Nickels & Dimes: What To Do When Your CDMO Charges You Unexpected Fees

By Barbara Berglund, COO, CMC Turnkey Solutions

There are so many factors that figure into initial selection of a CDMO; you would consider capabilities, core competency, schedule flexibility, quality, and regulatory track record. Perhaps the largest focus, or at least the greatest pressure, comes from the financial aspect of CDMO selection. You need to consider the cost of transferring in your process, your test procedures, your overall program; you need to set assumptions for costs associated with changing the timing of manufacturing dates; or you may find that there is a discounted price for campaigning several batches or if you manufacture a certain number of batches per year. You may find that some organizations will work to include your product in their validation matrix, while others do not, but they provide a discount for your process validation. In some cases, the cost of goods for the process is included in the pricing and, in others, individual costs are figured into the final invoice. At the end of the CDMO selection process, a contract is signed by both sides, agreeing to all factors.

This is also true for any contract service provider. It might be a GLP laboratory, a testing laboratory, a secondary packaging operation, warehousing service, or any other service. The initial selection of these organizations is certainly based on capabilities and resource availability, but the cost factor is essential for long-term partnership. It’s not just the initial agreement, but the continued business practices on both sides that determine the success of the partnership.

Vague Contract Terms Are The Root Of Disagreements

In many cases, the business development and sales teams from your organization and the contract service provider work separately from the technical team to reach the final terms, just informing the technical team as to the expectations. The CDMO is working toward finding the best balance of attracting your business while keeping the best possible margin for their organization; you are trying to minimize costs against a budget, perhaps answering to a board of directors or a management team, having to constantly defend your selection of the CDMO. This means that once you have signed the agreement, you should be able to readily communicate budget and expectations based on the agreement.

What happens when the invoices begin coming in and the costs are not as expected? There are many possible reasons for this, but perhaps the most frustrating is having loose language in the agreement. The CDMO might send out an invoice for a one-month storage fee per pallet because a shipment went out one day into the new month, pointing to the part of the agreement that says there is a per-month fee, but you could point to a clause with a general +/- three-day period for scheduling. Both sides may have a place to point to, but in the end resolving the money part is costly in terms of time spent and also in terms of the overall relationship. Perhaps during a process run there is an investigation that takes 25 man-hours to resolve, and the CDMO puts this time on the invoice because there is clause that states that you “may” be required to pay for investigation time. On the other hand, your argument is that the investigation outcome was that the CDMO made a critical error that resulted in the deviation. Both sides have a rationale for why the fee does or does not apply, and, again, it often impacts more than just the financial bottom line.

When A Poor Business Relationship Overrides Technical Competence

Imagine that you are leading the technical team and you are executing with the CDMO. In this case, you are very satisfied with the technical operation; the quality is adequate, manufacturing is essentially on target, the analytical laboratory is competent, and the packaging operation is acceptable. In a quarterly meeting, the business team announces to you that you need to find a new CDMO because the sales team is not meeting the business needs of your organization. When you dig into this, you find that the CDMO is charging hidden costs and fees; this has been going on for almost two years, and they are no longer an acceptable business partner for the organization.

This is a frustrating situation for the technical team. Logistically, moving to another CDMO partner is an expensive endeavor, but it also impacts time and resources. In addition, if you are working with an organization that is operating reasonably well, developing a relationship with a new team and a new organization may be difficult. Also, if your process is in any way unique or requires specialized equipment, if your product requires a unique packaging configuration that has been solved by the CDMO, or if several deviations and excursions have been acceptably resolved, you may not want to move away from this. If the project management team from the CDMO has been working well and has managed timelines effectively, moving away from this into an unknown is not appealing.

It is possible in this situation that you could appeal to the business group and perhaps to the leadership and decision makers to rewrite the agreement and stick with the CDMO. It is likely, however, that if the business group has already received the blessing from the leadership team to move, this is an indication that the business relationship is already thin. A competent business team does not look for this kind of final solution without having made multiple attempts to keep a smooth relationship.

This year, I was working with a client using a development laboratory for a process and formulation development project. The lab did competent work, and the technical team was able to produce a favorable outcome for the product’s stage of development. Throughout the year, the business group sent invoices with numerous add-in costs that were not explicitly part of the original agreement. We updated the agreement, but new add-in costs continued to appear on invoices. Throughout the year, this cost dozens of man-hours in meetings with both teams and, overall, my client paid out approximately half of the unexpected fees. The client felt as though we were being squeezed for nickels and dimes at every turn.

Ultimately, my client and I found an alternate laboratory to perform development work. This client has a pipeline with approximately three new products per year over the next five years; having a working partnership with a development lab is a crucial part of the organization’s success. So, this lab risked – and lost – a long-term relationship while chasing a few thousand dollars. In addition, when I am asked about this laboratory, I indicate that, in my experience, they are technically competent but I have found working through their business group is very difficult and I advise that they should expect to need to perform detailed reviews of every invoice and to check for hidden costs.

Collaboration, Communication Avoid Unexpected Surprises

This is not to say that every time a CDMO puts an added charge into an invoice that the CDMO is using nickel-and-diming practices; the CDMO should not absorb costs if the client has agreed to terms. The CDMO also needs to deal with clients who do not pay on time or provide partial payments, complicating the invoicing process. The client, too, has a responsibility to understand every line of the invoices and should meet with the CDMO on any questions. If a client has agreed, for example, to pay for shipping of samples and the CDMO sends an invoice for that charge, that is entirely acceptable. The business relationship between organizations should allow for continuous communication for all matters.

Part of resolving issues with invoicing may include proactive and collaborative updates to agreements when the first or second vague or unclear term is identified. Also, involving the technical team after the first invoice arrives could be beneficial. For example, if you notify your technical lead that once a manufacturing process run is confirmed in the schedule, delaying the run with less than 10 working days’ notice will result in a cancellation fee, this may result in improved planning. So, if a technical lead just knows that a run needs to occur in “second quarter,” and the run is scheduled for March, delayed to early and then late April, and then finally run in May due to technical issues, there may be a large financial impact. If the delays were due to technical issues at the CDMO, the fees may not be due, or there may be a shared responsibility. This kind of communication is helpful for explicitly stated costs.

Any CDMO is expected to invoice clients for services rendered or for pass-through costs as agreed. However, a technically excellent CDMO may lose some clients based on the business relationship. This also goes for research organizations, laboratories, and study centers. Sales and business development at the CDMO should recognize the signs of confusion or reluctance when it comes to invoicing and deal swiftly and effectively with issues in collaboration with the client or clients impacted by unclear agreements and terms.

Ideally, a technical team effort between a CDMO and its client should be focused on quality and technical process success. Essentially, when an excellent partnership has been formed between a CDMO and a client, continuing the business relationship as initially established, or as it evolves through a program, is ideal. When a program has been going along well from a quality and technical point of view, having the partnership fail due to a negative business relationship is frustrating. Collaboration and communication between the business teams and open communication with the technical teams can alleviate potential issues and confusion on both sides.

About The Author:

Barbara Berglund is COO of CMC Turnkey Solutions, where she applies over 20 years of experience in finished pharmaceutical, API, and medical device manufacturing. She has direct experience with quality assurance and manufacturing of commercial and clinical-trial sterile liquid and lyophilized parenterals, microencapsulated products, intravitreal products, suspensions, and solid dosage forms. She has held strategic leadership positions in QA, QC, sterile manufacturing, and project management and has a particular interest in technical transfers both of processes and analytical procedures. Berglund has an undergraduate degree in chemistry and postgraduate degrees in chemistry and pharmacological and physiological science. She received her PMI PMP certification in 2007, and her ASQ CQA and CMQ/OE certifications in 2015.