The forces shaping pharmaceutical manufacturing are demanding greater innovation: global healthcare costs are rising faster than GDP; regulatory bodies are demanding greater security and quality; start-ups are pushing disruptive manufacturing innovations into the market; and faster, lower-cost competitors are emerging all the time. Returns on R&D, the historic source of competitive advantage, have fallen to below 5%. Exclusivity periods are being squeezed: The median duration between the filing of patent challenges by generics companies dropped by 20% between 2006 and 2011.
Even as they experience downward pressure on prices, pharma companies are also having their margins eroded, from below by rising manufacturing costs and above by falling prices. Cost of Goods and Services (COGS) now account for around 25% of revenue in originators, and as much as 50% in generics. Supply chain complexity has increased tenfold over the past decade as companies service dozens of countries with thousands of SKUs.
Worse, the pharmaceutical industry has dramatically failed to get these costs under control through the kinds of productivity improvement measures achieved in other industries. Between 1987 and 2008, for example, labor productivity in the U.S. pharma industry rose by 0.7%, the lowest of any industry and less than a third of the average productivity increase across all industries.
For the sake of society, and for their own long-term survival, pharma companies need to recognize these forces and invest wisely in manufacturing productivity innovation that puts them ahead of the competition. Our POBOS benchmarking data shows that there are some companies making sustained year-over-year productivity gains over 5%, and that the top quartile companies are three times more productive than those in the bottom quartile.
Leaders in operations productivity are also investing in game-changing innovations to dramatically improve their labor and asset productivity. These radical changes hold the promise of long-term competitive advantage as robust and important as any blockbuster drug. Winners will not only capture profits, they will also be in a position to fundamentally change the shape of the industry and to provide medicines at price points accessible to the next billion consumers.
KICK START A REVOLUTION
Today, the pharma industry has the opportunity to fight back against relentlessly rising costs and kick-start a revolution in manufacturing productivity. That opportunity is offered by two distinct, but related, trends: Far greater understanding of product and process parameters and more diverse and powerful technological capabilities. The “holy grail” is the fully integrated line that takes advantage of both trends to set a new performance bar for manufacturing productivity.
For example, thanks to advances in chemometric modeling and the development of sophisticated, sensitive multivariate instruments that can monitor the progress of reactions in real time and at an industrial scale, pharmaceutical manufacturers have the chance to manufacture with a speed, precision and reliability that would have been unthinkable only a decade ago. Tighter process control will improve yields and cut rework and recalls. Real-time monitoring and closed loop process control will cut manufacturing cycle times and accelerate the shift from batch to continuous manufacturing. These advances can begin to fulfill the aspirations laid out in pharmaceutical GMPs for the 21st century.
So why has the entire sector not yet been transformed by a manufacturing revolution? What is preventing the cost of all pharmaceuticals being reduced by 50% or more within 20 years, or even within 10?
Executives and observers cite a handful of reasons. First, the highly regulated nature of the industry can make some players extremely reluctant to “meddle” with processes that currently meet regulatory requirements. Many perceive the risk of regulatory scrutiny as greater than the potential benefits of productivity improvements. Second, some are reluctant to make the significant investments in new equipment required to take advantage of the latest manufacturing and control technologies. Third, many companies simply lack the capable teams to lead these efforts. Some are struggling to attract and retain statisticians who are fluent in pharma operations or even business, for example. Fourth, many feel that there are still significant gains to be captured within the more traditional productivity improvement levers of lean and network reductions. Finally, and perhaps most compelling, many of the big investments made so far haven’t appeared to pay off yet, so there is no proven low-risk path. As a result, executives are hedging their bets.
THE CHANGE IMPERATIVE
We believe, however, that the risk balance is shifting. On the one hand, the forces driving change are becoming stronger every year. On the other, each successful PAT or continuous manufacturing implementation helps to reduce the risks faced by subsequent efforts. As transformation in manufacturing becomes inevitable, the imperative for companies is to plan and execute their own change journey in a way that ensures they meet their short-term challenges, while equipping themselves to seize longer-term opportunities. We believe that the pharma leaders of tomorrow will make strategic and systematic use of new manufacturing technologies to improve their competitiveness across three horizons:
1. First, pharma companies will close the productivity gap, using incremental improvements to their process knowledge and technical capabilities to bring manufacturing performance up to global best-practice levels. They will reshape their operating systems, management systems and build the required skills and capabilities.
2. Second, drug makers will draw ahead of the pack, using entirely new technologies and manufacturing models as sources of significant competitive advantage. Leaders will define a portfolio of technology investments and leverage partners, researchers and equipment providers.
3. Third, pharma will rewrite the rules of the game, taking advantage of their knowledge and technological leadership to transform the structure and competitive dynamics of the industry.
The opportunity for incremental improvements that build speed, productivity and quality into today’s pharma production lines is significant. Our POBOS benchmarking of global pharma sites has revealed huge performance differences between today’s top performing sites and the rest. Top quartile sites are 20-40% more productive than mean performers. Top performers also deliver better service to customers at considerably lower cost, with half the lost sales and half the inventory volumes of mean performers.
The technological opportunities to close the current performance gaps come from improvements to automation and measurement systems and the ability to use both in creating intelligent risk-based feedback loops within production. Examples include the use of advanced reliability analytics, by line, to understand the drivers of unreliability; the use of advanced analytics related to annual product quality reviews to truly understand sources of risk and product variation; and the use of real-time particulate detection and content uniformity assessment through infrared technology.
As manufacturing capabilities that seem advanced today become established practices, the best companies will seek approaches that allow them to differentiate their manufacturing performance. Even the significant gains offered by the application of improved process understanding and emerging technical innovations to existing production environments will be dwarfed by the potential of new lines designed from the ground up to take maximum advantage of these changes.
Leaders are already investing in these capabilities. The Rutgers University Engineering Research Center for Structured Organic Particulate Systems and its partner, Johnson & Johnson, are collaborating on continuous process manufacturing of powder-based products. Bayer is similarly investing in continuous processing of producing an oncology API. Its collaboration with TU Dortmund University and others has resulted in a “chemical production plant of the future” at the INVITE (Innovation, Vision, Technology) research center. Novartis has collaborated with MIT on the development of an integrated continuous manufacturing (ICM) technology (API synthesis and drug product formation are integrated in one seamless process) and has demonstrated a pilot process that offers the potential to reduce throughput time by 95%, plant footprint by 40-90%, capital cost by 40%, and operating costs by 25-60%, all with greatly improved process and product control.
This ambitious approach of implementing integrated, continuous manufacturing lines, such as the development at MIT, is currently being pursued by Novartis and CONTINUUS Pharmaceuticals, a spin-out company of the Novartis-MIT Center for Continuous Manufacturing.
REWRITING THE RULES
Technologies that change key manufacturing performance measures will have a huge affect on the industry, but tomorrow’s leaders will go even further. Work underway today provides a few hints of the potential to come. For instance, intermediate-scale modular facilities like GE’s XCellerx initiative promise to greatly increase the agility of pharma manufacturing footprints, allowing companies to establish and ramp up production in a new facility in is little as 12 months.
The potential elsewhere is equally significant. Compact, modular production facilities sited at major distributors or pharmacies create the prospect of true manufacture-to-order, offering 100% service levels with zero finished-goods inventories, or the fast, low-cost production of truly personalized medicines. Low-cost, flexible facilities would also enable a far different supply chain design for serving emerging markets with local-for-local production.
Superior process understanding could also help originators to preserve their competitive advantage once patents expire by building tight process limits into the specifications, making it much harder for generic competitors to replicate their products when they enter the market. Imagine if operational excellence became a stronger competitive advantage than patent status!
Capturing the potential of these emerging technologies will require companies to reshape their commercial models, organization and culture, as well as their manufacturing facilities. They will have to improve their ability to collaborate right across the value chain, mastering QbD so that newly developed molecules and novel manufacturing processes are optimized together. They will also need to collaborate beyond corporate borders, working closely with equipment suppliers.
Will the payback justify all this effort and investment? McKinsey believes it will. Today’s median oral solid dosage manufacturers produce at around $0.46 per 30-pack of “normalized” units, excluding API and materials costs. Top quartile performers produce at less than half that cost. Projecting even a moderate case for improvement from manufacturing innovation could take that cost to below half a penny per tablet. For every 10 million units, the return would be $4 million, rapidly paying back the required investment in high-volume product families.
Pharma players need to understand the likely effect of these radical shifts in manufacturing technology and performance on their own product portfolios, and they need to position themselves to be ready for them. The incremental steps many companies are making are helping them to improve quality and reduce costs. The best companies are also systematically using those steps to build their process understanding and technological experience in order to provide a platform for the radical innovations of the future. It is those innovations that will deliver the dramatic shifts in cost, quality and service required to profitably serve the next generation of customers.