To speed expansions and new plant projects, pharmaceutical manufacturers are relying more heavily on engineering firms' expertise in risk mitigation and process innovation. Belts are tight, industry wide (Box 1), and drug company sponsors are becoming choosier. In addition, global competition is intensifying among engineering and construction (E&C) firms. As a result, E&C companies are becoming more proactive pharmaceutical business partners, seeking strategies that streamline project delivery and add value to traditional design-and-build services.
Flexibility and modularization are driving projects today, allowing pharmaceutical companies to accelerate project work and minimize risk. More companies are building modest "launch" facilities that can be expanded once a market is established for their products. This strategy is becoming increasingly important to smaller companies and in the biotech sector.
Plants are being planned and built with the future, and potential changes in demand, clearly in mind. Flexible production facilities, capable of making a variety of products, are one trend. Engineering firms like Lockwood Greene make clients aware of the stresses that unforeseen demand might impose on their facilities. "Many of our flexible designs utilize portable equipment, flexible layouts and expandable utility systems," explains Ron Jones, director of pharmaceuticals and biotech at Lockwood Greene (LG), Spartanburg, S.C.
LG also employs modularization. For example, the "baseline process module" it offers as the primary process train for biotech facilities greatly shortens schedules while lowering and design costs, according to Jones. LG ties all these innovations together with web-based project management to improve information-sharing among the design team and engineers.
Using In-House Staff For the Basics
Typically, larger companies do initial project work in-house before calling in contractors.
"They use in-house engineering to define basic parameters of a project, then bring in people like us to enhance the design," says Dave Goswami, principal at IPS, Lafayette Hill, Pa.
When a project involves new process or plant technologies, though, hired guns are brought in much earlier. "In-house engineers aren't always up to date on the latest innovations," Goswami adds, especially when a company plans to launch a new type of product---say, a traditional manufacturer decides to develop a biologic, a drug with a new delivery system or a new manufacturing process involving cell culture or fermentation. "In these cases we can help with technology development, scale up, equipment specification, validation, vendors, capacity analysis, human resource allocation and facility layout," Goswami says.
Risk related to product approvals plays mightily in all decisions, although differently at larger vs. smaller sponsors. "After they decide to move forward, larger firms plunge ahead because they want to be the first guy in," says Goswami. "Smaller companies must hedge their bets somewhat."
Building "launch" facilities is one strategy that companies, particularly smaller ones, are using to hedge their bets. "We try to get them into a facility that's functional and can be validated within their budgets. Risk minimization is one of the first discussions we have," Goswami says.
Flat capital spending and fewer new drug approvals have presented operating companies with a dichotomy. "Companies are eager to take advantage of supplier competition," says Patrick Hurley, principal consultant with the New York-based consultancy Cap Gemini Ernst & Young. "At the same time, they're interested in reducing long-term support costs through standardization." Long-term contracts help many to resolve this conundrum, and get both price and standardization, he says.
Integration? Most companies still don't get it
Assuming, of course, that companies can make products and services from disparate suppliers work together. Although this concept may seem obvious, it's surprising how many reputable companies still don't "get it," Hurley say.
Recently, Hurley was involved with a new, costly biologics facility for a large pharmaceutical client. When they were designing a new plant, he says, they decided to use a warehouse design with very narrow aisles for storage, but also specified that weigh-and-dispense functions be conducted within the warehouse.
Only after construction did the client realize how difficult this design made material movement and operations. In fact the layout affected not only operating procedures, but even the information systems related to weigh-and-dispense. "I'm sure they did everything right when it came to design, engineering and figuring construction costs per square foot. The problem was that everyone was doing their jobs independently, and engineering and design were out there ahead of business process planning," he says.
Today's economic realities have dramatically changed relationships between pharmaceutical companies and outside engineering firms, according to Tim Barba, principal at CRB Consulting Engineers, Kansas City, Mo. More and more "pure procurement" groups are choosing outside engineering firms based solely on costs, as opposed to the contractors' capabilities.
"Just two years ago companies focused on technical capability and resources," he adds. CRB has bucked this trend by playing and re-playing the value card, for example through its investment in a data system that delivers high-quality engineering documents at low cost. Barba believes that lowball procurement strategies will eventually backfire through lower quality, fewer deliverables and higher risk, noting that "the more you spend on design the more you will save in the field."
The flexible facility initiative began in earnest in the early 1990s, when competitive pressures began forcing companies to construct facilities that manufactured multiple products. Modularization was a bigger issue several years ago when engineering firms were busier and field fabrications represented a higher risk to drug sponsors. "Modular design clearly has a place and time within our industry but each situation needs to be evaluated to assess its value," notes CRB's Barba.
Another dichotomy of sorts is evident in the types of services required for small molecule drugs versus biotech products. Biotech companies tend to ask for a wider range of services from one engineering firm, while small-molecule sponsors more often hire outside engineers for niche services within the overall context of the project.
Larger firms are also less likely to require a fully managed design/build than smaller companies. "The likes of Pfizer and Merck will commission us to do just process development, design, construction management or the master plan," states Lockwood Green's Jones. Biotech companies typically don't maintain large in-house engineering groups, he says, adding that, since many of them are smaller to begin with, they typically require more from contractors than large companies with inhouse engineering resources.
Risk Mitigation vs. Time-to-Market
Where other industries such as chemical processing, use a design-build approach, plant design and construction are usually separate in most pharmaceutical projects, and the design, bid, guild and validate format dominates (Box 2). "In pharmaceutical manufacturing, the process is so critical that companies like to separate it out from construction," says LG's Jones.
This approach can lead to inefficiencies because a design, bid, build, and validate approach inherently takes longer, and requires more detailed engineering documents, than design-build. The gains are greater control and flexibility, as well as reduced client risk. "Many firms are intent on having checks and balances built into the process," Jones observes. "They don't want validation tied to design because they feel this presents a conflict of interest. It all comes down to what's most important for a particular project: timelines and efficiency, or risk mitigation?"
If a company is trying to rush an important product to market, fast-track or even "flash-track" engineering may be the way. Of the two, fast-track is more compatible with design/build. "You can't do design/bid/build on a flash-track basis because you need two to four weeks to bid out each phase of the project. The more the project is chopped up, the longer the schedule," Jones says.
The Sooner The Better
"Earlier is better" is a recurring theme in engineering services procurement. Industry now recognizes the importance of developing strategic engineering partnerships early, to decrease project time and engineering cost, says Gabrielle Naeger, life sciences business development manager at Rockwell Automation, Los Angeles, Calif. "However, we need to continue to improve to realize full benefits," she says.
To illustrate how to best identify and leverage strategic suppliers' core competencies during a project, Naeger cites a third-party party study conducted by the Construction Industry Institute (CII), a consortium of end users, architectural and engineering firms and automation suppliers. If end users identified all three parties early in the project life cycle and leveraged their core strengths, the study concludes, project timelines could be shortened by 4-8% and project engineering costs lowered by 5-10%.
The study suggests shifting the traditional sequence of Engineering, then Procurement and finally Construction (EPC) to perform strategic procurement first, then engineering, then the balance of procurement, and, finally, construction (PEpC). Rockwell's execution model is based on PEpC and has been successful in reducing project costs.
So whither engineering procurement? Drawing far-reaching conclusions from two years of flat capital spending is probably not a great idea. However, the trend towards tighter purse-strings is apparently here to stay.
Pharmaceutical companies will continue value-hunting in their search for the perfect engineering partner. In the past, says Robert Hsu, principal project director for Philadelphia-based Kling, this meant establishing alliances with partners that had a proven track record of high-quality, cost-effective services. But perhaps at some point quality and experience will not suffice. "With the belt-tightening, some firms may look for more creative ways to procure services."
Flat Cap Spending And Falling NDAs: Chicken and Egg?
Capital spending in the pharmaceutical industry has been flat, and the number of new drugs introduced has fallen over the past few years. The U.S. Food and Drug Administration approved 33 New Chemical Entities (NCEs) 1999, 26 in 2000, 24 in 2001 and just 17 in 2002. Despite streamlined drug approval, pharmaceutical companies now spend about ten years and an estimate $1.7 billion to launch a new product. The downward approval trend combined with long development times and high costs, is redefining how companies undertake capital projects, and with it the relationship between drug sponsors and engineering firms.
The NCE drain partly results from pharmaceuticals' merger-mania and FDA's reluctance to approve "me-too" drugs. Companies are also becoming more cautious, says Ron Jones, director of pharmaceuticals and biotech at Lockwood Greene, Spartanburg, S.C.. "The range of indications that can provide blockbuster opportunities has narrowed," Jones says. "Long term, the 'me-too' strategy can't be sustained."
Fewer drug approvals coinciding with flat capital spending raises an interesting point: Is the former causing the latter, or are other competitive pressures simply forcing pharmaceutical sponsors to tighten their belts?Most observers believe that overall competitive pressures are forcing drug companies to tighten their belts. Industry consolidations have contributed to capital spending woes, says Patrick Hurley, principal consultant with New York-based consultancy Cap Gemini Ernst & Young"When companies undergoing mergers go through a plant rationalization process, they inevitably curtail spending."
"Drug approvals have always been slow," notes Tim Barba, principal at CRB Consulting Engineers, Kansas City, Mo. "Companies do not have the excess funds they used to have and that's forcing them to look at every dollar spent," he says.
Parallel or Intersecting Tracks?
Design/bid/build refers to the "traditional" execution strategy where engineering is separate from construction and is executed sequentially. In this scenario, procurers significantly manage the transition between engineer and constructor. In contrast, the design/build strategy involves a single firm providing both design and construction services, and typically procurement as well.
"Fast-track" refers to projects where the normal schedule is accelerated through such strategies as concurrent execution of design and field activities, expedited procurement of long-term equipment, and accelerated construction schedules (by utilization of overtime/extended work schedules/etc.).
Flash track is essentially the same as Fast track, only faster, to meet anticipated market needs and product launch requirements. "'It's a euphemism for those projects whose schedule requirements are even more aggressive," says Ron Jones of Lockwood Greene.
What takes time is not just the bidding, but the act of bringing in a new company to handle the next phase of the project. "The company next in the cycle needs to familiarize itself with everything that's gone before. If you use the same company those added learning curves are eliminated," Jones says.