Presented by. February p HighTech Business Decisions, Moraga, CA

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1 Presented by HighTech Business Decisions 346 Rheem Blvd., Suite 208, Moraga, CA Tel: (925) Fax: (925) February 2006

2 FORWARD AND ACKNOWLEDGMENTS HighTech Business Decisions conducted the market research and wrote the report, Biopharmaceutical Contract Manufacturing: Best Practices Pricing 2006 to provide an analysis of the biopharmaceutical contract manufacturing market s best practices in pricing and contract agreements. The research was specifically designed to understand pricing structures and actual prices, payment terms, and contractual agreements. In-depth data collected from both pharmaceutical and biotechnology company users as well as contract manufacturers allowed for an objective analysis of individual pricing practices while respondent names remain anonymous. We thank the 46 respondents from pharmaceutical, biotechnology, and contract biomanufacturing companies who took the time to share their insights, opinions, and pricing practices with us. We thank our sponsoring companies, who supported this project with their ideas, suggested topics, and funding for the first few months of this four-month project. The following HighTech Business Decisions analysts and staff made important contributions to this research and report: Analysts Sandra J. Fox, MBA Gary W. Ogden, MBA Amy Boggs, Ph.D. Shauna Farr-Jones, Ph.D. Lynne Sopchak, Ph.D. Helen S. L. Wang, Ph.D. Mike Biros, MBA Richard Khoury, Ph.D. Staff Elise J. Fox Project management, analysis, and report Pricing analysis and report User interviews User interviews User interviews User interviews Contractor interviews Contractor interviews Production We hope that our clients obtain significant value from this report to help ensure the success of their future business. Sandra J. Fox, MBA President

3 February 2006 This report is Copyright protected by HighTech Business Decisions. All rights reserved. Printed and bound in the United States of America. Neither this report, nor parts of it, may be reproduced without written permission from HighTech Business Decisions. HighTech Business Decisions has exercised due care in compiling this report, which is based on publicly available information as well as information submitted by individual companies. The publishers have taken due care to ensure the accuracy of this information, but shall not be held liable for any consequential damages arising from the material in this report. Copies of this report may be ordered from HighTech Business Decisions. To place an order, please call HighTech Business Decisions at (925)

4 TABLE OF CONTENTS Chapter 1: EXECUTIVE SUMMARY 1.1 Introduction Industry Pricing Trends Opinions Regarding Industry Price Changes Estimates of Return-on-Sales and Return-on-Net-Assets Outsourcing Strategies and Contractor Selection Strategic Reasons for Outsourcing Users Contractor Selection Criteria Most Popular Attributes Users Will Pay More For How Reasonableness of CMO Pricing is Judged Contractors Business Strategies and Customer Types Sources for Finding Clients Contractors Client Base Fee-For-Service Clients vs. Partnership Relationships Prices Paid and Prices Charged Contractors Pricing Models Pricing: Per Batch, Per Week, and Per Gram Improving Contract Agreements and Solving Problems Difficult Contract Sections to Negotiate Common Roadblocks in Contract Negotiations Cancellation Fees How to Solve the Most Difficult Problems The Most Important Suggestions for Improvement 1-20 Chapter 2: METHODOLOGY, DEFINITIONS, AND ACRONYMS 2.1 Research Objectives Research Methodology Definition of Biopharmaceutical Manufacturing Acronyms 2-3

5 TABLE OF CONTENTS (continued) Chapter 3: INDUSTRY PRICING TRENDS 3.1 Introduction Opinions Regarding Changes in Pricing Estimates: Returns and Profit Margins Return-on-Sales and Return- on-net-assets Percentages Contractors Target Gross Profit Margins Contractors Utilization Rates Contractors Opinions: Users COGS Percentage Industry Services Difficult to Secure 3-13 Chapter 4: OUTSOURCING STRATEGIES/CONTRACTOR SELECTION 4.1 Outsourcing Strategies Percentage of Manufacturing Budgets Spent on CMOs Respondents Outsourcing Strategies Outsourced Process Development Outsourced Cell Line Development Outsourcing Relationships Long-Term vs. Short-Term Relationships Use of Dedicated CMOs vs. CMOs with Products Contractor Selection Preferences for One-Stop Shopping Important Contractor Selection Criteria The Importance of Proximity in Selecting a CMO Willingness to Pay More for Commercial Experience What Attributes Respondents Will Pay More For Willingness to Work with CMO Building Capacity Impact of Geographic Regions on Price Competitiveness Opinions Regarding the Use of Asian CMOs Methods Used for Finding a CMO Future Work: Use of Current CMOs vs. New CMOs CMOs Underestimating Project Costs to Win Business Preferences: Client/Contractor Relationship Preferred Types of Contact Persons at CMOs Development Phase Preferences Process Development and Mfg. at the Same CMO Evaluating the Reasonableness of the Price 4-56

6 TABLE OF CONTENTS (continued) Chapter 5: CONTRACTORS BUSINESS STRATEGIES/CUSTOMER TYPES 5.1 Business Strategies Overall Business Strategies Technologies Yielding the Higher Profits Manufacturing in Asia Pricing Model Strategies Pricing Models for Long-Term Utilization of Capacity How Expression Yields Affect Pricing Customer Base Sources for Finding Clients Client Base: Types of Customer Companies Served Fee-for-Service Clients vs. Partnership Relationships 5-14 Chapter 6: CONTRACT AGREEMENT EXPECTATIONS/PREFERENCES 6.1 Users Expectations of Pricing Models Process Development Pricing Technology Transfer Pricing Opinions on Licensing Fees Expectations of Core Charges: Users vs. Contractors Preferred Pricing Models Preferences: Fixed Price vs. Time and Materials Willingness to Accept Time and Materials Pricing Preferences for Pricing Proof-of-Concept Material Timing Preferences: Moving from Daily Rates Opinions on Balancing Cost vs. Quality and Timeline Users Expectations of Payment Agreements Reservation Fees Down Payments Typical Payment Terms Expected Annual Adjustments to Unit Prices Differences in Payment: Engineering Runs vs. GMP Runs Differences in Material Pricing Phase I/II vs. Phase III Contractors Pricing Practices and Preferences Reservation Fees Time Getting Started Technology Transfer Start Times and Fee Structures How Prices for GMP Suite Time are Determined How Prices for Registration Campaigns are Determined Use of Bonus or Penalty Fees Timing Preferences: Moving to Gram Pricing 6-58

7 TABLE OF CONTENTS (continued) Chapter 7: PRICES PAID AND PRICES CHARGED 7.1 Process Development Prices Examples of Process Development Prices: Microbial Examples of Process Development Prices: Mammalian FTE Rates for Process Development FTE Rates Paid by Clients and Charged by Contractors Contractors Pricing Models Contractors Short-Term vs. Long-Term Rates Contractors Time-in-Facility Pricing Contractors Batch Pricing Contractors Per-Gram Pricing Pricing: Per Batch, Per Week, and Per Gram Per-Batch Pricing: Contractor vs. User Averages Time-in-Facility Pricing: Contractor vs. User Averages Price Per Gram: Contractor vs. User Averages Special Analysis: Price Per Gram 2002 vs Special Analysis: Price, Per Batch or Week, Per Liter Typical Charges for Special Services Typical Charges for Mammalian Cell Culture Services Typical Charges for Microbial Fermentation Services 7-33 Chapter 8: IMPROVING CONTRACT AGREEMENTS AND SOLVING PROBLEMS 8.1 Contract Negotiations for Outsourced Production Users Perspective: Difficult Sections to Negotiate Contractor Perspective: Pricing Pressures/Roadblocks Users Perspective: Preparing for Problems Cancellation Fees Charges for Client-Caused Delays Payments for Periods of Hold Time Agreements for Failed Batches 8-17

8 TABLE OF CONTENTS (continued) 8.3 Contractors Perspectives: Preparing for Problems Contractors Cancellation Fees Contractors Charges for Client-Caused Delays Contractors Fees for Periods of Hold Time Contractors Agreements for Failed Batches Agreements for Transferred Processes that Fail Ownership of Proprietary Processes Developed by CMO Managing Scope Creep Managing the Uncertainty of Capacity Usage Why Clients Leave CMOs Suggestions for Better Client/CMO Relationships Users Suggestions: Solving Problematic Areas Contractors Suggestions: Solving Problematic Areas Users Perspective: Areas for Improvement Contractors Perspective: Areas for Improvement 8-56 Chapter 9: SUMMARY OF BEST PRACTICES 9-1

9 LIST OF TABLES Chapter Respondents Strategic Reasons for Outsourcing Users CMO Selection Criteria How Reasonableness of CMO Pricing is Judged Users Perceptions: Contract Sections Most Difficult to Negotiate Contractors Perceptions: The Most Common Roadblocks in Negotiations Users Perspective: How to Solve the Most Difficult Problems Contractors Perspective: How to Solve the Most Difficult Problems Users Top Suggestions for the Industry Contractors Top Suggestions for the Industry 1-20 Chapter Market Research Steps Acronyms 2-3 Chapter Contractors Target Gross Profit Margins Contractors Averaged Utilization Rates by Tank Size and Technology Contractors Opinions: COGS Percentage Clients Should Target 3-12 Chapter Examples of Down Payments Users CMO Selection Criteria Selection Criteria Ranked as the #1 Criterion by Respondents CMO Attributes for which Respondents are Willing to Pay More Willingness to Work with a CMO that Needs to Build Capacity Willingness to Work with a CMO in Asia to Obtain a Price Advantage Methods Used for Finding a CMO Future Plans: Use of Current and New CMOs Precautions Taken to Handle Underbidding Primary Types of Contacts Involved in the Client-CMO Relationship How Reasonableness of CMO Pricing is Judged 4-57 Chapter Overall Business Strategies Opinions Regarding Technologies that will Yield Higher Profits Pricing Models to Ensure Long-Term Utilization of Capacity Fee-for-Service Clients vs. Partnership Relationships 5-14

10 LIST OF TABLES (continued) Chapter Preferred Pricing Models for Process Development Technology Transfer Pricing Methods Willingness to Pay the Same Amount for Engineering Runs as GMP Runs Areas Where Penalties and Bonuses Can be Applied 6-57 Chapter Pricing Models Used by Respondent Contractors by Percentage Averaged Numbers of Batches per Project Per Tank Size Averaged Numbers of Weeks per Project Per Tank Size Averaged Numbers of Grams per Project Per Tank Size Number of Products Included in the Analysis Average, Max, Min Prices Paid, or Prices Charged, for Additional Services 7-33 for Mammalian Cell Culture Average, Max, Min Prices Paid, or Prices Charged, for Additional Services 7-36 for Microbial Fermentation Chapter Users Perceptions: Contract Sections Most Difficult to Negotiate Contractors Perceptions: Areas with the Most Pricing Pressures Contractors Perceptions: The Most Common Roadblocks in Negotiations Opinions Regarding Fees for Client-Caused Delays Determining Fault and Who Pays for a Failed Batch Contractors Charges: Cancellation Fees Contractors Charges for Client-Caused Delays How Transferred Processes that Fail are Handled How Scope Creep is Handled Managing Uncertainty of Capacity Usage Reasons why Clients Leave CMOs Users Perspective: How to Solve the Most Difficult Problems Contractors Perspective: How to Solve the Most Difficult Problems Users Suggestions for the Industry Contractors Suggestions for the Industry 8-56 Chapter Best Practices in Pricing: Summary Quotes from Chapter Three Best Practices in Pricing: Summary Quotes from Chapter Four Best Practices in Pricing: Summary Quotes from Chapter Five Best Practices in Pricing: Summary Quotes from Chapter Six Best Practices in Pricing: Summary Quotes from Chapter Eight 9-11

11 LIST OF FIGURES Chapter 1 1-A Opinions Regarding Industry Price Changes B Averaged Estimates for CMO Return-on-Sales and Return-on-Net-Assets C The Most Popular Attributes Respondents are Willing to Pay More For D Respondents Sources for Finding Clients by Averaged Percentage E Contractors Client Base: Averaged Percentages of Each Segment Served F Number of CMOs Using 100% Fee-For-Service vs. Partnership Agreements G Averaged Percentages of CMOs Contracts by Pricing Model H Averaged Contractor Prices Charged Per Batch for Mammalian Cell Culture I Averaged User Prices Paid Per Batch for Mammalian Cell Culture J Averaged Contractor Prices Charged Per Batch for Microbial Fermentation K Averaged User Prices Paid Per Batch for Microbial Fermentation L Averaged Contractor Prices Charged Per Week: Mammalian M Averaged User Prices Paid Per Week: Mammalian N Averaged Contractor Prices Charged Per Week: Microbial O Averaged User Prices Paid Per Week: Microbial P Per-Gram Pricing: Fee Per Gram by Project Volumes: Mammalian Q Per-Gram Pricing: Fee Per Gram by Project Volumes: Microbial R Users Expectations of When a Cancellation Fee Should First Be Charged S Users Expectations: Cancellation Fees 1-17 Chapter 3 3-A Opinions Regarding Prices Changes in the Past Two Years B Averaged Estimates for CMO Business: Return-on-Sales and Net-Assets C Contractors Target Gross Profit Margins for Process Development D Contractors Target Gross Profit Margins for Phase I GMP Campaign E Contractors Target Gross Profit Margins for Phase III GMP at >1,000L F Contractors Target Gross Profit Margins for Commercial Phase G Opinions Regarding the Most Difficult Service to Secure and Schedule 3-14 Chapter 4 4-A Averaged Percentages of BioManufacturing for Outsourced Production B Summary of Strategic Reasons for Outsourcing C Respondents Percentages of Outsourcing Budgets for Process Development D Number of Respondents Outsourcing Cell Line Development E Respondents Preferences for Long- or Short-Term CMO Relationships F Respondents Use of Different Types of Contractors G Preferences for One-Stop-Shop Contractors vs. Specialists in Each Activity H Number or Mentions of Price as an Important Selection Criterion I Importance of Proximity in Contractor Selection J Willingness to Pay More for a CMO with Commercial Experience K The Most Popular Attributes Respondents are Willing to Pay More For L Opinions Regarding the Most Price-Competitive Region: Europe vs. the U.S M Experiences with CMOs Underbidding N Importance of Having Process Development and Mfg. Done by Same CMO 4-54

12 LIST OF FIGURES (continued) Chapter 5 5-A Willingness to Consider a Manufacturing Site in Asia B Respondents Sources for Finding Clients by Averaged Percentage C Contractors Client Base: Averaged Percentages of Each Business Segment D Percentage of Respondents Clients Located Within the Same Country E Number of Respondents Using 100% Fee-For-Service vs. Partnerships 5-14 Chapter 6 6-A Preferred Pricing Models for Process Development B Respondents Use of IP and License Fees C Percentage of Respondents Expecting Certain Services to be a Core Charge D Pricing Model Preferred for New Projects: Fixed Pricing vs. Time/Materials E Preferences for Pricing of Proof-of-Concept Material F Product Stages When Pricing Moves from Daily Rates to Batch/Gram Prices G Opinions Regarding the Importance of Quality and Timelines vs. Price H Payment of Reservation Fees and Down Payments I Examples of Respondents Down Payments Paid J Payment Terms: Milestones vs. Amortized Payments K Use of Annual Adjustments to Unit Prices L Differences in Material Pricing, Phase III Compared to Phase I/II M Contractors Reservation Fees N Time from Contract Start to Signing O Typical Pricing Models for Technology Transfer and Process Development P Pricing a Registration Campaign Q Use of Bonus or Penalty Fees 6-56 Chapter 7 7-A Estimates of Process Development Fees for a Microbial Process B Estimates of Process Development Fees for a Mammalian Process C Annual FTE Rates for Process Development D Users Expectations vs. Experience: FTE Rates for Process Development E Annual FTE Rates for Manufacturing Staff F Annual FTE Rates for QC Staff G Annual FTE Rates for Project Management Staff H Annual FTE Rates for Regulatory Support Staff I Users Expectations vs. Experience: FTE Rates for Management Staff J Users Expectations vs. Experience: FTE Rates for QC Staff K Users Expectations vs. Experience: FTE Rates for Project Management L Users Expectations vs. Experience: FTE Rates for Regulatory Support M Averaged Percentages of Each Pricing Model Used: Contractors N Time-in-Facility Pricing: Averaged CMO Rates Per Week: Mammalian O Time-in-Facility Pricing: Averaged CMO Rates Per Week: Microbial P Batch Pricing: Averaged CMO Rates Per Batch or Run: Mammalian Q Batch Pricing: Averaged CMO Rates Per Batch or Run: Microbial 7-16

13 LIST OF FIGURES (continued) 7-R Per-Gram Pricing: Averaged CMO Rates Per Gram: Mammalian S Per-Batch Pricing: Averaged Prices Charged and Paid: Mammalian T Per-Batch Pricing: Averaged Prices Charged and Paid: Microbial U Time-in-Facility Pricing: Averaged Prices Charged and Paid: Mammalian V Time-in-Facility Pricing: Averaged Prices Charged and Paid: Microbial W Per-Gram Pricing: Averaged Prices Charged and Paid: Mammalian X Per-Gram Pricing: Averaged Prices Charged and Paid: Microbial Y Per-Gram Pricing: Fee per Gram by Project Volumes: Mammalian Z Per-Gram Pricing: Fee per Gram by Project Volumes: Microbial AA Per-Batch Pricing: Fee per Batch per Liter by Tank Size AB Time-in-Facility Pricing: Fee per Week per Liter by Tank Size AC Averaged Prices Paid by Users for Additional Services: Mammalian AD Averaged Prices Paid by Users for Additional Services: Mammalian AE Averaged Prices Paid by Users for Additional Services: Mammalian AF Averaged Prices Charged by CMOs for Additional Services: Mammalian AG Averaged Prices Paid by Users for Additional Services: Microbial AH Averaged Prices Paid by Users for Additional Services: Microbial AI Averaged Prices Paid by Users for Additional Services: Microbial AJ Averaged Prices Charged by CMOs for Additional Services: Microbial 7-35 Chapter 8 8-A Users Expectations of When a Cancellation Fee Should First be Charged B Users Expectations: Cancellation Fees C Expectation of Fees for Client-Caused Delays D Opinions Regarding a Fee for Facility Hold Times E Contractors Practices: When a Cancellation Fee is Charged F Contractors Fees for Periods of Hold Time G Ownership of Proprietary Processes Developed by the CMO 8-33