Disclaimer

All opinions are my own.

Friday, May 1, 2015

May Day May Day: Can Someone Help and Lower Drug Prices?

Answer to the distress call is YES! However, it needs effort. I am presenting my perspective about the effort.

A recent article (1) tells us a story, some call it bogus (2), but everyone is clamoring about high drug prices. Not much is being done by the movers and shakers to address the price issue. They also are not doing much to address the shortage and quality lapses.

With respect to brand drug pricing, not much can be done as the world’s patients are at the mercy of very select band of people whose focus is, by charging the highest drug price possible, delivering the ROI to the investors even if the drug is for less than 100,000 people worldwide. We cannot fault them as they are meeting their objectives and keeping the financial analysts happy. We are in way judging their motives and goals. It is our hope that in their efforts they might do some good by stumbling on new drugs/therapies that might benefit millions. Global need and want for lower drug prices remains.

What is needed to lower drug prices?

Generic drugs constitute more than 50% of the global market. They present the highest opportunity to lower pharma costs through manufacturing technology and the total business process innovation. Everyone and that includes regulators, legislatures, patients, PBMs (Pharma Benefits Managers), various health organizations and foundations (WHO, CHAI, Gates Foundation, Médecins Sans Frontières etc.) would like to see lower prices. There are many things standing in the way to get to the goals. They are:

  1. Current business model

  2. Fragmented and multitude suppliers

  3. Lack of economies of scale

  4. Inefficiencies of the manufacturing processes

  5. Inefficient use of corporate (equipment, infrastructure) assets

  6. Quality control practices

  7. Regulations

Generic pharma companies have not done much to lower drug prices as they do not see any need. Why? They capitalize on the need to extend life. PBMs and national healthcare agencies worldwide have not made any moves to convince the generic pharmaceutical companies to step up and use the best manufacturing technologies, business practices and systems to alleviate shortage, quality lapses and lower drug prices.

In the current business model generic pharma companies have an argument against doing anything for better technologies and practices. Regulatory re-approval would be needed for the incorporation of innovations. Intent of drug efficacy and quality will have to be re-assured. Under the current regulatory environment, re-approval cost is unknown, could be expensive and time consuming. Any effort is going to take away from the focus of generic pharma to supply the needed drugs as it could lower their profits. Since there are many suppliers of the same drug, there are no economies of scale. Re-approval will also burden the regulatory bodies.

Thus we have a “chicken and egg” quandary. However, there is a potential solution. It has been practiced worldwide but not much in pharma. Most of us know them as “TENDER (3)”bidding.

If every organization mentioned above asks for the supply bids from the companies worldwide, for drugs they dispense, we would have competitive bidding. It would allow them to compare and negotiate drug prices based on their manufacturing technologies, business practices, quality methods and any other measure they think will assist them. We will have an interesting business environment and as we know competition would be best for all involved.

PBM companies, foundations, global healthcare organizations can use “reverse calculation method (4)” to determine what would be the costs if the companies were using the best possible technologies and methods at different supply levels (economies of scale). Information thus generated could be used for their pricing negotiations. It is very possible that such an effort “could be called foul” by many in the pharma industry, their lobbyists and even legislatures but this is one way to rationalize economies of scale, technologies and best business practices which will lower drug prices, improve profits and include many patients who cannot afford drugs. Change has never hurt anyone but made all involved strong. It is pharma’s time.

Such an effort will take time on part of PBM companies, foundations and global healthcare organizations. If they move forward, the process could give the best of the suppliers time to showcase their chemistries, manufacturing practices, asset utilization capabilities and how they can produce quality products from the onset using better batch or even continuous processes for API manufacture and their formulations. Tender bidding could also alleviate drug shortages.  

Pharma is a unique business where the industry improves the health of its patient base besides making profits. Yes it is tight rope, between profits, greed and compassion, to walk but someone has to walk it.

Please suggest if anyone has better ideas. We need to address the May Day call.


Girish Malhotra, PE

EPCOT International


  1. Small Number of Drugs Drives Big Medicare Bill, Spending Data Show http://www.wsj.com/articles/medicare-releases-detailed-look-at-prescription-drug-spending-1430426438 Accessed May 1, 2015
  2. Herper, Matthew, Why Medicare's List Of Costly Drugs Is Kind Of Bogus http://www.forbes.com/sites/matthewherper/2015/05/01/why-medicares-list-of-costly-drugs-is-kind-of-bogus/?utm_source=followingimmediate&utm_medium=email&utm_campaign=20150501 Accessed May 1, 2015
  3. Tender http://www.investopedia.com/terms/t/tender.asp Accessed May 1, 2015
  4. Malhotra, Girish A Blueprint for Improved Pharma Competitiveness http://www.contractpharma.com/issues/2014-09-01/view_features/a-blueprint-for-improved-pharma-competitiveness/ Accessed May 1, 2015

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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