Pharmaceutical manufacturers, like companies in any other industry, compete with each other to create new or better (sometimes only marginally better) drugs. However, pharma’s innovation in manufacturing technology and business processes continues to lag behind that of other industries. With its profits assured, innovation in any manufacturing and associated practices has not been part of the consideration.
However, strategies that can bring manufacturing technology innovation and transform or change the pharma business practices are worth discussing. Today, the industry could potentially increase its patient base1,2 by about 1.5-2 billion and also lower global health care costs, while improving revenue and profits.3
In pharma’s current business model, companies invent new molecules and market them as fast as possible to get more market share than their competitors. This has worked extremely well. However, due to pricing policies, even in countries that have healthcare programs, many patients cannot afford drugs or their recommended dosage4. Patients who do not have healthcare programs may face a difficult choice between food and drugs.5
When a drug’s patent expires or it goes from name-brand to generic, there is some reduction in price, but not enough to grow the global customer base. The true global commoditization of drugs never happens.
The fundamentals of chemistry and chemical engineering are precisely practiced and executed in fine/specialty chemicals, coatings and other industries, but I’m not sure they are being applied in pharma to the same degree. Over the past few years, we have increasingly seen the results in shortages, poor product quality and asset utilization, low inventory turns and poor process yelds. Due to diverse metabolic, genetic and ethnic differences among people, different moleules or doses may be needed to cure a disease. These factors add to business complexity and increase the risk of operational inefficiency.
Some chemical engineering and chemistry fundamentals have even been given new names/nomenclature. Regulatory bodies have chimed in to cajole the industry to adopt and commercialize better technologies and business practices. Even with that nudge, companies have not internalized and adopted what is being suggested or discussed.
We have to recognize that pharmaceutical businesses, besides being profit centric, are driven by regulation centricity. Existing regulations, even though minimalistic, along with proposed guidances, can be a huge impediment to anyone to be innovative and creative in their manufacturing and business practices.
Since innovation in manufacturing practices is not coming from inside pharma, it will have to come from external sources. Perhaps patient watchdog groups or non-profit organizations6,7 could pressure companies to innovate. Or maybe a maverick business person such as Elon Musk, Elizabeth Thomas, or Anne Wojcicki could promote change. Perhaps, in the end, change will be driven by pharmacy benefit managers (PBMs). Major drug buyers such as Walmart or Target could also be change agents if they were to act on some of the information presented here to push pharmaceutical companies to use the best manufacturing technologies and supply chain practices. The result would be quality drugs at lower cost, which would lower overall healthcare costs and improve company profits and drug accessibility. Table 1 outlines the information that every buyer should know, at different points in the value chain.
Current Supply Chain Process
Even though everyone is familiar with how the drugs get to the market, a brief overview is always helpful. Figure 1 is a simplified schematic of today’s post-discovery pharmaceutical supply chain.
Different raw materials at various steps of active pharmaceutical ingredient (API) manufacturing and formulation are reacted and/or blended to produce a product that is packaged in single drug dose or dispensable form.
Product Cost Analysis
Generally, for brand name pharmaceuticals, the highest prices are set at a level. This is the level targetting not all potential patients, but a sufficient number of patients who will be able to afford the drugs through mutually subsidized healthcare programs or from their own pocket. The revenues that result then go to pay for the new product development, create necessary profits and absorb every business inefficiency costs. Since most of the new molecules or their applications are patented, these pricing strategies prevail, as patients want to extend their life. The cost of each product can be calculated on a theoretical basis, an actual basis, and based on an improved process.
Cost analysis, from raw material to finished product and also from finished product to raw material, shows the impact of manufacturing technology and business process innovation on costs. Using cost accounting principles and knowledge of chemistry and chemical engineering practices, one can develop the necessary cost and profit information for each seller8,9 at each transaction. Companies can use this information to encourage suppliers to innovate, incorporate better technologies and practices and lower their overall costs.
Theoretical cost is based on the assumption that we have 100% yield at each step, i.e. no loss of any material. This is ideal and would be the lowest cost. Actual costs are based on what each processor is using in their commercial operation. These costs would include process inefficiencies. Table 2 summarizes the basic cost elements.
For instance, if the overall yield for an API is 40% and nothing has been done to improve it to 60% or higher, that would be reflected. If the formulation yield is 75% and nothing has been done to improve it, it will be part of the cost. Similarly, poor batch cycle time of API, low inventory turns, poor formulation practices, repeated sampling for quality checks and asset utilization efficacy would all be part of the cost. The costs for such a process would be the highest. Today’s prices reflect actual practices. Costs based on improved process would be between the current and theoretical costs.
Table 3 shows how the prices of the same drug vary at different pharmacies. Pharmacies, in their effort to maximize profits, are playing the law of averages with different dose levels. This is obvious when different API content tablets are being sold at the same price. We have to recognize that some of these prices are much better than what they were before introduction of 30 and 90 day fixed prices. There are startling price differences between prescription and non-prescription drugs. Review suggests that lower drug prices are an opportunity.
Table 4 offers a quick, approximate cost and profit analysis from API to finished tablet. Ciprofloxacin is used as an example. Active ingredient costs about $50.00 per kilo. Costs associated with some of the elements are an approximation. With this example, an astute buyer could negotiate a purchase price and cajole manufacturers to lower costs using better manufacturing and business practices. Similar cost analysis of Provigil/Modafinil using a better technology and business process can be done.8,9 Its selling price is considerably higher than what could be the selling price using cost elements described in Table 2.
Reverse Product Cost Analysis
Buyers must understand costs and profits at every stage of the supply chain in order to have a meaningful negotiation. In their current negotiations, most likely they do not challenge any manufacturing process/practices, business inefficiency costs or any other costs that occurs in each channel of manufacture and/or distribution of drugs. Any company that is outsourcing its purchases or even contracting out manufacturing can also use the methodology outlined here. Reverse calculated cost based on the above information could be within +/- 15-20% what should be the seller’s selling price.8,9,10,11
Armed with this information, a buyer and/or an entrepreneur using the best process technology and practices can calculate costs at different staging points and negotiate the best prices. Over time, this could entice companies to evaluate, implement technologies and methods that will improve their profits. Information could be used to consolidate manufacturing or design a grass roots facility.
Chemical engineers and chemists use process considerations previously described to design and commercialize processes that have been producing fine/specialty chemicals, coatings, resins and petrochemicals etc.8,9 Outlined practices are being used today. Thus pharma would not be inventing anything new.
Based on patient base and dose (Table 5), buyers would have an idea of how much API is needed10. This is the basic building block of type of process (batch, semi-batch, continuous12 or modular13 and number of sites that would be needed to serve the projected patient base. Reverse calculated costs give significant insight about sites needed for formulation and API manufacture.10,11 They also give us approximate costs and margins at different points in the supply chain.
With the developed information, an outlier company or entrepreneur could develop an alternate business model to manufacture drugs that are needed by many in the world. Excellent and economical processes using available equipment and best chemical engineering practices could be creatively developed and commercialized to deliver highest quality drugs that cost 50% less than they do now. If by using outlined methods, companies are able to lower the drug prices and are able to include 1.5 -2.0 billion people in their fold, there will be an overall revenue increase of between $350-$400 billion dollars per year if each new patient spends about $200 dollar per year. This revenue gain would more than offset the corresponding sales reduction due to lower selling prices due to improved technologies. Overall profits will be higher. No industry has such a revenue and profit increase opportunity. Going through this exercise could also change how we measure pharmaceutical company and product value. Today, pharma company performance is measured by revenues generated, rather than how many patients benefit from specific drugs. Maybe the time has come to measure the true value of drugs, and drug manufacturers, based on how many patients they benefit.
A“Drug Value Index” could be based on revenue per patient, giving everyone clear insights into the value of drugs, and the companies that make them. In turn, such an Index could revitalize R&D and discovery program. What do you think? Please write in and let us know.
- Malhotra, Girish: Increasing Profits by Reaching Pharma’s Silent Majority, Pharmaevolution.com, August 5, 2013
- Malhotra, Girish: Will Pharma’s Global Customers Redefine Maslow’s Hierarchy of Needs? Pharmaevolution.com, January 27, 2014
- Malhotra, Girish: Are The Savings of $120-$150 Billions Worth Having? Pharmachemicalscoatings.blogspot.com August 30, 2012
- Costly Vertex Drug is Denied and Medicaid Takes Heat, wsj.com Accessed July 18, 2014
- Malhotra, Girish: Drug Prices: Food vs. Medicine – A Difficult Choice for Some, pharmachemicalscoatings.blogspot.com, June 16, 2011
- Malhotra, Girish: Can Gates/Clinton Save Pharma? Pharmaevolution.com, June 24, 2013
- Malhotra, Girish: Does the Pharmaceutical Industry Needs a Steve Jobs? Pharmachemicalscoatings.blogspot.com, November 8, 2011
- Malhotra, Girish: Chemical Process Simplification: Improving Productivity and Sustainability, John Wiley & Sons, February 2011
- Malhotra, Girish: Pharmaceutical Costs, Technology Innovation, Opportunities & Reality, Pharmaceutical Processing, March 10, 2010
- Malhotra, Girish: Strategies to Enhance API Manufacturing: Identifying inefficiencies and optimizing development through quality by design, Business Insights, London, UK March 2011
- Malhotra, Girish: Why Fitting a Square Plug in a Round hole is Profitable for Pharma and Most Likely Will Stay? Pharmachemicalscoatings.blogspot.com August 1, 2014
- Malhotra, Girish: Is Continuous Processing in Pharma’s Future? Pharmachemicalscoatings.blogspot.com, July 24, 2012
- Malhotra, Girish: A Radical Approach to Fine/Specialty API Manufacturing, Pharmachemicalscoatings.blogspot.com Jan 20, 2010
- Malhotra, Girish: Neglected Tropical Disease (Infectious Diseases) Drugs: What are they telling us about Innovations!, Pharmachemicalscoatings.blogspot.com, March 7, 2012
- Lucrative Drug Niche Sparks Legal Scramble wsj.com accessed July 20, 2014