For years, observers have predicted a “sea change” in the pharmaceutical industry, driven by external economic forces. The result would be more efficient drug manufacturing and R&D, and greater recognition of the strategic importance of drug manufacturing.
The industry has been facing change on a massive scale for the past few years. There is a dwindling pipeline of new drug candidates, and the “patent cliff.” Over the next five years, $92 billion worth of name-brand drugs will come off patent, and, research firm IMS predicts, generic drugs will account for 85% of the U.S. market.
Generic manufacturers, meanwhile, are pressured by high demand but low prices for many of their products, as well as insufficient manufacturing capacity, at a time when compliance and quality problems have driven several suppliers out of the market.
Price controls are being enforced throughout Europe, while, in the U.S., changes in the healthcare system are expected to reduce profitability and drive increased demand for lower cost products. We asked a number of industry analysts whether all these factors had pushed the drug industry to its tipping point. The consensus is a resounding “yes.”
“At the start of this new decade, pharma simultaneously faces the pressures of an ‘innovation gap’ resulting from lack of R&D productivity within large enterprises, reimbursement pressure leading to reduced prices, [the need to] supply a larger market demanding safer products, global competition coupled with global market opportunities, and poor consumer perception,” says Matthew Hudes, national managing principal for biotech, life sciences and healthcare with Deloitte Consulting (San Francisco).
Late to the Party
But, industrial transformation takes time, says Suraj Mathew, partner with the consulting firm, Tefen, Inc. (New York, N.Y.), “If you look at electronics [now at a nine-sigma level], and where it was back in the 1970s, you see that the process takes decades, and the pharma industry was relatively late in adopting operational excellence.”
Most Big Pharma manufacturers didn’t begin their Six Sigma or Lean programs in earnest until around 2000. Before that time, pharma’s efforts to apply these tools were tactical and based on the need to solve a specific problem, says Thomas Friedli, professor at the University of St. Gallen in Switzerland, who has been analyzing pharma’s OpEx practices for the past several years. Today, Friedli says, more pharmaceutical companies are at a more advanced stage in their OpEx evolution, and smaller and mid-sized firms, and even some contract manufacturers, are also embracing the concepts.
“The recent movement of pharma companies to OpEx is similar to what heavier manufacturing companies did in the 80s and 90s,” says Allan Krul, principal for Strategy and Operations with Deloitte. “Added cost and competitive pressure from outside the U.S. forced many manufacturing companies to find new ways to reduce cost, improve operations and product development, reduce time to market and improve overall quality.”
Today, many drug manufacturers’ processes are at 2.5 to 3 Sigma, Krul says. “Over the past 10 years, much of the emphasis has been directed at pipeline development, with a primary focus on speed and cost. As a result, not much improvement has been made to the overall process quality, which has had a negative impact on regulatory compliance,” he says. Given some of the recent regulatory challenges that many companies have been facing, a majority are stepping up their efforts to improve process quality by implementing Design for Six Sigma, Quality by Design (QbD) and other advanced Lean Six Sigma Methods.
However, Tefen’s Mathew acknowledges that, given increased competition and other pressures, OpEx, per se, can be a tough management sell for some pharma companies right now.
Based on McKinsey & Co.’s pharmaceutical operations benchmarking study, the industry’s current “Right-First-Time” is 95% on average, a figure that has increased, but not much, over the past few years, says Ulf Schrader, McKinsey principal based in Europe.
Roughly half the sites that the analysts studied are still focusing on reducing slack in their systems, which translates into significant efficiency gains. Only the other half has moved beyond this point, and is focusing on in-process checks and control, stabilization, and standardization, he adds.
The Impact of Mergers
Mergers and acquisitions can delay OpEx efforts, and make them more challenging. According to MedTrak analysts, the pace of pharma and biotech mergers and acquisitions (Table 1) increased by a record 20% last year, and projections call for more activity this year.
But with every merger comes the need to blend two very different cultures, to determine restructuring and business goals, and to settle on management, says Tefen’s Mathew. Efforts on basics as standard work may stop until the cultures merge. And sometimes, leadership changes don’t even require a merger. For Pfizer, whose CEO Jeffrey Kindler abruptly resigned last month, it may take up to a year for new management’s priorities and goals to gel.
Other challenges are posed by the urgent need to cut costs. Drug companies have rapidly pruned manufacturing capacity over the past five years. Through November of 2010, some 50,168 professionals in the industry lost their jobs, down from 61,109 the previous year, according to Challenger, Gray & Christmas’ latest employment statistics.
Even R&D spending is down. In 2009, pharma reduced R&D funding by 26%, with U.S. pharma cutting spending by 13% to $17.2 billion, according to Ernst & Young.