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

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

President

EPCOT International

1.     Malhotra, Girish: Does the Pharmaceutical Industry Need A Steve Jobs? November 8, 2011

2.     Malhotra, Girish: Can the Combination of Creative Destruction and “Steve Jobs’ Traits” Lead to Pharma QbD Spring? April 15, 2012  

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

5.     Pharma Report Predicts Trillion Dollar Global Industry by 2020 Accessed October 13, 2014

6.     Chemical Industry Profile Accessed October 10, 2014

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

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

President

EPCOT International

Why Fitting a Square Plug in a Round hole is Profitable for Pharma and Most Likely Will Stay?

In 2005 I had raised a question about Batch or a Continuous Process: A Choice. At that time it seemed like a logical question and still is. However, I left part of the question unanswered. Missing was the discussion of components of pharma manufacturing, API manufacture and their formulations. Generally most of the discussion about pharma manufacturing focuses on formulations. API manufacturing is treated as an orphan and is not discussed.

In this discussion I have used Synthroid, # 1 prescribed and # 59 by revenue drug from top 100 US drugs from 2013 to review both segments of manufacturing and related options. Information could be used to create a better business model that will incorporate better manufacturing technologies and move away from ‘regulation centricity” to “process centricity”. End result would be improved profits and expanded global healthcare and coverage with lower costs. If properly done global pharmaceutical landscape will change.  

API manufacturing and their formulations need to be dealt separately as the technologies involved (unit processes and operations) are different. However, they influence the total business process. First has reactive processes along with purification. Resulting products could be solid or liquid. Formulation in the simplest form is basically mixing of excipients and creating dose that delivers the expected performance and can be easily dispensed and consumed. Packaging is part of the formulation.

Why Continuous Manufacturing of API’s would be a challenge:

In the last few years many on increasing frequency have chimed in for the continuous processes for API. However, it seems like that the rational principles of chemical engineering have not been applied in coming to that conclusion. Continuous usually means operating 24 hours per day, seven days per week with infrequent maintenance shutdowns, such as semi-annual or annual. Generally 15% downtime is acceptable. Anything short of this definition is not a continuous process. Continuous process also means starting with raw materials and producing finished salable product.

The following dictate the rationality of what type of process would produce lowest cost and highest quality products.

• Product volume per year
• Process
• Equipment

In the development of a commercial process chemist/chemical engineer have to know and understand these. They can have the best process but equipment and product volume dictate the course of action. Generally the first thought is to use the existing equipment if the volume does not justify a continuous process. We all know and understand that a continuous process most of the times means capital investment.

For batch or continuous process complete command of the operating conditions and methods is necessary to produce repeatable quality product. Anything short impacts product quality and business process.

Batch cycle time exceeding e.g. 48 hours necessitates a thorough review and effort even going back to the lab bench to reduce the cycle time. Long batch processes impact asset utilization and the whole business process. Every effort needs to be made to minimize the batch cycle time. In pharma extended API manufacturing batch cycle times are normal as there is no “process centricity”. “Regulation centricity” rules and is an impediment to innovation.

Table 1 is self-explanatory and presents very interesting numbers. There are some extrapolating assumptions. It is assumed that 5% of the global population uses synthroid. This most likely is a high number. Thus the actual demand for the active ingredient would be less than illustrated.

Table 1 illustrates that at 112 microgram dose at 100% formulation efficiency about 15,000 kilograms of the active would be needed to satisfy the global demand. A continuous API plant operating [24X7X350x0.85 =7,140 hrs.] would produce at about five pounds per hour, an extremely low production rate for a continuous process. Use of currently available equipment would pose many challenges and be really trying to fit square plug in a round hole. If a continuous process plant were to be built, it will require special equipment and process controls that might not be available.

All said and done there is no justification to have a continuous plant for the manufacture of active Levothyroxine (synthroid). I have not looked into it but I am sure that today multiple plants are producing the active ingredient. Each possibly has low process yields, are inefficient, have variable site to site and batch to batch product quality. Significant and expensive manpower would be needed to have consistent quality product. In reality a single plant using a batch process would satisfy total global demand.

Synthroid (Levothyroxine) sales number and prescriptions [Table 2] presents another interesting hypothesis. We can reverse calculate the price of the active ingredient. It would be based on certain assumptions and would give us a picture of profitability at different levels. US sales per prescription per month are about $3.05. These compare to sale price of $4.00 for thirty or $10.00 for ninety day supply at Walmart and Target etc.

2013 Sales, $	2013 # prescriptions	Dosage
858,725,708	23,452,848 [One prescription per person]	There are eleven different doses between (25-200 microgram) available. To facilitate calculations an average dose of 112 micrograms has been used.
Since synthroid has to be taken every day of the year we can calculate the total micrograms needed assuming 100% formulation yield. One prescription = one patient
Total API needed, micrograms per yr.		=23,452,848x112x365= 958,752,426,240
One kilogram = 1,000,000,000 micrograms
Total API needed to serve US population, Kilograms per yr.		958.75
US population taking Synthroid		(23,452,848x100)/320,000,000* = 7% [*US population]
Extrapolating number to project global Synthroid API demand per year
Global population seven billion. Assumption 5% takes synthroid = 350,000,000
Total Synthroid global API need Kg. per year			=(350,000,000x958.75/23,452,848) = 14,308

Table 1: Levothyroxine active ingredient needed for Global and US population

Sales, $	# Prescriptions
858,725,708	23,452,848
Avg. US patient cost $ per month = 858,725,708/(23,452,848x12) =3.05
Avg. dose, micrograms =112	API, Kg needed to fill US need = 958.75 Per Table 1
Profit assumption at wholesale level	100%
Sale price at wholesale level, $	= 0.5x858725708 = 429,362,854
Formulation profit 40%
Formulation level factory cost	=0.6x 429362854 = 257,617,712
Excipient and conversion cost	70% of Factory cost
Total API Purchase price, $	= 0.3x257617712= 77,285,313
API Selling price, $ per kilo	= 77,285,313/958.75= 80,610

Table 2: Reverse calculation of Levothyroxine selling price

Reverse calculation using US sales numbers suggest that active ingredient Levothyroxine cost to the formulator should be about $80,610 per kilo. Current selling price of levothyroxine on the world market is less than $3000 per kilo. This suggests even after generous profit margins being factored in Table 2 everyone in the supply chain has significant profits. These margins also indicate that all of the inefficiency costs can be passed on and there is no incentive to improve manufacturing practices. Average sale price of $3.05 per month would considered low by US standards but it might be considered expensive in the developing countries even when it is sold at $1.00 per month’s supply.  

Formulation Processes

Since dosages are in micrograms or milligrams, one kilogram can go a long way. One kilogram can make one million of one milligram and one billion of one microgram tablets at 100% yield. It tells us that a large volume of high value product can be produced from a small quantity. Using 10,000 kilograms Table 3 illustrates different production rates. At 100% yield we can produce ten billion of ten milligram or 10,000 billion tables containing one microgram active ingredient.

Tablet dose	10 milligram	100 microgram
10,000 Kilogram	10,000,000,000 Milligram	10,000,000,000,000 Microgram
# Tablets	1,000,000,000	100,000,000,000
Hours per year using 85% operating time	=350*24*0.85= 7140
Minutes per year using 85% operating time	=7140*60= 428,400
Tablets production rate per minute	=1,000,000,000/428,400 =2,334	=100,000,000,000/428,000 =233,426
Production rate Synthroid, 112 microgram tablets per minute		=233,426*1.43/1.12=298,202

Table 3: Formulation production rates

Review suggests that a single plant could produce the necessary active ingredient to fill global synthroid demand. However, it would take multiple tableting lines/sites to convert the active in salable product. Since multiple doses are needed it would be worth to have parallel tableting lines. Multiple lines would give flexibility to meet the customer demand. 

Very precise and high degree of process control is needed at every step in each line. Various technologies to produce and package tablets exist. Blending of excipients and actives to deliver a uniform product requires precise controls. 

Analysis:

Point of this exercise is not to suggest that continuous processing is dead. Each manufacturing component has to be looked at separately to see what is the best for business and patient base. Going continuous for formulations is much easier than for API. Basis is ONE kilogram active ingredient can produce ONE million one milligram tablets that will serve about 27,000 patients per year at one milligram dose.

Many companies produce same API. Processes for these APIs are generally inefficient. Square plug in a round hole scenario for such molecules will exist unless a concerted business effort is made to alter the landscape through consolidation. If we look around, out of thousands of small molecule drugs may be less than ten APIs are produced using continuous processes.

Going from “B”(batch) to “C” (continuous) is not like going to the next alphabet. It will require a significant change in business thought process. Omeprazole, metformin hydrochloride and HCTZ (hydrochlorothiazide) are some APIs that could be produced using continuous process. For that matter any API that has a global requirement of more than 350,000 pounds per year could be produced using continuous process. Breakthrough chemistry and brilliant execution would be needed. Use of any API that is produced at these volumes (350,000 pounds per year or more) suggests that their consumption could be increased if costs come down. Pharmaceutical is the largest business segment where cost reduction can increase consumption by 20-30% i.e. by billions.

I am not giving up hope for continuous processes. I hope you don't either. It will take effort.

Girish Malhotra, PE

President

EPCOT International