The Other Path to Productivity Improvement

Pharma must transform its productivity, and an emerging set of disruptive innovations promises giant gains

By Andrew Gonce, McKinsey & Company

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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.

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.

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.

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