Over the past forty years, Pharma companies have become, via mergers, acquisitions, and internal growth, larger and larger, growing into multi-national behemoths. Many of the “environmental factors” that encouraged the rapid growth and large size of Pharma companies were unique to the time.

First, there was the emergence of blockbuster drug products. For example, Cimetidine (Tagamet), for heartburn and stomach acid, was the first drug to generate over $1 billion a year in sales and, thus, has gone down in history as the first ever blockbuster drug. Such large sales not only allows companies to expand, but forces them to expand in order to keep up with demand.

Second, from the 1960s onwards, more and more companies began providing their employees with healthcare benefits, and Medicare was also instituted, sharply increasing the number of people with access to pharmaceutical products. This also increased the levels of income for Pharma companies, adding further incentives to expand the size and scope of operations.

Third, drugs were allowed to be advertised on TV and radio, making all of us think we needed more and more drugs. Do NOT underestimate the effects of advertising on sales. Why else would Pharma spend millions of dollars on it each year!

Is bigger better?
Now, anyone working on producing products in a free-market society might think bigger is always better. That is true to a point. When you consider increasing your income/profit, yes, that is never a bad thing. However, there comes a point where operating expenses—property taxes, HVAC, salaries, employee benefits, maintenance—can become equal to or greater than the income generated. The closest parallel I can think of to give as an everyday example is buying too large a house in 2007 with a balloon mortgage.

Since we are speaking of pharmaceuticals, using the analogy of addiction is apropos. The more income the industry generated—mostly through greater sales, but price increases helped—the bigger they needed to be; the larger they became, the more income they needed to generate to fund their organization.

I had a front row seat to the early merger “fever” when I was working at Ciba and they merged with Geigy (1972). At the point of the merger’s completion, the new company (Ciba-Geigy) had at least two people at every position. Now, this wasn’t necessarily a bad thing in some departments, but an albatross in others.

If you have melded all your product lines to a single manufacturing entity, you will need twice the hardware, facility space, and production staff, at least for a while in the short-term. Let’s look at this from a few angles.

Quality control
For the short-term, merging two quality control staffs and their facilities can be useful. However, the 1970s was the decade the FDA not only accepted, but began to prefer High-performance liquid chromatography (HPLC). [Note: prior to the mid-1970s, the FDA had a nasty habit of dismissing any NDA that used HPLC to release the product. They would suggest titration or TLC, instead.] You do not have to be an analytical chemist to recognize the throughput advantage of automated HPLC (and GLC) versus TLC and certainly titrations. Over-staffing always leads to attrition and lay-offs.

R&D
This can be broken into several sections:
Basic research. There are some who follow the “no such thing as too much” research tenet. However, there have been many breakthroughs that originated in academic institutions. In fact, many of recent “blockbusters” have come from either universities or contract research organizations (CROs). The trend is towards leaner research staffs focused on fewer diseases. Or, those dedicated to discovering new “disorders” for existing drugs, in order to extend their patents, e.g., “restless foot syndrome.”

Product development. This actually should be a “no-brainer.” An expanded company now has the luxury of twice the staff for developing new products, while downplaying (ignoring) the fact that the companies merged because each had fewer new products in the pipeline and needed help. Can you spell “redundancy?”

Management/Sales/Human Resources
Quickly breaking this down:
Managers are, despite what most scientists might assert, necessary for an organization to function. However, after a M&A event, there are roughly twice as many managers as before for half the number of departments. Indeed, with a larger technical staff, a director can use at least one assistant director; and any manager can use one or two more group leaders, and so on. However, there will be attrition as they don’t need all the old managers.

Salespeople, by their very nature sell whatever “widgets” they are given. Having interacted with them early in my career and being told I couldn’t apply because I “knew too much” and might tell a doctor more than the company wanted her/him to know about the products and side-effects. I realize they can easily expand their box of brochures to include the new product lines resulting from a merger. Thus, there could be a large downsizing—also called the politically correct “right-sizing”—of the sales force after a M&A with little loss of overall sales representation.

Human resources, or, as we older dudes call them, “Personnel”) often benefit from an influx of new and different ideas from each company. Nonetheless, seldom does the new company need all the HR personnel, so attrition is inevitable. This reminds me of a funny story. After my first merger, the company announced that no one would get above a 2.5% raise, unless there was a “title-change.” That’s when Personnel decided to change to HR and, to avoid grade-level confusion, they ALL changed their titles, ensuring hefty wage increases.

Facilities
Big Pharma has begun simultaneously to downsize and outsource, because:
Unfortunately, there are a number of drugs coming off patent protection, slowing, drastically in some cases, plant usage. This is leading to some older facilities being shuttered or sold off.

Labor costs have made U.S. and EU production more expensive than in developing countries, making outsourcing of production more and more attractive. This, too, leads to closing sites and mothballing portions of others.

As I mentioned in a previous column, orphan drugs, or drugs for specialized medicines, can tie up a production facility disproportionality to the number of lots produced, blocking access to production equipment for “true” blockbusters. The flip side here is that blockbuster production can “elbow out” smaller, less profitable products.
More recently, as Pharma moves to QbD (fewer warehouses) and continuous manufacturing (smaller production footprint), they are downsizing their “brick and mortar” facilities. This accommodates their current and near future needs, but limits any swell in production needs, leading to CMO partners being necessary on short notice.

Silver lining?
Almost all economic news contains both good and bad points. Where a large, recently expanded, Pharma company may see “too much staff,” a generic or CMO or CRO may well see “available, experienced staff,” suddenly available. Where a Pharma company, undergoing downsizing (sorry, “right-sizing”), might see facilities as “excess,” a CMO might see them as “move-in ready” production sites.

Not trying to simplify the situation—it is not a zero-sum equation—not all discarded venues will be snapped up by CMOs and CROs for a number of reasons:

1. The site may well be closing because it is too old to rejuvenate. Some of these sites are over 50 years old.
2. While it sounds cold, and I can name a few, the site may be located in an area where the salary levels are high due to the area or unions or whatever. This makes it less attractive to a smaller-margin company (CMO, generic) for economic reasons.
3. In the time required to clear an old site of worn out, tired equipment and rebuild and outfit it to 21st century standards, a new facility could be built faster and cheaper, in most cases.
4. If the Pharma company you wish to service is switching from GMP (traditional, batch-made) manufacturing by QbD or even continuous manufacturing (CM), you will need to model your newer, smaller facility differently from “traditional” plants. Traditional simply means lots and lots of warehouse space to store incoming raw materials and intermediate materials and production space, geared to GMP batch processes. QbD and CM production modes require far less warehousing since you can institute “just-in-time” deliveries of raw materials and need not store process intermediates, waiting for equipment to be opened and assays to be completed.

Coming back to the non-zero-sum equation, generics and CMOs will not need the space or personnel required for traditional manufacturing. If the initiator and proprietary companies are moving to modern process control (PAT/QbD, CM), the products they are outsourcing will need to be produced in a similar manner. The total square footage of the combined facilities will shrink despite the increased volume of drug products made—the population of Western/developed countries is both growing and aging, while developing countries are increasingly gaining access to modern healthcare—so no matter what the CMOs and generics do, there will be fewer and smaller sites for the foreseeable future.

If the industry is smart (fingers crossed), there will be better cooperation between sponsors/clients and their contract partners. There is a movement in developed countries to force lower prices on drugs, while developing countries are a long way from being able to afford prices charged, for example, in the U.S. Both the price and quality of drug products will be closely watched by governmental agencies and eventual clients (hospitals, wholesalers) as we progress into the century.

In short, it will behoove ALL manufacturers to shrink, while getting a better handle on how to make better, higher quality products.

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Emil W. Ciurczak
DoraMaxx Consulting

Emil W. Ciurczak has worked in the pharmaceutical industry since 1970 for companies that include Ciba-Geigy, Sandoz, Berlex, Merck, and Purdue Pharma, where he specialized in performing method development on most types of analytical equipment. In 1983, he introduced NIR spectroscopy to pharmaceutical applications, and is generally credited as one of the first to use process analytical technologies (PAT) in drug manufacturing and development.