Ten Things Biologics Contract Manufacturing Organizations Don’t Want You to Know

The biologics contract manufacturing industry is a competitive, low margin business.  During their hey-day – approximately 10 years ago – when demand was high, investor’s money for biotech companies was easier to get, and capacity was lower, it was relatively easy for CMOs to ask for and get a long term manufacturing capacity commitment.  This led to entry of more competitors and additional capacity – which became excess capacity when investor’s money became harder to get.  To win business CMOs have had to adjust by taking on smaller projects with limited immediate revenue prospects and without long term commitments.  Nonetheless, since they negotiate many contracts they are quite good at hiding things they don’t want you to know in order to improve their prospects of winning your business.  Here are ten things they won’t tell you which will help you when you are considering signing a services contract with them.

1.      They need your cash now to stay in business

The contract manufacturing sector is a cash flow business.  Companies make money by keeping costs as low as possible.  While this should not be surprising it is not fully appreciated by biotechnology and pharmaceutical companies which either have money from product sales or have raised large amounts from investors.  To keep costs down CMOs keep salaries down, keep aging facilities and equipment in use as long as possible, minimize services provided, and pay vendors (and reimburse employees) as late as possible.  The result is high employee turnover, possibly late delivery of materials and components, and the bare minimum provided to the customer.

2.      They need a “take or pay” commitment

These days most CMOs will agree to do cell line development and/or process development – whether or not they have the capabilities.  They do this for a couple of reasons:  Though the absolute amount of money for these stages is not great, the margins are very good because they know for the most part that it is difficult to compare these custom services among multiple CMO proposals.  Once you are in the door and your project progresses you are likely to sign an additional contract for manufacturing.  They will take as many of these projects as they can reasonably sign but the reality is that they would greatly prefer that you sign a commitment for manufacturing capacity well in advance of actually needing it.  They need these “take or pay” commitments to stay in business.  Without them they know that you are free to take your project to a competitor or stop it altogether at any time after the early stages are completed.

3.      Excess capacity is always available

CMOs are always scrambling to fill capacity with revenue-producing manufacturing batches.  Capacity rarely fills up cleanly as contracts are signed.  As a result there will always be “orphan” manufacturing slots which do not coincide with the agreed timelines.  The CMOs do not want you to know about these open slots because then you could negotiate a price which includes only a small margin above the variable cost of production.  They would of course prefer to sell you this manufacturing slot at their “market” price.

4.      They will charge a premium for add-on services

The fact is that no matter how good you think you negotiated the original services contract there will be other services you will need.  You will realize this after the project gets started and you receive some results.  But even if you don’t know that you need anything else, the CMO will be happy to tell you.  They do this because they didn’t tell you when you negotiated the agreement that you will need additional services in order to get your product ready for the clinic.  They can then charge you more – a lot more – because you are now a captive audience and it is more expensive for you to have those services performed elsewhere.

5.      They want to make all processes the same

It costs the CMO less money and allows them to more easily schedule the project in their facility if they can use a generic process.  By using a standard process less research is needed in the lab, less training is required to transfer the process to the operators in the manufacturing facility, and fewer new batch records need to be written.  The timeline from cell line development to GMP manufacturing becomes more predictable.  While this can be an advantage to you as you plan your clinical trials, the generic process they develop may not be the optimal process for your product forcing you to pay for changes at a later time.

6.      They will want to include their proprietary technology into your process

Let’s face it all businesses seek a competitive advantage.  For the CMO, this includes patentable technology, trade secrets, know-how, techniques, or other confidential information.  By introducing these proprietary components into the process they can generate direct revenue by requiring a user license; or indirect revenue by making it difficult for you to transfer the process to a competitor without their detailed assistance.  In extreme cases they will forbid you to transfer the proprietary information to a competitor.

7.      They prefer not to improve expression levels (requiring you to pay for more batches)

When you think about it, you realize that there is rarely an incentive for a CMO to improve expression levels – unless you are willing to pay them for improvements.  And to be clear the payment would not be performance-based but rather just for putting out the effort.  Unless the payment for process improvement is more than the batch manufacturing price they are much better off just having you pay for another manufacturing run.  If you have some clinical success and come back for more manufacturing runs they are way better off than if they had improved the process for you in the first place.

8.      They do not want to commit to meeting specifications

For a manufacturing run to be categorized as a successful GMP run, two criteria need to be met:  A. GMP guidelines were followed; and B. the agreed to specifications were met.  There is no way for a CMO to get around the requirement that GMPs be followed.  But they have you in a bind with regard to specifications.  If you ask them to agree to given specifications before you sign the contract they will argue that they have no in-house at-scale data on which to set the specifications.  If you agree to an “engineering” run at-scale before negotiating specifications, the CMO will still insist on specifications which are so broad only incompetence would cause them to fail.

9.      They will not agree to produce specific amounts of product

This is often one of the bigger disconnects during a negotiation.  It doesn’t do you a lot of good if the CMO cannot or will not agree to produce the amount of product you need for a clinical trial.  The reality is that unless many batches are performed the manufacturer has little control over the biological process they have developed or transferred in and cannot agree to produce a specified amount of product unless you agree to pay them for however many batches are required to produce that amount. Just don’t let them tell you then that the biological process they developed is “in control”.

10.  Their definition of success is different from yours

CMOs will routinely advertise that their “success rates” are much greater than 90%.  It would be difficult to accuse them of false advertising since this is clearly a situation where success rates have different meanings to different organizations.  We have seen situations where “success” can variously mean completing batches, meeting timelines, meeting specifications, performing under cGMP, and even starting manufacturing runs.  What success should mean is performing a manufacturing batch under cGMP conditions that meets specifications in amounts sufficient to perform a clinical trial and within the agreed timeline.  If you ask your CMO you will find that their definition of success is a lot easier to achieve.

Determining the Cost of Manufacturing a Biologic Product

A biologics cost of goods analysis or specifically, the cost of manufacturing a unit of biological material for clinical trials and ultimately for the market is an important part of the overall analysis of product value.  There are several components to determining an accurate and verifiable cost of goods.  These include process performance parameters, facility operational limitations, the direct and indirect costs of manufacturing including labor and materials, facility overhead, and depreciation costs of facility and equipment.

Process Parameters

At a high level, process parameters include expression levels/product titers and overall recovery and purification yields.  However, product losses are typically incurred upon harvest and consideration should also be given to reduction in material due to allotments for QC and other sampling.  It is important also to include bioreactor size since lower productivity often occurs as the size of the bioreactor increases.  Bigger is usually better however since the reduced number of batches (and resulting decrease in labor and materials costs and QA/QC costs) can easily offset lower expression levels.  It is necessary to include the longest unit manufacturing time in the calculations since this will directly affect throughput.

Operational Parameters

Often overlooked in the cost calculation are the operational limitations of the facility.  Many people wrongly assume that a facility can be operated at close to 100% of the theoretical capacity and use this in their planning.  Since there are many factors involved in performing a successful manufacturing batch it would be unwise to assume that everything will be performed perfectly every time.  And once time is lost it cannot be regained.  Since even small errors can result in time delays it is prudent to incorporate these unplanned events into the overall cost model.  Thus, effective facility capacity in the biopharma industry is typically assumed to be 85% of theoretical capacity.  Tied closely to this is the batch success rate.  The success rate will be low (~50%) early in development as scale-up procedures are being designed and tested and batch records are being written.  As more experience is gained the success rate should improve dramatically.  A good manufacturing organization should see success rates approaching 95%.  If the effective capacity is pushed higher than 85%, the success rate will inevitably decrease due to operator error or equipment malfunction.  This is not to say that occasional short surges in productivity cannot be implemented to meet a corporate deadline.  This should not be the practice however as mistakes including operator error will inevitably occur, equipment will malfunction simply because there is limited time for routine maintenance checks, or a batch will not pass a QA inspection.

All manufacturing facilities should plan for an annual stoppage for maintenance.  While not shutting down parts or all of a facility for maintenance may increase productivity in a given time period it will eventually result in an unplanned halt to production during a critical campaign as equipment fails.  Strategies to minimize the impact of a slowdown or stoppage in production include scheduling facility shutdowns during typically slow periods such as the end of the year holiday season.  Some organizations institute rolling shutdowns where portions of the facility are closed for maintenance during selected periods throughout the year.  This can minimize the down time but requires extensive planning and highly trained staff.  In any event, the cost of goods model should include an annual period of no production.  This period for many organizations is as long as four weeks.

Throughput

Maximum throughput calculations, that is, the maximum number of batches and maximum amount of product which can be produced per year should also consider the amount of time needed between batches to prepare for the next batch.  This time may be short (1 -2 days) for manufacturing of a new batch of the same product.  However, if a second product is to be manufactured in the facility, product changeover is longer (at least one week) and needs to be included in the model.

A simple calculation illustrates the error in not considering operational limitations in the throughput equation.  Let’s assume it takes 6 days to produce product in the bioreactor; 5 days to purify the product; 1 day to clean the production and purification suites to get ready to produce the next batch of the same product; and there is sufficient staff to operate the facility 7 days per week.  This schedule allows for one batch per week under steady-state conditions and a theoretical maximum of 52 batches per year.  However, once we include a four week annual maintenance shutdown, and performance at 85% of theoretical capacity, the annual production weeks (and # of batches) drop to 41 per year.  With a 95% success rate only 39 successful batches will be performed which represents a 25% reduction in throughput compared to the theoretical capacity and a corresponding rise in the calculated cost of production.

Labor Costs

Labor costs should include both direct and indirect labor.  Direct labor includes the cost of salaries, wages, and benefits for personnel who work directly on the manufactured product.  These include upstream manufacturing and downstream purification personnel as well as anyone directly involved in buffer preparation and staging of raw materials for example.  Indirect labor includes the cost of salaries, wages, and benefits for personnel whose services are necessary for the manufacturing process but who are not directly involved in manufacturing activities.  These likely include facilities/engineering personnel, and QC/QA staff.  Models can be constructed which show the impact of additional personnel on overall costs as the scale is increased.  Increased costs are easily offset by the increased productivity of running at larger scales and the percentage of labor costs compared to overall manufacturing costs decreases dramatically.  Labor costs should be treated as fixed costs since it takes months and several at-scale batches to train personnel properly.

Materials Costs

Direct materials include any raw material that is directly consumed in the manufacturing process, is physically incorporated into the finished product, or can be traced to the product.  Indirect materials would include anything else necessary to manufacture the product that is not incorporated into the product such as tubing, media bags, gowns, and pipettes.  We have found in practice that the distinction between direct and indirect materials is not an important one.  All such materials are incorporated into a Bill of Materials as required under Good Manufacturing Practices and this BOM will be the most accurate metric of cost of materials per batch.  The most expensive raw materials by a large margin are the purification resins.  Efforts need to be undertaken during development to maximize the resin capacity and to study resin reuse.  The number of times a resin can be reused for a given product and process amortized over the number of batches which will be performed in a given time period will result in a substantial reduction in the overall materials cost per batch.

Overhead

All manufacturing costs that are neither labor nor materials costs are classified as overhead costs.  These costs include utilities, leases, permits, insurance, taxes, waste disposal, maintenance and repairs, maintenance contracts, tools and supplies, training, outside testing, outsourcing, non-capital equipment, and depreciation of facility and equipment.  We treat depreciation of facility and equipment as a separate cost driver since the list is extensive and the costs can be a very large component of overall manufacturing costs if the facility is recently constructed.

Cost Model

We have developed an accurate, comprehensive, and user-interactive biologics manufacturing cost model.  The Excel model allows the user to easily input process and operational parameters in order to obtain an immediate determination of manufacturing costs.  By entering estimated market demand data the model will also provide extensive information on the amount of product and doses required as well as information on the number of batches and time required to meet demand.  A simplified model is available which allows for an infinite number of process and operational conditions to be tested for sensitivity analysis.  The model can also be customized for your specific process and product by license from, or consultation with, Borealis Biotechnology, LLC.  A Checklist for Cost of Goods Calculations is also available.