Prices for biopharmaceutical contract manufacturing services continue to increase. Higher prices result from a better balance between supply and demand, higher overhead and labor expenses, and higher raw material costs. Both biopharmaceutical companies and contract manufacturing organizations see this upward price trend. These market participants expect increased prices over the next two years, but at rates slightly lower than historical trends.

Background
This article draws from HighTech Business Decisions’ latest report, “Biopharmaceutical Contract Manufacturing: Best Practices Pricing Study 2019.” The analysis and conclusions in this report come from written surveys and interviews with executives at biopharmaceutical companies and contract manufacturing organizations. In this article, we define “biopharmaceuticals” as complex molecules created through the genetic manipulation of living cells or organisms used for therapeutics or vaccines. The terms “contractor” or “CMO” means organizations that produce biopharmaceuticals on a fee-for-service basis. This excludes organizations with only lab-scale production whose primary focus is development services.

Past price changes
Most biopharmaceutical respondents (“Users”) and CMOs report higher prices for contract manufacturing services over the past two years. Roughly one-fifth of the Users in our study report dramatically higher prices (greater than 10%), while six-tenths of the Users report price increases between 3% and 10%. Only one-fifth of the Users report stable or lower prices as seen in Figure A (note: all figures appear in the slider above). The CMOs report similar experiences. Slightly more than one-fifth of the CMOs note dramatically higher prices and more than seven-tenths of the CMOs report price increases greater than 3% over the past two years. Most respondents report increased prices for all outsourced services: 75% of the Users and 67% of the CMOs report across-the-board price increases.

The respondents reporting across-the-board price increases point to higher overhead and labor expenses, the effects of higher demand, long lead times, and industry consolidation as the reasons for the price hikes. The other respondent group who reported higher prices for specific services listed higher prices for a) 1,000- to 2,500-L scale production, b) overall GMP production, c) analytical and development services, and d) plasmid production for immunotherapy and viral vectors. Below are selected respondent comments on price increases:

• “There are general increases everywhere. I can’t unequivocally point my finger to specific drivers, but one thing that’s happening is that CMOs are acquiring more facilities and their cost structure is increasing. Users pay for that.”   —Pharmaceutical/Biotechnology Company
• “Overall, there has been more business for process development and manufacturing. CMO’s capabilities and quality are good. Prices seem to be increasing across the board.”   —Pharmaceutical/Biotechnology Company
• “The prices for plasmids for immunotherapy and viral vectors have changed the most due to the increase in demand. In 2018, we collected bids from five different CMOs and all of them had capacity. In 2019, three out of five of them were fully booked and too busy. For viral vectors, there is a six-month to a year backlog. Consumables may have increased around 3%.” —Pharmaceutical/ Biotechnology Company
• “Pricing for our gene therapy and viral vaccine offerings have been changing the most. They are new technologies and we are getting a handle on where our place is in the market.” —Contract Manufacturer
• “There has been a big demand increase and little capacity for microbiome production. Bacteria production as therapeutic has come back into fashion. In addition, we have seen an increase in microbial fermentation for the production of recombinant proteins.” —Contract Manufacturer

Longer term price increases
The recent price increases reported by all respondents are in line with the longer-term price trends reported by the CMOs. Over the past five years, prices charged by CMOs for manufacturing and related services have increased at an average rate of 5% a year. A few CMOs noted that annual price increases have varied, and that price changes for any given year may be higher or lower than their five-year trend. This long-term price trend is slightly higher than the annual producer price index of drugs and pharmaceuticals published by the U.S. Department of Labor, Bureau of Labor Statistics. Interestingly, the five-year price trend differs between CMO market segment. The CMOs that make commercial-phase products report lower than average annual price increases, and CMOs that only make noncommercial products report higher than average price increases. The commercial CMOs report a 4.7% average annual price increase, while the noncommercial CMOs report a 6.3% average annual price increase. The distribution of five-year price increases reported by the CMOs is shown in Figure B.

One quantitative example of higher prices is the GMP batch price for mammalian cell culture production. From our studies, 37 prices were reported at the 500-L scale. The price sample includes both prices paid by Users and prices charged by CMOs. The average batch price in 2019 was $726±$149 thousand at the 90% confidence interval. This average price is 11% higher than the average batch price reported in our prior study. Also note, the batch price variation may result from the charges that CMOs either include or exclude in its batch price. Most CMOs include manufacturing time, quality assurance, and administrative costs in their batch price calculation. Conversely, CMOs typically exclude the cost of engineering runs, change orders, raw materials, and consumables from the batch price. There is no typical practice for other costs, such as, project management, research and development support, and quality control. 

Future price changes
In this study, we also asked the respondents about expected price changes for biopharmaceutical contract manufacturing services over the next two years. The respondents expect annual price increases of 3.7±0.6% at the 90% confidence interval. Most respondents expect annual price increases of 4%, while one-quarter of the respondents expect stable prices. The distribution of expected annual price increases is shown in Figure C. There is no significant difference of price expectations between the Users and CMOs. Also, most respondents expect across-the-board price increases, while a minority of respondents expect price increases for specific services. Those respondents who expect higher prices for specific services mention a) gene and cell therapies, b) 1,000- to 2,000-L batch production, and b) raw materials.

Importance of price in CMO selection
The Users also provided insights into the importance of price when choosing a CMO. Most Users rate price as either “most important” or “important” when choosing a CMO. However, the Users rate price as either a “neutral” or “not important” consideration for noncommercial projects.

Overall, a slight majority of responses (53%) rate price as an important criterion for choosing a CMO. While price is an important consideration in the CMO decision, many Users note other important CMO attributes to consider. Some CMO attributes mentioned by the Users include a) track record, b) quality and quality systems, c) technical capability, d) technology, and e) capacity. Given the differences between CMOs and their service offerings, criteria other than price play an important role when choosing a CMO. 

The importance of price significantly differs when choosing a CMO for either a commercial project or a noncommercial project. Users are more price sensitive for commercial projects. By a 3.4:1 ratio, Users consider price an important factor for commercial projects. Conversely, by a 0.4:1 ratio, Users consider price an important factor for noncommercial projects. Thus, Users are 8 times more likely to consider price an important factor in CMO choice for commercial projects compared with noncommercial projects. The chi-square test for independence shows this difference between commercial and noncommercial projects to be significant (Figure D). The p-value of 0.007 from the chi-square test allows us to reject the null hypothesis that price sensitivity is the same for each project type. This analysis shows Users are not equally price sensitive for commercial and noncommercial projects. 

Below are selected comments from the respondents regarding the importance of price in CMO choice:

• “Price is a lot more important as we move into commercial production. I would rank price closer to 1 when cost of goods matters.” —Pharmaceutical/Biotechnology Company 
• “In preclinical projects, timing and speed are more important than price.” —Pharmaceutical/Biotechnology Company 
• “Price would rank low. The parameters around compliance, quality, capacity, capability—i.e., the ability to be successful, get things done on time and not have issues with validation are much more important.” —Pharmaceutical/Biotechnology Company 
• “For us, pricing is not generally important, nor critical, whereas quality and success are more important. With viral vectors, there are so few CMOs available that price negotiations are fruitless. It is a seller’s market. Therefore, if we don’t take the CMO’s offer, another company will quickly take our place, leaving us with no other option.” —Pharmaceutical/Biotechnology Company 
• “It’s more important to meet timelines and be able to manufacture supply for clinical studies. Price is important and we look at it carefully, but it’s not our primary consideration. Most of our strategic partners understand that if they’re going to be opportunistic about it, then they’ll no longer be our strategic partner.” —Pharmaceutical/Biotechnology Company    
• “Timeline and capacity are more important. Clinical supply is only one or two batches.” —Pharmaceutical/Biotechnology Company

Closing
Biopharmaceutical contract manufacturing prices have increased 5% a year over the past five years. Commercial project prices have increased at a slightly slower pace than noncommercial project prices. Prices will continue to increase over the next two years at 4% a year, slightly lower than the five-year trend. Prices are a bigger consideration when choosing a CMO for a commercial project compared to a noncommercial project. 

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William Downey is the president of HighTech Business Decisions, a market research and consulting company that has been publishing reports on the biopharmaceutical contract manufacturing market since 1997. For more information, visit www.hightechdecisions.com or call (408) 978-1035.