Article by: Michael Hurwich, Dr. Doug Treen & Tammy Power
Outsourcing drug research has become more popular, not only because of increased efficiencies in third-party core competencies, but also because numerous Pharmaceutical & Biotech companies are often challenged with conflicting budgets, dated equipment, software or knowledge that may or may not fall short of existing regulatory allowances.
Emphasis has traditionally been placed on chemical methodologies over technological advances and process design, therefore, even if a faster process is discovered many companies do not have the capacity or budget to execute it.
What does all this mean?
Well, since time is of the essence in drug discovery, any delay in R&D becomes a double-edged sword. Costs increase & revenue is not realized sooner. With the aforementioned challenge in mind, we conducted proprietary research with customers and non-customers to determine whether pricing for the "Speed of Service Delivery" would contribute to top line revenue. The goal of the research was to determine whether our client could price for Speed?
This article will provide you with some food-for-thought by drawing upon research conducted with companies from Pharma, Biotech and Clinical Labs - both small & large.
Pharmaceutical and Biotech companies occasionally have conflicting budgets and agendas for lab time usage and are often not performing effectively & efficiently in an effort to identify or produce new drugs for approval and sale. One attribute third-party companies can leverage over their larger Pharma and Biotech counterparts is the ability to develop rapid-response upstream R&D and step-up manufacturing downstream. Smart companies that are outsourcing their available expertise and recent technology will capture additional value brought forth by their core competencies through price.
Capturing this incremental value through price comes into play when time is of the essence and sheer speed itself becomes a highly valued element for an organization. The question therein lies, just how valuable is it? In drug development, the answer is very valuable! When a Pharmaceutical or Biotech organization is in the development stage of their R&D process, timing is critical. The greater the number of assays that can be conducted in a uniform and systematic timely fashion, the greater the probability of hitting a winning formula that equates to a multi-million dollar success. How can a Pharma, Biotech or Clinical Lab increase the odds of discovery? Partnering with third parties to deliver specialized and available targeted developmental services can exponentially increase the odds.
We know it's desirable for customers to seek rapid turnaround time for product development - a highly valued attribute; but is the industry willing to pay a significant premium in order to beat the competition for both FDA approval and the Patent office? Through our research, we found third-party companies can validate charging a higher price as they are providing customers with a highly valued and dedicated service in an expeditious amount of time. Speed becomes a value-added attribute and a tremendous asset to their service delivery solution. As such, companies that outsource their expertise and technology in a third-party relationship can capture value and the resulting incremental revenue by pricing according to their customer's need for rapid service in the arena of drug development and manufacturing.
SPEED IS OF THE ESSENCE - WORKING WITH THIRD-PARTIES
In the Pharmaceutical & Biotech industry, turnaround time for new drug development is vital to their success and can be achieved by understanding:
1. | The more assays that can be conducted and completed in the developmental stage in a narrower span of time, the greater the odds for discovering a successful formula, the quicker the results are presented to the FDA and other regulatory bodies and if approved, the quicker to market. |
2. | The cost could be reduced to develop a drug as information is banked through previous efforts at discovering a winning formula by a third-party that has obtained incremental knowledge by researching for other Pharma's or Biotechs with similar or like drug discovery. |
3. | The cost to develop a drug is an expeditious manner is far outweighed by the potential revenue realized by sooner bringing the product to market. |
In an effort to quickly bring the potential drug to market sooner, many experiments must be conducted to both discover a winning formula and satisfy regulatory requirements. The industry looks to effectively maximize the amount of tests conducted in an effort to find a champion in the most efficient time span possible. The greater the number of tests completed, the faster the profitable drug can be discovered and presented for FDA approval. Outsourcing lab services is widely used at various points in the drug discovery process. Third-party companies can focus on their core competencies (including speed) in both drug development and manufacturing. Our research noted that many Pharmaceutical companies traditionally strong in drug research and development would consider outsourcing for manufacturing assistance if quality & speed could be ensured through the step-up process, whereas Biotechs may require more efficient and less expensive R&D processes at different developmental stages.
MATCHING SPEED WITH PRICE
It is important to note that a large portion of R&D costs are allocated in the initial stages of drug development, yet a return is not generated until the drug actually goes to market. The faster a patent can be obtained, coupled with the speed to market of a new drug, the faster a company can maximize profit through the utilization of optimum value-based pricing models before competitors start production of their own generic or like knock-offs. To sustain a consistent revenue stream, new products must be developed and brought to market in the most efficient manner possible in order to offset declining prices and ensuing revenues from older well-known brands that may be in the remaining years of patent protection, thereby becoming susceptible to a competitive threat from their generic counterparts offering lower-priced alternatives.
CAN I CHARGE MORE FOR SPEEDY RESULTS?
Value-based pricing revolves around knowing your customer and understanding what constitutes their decision selection criteria to achieve both your mutual goals and objectives. Capturing all that drives a customer's purchase and ensuring that you can deliver on these attributes is key towards generating incremental revenue through value-based pricing. A value tradeoff is made when incremental value is priced at the appropriate incremental rate. Simply put, customers are willing to pay a higher price for something they attach a higher value rating towards.
Pricing services based on how the value proposition is perceived by the customer is a proven method for any company to help realize corporate goals and objectives of improved market share, ROI, revenue or profitability. Through our pricing research, we found speed to be a highly valued element in the arena of drug development as companies are willing to pay above market prices if such services can be executed in a timely fashion by a third party.
Companies' outsourced services will yield greater value if they are able to offer their customers fast, consistent and reliable research at various stages throughout the drug development process. With this realization, third-party vendors can capture additional incremental value by "pricing for speed". In determining an accurate pricing formula for third-party outsourcing, one must first estimate the worth of additional value the customer places on significant time savings, and then adjust prices accordingly to share in the supplementary value presented to the customer.
In a recent study, The Foundation Group found that small and large Pharma's and Biotechs in the United States were willing to pay significant premiums for faster results. In some cases, customers were willing to pay upwards of 30% based on a 10-30% timesaving. This willingness-to-pay varied according to the type and size of the customer within the organization and industry. (See Chart of Findings, n=56) The value of pricing for speed is emphasized as even the smallest timesaving of 10% still yielded a willingness-to-pay premium of 3-10%.
PROFITABLE SEGMENTATION
Different customer segments allot varying amounts of value to the vital attribute of "speed" depending on the priority & ranking attributed to the aforementioned in a customer's decision selection criteria. The price premium attributed to the speed of drug development also depends on the type of customer, in addition to the extent to which time is of the essence in their operations. If a customer places high priority on development of a certain drug, and/or the company is less price-sensitive, they are more apt to pay above market prices in a race to evaluate & validate the experiments in the R&D process.
Customers can further be clustered into three distinct market segments: price sensitive, strategically focused and loyal. Once these markets are determined, a third-party contracted to conduct various stages of drug development can significantly improve incremental revenue.
1st Segment - Price Sensitive Segment. These companies have a low threshold for pricing pain and place a higher priority on price over speed. For a third-party company, this segment represents the least opportunity in terms of additional revenue resulting from offering time savings.
2nd Segment - Strategically Focused Segment. Customers are value driven. These customers will make a trade-off between price and a value-added element (e.g. speed of service), thereby justifying a price premium for service that provides them with incremental value.
3rd Segment - Loyal Segment. A change in price will not affect their willingness-to-pay. These customers are willing to pay a higher price for an increase in value; therefore, since speed has been determined to be a valuable commodity, the greatest opportunity for a third-party vendor relationship for profitability resides within this segment. Additionally, this segment's loyalty is likely the result of a longstanding, credible relationship with a history of consistent and uniform analysis. A customer risks compromising existing test results and regulatory approvals if new tests are conducted with a new or different vendor.
The challenge and goal is to quickly evaluate and validate which companies within which industries are either price sensitive, strategically focused or loyal. Once the market and customer segments can be determined, a price-metering exercise is warranted to determine each customer's price/value tradeoff associated with the attribute of "speed".
Use segmentation to select or reject customers that place little value on "speed" through their willingness-to-pay. Price segmentation is often used to identify which group of customers is the best to serve. Although these customers are targeted, many companies cannot resist the temptation to sell their services to the whole market in a misguided attempt to grab market share. Consequently, serving the unprofitable "price-sensitive" segment at the expense of profitable customers bogs down these companies.
PRICING SPEED OF SERVICE TO THE MARKET
Third-party companies can recognize the unique advantage of "pricing for speed" and price their services, both in research and step-up manufacturing accordingly. The goal and objective is to understand how "speed" obtained by outsourcing available capacity, expertise and technology for drug development and manufacturing services can equate to greater revenue for both parties involved. In fact, the revenue gained by being first-to-market will far exceed the cost to outsource.
In conclusion, in the Pharmaceutical and Biotech industry, the fastest possible turnaround time for a new drug launch is critical for success. Within this industry, companies clearly consider the attribute of "speed" to be of great importance, and value it accordingly based on the segmentation pattern to which they would reside. Speed to market translates into superior performance allowing Pharmaceutical and Biotech companies to gain a leg-up on competing generic counterparts by stretching short-term exposure to revenue erosion.
