All opinions are my own.

Friday, April 24, 2015

Could Pharma’s New Movers and Shakers Make a Difference?

Mergers and acquisitions in Pharma like any other M&A have consequences. They are:

·       Higher Revenue

·       Increased Profits

·       Loss of jobs

·       Lot of money for some in “C and S” suites

Generally the first three happen due to economies of scale and elimination of redundancies. The last happens due to contractual obligations.

Generally economies of scale and better manufacturing technologies can be easily incorporated to improve the overall business. In pharma M&As incorporation of better manufacturing and related practices is not easy. In brand mergers it is impossible due to short patent life. For the generics after the low hanging fruits have been collected companies have to sort out their product portfolio. Companies that cater singular products [single active formulated in different doses] have to decide the future course. If they want to increase the market share, they have two options.

1.     Stay with the existing practices irrespective of their efficiencies or inefficiencies. This will depend on their market position.

2.     Capitalize on economies of scale and use better and efficient technologies to expand their market share. Upside would be higher revenue due to larger market and higher profits. Downside would be the investment (unknown) necessary to ensure the product meets accepted efficacy and performance. Process economics can justify their course.  

I do not believe that patients in either case will see much or any reduction in their drug costs. Most likely the drug costs after the mergers go up and that is especially true for the brand drugs. We have seen that in the recent case of HCV.

Focus of the pharma companies is to maximize their revenue and profits while suggesting that their more expensive drugs are better for the disease. A recent opinion by Dr. Jeremy A. Greene (1) is in an interesting and excellent overview about drug strategies and pricing. Reformulation of existing drugs through patent extensions and charging higher prices (2) is another strategy. I just wonder why in the name of better drug, which may be no better or marginally better than the existing drugs, companies are charging higher prices. It is obvious revenues and profits are the focus rather than the patient. Mutually subsidized healthcare systems really camouflage the real sales prices. Higher drug price are justified for longevity and convenience but generally patients are the losers as they cannot afford their higher priced drugs.

Recent merger frenzy involving Teva, Mylan and Perrigo has an interesting cast of CEOs (3). They are not pharma bred. Their demeanor during their consulting careers has been to maximize profits and shareholder values. They could be the “creative destructionists” pharma has needed to move from “regulation centricity” to “process centricity” which would bring significant change in the generic pharma model.

Generics have the best opportunity to increase their revenues by including almost 1.4 billion people, due to lower drug prices, in their patient base through the use of better manufacturing technologies and business practices. Economies of scale and “process centricity” could release pharma from the regulatory guideline and directive shackles that have impeded “operational excellence” in pharma. If they venture out to include “manufacturing excellence” they could save as much as $200 billion dollars. Using the current estimated monies needed to develop and commercialize a new drug could result in the development of one hundred new drugs. With this money developers for the new drugs could be busy for the next forty years and may save many jobs.

Girish Malhotra, PE

EPCOT International

Tuesday, February 3, 2015

Regulatory Compliance vs. Operational Excellence: What Should Happen First?

For every manufacturing operation in the world to be successful and profitable, it has to have “operational excellence” in their business environment. Unless there is an extreme anomaly, this is the law of economics and nature. To me, “operational excellence” means the companies have to produce consistent quality products and serve customer’s needs all the time. It also means that the companies comply with necessary regulations that apply to product quality, safety, meet their sustainability obligations and continuously innovate.

Companies focused on “regulatory compliance” most likely will not have the best technologies to produce quality products and also will not have “operational excellence”. Any company believing that “regulation compliance” will give them “operational excellence” could be considered overestimating itself. Surely such companies can produce quality products but only after lot of effort and consternation. In a competitive environment their long-term existence can be in jeopardy. 

Companies focused on achieving “regulation compliance” as their first priority might be able to meet the minimum regulations. It is very likely that their inefficient technologies and methods will result in lack of process repeatability and occasional failures. They will have to be extra vigilant to comply with regulations. This effort would lead to higher costs. Companies achieving “operational excellence” might take a bit longer to commercialize their products but compared to their “regulation centric” competitors their overall costs will be lower i.e. higher profits and they will have easier time complying with regulations. 

Companies with marginal/mediocre operations can stay in business only if their products are a “must have” irrespective of the cost and extend life or significantly impact life expectancy. In a competitive environment such companies will have to watch their costs. It is very likely that in order to stay profitable they will cut corners every place they can. Most likely places will be like poor processing, record keeping, personnel training, safety and house keeping to name a few. These will impact product quality and regulatory compliance during their product’s life. In a non-competitive environment they will pass their inefficiency costs to their customers. If companies are able to pass inefficiency costs “operational excellence” does not matter. 

Globally some food and pharmaceutical companies who sell “must have products to live or extend life” could fall in mediocre/marginal category. Food business is highly regulated and very competitive. Regulatory compliance is a must. Companies desiring to stay in business are forced to achieve “operational excellence” otherwise they will go out of business.  

Pharmaceuticals are a different story. In pharmaceuticals, no matter how we look at things, patients will pay whatever it takes to extend life whether they are part of a mutually subsidized system or pay from their own pockets. Compared to food if one does not get the necessary medicine, life is generally shortened. This is not an acceptable proposition. Thus, having the correct dose of quality medicine at reasonable cost is a must.

Brand pharma have monopoly thus can easily charge the highest price a patient will pay. For generic products there are too many players making the same product and generally no one has economies of scale to have the best manufacturing technologies and operating practices. Not having the economic processes, companies try to get a competitive edge through pricing advantage. Short cuts are taken at every step and that includes regulatory compliance. Lack of command of processes to assure quality demands repeated quality checks and is an expensive task. Such companies will generally have lower profit margins and their existence is dependent on regulatory compliance, which at times falters. Quality and regulatory lapses are a common occurrence. Companies especially generics watch their costs.

When every bit of “manufacturing technology innovation” is stifled by perceived difficulty of complying with regulations rather than by lack of application of fundamentals of science and engineering, we begin to see issues like faltering product quality and regulatory compliance, less than 50% asset utilization, low inventory turns (less than two) etc. We also begin to see higher product prices and/or companies cut corners to stay profitable. These are symptoms of an industry telling us or even begging for help. We might not want to admit it but some pharma companies fit many of the described symptoms. Even though pharma companies have done a wonderful job of helping billions over the years but it itself seems to need a curing dose to achieve “operational excellence”. This dose could be “manufacturing technologies innovation” that will produce quality products that can exceed regulatory expectations.  

“Operational excellence” has to come from within and cannot be thrust upon in any business or company. I believe time has come for pharma to take a re-look of the current model and operating practices (process development, manufacturing and supply chain etc.). Unless it is done we will continue to see increasingly product quality lapses, bad publicity, higher drug prices and drug shortages especially in generics where the overall business is expanding as patents expire.

Since pharma has not internalized “operational excellence” it seems like regulatory bodies are creating guidances and directives trying to nudge companies to excellence. However, companies are putting additional effort trying to comply rather than put effort in achieving excellence. This seems like a catch 22 and no one is making much progress.

We need to review and explore the current business model to see how and what all is needed for manufacturing innovation rather than pontificate “how difficult or complex” it is to comply with regulations. Regulations are an “after effect” of lack of continuous innovation.

A recent article discusses regulatory complexities one will face when no regulations exist for the kinds of technologies being practiced in other industries but not in pharma. Obstacles are being discussed when the landscape is not even known or understood. Yoda said rightly “Do or do not. There is no try.”

There are “creative destructionist” companies who are driving innovation on the diagnostic side of healthcare. Their innovations are being road blocked by traditional companies who are afraid of loss of lucrative business. We need similar innovator companies for the manufacturing technology side as their efforts will lower drug costs, improve profits and could make drugs affordable to additional 20% of the global population that cannot afford drugs.

I believe that if pharma companies follow basic fundamentals of chemical engineering, economics and chemistry, simplicity of economies of scale will lead them to have best of the manufacturing technologies. This effort would even direct them to a better business model.

“Operational excellence” in drug discoveries will run at their pace but it is possible that they could have a trickle down benefit of “manufacturing technology innovation”. It will be a win-win.    

Girish Malhotra, PE

EPCOT International

Tuesday, October 14, 2014

Is McLaren Going to be Pharma’s “Creative Destructionist”?

Since 2011 (1, 2, 3) I have postulated that pharma needs a “creative destructionist” for its manufacturing technology innovations to get out from its archaic “quality by analysis” methods to “quality from the get go methods”. Current practices have cost patients billions in excessive costs.

Generally most of the “creative destructionists” are from outside the industry, McLaren could be the one for the pharma and the chemical industry.  

“What Can the McLaren Racing Team Teach the Rest of Us?(4)” is an interesting read. McLaren Applied Technologies (MAT) is analyzing generated/available information and creating scenarios that are changing the current operating models in some industries. Their analysis and methods along with human creativity take an acceptable 2+2=2.5 or 3 to a higher number, closer to 4 and are the key. Such improvements are game changers.

Methods and technologies of MAT besides winning car races have been used to train Olympic athletes, in oil drilling and improving airport operations. These are just few examples. GSK, the pharma company, is using them to improve its toothpaste production and drug discovery processes. In these applications there is complex interaction of humans and machines. Since MAT methods and technologies are being successfully applied to these complex situations, I believe that they could be very effectively used in less complex manufacturing situations e.g. reactive chemical manufacturing and their formulations.

Total revenue for these markets would soon be approaching FOUR Trillion dollars, one trillion dollar for the global pharma (5) and about three trillion dollars for the chemicals (6). Combined savings of 10% for pharma and chemicals could be about $400+ billion dollars and that would be a wonderful achievement. Savings will come from improvements in supply chain, process yields, business practices and product quality.

Significant information about the reactive processes used to produce chemicals including active pharmaceutical ingredients that are chemicals with disease curing value and their formulation is readily available. Proficient chemists/chemical engineers can combine chemistry and chemical engineering principles, creativity (7) along with “what if” scenarios to create processes that are efficient, cost effective and significantly sustainable compared to the current processes. Their application would be extremely helpful for pharma molecules before they get in to clinical trials. QbD in pharma could become a reality. We all know that once the selected molecule gets in clinical trials, process changes are difficult. “Process centricity” will overtake “regulation centricity” and for the first time quality from the get go will become way of life for pharmaceuticals.

Girish Malhotra, PE
EPCOT International

1.     Malhotra, Girish: Does the Pharmaceutical Industry Need A Steve Jobs? November 8, 2011
3.     Malhotra, Girish: Landscape Disrupters Are Becoming Part of the Pharma’s Playing Field, August 17, 2014
4.     Bennett, Drake: What Can the McLaren Racing Team Teach the Rest of Us? Business Week, October 2, 2014 accessed October 7, 2014
6.     Chemical Industry Profile Accessed October 10, 2014

7.     Malhotra, Girish:  Chemical Process Simplification: Improving Productivity and Sustainability John Wiley & Sons, February 2011

Sunday, August 17, 2014

Landscape Disrupters Are Becoming Part of the Pharma’s Playing Field

In recent years genetic testing has been introduced (23andme, Navigenics, deCODE and others). It has caused a bit of for and against uproar. Information from this testing could be used for changing the lifestyle that could avert diseases one might encounter with age or even could be used for personalized medicine. Better lifestyle could lower pharma sales and an unacceptable scenario by the current players. Others consider that the generated information could be abused and invade privacy and would want to block such testing.

Similarly companies like Theranos and Nanobiosym are introducing low cost, efficient and speedier diagnostic testing. This is happening due to better application of existing physical sciences and engineering principles along with advances in microchip technologies. Speed and lower costs are causing quite a bit of angst at the companies who are currently involved in this work and had thought what they do cannot be done by anyone else. 

Diagnostic test results with newer technologies offer wide range of information that may not require repeated or additional testing if the physicians want to have supplementary information. Using the existing technologies additional testing would be necessary if such information. New companies will impact the revenue base of the existing companies since their costs are lower. These technologies will lower healthcare costs and are a perturbation.

Above are few of the disruptive companies that are changing the pharmaceutical diagnostic playing field and giving people opportunity to manage their life style. The established players frown upon loosing control of large population base and revenue. Privacy and other concerns are being raised to limit wide spread use of methods. Every possible legal argument and scare tactic is and would be made against information that could improve our health and lifestyle. Different pro and con arguments and lawsuits will come through till all involved understand value of testing and privacy safeguards are put in place. After adequate safeguards these companies will eventually succeed.

Driverless car is a technology leap that is causing a perturbation in the automotive field. Google’s thrust has been formidable and is well known. Automotive companies could have fought the technology but have decided to join in. They do not want to loose the customer base. Microchips with smartphones have changed global lifestyle landscape. Origami engineered robots being explored at Harvard and MIT once commercialized could revolutionize the global industrial landscape.

Edison, Gates, Jobs, Ford, Musk and others created new landscapes. History tells us that change is possible and if the industry does not change, revolutionary and free wheeling explorers who are not part of the current landscape make the change. They create a very different business model because the current model does not serve the need they envision.

It is ironic that many see a similar change is needed in pharmaceuticals to make the drugs affordable to about additional 40% (2 to 3 billion people, my conjecture) of the global population. Existing pharma companies will like to capture this customer base on their terms of drug availability and pricing. However, their current business strategies and practices are making this extremely difficult. Families have to decide how to manage their money between food and medicines and are a roadblock to pharma’s ambitions. Alternates to achieving the goal do exist but need different business strategies.  

Additional mavericks similar to diagnostic or lifestyle changers are needed for the pharmaceuticals. I am not sure anyone has taken up that role. Its time may have come. Companies like Emerald Therapeutics could assist or be the game changer. Wouldn't it be interesting if few outlier companies (small molecule active producers and their formulators) could create a business model that will have a larger customer base for limited drugs just to show what all is possible and in turn lower drug costs and have high profits? Such an opportunity would be worth exploring.  

Girish Malhotra, PE

EPCOT International