Girish Malhotra, President, EPCOT International11.09.16
Every business in every industry, whether it’s the financial services sector, the transportation industry, or the durables and consumer goods sector, as well as pharma, has to adhere to safety and product quality regulations. If regulators can point to oversights, errors and shortcomings, businesses have to fix their operations. To stay ahead, businesses must undergo the process of continuous improvement and innovation in order to compete in today’s business world.
Modern pharma businesses have done an excellent job serving the global needs of patients for more than 100 years. However, their business model has remained relatively staid when it comes to process innovations in R&D and manufacturing. Sooner rather than later, the current model needs to be reconfigured and rejigged.1,2 This observation is fortified by a McKinsey & Co study.3 The opening paragraphs of the report were very telling five years ago when it was first published and, in my estimation, are still valid. Exhibits 2 and 3 of the report give us a snap shot of the industry and even though it is a bit out-of-date now, it revealed what has happened over the last ten years. We have seen the total number of generic companies have increased whereas the number of brand companies due to merger and acquisition (M&A) have decreased.
A more recent report, “Generic medicines, the opportunity for growth,”4 projects generic drugs sales to 2019 and identifies the need for legacy drugs—infection, pain, cardiovascular and some chronic diseases—in countries outside the developed markets and also makes a very poignant remark about their affordability and access. It is true that drug prices outside developed countries are a fraction of what they are in developed countries, but even at those low prices they are unaffordable to much of the population.5
I have used 80% (~5.8 billion)6 of the global population as the potential market size of individuals that have an increased need for pharmaceuticals. The remainder, about 1.4 billion, represents the population of developed countries. They have either government sponsored or mutually subsidized healthcare programs. Table 14 provides an illustration of generic drugs sales per million between developed and pharmerging countries.7 Since the generic sales for rest of the world (ROW) sales are not suggested in either report4,7 I have used an IMS report8 to increase ROW generic sales by 10%.
However, the numbers in Table 1 can be interpreted in many different ways. The following are some of my interpretations:
Pharmaceutical sales have been projected at $1.4 trillion for 2020.9 This represents significant sales growth in both brand and generics for every population segment. While global pharma sales will definitely increase, most of them will be through brand drugs for a very limited population in the developed countries and not through generic sales increase. Using projected generic sales for 20194 as a guide, I believe that 2020 global dollar sales projections9 are overly optimistic.10
One fact we have to accept is that the brand new drugs will generally be sold in developed countries at much higher prices than the rest of the world. They are generally sold outside the developed markets either through licensing agreements or through WTO compulsory license (CL) provisions. Compulsory licensing is despised by brand pharma companies because it leads to big revenue losses. Drugs for AIDS suffered the wrath of CL. Gilead learned well from the AIDS drug debacle and sold HCV drugs through license agreement. Prices outside the developed countries are a fraction of developed country prices and still unaffordable to many.
Generic sales shown in Table 1 reinforce the hypothesis that the prices in the developed countries are set at the highest level on the sentiment of extending life forever through government or mutually subsidized programs. Since actual prices are a mystery to most no one cares about them except when the drug prices dent family budgets as is happening with many drugs, too many to numerate here.
Low sales dollars outside the developing countries suggest that through better manufacturing technologies it is possible to make drugs more affordable. Point of affordability and value11 is repeatedly emphasized for the pharmaceutical industry’s success.
It is well known that economies of scale result in better technologies that lower prices of the existing products and increase the customer base. Economies of scale also increase total sales and improve profits. I believe that pharmaceuticals could capitalize on this opportunity.
Process technologies in pharma
One could ask why pharmaceuticals have not experienced or indulged in manufacturing innovation? My plausible answer is that the selling price of active pharmaceutical ingredients (APIs) and their formulations are a fraction of the actual drug-selling price and necessary investments in innovation do not provide financial justification. Brand companies have been able to charge the highest price for new drugs. Thus, during the short patent life, the need to optimize and lower manufacturing costs is not a priority for the brand companies.
Generic producers have been able to make substantial monies by selling products in developed countries. Thus the need for cost reduction through process innovations has not existed. Since the same equipment is used for many products, financial justification for improvements could be challenging.
Table 1 suggests that there are significant opportunities to increase sales outside the developed countries. However, there are significant roadblocks. They come from within pharma’s current business model. Readers should be very familiar with the current model but a quick review is helpful.
Big pharma’s focus mostly has been and is on new drugs. In recent years the focus of “Big” pharma has shifted from drugs for large masses (seven digits) to orphan drugs that are for small populations (five or low six digits) in the developed countries. These drugs are very high priced and are unaffordable to many even in the developed economies. Drugs (e.g. PCSK9 inhibitors) that are supposedly developed for large patient bases are also unaffordable. Their efficacy and performance compared to the existing drugs are questionable and have not delivered expected sales. Limited market results in lack of economies of scale do not help process innovation.
Drugs when out of patent are produced by Generics. Generic producers use technologies and methods that are similar to what is used for brand drugs. Local generic producers make medicines for the local markets. The WTO TRIPS agreement changed the landscape. Due to high prices compared to the developing countries and ROW, the major focus of the generic companies located mostly outside the developed countries is to sell in the developed countries. There are many companies in the game. This has led to lack of economies of scale. The result is that there are many small producers and CMOs in the supply chain. Even with every effort to be the best, increased numbers of CMOs do not have the best of the best technologies. In addition, product changeovers and regulations can lead to multiple issues.
We need to recognize that drug dose—brand and generic—and the size of the patient base has a significant influence on the type of manufacturing methods that will be used for APIs and their formulations.10,12 As the global effluence increases the need for legacy drugs outside the developed world pharma sales would increase. But sales increase still would depend on affordability. If, through process innovation drug affordability can be improved and result in the additional sale of one-cent a day per drug per person outside the developed countries, additional revenue would be about $21 billion dollars per year, an unprecedented opportunity. Sustained yearly sales of $21 billion per year are equivalent to more than twenty blockbuster drugs per year, a windfall for Generics.
For generic drugs depending on drug efficacy and effectiveness, API and their formulations can be produced by any of the following processing methods: Batch, Campaign batch, and Continuous.13
Brand pharma could also use these options but their choices of technology due to market volume during the patent life are generally limited. Brands will essentially stay with batch process for APIs and their formulations. If the volume of a brand drug rises above a certain threshold they could move to “batch campaigns” provided the reactive chemistry for APIs and their formulations are similar. Product demand has to justify related investment for campaign batch or continuous processes.12,13 It is easier to say that we have or should have continuous or campaign batch processes in the manufacture of API and formulations but for that to happen, production volumes above certain threshold are needed. If the process equipment is used for less than 50% of the available yearly operating hours and is named a campaign batch or continuous, it would be really fudging the established definitions.
If pharma is to cater to larger population then they have to make drugs affordable. This can only happen through lower medicine prices that will come from manufacturing process technology innovation. Larger manufacturing volumes generally would mean consolidation of CMOs and generics in API manufacture and formulations. Such a scenario might not sit well with many of the existing companies.
One has to review supply and demand to think about consolidation. Consolidation generally changes the business model. Again, I believe if pharma companies want to cater to a larger global population base, they will have to make drugs affordable. Transition/evolution from the current model to a model that will cater to global needs is inevitable. It is waiting to happen. Speed and the timing of such an evolution is anyone’s guess.
Mavericks similar to those who have caused a perturbation in high tech, biotech, genomics or diagnostics could be the movers and shakers in pharma also. Pieces and parts have been available but need to be put together differently.
Physical properties and mutual behavior of the chemicals involved, created and blended during reactions and post reactions could be predicted and manipulated by algorithms and artificial intelligence to create products that are cheaper and their manufacturing processes are simpler and sustainable. Technology has to be such that it exceeds regulatory compliance needs. I would not be surprised if a creative genius at this moment is working in a garage to meet all of the expectations. The world population of about seven billion people and counting at every economic level14 would welcome process technology innovation, as it would lower healthcare costs. Even governments would welcome them. If they succeed they would make a dent in about a trillion plus dollar market in many different ways.
Making drugs affordable through process technology innovation will have a lasting impact on pharma revenues and profits. Generics can lead the way and show what is possible.
References
Girish Malhotra, president and founder of EPCOT International, has more than 45 years of industrial experience in pharmaceuticals, specialty, custom, fine chemicals, coatings, resins and polymers, additives in manufacturing, process and technology development and business development. girish@epcotint.com; Tel: 216-223-8763
Modern pharma businesses have done an excellent job serving the global needs of patients for more than 100 years. However, their business model has remained relatively staid when it comes to process innovations in R&D and manufacturing. Sooner rather than later, the current model needs to be reconfigured and rejigged.1,2 This observation is fortified by a McKinsey & Co study.3 The opening paragraphs of the report were very telling five years ago when it was first published and, in my estimation, are still valid. Exhibits 2 and 3 of the report give us a snap shot of the industry and even though it is a bit out-of-date now, it revealed what has happened over the last ten years. We have seen the total number of generic companies have increased whereas the number of brand companies due to merger and acquisition (M&A) have decreased.
A more recent report, “Generic medicines, the opportunity for growth,”4 projects generic drugs sales to 2019 and identifies the need for legacy drugs—infection, pain, cardiovascular and some chronic diseases—in countries outside the developed markets and also makes a very poignant remark about their affordability and access. It is true that drug prices outside developed countries are a fraction of what they are in developed countries, but even at those low prices they are unaffordable to much of the population.5
I have used 80% (~5.8 billion)6 of the global population as the potential market size of individuals that have an increased need for pharmaceuticals. The remainder, about 1.4 billion, represents the population of developed countries. They have either government sponsored or mutually subsidized healthcare programs. Table 14 provides an illustration of generic drugs sales per million between developed and pharmerging countries.7 Since the generic sales for rest of the world (ROW) sales are not suggested in either report4,7 I have used an IMS report8 to increase ROW generic sales by 10%.
However, the numbers in Table 1 can be interpreted in many different ways. The following are some of my interpretations:
- Sales per person per year in the developed countries—about 20% of the global population—are projected to be about 7.5 times higher than the pharmerging countries and about 12 times higher than the ROW.
- Total dollar sales in the developed countries are slightly more than three times higher than the pharmerging countries and 6.5 times of ROW sales.
Pharmaceutical sales have been projected at $1.4 trillion for 2020.9 This represents significant sales growth in both brand and generics for every population segment. While global pharma sales will definitely increase, most of them will be through brand drugs for a very limited population in the developed countries and not through generic sales increase. Using projected generic sales for 20194 as a guide, I believe that 2020 global dollar sales projections9 are overly optimistic.10
One fact we have to accept is that the brand new drugs will generally be sold in developed countries at much higher prices than the rest of the world. They are generally sold outside the developed markets either through licensing agreements or through WTO compulsory license (CL) provisions. Compulsory licensing is despised by brand pharma companies because it leads to big revenue losses. Drugs for AIDS suffered the wrath of CL. Gilead learned well from the AIDS drug debacle and sold HCV drugs through license agreement. Prices outside the developed countries are a fraction of developed country prices and still unaffordable to many.
Generic sales shown in Table 1 reinforce the hypothesis that the prices in the developed countries are set at the highest level on the sentiment of extending life forever through government or mutually subsidized programs. Since actual prices are a mystery to most no one cares about them except when the drug prices dent family budgets as is happening with many drugs, too many to numerate here.
Low sales dollars outside the developing countries suggest that through better manufacturing technologies it is possible to make drugs more affordable. Point of affordability and value11 is repeatedly emphasized for the pharmaceutical industry’s success.
It is well known that economies of scale result in better technologies that lower prices of the existing products and increase the customer base. Economies of scale also increase total sales and improve profits. I believe that pharmaceuticals could capitalize on this opportunity.
Process technologies in pharma
One could ask why pharmaceuticals have not experienced or indulged in manufacturing innovation? My plausible answer is that the selling price of active pharmaceutical ingredients (APIs) and their formulations are a fraction of the actual drug-selling price and necessary investments in innovation do not provide financial justification. Brand companies have been able to charge the highest price for new drugs. Thus, during the short patent life, the need to optimize and lower manufacturing costs is not a priority for the brand companies.
Generic producers have been able to make substantial monies by selling products in developed countries. Thus the need for cost reduction through process innovations has not existed. Since the same equipment is used for many products, financial justification for improvements could be challenging.
Table 1 suggests that there are significant opportunities to increase sales outside the developed countries. However, there are significant roadblocks. They come from within pharma’s current business model. Readers should be very familiar with the current model but a quick review is helpful.
Big pharma’s focus mostly has been and is on new drugs. In recent years the focus of “Big” pharma has shifted from drugs for large masses (seven digits) to orphan drugs that are for small populations (five or low six digits) in the developed countries. These drugs are very high priced and are unaffordable to many even in the developed economies. Drugs (e.g. PCSK9 inhibitors) that are supposedly developed for large patient bases are also unaffordable. Their efficacy and performance compared to the existing drugs are questionable and have not delivered expected sales. Limited market results in lack of economies of scale do not help process innovation.
Drugs when out of patent are produced by Generics. Generic producers use technologies and methods that are similar to what is used for brand drugs. Local generic producers make medicines for the local markets. The WTO TRIPS agreement changed the landscape. Due to high prices compared to the developing countries and ROW, the major focus of the generic companies located mostly outside the developed countries is to sell in the developed countries. There are many companies in the game. This has led to lack of economies of scale. The result is that there are many small producers and CMOs in the supply chain. Even with every effort to be the best, increased numbers of CMOs do not have the best of the best technologies. In addition, product changeovers and regulations can lead to multiple issues.
We need to recognize that drug dose—brand and generic—and the size of the patient base has a significant influence on the type of manufacturing methods that will be used for APIs and their formulations.10,12 As the global effluence increases the need for legacy drugs outside the developed world pharma sales would increase. But sales increase still would depend on affordability. If, through process innovation drug affordability can be improved and result in the additional sale of one-cent a day per drug per person outside the developed countries, additional revenue would be about $21 billion dollars per year, an unprecedented opportunity. Sustained yearly sales of $21 billion per year are equivalent to more than twenty blockbuster drugs per year, a windfall for Generics.
For generic drugs depending on drug efficacy and effectiveness, API and their formulations can be produced by any of the following processing methods: Batch, Campaign batch, and Continuous.13
Brand pharma could also use these options but their choices of technology due to market volume during the patent life are generally limited. Brands will essentially stay with batch process for APIs and their formulations. If the volume of a brand drug rises above a certain threshold they could move to “batch campaigns” provided the reactive chemistry for APIs and their formulations are similar. Product demand has to justify related investment for campaign batch or continuous processes.12,13 It is easier to say that we have or should have continuous or campaign batch processes in the manufacture of API and formulations but for that to happen, production volumes above certain threshold are needed. If the process equipment is used for less than 50% of the available yearly operating hours and is named a campaign batch or continuous, it would be really fudging the established definitions.
If pharma is to cater to larger population then they have to make drugs affordable. This can only happen through lower medicine prices that will come from manufacturing process technology innovation. Larger manufacturing volumes generally would mean consolidation of CMOs and generics in API manufacture and formulations. Such a scenario might not sit well with many of the existing companies.
One has to review supply and demand to think about consolidation. Consolidation generally changes the business model. Again, I believe if pharma companies want to cater to a larger global population base, they will have to make drugs affordable. Transition/evolution from the current model to a model that will cater to global needs is inevitable. It is waiting to happen. Speed and the timing of such an evolution is anyone’s guess.
Mavericks similar to those who have caused a perturbation in high tech, biotech, genomics or diagnostics could be the movers and shakers in pharma also. Pieces and parts have been available but need to be put together differently.
Physical properties and mutual behavior of the chemicals involved, created and blended during reactions and post reactions could be predicted and manipulated by algorithms and artificial intelligence to create products that are cheaper and their manufacturing processes are simpler and sustainable. Technology has to be such that it exceeds regulatory compliance needs. I would not be surprised if a creative genius at this moment is working in a garage to meet all of the expectations. The world population of about seven billion people and counting at every economic level14 would welcome process technology innovation, as it would lower healthcare costs. Even governments would welcome them. If they succeed they would make a dent in about a trillion plus dollar market in many different ways.
Making drugs affordable through process technology innovation will have a lasting impact on pharma revenues and profits. Generics can lead the way and show what is possible.
References
- Christensen, Clayton M., Bartman, T., van Bever, Derek: The Hard Truth About Business Model, MITSloan Management Review, Fall 2016 Accessed October 5, 2016.
- Price II, W. Nicholson: Problems of Innovation-Deficient Pharmaceutical Manufacturing, The New England Journal of Medicine, November 23, 2013, Accessed February 5, 2015.
- Hunt, Vivian, Manson, Nigel and Morgan Paul: A Wake-up call for Big Pharma, McKinsey & Co., December 2011, Accessed September 28, 2016.
- Sheppard, Alan, Generic medicines, the opportunity for growth, CPhI 2016 Expert Report, pgs 55-59 Accessed September 28, 2016.
- Malhotra, Girish: Drug Prices: Food vs. Medicine – A Difficult Choice for Some, June 6, 2011, Accessed October 6, 2016.
- World Population http://www.infoplease.com/world/statistics/most-populous-countries.html, Accessed October 10, 2016.
- Hill, Raymond, Chui, Mandy: The Pharmerging Future, Pharmerging Executive, July 2009, Accessed October 10, 2016.
- The Global Use of Medicines: Outlook Through 2016, IMS Health, https://www.imshealth.com/files/web/IMSH%20Institute/Reports/The%20Global%20Use%20of%20Medicines%20Outlook%20Through%202016/Medicines_Outlook_Through_2016_Report.pdf, pg. 8, Accessed October 6, 2016.
- Global Medicines Use in 2020: Outlook and Implications, http://www.contractpharma.com/contents/view_experts-opinion/2016-09-27/manufacturing-processes-require-financial-justification/, Accessed October 6, 2016.
- Malhotra, Girish: Manufacturing technologies and their part to achieve future pharmaceutical, Chimica Oggi-Chemistry Today, Vol. 33(5), September/October 2016, pgs 28-31.
- Davis, Philip J: Affordability and Value-The Economics of Pharma’s New Science, https://www.accenture.com/us-en/insight-affordability-value-economics-pharma-new-science, Accenture Research, Accessed September 20, 2016.
- Malhotra, Girish: Manufacturing Processes Require Financial Justification, Contract Pharma, CPhI 2016 Annual Report, September 27, 2016, Accessed September 28, 2016.
- Malhotra, Girish: Pharmaceutical Processes: Batch or Continuous, Contract Pharma, September 23, 2016, Accessed October 6, 2016.
- Cone, Jason and Offenheiser, Raymond C., The U.S. Is Standing in the Way of Cheaper Drugs for the Poor, The New York Times, October 27, 2016 Accessed October 27, 2016.
Girish Malhotra, president and founder of EPCOT International, has more than 45 years of industrial experience in pharmaceuticals, specialty, custom, fine chemicals, coatings, resins and polymers, additives in manufacturing, process and technology development and business development. girish@epcotint.com; Tel: 216-223-8763
