How To Take Charge of Your COGS
In my last blog, I wrote about all the gory details describing expenses that can go into cost of goods sold (COGS) for biopharmaceuticals. However, I did not describe why COGS are so important to model in the first place. The simple answer is that a good model allows you to forecast COGS based on information from development runs at scales that are very different from the intended commercial scale. For drug substance, this may be in the form of cost per gram. For drug products, this is often in the form cost per dose, whether this be a vial, pre-filled syringe or other delivery device.
Routinely the most important COGS related calculation is the cost per dose. A good model will calculate accurate costs that are a critical factor in determining whether your product will be economically viable at the anticipated selling price. Of course, the selling price is generally determined by what the market can support. For many products, there is also a trade-off between price and sales volume; as prices are lowered, sales volume increases. Similarly, there is a relationship between production volume and COGS, which can be forecast with a good model. Having an accurate COGS model as early as possible in the development process is extremely useful to assist companies in determining appropriate investment, sales and marketing strategies that will guide future product development activities. Just take a look at these top ten disastrous launches. In many of these cases, failure to set a reasonable market price and manage COGS contributed to the unsuccessful product launches.
A current area that is hot for applying COGS modeling is biosimilars. Many of the blockbuster biologics have or will soon experience patent expirations. This will introduce competition into the market for many biopharmaceuticals, causing many big pharma companies to take a hard look at reducing price to ensure market share with potential biosimilar competition. Historical data from these well-known processes are useful in constructing a very accurate cost model, which can aid in developing strategies for innovator product firms. On the other end of this spectrum are the biosimilar companies. These companies are applying COGS modeling very early in the development stages to determine which target molecules are worth manufacturing for the biosimilars market and to establish COGS targets for these products.
Finally, COGS models can aid in determining the costly portions of the manufacturing process for all companies manufacturing biologics. Results from these models drive manufactures to remove “economic bottlenecks” by heading back to process development to increase titers and purification yields, reducing labor with new technology or outsourcing activities in order to reduce COGS. A COGS model developed early in the product life cycle will allow you to identify the key cost drivers in your manufacturing process at all stages of development. This approach will provide the insight required to inform critical manufacturing decisions that significantly impact the success of your product(s).
Blog article by: Rick Stock