The purpose of this article is to discuss how to get “buy-in” from senior or executive management for implementation of Process Analytical Technology (PAT). We must first define PAT:
PAT is a process for building quality into products through a thorough understanding of the manufacturing process, especially Key Quality Attributes (product specific) and Critical Process Parameters (process specific) . PAT generally involves in-line, on-line or at-line measurements at timely intervals to enable the manufacturer to define a “Design Space” . The Design Space is the multidimensional plot of critical process parameters and their acceptable ranges, which define a product that will always be of high quality when the manufacturing process is kept within this Design Space.
Where does the buy-in from senior management come in? It comes in because the instrumentation, personnel, consultants, etc. that are required to implement PAT are expensive. They are generally expensive enough to be designated as “capital projects” by most organizations. The engineers and scientists who are often responsible for implementing PAT generally do not have the authority to sign for the amounts of money that are required to initiate or maintain a PAT initiative. Thus, it becomes a necessity to build a business case for senior management in order to have an effective PAT program. Scientists and engineers are too often caught up in the elegant science of a specific PAT application without doing a careful economic analysis of how the application might (or might not) yield a positive economic return.
Building a business case requires us to be able to talk about Value Added Indicators . Value Added Indicators (VAIs) are tools to evaluate whether an investment is going to give acceptable returns. In today’s business climate, it is not sufficient to simply have a net positive return. The returns must meet or exceed the company’s growth strategy in order to make a convincing business case. The three VAIs we would like to discuss for purposes of this article are:
I. Net Present Value (NPV)
II. Internal Rate of Return (IRR)
III. Return on Investment (ROI)
If these indicators give returns that meet or exceed the company’s growth strategy, it will be easy to build a convincing business case for the implementation of PAT. After discussing the definition of these VAIs, we would like to apply them to a hypothetical business case for illustrative purposes.
Net Present Value (NPV)
Net Present Value is the difference between the Present Value of cash inflows and cash outflows. NPV is used to consider future returns, and discount them to a Present Value. This Present Value takes into account that the returns are generated over a defined period time (typically three to five years) and that inflation will erode some of the value. The future cash flows are discounted into one lump sum, known as the Present Value Amount. The amount applied to obtain the lump sum (the Discount Rate) is set by senior management and the Finance Department. For example, if we anticipate that an investment in PAT will bring in $1M over a five-year period, we might assign a Net Present Value of $800K to that cash flow, using a 20% discount.
The formula for calculating NPV is:
Internal Rate of Return (IRR)
IRR is also known as the Economic Rate of Return. IRR is calculated as the Discount Rate that makes the Present Value of all cash flows from a particular project equal to zero. IRR is a measure of the rate of growth that a given project is expected to generate. Obviously, the higher the predicted IRR, the more desirable a specific project would be. Thus IRR is a useful tool for prioritizing projects if several projects are being considered. It should be noted here that IRR is a company specific VAI. This is in contrast to NPV, which is considered to be a universal VAI.
Note that the “$1st yr. investment” in the equation above would be a negative number, as it is an expense. The equation can then be solved for IRR.
Return on Investment (ROI)
Return on Investment is calculated as the NPV divided by the initial investment cost. This is multiplied by 100 to convert to percent:
ROI is analogous to IRR in that the higher the value the more desirable the project. It differs from IRR in that it is a universal VAI, not a company-specific VAI.
The three most important criteria when using the VAIs are:
1. NPV is positive.
2. IRR is greater than the discount rate of the company.
3. ROI should be high enough to make the project worthwhile.
A project could have a positive NPV, yet give an IRR that is less than the discount rate of the company. This would generally not be considered an acceptable return, and thus the project would not be undertaken.
Let us now examine how to build a business case for the implementation of PAT. The example we use will be that of a mid-sized pharmaceutical company, and the technology to be employed will be Near Infrared (NIR). This example is only to illustrate the process. Each technology, application and company is different.
The NIR is proposed to be used in three phases as follows:
I. Raw Materials
III. Quality Control (QC)
Our discussion for our business case will focus on only #I, (Raw Materials) above. However, it is instructive to look at how the three parts can be further subdivided with respect to application of PAT:
I. Raw Materials
A. Identification (ID) of Incoming Raw Materials
B. Determination of Physical Properties (Moisture Content, Particle Size)