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Little-Known Factors That Affect COGS

As competition, product price sensitivity, and insurance drug coverage concerns for biopharmaceuticals increase, understanding cost of goods sold (COGS) has never been more critical. If you don’t have a keen understanding of your COGS, it could be detrimental not only to your product’s success, but to the success of your business as a whole, especially if you are a small, single-product company. Rather than crossing your fingers and hoping for the best, it pays to invest the time (and/or money) to develop a robust COGS model as early as possible in your product’s life cycle to fully grasp your product’s unique COGS.

There are many reasons to have at least a basic understanding of the COGS for your product. The single most important use of a COGS model is to determine a manufacturing price that will allow enough of a margin for a profitable market price. However, COGS models also inform ‘make vs. buy’ decisions to determine if you should build a facility or outsource the manufacturing of your product, and illustrate the impact (positive or negative) of new technologies or process changes on your overall manufacturing costs. COGS are also important in understanding costs and risks associated with unbalanced inventory of bulk drug substance or drug product.

Unfortunately, the methods for determining the COGS for biopharmaceuticals are not always clear and straightforward. So it is not surprising that many of us are not exactly sure which expenses should be included when performing this calculation. COGS categories are typically defined as materials, resources and hardware used to create the final product. If you’re struggling to calculate the COGS for your product, Table 1 outlines the six major cost categories and factors we routinely include in our COGS calculations.

Table 1. Major Cost Categories for COGS Calculations

Category Can Include:
Materials (used per batch) Media, Buffers, Water, Vials, Packing Materials, Single-use Components
Consumables (used across multiple batches) Column resins, TFF Membranes
Labor Operators, Supervisors, QA/QC, Admin, Facilities, Warehousing
Capital (depreciated over life of equipment and buildings) Equipment and Facility
Overhead Maintenance, Insurance, Taxes, IT, Training, Security
Utilities and Waste Electricity, Fuel, Solid Waste, Treatment of Liquid Waste

As every product and cost accounting framework is unique, other hidden or forgotten cost categories worth considering might include: licensing expenses such as royalties and/or milestone payments, commercialization costs (advertising, sales labor, distribution chain) and research and development costs (amortized appropriately). All of these cost categories can significantly affect your COGS.

Now that you know the factors that go into COGS calculations, get started today. For more modeling tips and tricks, be sure to check our blog for future updates.

 

Blog article by: Rick Stock