The pharmaceutical industry continues to grow and is estimated to be worth $1.5 trillion by 2021. One important driver is the trend towards outsourcing of development and manu­facturing to contract development and manufacturing organizations (CDMOs). What sounds like good news for CDMOs also holds its own challenges — many of these companies are operating in a highly fragmented market that is currently undergoing a significant consolidation. At the same time, many of them are not fully prepared to exploit the maximum potential and willingness-to-pay in project pricing, which calls for new and innovative monetization strategies.

Since price is the single most powerful lever to increase a company’s profits, it is high time for CDMOs to reconsider their project pricing approach. Instead of clinging to traditional cost-plus pricing logic that usually lack consistency, transparency and control, experts propose measures such as harmonizing costing methodologies, incorporating value-based pricing metrics, and systematically using internal project price benchmarks for developing a value-based price model. ­

CHEManager International asked executives and opinion leaders operating in this market to share their experience and advice. We asked the experts to discuss the following questions:

How would you describe the current market situation for pharma CDMOs and which trends affecting your project pipeline do you see?

Marianne Späne: The pharmaceutical industry is undergoing change. Shifting customer needs and fundamental developments in the industry will provide additional positive impulses to the CDMO market in the coming years. Therapies and drugs are becoming increasingly complex. In this situation, pharmaceutical companies increas­ingly focus on research and marketing. Their own production activity is losing significance, especially from a strategic point of view. That is where CDMOs come into play.
Besides strategic outsourcing, innovative drug substances and drug products represent a significant driver of above-average growth in the CDMO sector affecting our project pipeline significantly. As a result, the CDMO industry will have to expand its technological basis in order to fulfil the increasing requirements related to development, production and process quality.

Which role can CDMOs play in helping pharma companies to manage development, production and supply chain cost?

Marianne Späne: It is extremely important that our customers obtain their product on time and in the desired quality. That, however, is only a part of the strategic cooperation. We lower complexity for our customers because they can leave all aspects concerning production to us, namely procurement, development, synthesis/formulation, compliance and logistics. We help them avoid costly investments and lower their financial exposure and risk. This awareness is catching on increasingly. Today, outsourcing is no longer an option in the event of an emergency, but a generally accepted and recognized business model.

How do you rate the potential of ­value-based pricing models as a contracting strategy and how do your customers respond to that?

Marianne Späne: For certain products or services, it may make sense to charge a higher amount relative to your costs. You can do this if your product is unique, if you are positioning your product as a high-status item or if it will save your customers ­money. In the branded pharma industry, they may price their products high and justify this by pointing out their drug can save the patient an even more expensive ­medical procedure. In the CDMO world, a service industry it is more difficult to apply the value-based price model especially in the manufacturing. Nevertheless, we discuss to implement models where you can measure the service provided with agreed KPI’s and quantify the value either as a lumpsum or with a direct impact on product pricing. This thinking is not standard, but we need to work on it as the service level CDMOs gets higher and needs to be evaluated.