The first article in this periodic series reviewed the impact of cost pressures on the biopharmaceutical industry, in particular the challenges the industry faces in relation to high capital costs, complex processes, and long product development cycles (1). Here we examine what companies are doing to assess costs in decisions about process and technology choices relating to manufacturing of biologic drug substances. We will look into what companies are currently doing and what they need to be doing to control costs. Companies need to know from a strategic perspective how technology and process choices influence manufacturing costs within a portfolio of products; the type and timing of investments required to ensure sufficient manufacturing capacity; and how an understanding of costs can optimize risk management.

Process development can be defined as the start of the product life cycle. At this stage a manufacturing process is defined in terms of unit operations (discrete manufacturing operations). There are significant pressures to be fast (not on the critical path of a clinical program) and reduce the cost of development. Cost pressures are related to clinical risk insofar as a product entering clinical trials is highly unlikely to reach approved status (high attrition rate). Consequently, there is no incentive to put a lot of effort into developing an efficient process early on. With respect to product lifecycle, the clear message is that as a product moves from research into manufacturing, the scope for improving manufacturing cost effectiveness diminishes. Many people in the industry, however, are realizing that in addition to characterization and forced degradation studies, cost optimization should be factored if we are to maximize the opportunity to develop cost-effective robust processes. The later stages of the product lifecycle are more about efficient operation of facilities (Table 1).

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Table 1: CoG model appliations (Click to enlarge)

How Is Cost of Goods Measured?

Most cost models draw on the principles of financial and management accounting to assess the cost impact of different investment and operating decisions. Of the various methodologies (net present value [NPV] and return on investment [ROI]), cost of goods (CoG) is by far the methodology most commonly used. Although not the most rigorous, it does have the merit that most people in the industry understand this approach. CoG should not be used when you need to understand the interplay between expenditures, timing, and project risk. NPV or ROI methodologies are better techniques for analyzing alternative technologies and manufacturing strategies because they can account for the impact of delays in expenditures and properly account for the time value of money.

For manufacturing, the most significant line item on an income statement is the cost of producing goods for sale (i.e., cost of goods sold or cost of sales), which is shown directly below net sales revenue. Subtracting that cost from the sales revenue results in a company's gross profit, which is an important measure of operating performance. By separating the direct costs involved in producing goods for sale from other expenses (e.g., selling, general, and administrative [SG&A] expenses; research and development [R&D] expenses; interest and taxes), a company can evaluate manufacturing performance as a distinct measure that contributes to overall business performance.

A robust, well-structured cost model enables managers to have a better insight into key cost drivers of a biomanufacturing process as well as the sensitivity of overall CoG to changes in key parameters. These models enable the cost impact of implementing various technologies to be evaluated (as well as the effect of process changes such as increasing product titers and yields) and can be validated with financial accounting data. Some management accounting techniques such as life-cycle cost analysis and activity-based costing are also incorporated into manufacturing cost models in recognition of the significant effect manufacturing efficiency has on the average CoG. In particular, the number of successful production runs per year and the cost of facility downtime and batch failure often have a much greater effect on overall manufacturing costs than changes in raw material or labor costs.

To illustrate this approach, we examine a modular approach initiated at BioPharm Software Solutions (a business unit of Biopharm Services Ltd.). The cost model is configured as modules (e.g., capital, materials, consumables, labor) that show the relationships among the various cost categories and the cost components that constitute the overall CoG (Figure 1). This methodology has the advantage of being scalable, flexible, user-friendly, and transparent.

Figure 1: (Click to enlarge)

CoG is a fairer comparison than capital cost because it accounts for all differences in facility throughput, material costs, labor costs, and so forth. The indirect (fixed) cost consists of the capital charges, insurance and taxes, and the direct (variable) costs include consumables, materials, and labor. Table 2 shows the component items that contribute each cost category (e.g., the consumables class includes column gels, filters, and single-use bags).

Table 2: Typical cost categories (Click to enlarge)