March 19, 2020 PAP-Q1-20-CL-035
The pharmaceutical industry is about a $1.25 trillion market worldwide, with manufacturing costs being about 27% or about $340 billion, and is growing at about 4.9% compound annual growth rate (CAGR), according to Results International.1 The industry value proposition continues to be based on innovation and delivering medicines that increase quality and length of life at a fair price. However, the future of the pharmaceutical industry is totally dependent on how leadership effectively resolves and communicates what price is fair for value delivered. One of the critical components in addressing this challenge will be finding ways to be more efficient and to reduce operating expenses.
Innovators and generic companies alike are challenged in the current highly competitive environment to bring new products to market that provide real therapeutic value — treatments that achieve measurable results in terms of improved health and quality of life for patients at a reasonable cost. Despite the increasing complexity of both small molecule and biologic drug substances, new drugs must not only be safe and efficacious but also be patient-friendly and increase medication adherence. Greater efficiency and productivity are needed. Access to novel technologies, from digital tools and manufacturing platforms to delivery solutions, will be essential. Entrepreneurial pharma and biotech companies will continue to lead innovation in next-generation medicines, driving further growth of licensing deals and codevelopment partnerships.
For all of these reasons, significant growth in outsourcing will be a dominant theme in the pharmaceutical industry going forward. However, there is a great need to improve the effectiveness of outsourcing to allow the industry to maximize the benefits of this approach. To truly increase the effectiveness of outsourcing, customers must have confidence and trust in the ability of their outsourcing partners to provide delivery on-time and in full (OTIF) while meeting the regulatory requirements of the markets they serve and doing so at a fair price.
As a result of these pressures, the manufacturing and supply chain sectors are experiencing significant challenges and scrutiny. Internal manufacturing organizations have been rationalizing and downsizing their internal networks and consolidating their external suppliers with a focus on reducing operating and capital costs. This has created a demand and significant opportunity for outsourced development and manufacturing organizations (CDMOs).
The current outsourced market is estimated to be about $90 billion and is projected to grow at a CAGR of about 7% to approximately $117.3 billion by 2023 and to represent about 30% of the overall manufacturing requirements.1
There is an opportunity for CDMOs to make a significant contribution to the cost basis of the industry, potentially reducing the overall industry cost of goods sold (COGs) by more than 10% (or about $34 billion) by utilizing best-in-class practices from the pharmaceutical industry and other industries. However, the changes and improvements that are required will not be easy or inexpensive. There are also regulatory risks involved that must be managed. Still, there are major benefits if more cost-effective medicines reach the market while continuing to allow the industry to make a fair return on investment.
These improvements have been discussed for years. The manufacturing infrastructure was built decades ago and is inefficient and costly. It is imperative that the industry face up to the challenge and drive improvements. To effect these changes, the industry must embrace technology and manufacturing and accept CDMOs as long-term strategic partners. This will require a sharing of risks (costs and regulatory challenges) and benefits (fair profits). Reducing the average COGs of the industry from 27%–28% to 15%–18% requires an integrated effort to establish a new process that is aligned with market needs.
The current supply chains for most of the companies in the industry are large, underutilized, dispersed, inefficient, and operating at only about 30% capacity utilization. Most run, on average, a five-day, two-shift operation. This only represents 47.6% (80/168) of the installed capacity. They also have on average 300–500 contract providers. These must all be periodically inspected, contracts must be periodically updated, and a monthly sales and operations planning (S&OP) process must be executed.
All companies need to update and rationalize their supply networks. Old, inefficient, or under-invested sites should be closed. Underutilized sites should be sold, and internal centers of excellence should be identified and appropriate volumes consolidated into these core sites. Sites should only be retained if capacity utilization can reach or exceed 60%–65%.
To achieve maximum benefit, the fragmented CMO/CDMO market must consolidate. The 500–1000 CDMOs must consolidate to 100–200. The successful CDMOs will have both development and manufacturing capabilities and have integrated delivery technologies, like API manufacturing, secondary manufacturing, and packaging for small and large molecules. They should also have the ability to manufacture as many dosage forms as possible (e.g., solids, semisolids, steriles, respiratory devices, and biologics) and be able to handle controlled substances, high-potency compounds, steroids, and oncology products.
This will allow pharmaceutical companies to consolidate their third-party suppliers and guarantee more business for a longer period of time. Pharmaceutical companies must treat their suppliers as strategic partners and not banks. The previous 30-day payment terms have shifted to 60- and 90-day terms over the past few decades. This results in hundreds of millions of dollars in working capital funding suppliers who are already at razor edge margins.
Contract development and manufacturing organizations that succeed must: (1) deliver product where needed and when needed on-time, OTIF, and on a sustainable basis; (2) meet or exceed the regulatory requirements of the markets served and the customers’ expectations; and (3) do so at a fair price.
To survive, CDMOs must become competitive with the lowest-cost providers by significantly increasing productivity and efficiency and to reducing the pharmaceutical company’s COGs while making a fair profit.
Both pharma companies and CDMOs must implement best-in-class practices from all industries to significantly increase productivity and efficiency to reduce industry costs. Some examples of tools being partially utilized in the industry are listed.
Lean Six Sigma: This process improvement methodology has been effective across many industries. Embracing and systematically embedding this process will focus on eliminating waste and reducing variability. It is estimated that 90% of the activities, and 50% of the costs in a normal process are not needed. Lean Six Sigma provides all involved with a way to challenge and improve everything. There are a number of effective components that are key to the pharmaceutical industry.
Quality by design (QbD): This aligns development with manufacturing so that the process is designed and developed with long-term outcomes considered. This is key, as many current pharmaceutical manufacturing processes lack this focus and are inefficient for commercial manufacturing, and at this point have become difficult to impossible to change owing to regulatory risk.
Right first time (RFT): Doing things with a RFT mentality reduces costly rework and shortens overall cycle time.
Process/cycle time improvement: Process inefficiency and cycle time are major contributors to costs. Process improvements will drive productivity and increase process yields. Cycle time reduction will allow major reductions in inventory, including both unfinished and finished goods.
Technology: Utilization of cost-effective technology will also drive efficiency and productivity improvements, including:
Continuous flow processing, and
Cellular manufacturing/factory in a box.
Capacity Utilization: Consumer goods companies run at greater than 85% capacity utilization. The pharmaceutical industry runs at about 30%–35%. An aggressive understanding and focus on increasing capacity utilization will generate major efficiency and productivity improvements that will significantly reduce the cost/unit of product manufactured.
The above examples are only a subset of the spectrum of opportunities for improvement across the industry. These are no longer vague concepts but rather well-recognized tools delivering for best-in-class companies whose value has been demonstrated both within pharma and across other industries. We must always consider “the art of the possible.” The benefits are difficult to comprehend or imagine and challenging to achieve, but at the same time are possible to realize and will be critical to the industry’s future. The motto of the British SAS says it all: “Who Dares, Wins.”
Bottomley, Kevin and Achim Newzella. “Outsourced Pharmaceutical Manufacturing 2020: Current trends & future prospects.” Results Healthcare. 2020. Web.
Tim Tyson is currently Chairman and CEO of TriRx Pharmaceutical Services, LLC and Chairman at Icagen Inc. He also currently serves on the board of Tyme Technologies Inc. Mr. Tyson recently served as Chairman and CEO of Aptuit LLC. He was Chairman and CEO from 2008 to 2012 leading a restructuring, acquisition and successful sale of a major portion of the company prior to stepping out as CEO to serve and guide the company as Chairman up until 2016. His corporate career spans over 35 years in the pharmaceutical industry.