By Dr. Marcus Ehrhardt and Peter Behner
Despite incremental technological advancement over the past 100 years, the production model employed by the pharmaceutical manufacturing industry has remained rigid and inefficient--stalled on the cusp of a much-needed paradigm shift. But now, pressure is mounting from regulators and payers alike, and new methodologies and disruptive technologies are emerging that may prove to be the catalysts that finally drive what Janet Woodcock, director of the FDA's Center for Drug Evaluation and Research, termed "a maximally efficient, agile, and flexible pharmaceutical manufacturing sector that reliably produces high quality drugs without extensive regulatory oversight."
According to a September 2014 roundtable gathering of pharma executives organized by Strategy&, nascent investments in new models from industry leaders show promise, but the full implications of the shift have yet to materialize. And, in all probability, the true shift will come only as more pioneering companies fully embrace the combined potential of these advancements. Two radical innovations, continuous manufacturing and producing drugs with a chemputer, also referred to as the 3-D printing of drugs, have the potential to fundamentally change the pharma manufacturing paradigm and, with that, impact whole pharmaceutical industry structures.
Status quo: The pharma operations sector lags the performance of other industries and faces significant supply chain challenges
In 2004, the FDA issued the report, "Innovation and Continuous Improvement in Pharmaceutical Manufacturing," stating that:
Pharmaceutical manufacturing operations are inefficient and costly. The cost of low efficiency is generally not understood or appreciated. ... Low efficiency is predominantly due to "self-imposed" constraints in the system.
This still holds true today. When graded on metrics including capacity utilization, throughput times, inventory turns, and scrap rates, the pharmaceutical industry lags considerably behind other manufacturing industries such as automotive, chemicals and chip production. Simply stated, pharmaceutical manufacturing remains more primitive.
From a supply-chain perspective, pharmaceutical companies face significant challenges from rising price pressure due to competition and government cost-containment measures. These pressures, coupled with dramatically increasing complexity from ever more SKUs; increasing demand volatility, e.g., from tenders; increasing regulatory scrutiny; and the difficulties posed by a shift in industry focus toward the world's emerging markets, make clear the need for supply chains with lower costs, higher agility, and complexity management capabilities, delivering products at a high quality level.
In recent years, these challenges have been addressed through a host of evolutionary developments. Industrywide emphases on strategies such as Lean Six Sigma methodologies, plant layout improvements, quality by design, and so on have led to small improvements. More cutting-edge innovations, such as disposable technologies and modular facility design (for example, those deployed by companies like Shire ($SHPG), Lonza, and General Electric ($GE) with its Xcellerex/KUBio offerings) are making strides to improve pharma operations, increasing flexibility and speed to market.
In the end, however, these new avenues are still tied to the old pharma batch-manufacturing paradigm and represent only incremental steps forward.
Disruptive technologies and step change
The picture begins to change dramatically, however, with the advent and use of radically new technologies and production approaches. Two of these radical changes are continuous manufacturing and drug manufacturing with a chemputer, also known as the "3-D printing of drugs." In the minds of our roundtable participants, these two innovations portend true paradigm shifts with enormous disruptive potential.
Continuous manufacturing technology strings together the traditional, segmented steps of pharmaceutical manufacturing into one cohesive process, continually verifying quality and releasing products swiftly, leading to dramatically reduced throughput times, lower operating and investment costs, and smaller manufacturing footprints. Prototype continuous systems developed by a joint research project from MIT and Novartis are showing promising results; many industry observers expect the first product introductions in the very near future.
Novartis ($NVS) is not the only company proactively investing in this technology. GlaxoSmithKline ($GSK) recently began building facilities in Asia that employ continuous manufacturing technology.
The concept of 3-D printing of drugs, an approach researched by Professor Lee Cronin and his team from the University of Glasgow, uses gel-based "inks" including carbon, hydrogen, and oxygen, plus vegetable oils, paraffin and other common pharmaceutical ingredients to create any organic molecules. This technique allows drugs to be produced anywhere and, even in low volumes, very cost-effectively. By harnessing that flexibility, on-demand, point-of-need, and personalized drug production is just beginning to show what may be possible in the future.
With the introduction of these two new technological advancements, not only will there be a tremendous reduction in manufacturing costs (a key element in competition, especially for generics), but the much-reduced lead and throughput times, along with lower capital requirements and smaller footprints, will also allow for new production networks. The novel manufacturing approaches provide the possibility of far more decentralized production setups, making it economical for smaller pharma companies to have their own production facilities--which will increase pressure on the business model of contract manufacturers.
None of these shifts will happen quickly, but as the manufacturing model morphs, both evolutionarily and revolutionarily, companies' level of adoption and specific strategic moves will determine which industry players will be the first to exploit the potential and achieve sustainable competitive advantage. More broadly, as is the case during the throes of any significant shift in technology, there will be those who recognize the coming sea change and invest for the future--cementing their position at the forefront of the industry--and those who see the change as a distant problem, still years away, who will then struggle to keep pace when the industry moves rapidly forward without them.
The question is: Where on that spectrum does your company fall?
Dr. Marcus Ehrhardt is a Partner with Strategy& based in New York and leader of the firm's Lifescience Operations business. With more than 12 years of consulting experience, he specializes in Operations strategy and value-creation programs. Peter Behner is a Partner with Strategy& based in Berlin and leader of the European Health Industries Practice.