likely the result of different project scales and product phases between Users and CMOs.
Several respondents gave specific examples or details about their price observations. A few respondents mentioned lower prices are associated with either new CMOs, or CMOs using single-use technologies. Other respondents noted that greater demand for contract manufacturing services has resulted in higher prices. Similarly, other respondents note that consolidation and mergers have reduced excess capacity; thereby lessening the need to offer steep discounts in an effort to fill unused capacity.
A few insightful comments from the biomanufacturing directors regarding the price changes for contract manufacturing services are given here:
- “There has been consolidation in the industry that has driven prices up. Some small start-ups are offering lower level pricing, but the mainstream CMOs are increasing their prices.”
– Pharmaceutical/Biotechnology Company
- “Pricing for single-use has decreased more than 10%. Pricing for manufacturing in stainless steel has remained consistent for the past seven years.”
– Pharmaceutical/Biotechnology Company
- “Pricing has been stable for the last three or four years. There was a downturn around 2008/2009. Since then the volume of projects has been going up but balancing that, there are more CMOs and some CMOs are making large investments in infrastructure. Single-use bioreactors are making it easier to get into the industry.”
– Contract Manufacturing Organization
GMP Production Price Changes
The mixed observations about changes in prices observed by the two respondent groups can also be seen in the change in prices for mammalian cell culture production. From our current and past studies we collected detailed price information from both the Users and the CMOs for GMP manufacturing in order to evaluate current industry pricing. From our quantitative analysis of pricing, the per-batch prices for mammalian cell culture have declined for small-scale production and increased for medium-scale production over the past two years (Figure 1).
The average per-batch price for small-scale mammalian cell culture production is down 8% from two years ago. While over the same period, the average per-batch price for medium-scale production is up 21% over the same time period. And the average price for large-scale production has stayed relatively flat; it is up 1%. As noted earlier, the lower prices for small-scale mammalian cell culture production most likely results from new CMOs entering the market coupled with the adoption of single-use technologies at these smaller scales. The higher batch prices for medium-scale production most likely results from consolidations and adjustments in industry capacity to better match supply with demand.
FTE Rates
Besides production prices, the respondents in this study also provided the annual FTE rates for the various consultative-type services provided by CMOs. These rates are for services using staffs in functions such as process development, manufacturing, quality, regulatory support, and project management. From the CMOs’ inputs, annual FTE rates for process development services range from less than $100,000 to greater than $400,000. The average annual FTE rate charged by CMOs for process development is $248,000, which is an increase of 19% from two years ago. This large increase in average FTE rates results from the distribution of FTE rates being more positively skewed in 2013 compared to 2011. From our analysis, there are fewer CMOs charging for process development services at the lowest FTE rate category, and more CMOs are charging at higher rate categories. As an example, in 2013, 75% of the CMOs charged an FTE rate of $350,000 or less, while in 2011, 78% of the CMOs charged an FTE rate of $300,000 or less.
Future Expectations
In addition to providing details about current prices paid for contract manufacturing services, the respondents from the pharmaceutical and biotechnology companies in our study also discussed their expectations about future price changes. Over the next two to three years, a majority of Users expect higher prices. The reasons for higher prices include higher demand for contract manufacturing services, greater regulatory and quality requirements being placed on CMOs, and general inflationary pressures.
They expect higher demand over the next few years to increase industry capacity utilization rates and thus reduce excess supply.
Currently, slightly more than half the Users (52%) are now experiencing higher prices or seeing proposed price increases from their CMOs. Additionally, about one-fifth of the Users (18%) expect to see higher prices in certain services and lower prices for other services offered by their CMOs, while approximately one-quarter (26%) of the Users expect stable prices in the future.
In addition to sharing their expectations about future price changes, the Users also provided details about specific products or services that they expect to see future price changes (Figure 2). The Users expect to pay higher prices for raw materials and consultative-type services. They specifically mention higher prices for raw materials and consumables, stability and release testing, analytical services and technology transfer. Higher prices for raw materials and consumables were mentioned most often by the Users, while higher prices for consultative-type services correspond to the higher average FTE rates reported by the CMOs. On the other hand, the Users have a mixed outlook for changes in manufacturing prices. In this case, more Users expect to see lower prices than higher prices.
Below are comments from both pharmaceutical and biotechnology companies and CMO respondents regarding their future price expectations:
- “We are seeing increased requirements for testing for adventitious agents but this is usually testing outsourced by the CMO so they pass through the costs to us so it is not really an increase from the CMO.”
– Pharmaceutical/Biotechnology Company
- “We’re seeing higher prices for ancillary services such as project management and supply chain distribution.”
– Pharmaceutical/Biotechnology Company
- “Materials costs seem to be higher, things like resins, chemicals, and components. Transportation costs are higher and sourcing takes more effort now because vendors are not keeping as much inventory on hand. It may be that we had very good agreements in the past and now vendors are realizing they need to charge more.”
– Pharmaceutical/Biotechnology Company
- “FTE rates are going up which will affect all services. The FTE inflation rate is higher in Asia than in the U.S. and Europe. The capacity utilization rate is increasing so we can expect prices to go up.”
– Pharmaceutical/Biotechnology Company
- “Raw materials, our vendors’ pricing is going up higher than inflation. It is not clear why, maybe because of consolidation among suppliers or maybe because of the cost of implementing quality systems. Testing pricing is stable, but we are doing more testing. Regulators and consultants at the biotechs are requesting the extra testing. There is a good database for different kinds of products now, tests that have proved to be useful, so the regulatory bodies expect them to be done.”
– Contract Manufacturing Organization
- “For any monopolistic situation pricing is higher, for example column materials. Consolidation at places like Thermo Fisher and Life Science Technologies are contributing to this monopolistic situation. Equipment maintenance costs are going up. Suppliers realize customers are bound to them.”
– Contract Manufacturing Organization
Analysis
An interesting observation can be seen from the changes in prices for both production and consultative-type services offered by CMOs. First, the lower prices for small-scale production and the expected higher costs for raw materials and consumables suggest that the benefits from adopting single-use production technologies will not accrue to the CMO itself. But rather the financial benefits of adopting single-use technologies will accrue to either the CMO’s supplier or client. The lower upfront capital cost of single-use production reduces the barriers of entry for new CMOs. As noted by a few respondents, there are more CMOs entering the market using disposable technologies. The lower entry barrier results in a more intensely competitive market creating greater price competition and lower margins for those CMOs that cannot effectively differentiate its service offerings. Thus we see lower prices for small-scale production where single-use technologies are being adopted. In addition, expected price increases for consumables and raw materials shows that larger raw material suppliers are also able to derive some of the financial benefits of using disposable technologies from their CMO customers. This is most likely the result of the limited bargaining power that smaller CMOs have with its raw material suppliers.
The other observation pertains to higher FTE rates. The rates paid by the Users for consultative-type services have remained flat over the past two years, however, we see that average rates being charged by CMOs increasing dramatically over the past two years. The average rates are increasing because fewer CMOs charge rates at the lowest tier. These higher rates most likely reflect the narrowing salary differences between geographic areas.
Summary
The market for biopharmaceutical contract manufacturing services is dynamic, and prices are both increasing and decreasing. Smaller-scale production prices have dropped over the past year, while mid-scale production prices have increased from two years ago. In addition, consultative-type service prices are continuing to increase. Some of these increases are the result of higher wage inflation in emerging markets compared to the wage inflation in developed markets. Overall, the pharmaceutical and biotechnology companies expect to pay higher prices for raw materials and consumables, and consultative-type services in the future.
William Downey, is president of HighTech Business Decisions—a market research and consulting firm that serves the pharmaceutical and biotechnology industry. HighTech Business Decisions closely follows and reports on the biopharmaceutical contract manufacturing industry with both private and public industry reports. Mr. Downey has published a number of articles covering various issues facing the biopharmaceutical contract manufacturing industry. Before joining HighTech Business Decisions, Mr. Downey held various executive positions in technical product marketing, strategic planning and finance at both public and private companies.
