Global pharmaceutical revenue, $ billion (Year 2012)
Cost of Sales @ 30% (avg. an assumption (9)) of revenue, $ billion
R & D @ 20% (avg. an assumption (9)) of revenue, $ billion
Sum of Cost of Sales and R&D, $ billion
Assumption: About 30% (assumption) of the Cost of Sales
and R&D money are Cost of Compliance.
Total cost of compliance, $ billion
Tuesday, May 22, 2012
Financial Justification for QbD and Cost of Regulation Compliance
QbD (Quality by Design a.k.a. having a robust and repeatable process which produces quality product without rework or re-testing) is financially important for the pharmaceutical industry and highly beneficial for the consumers; as it will ensure quality all the time, potentially alleviate shortages and lower costs. In order for QbD to become part of pharma landscape “C” and “E” levels of the companies need to have a very clear understanding of cost of regulatory compliance and financial benefits of QbD. Even with the understanding, timely implementation will need considerable cajoling within each company. I am not being opportunistic or pessimistic but being realistic.
I have discussed some of the ways to drive to QbD in my earlier articles (1,2,3). I have deliberately not been explicit about the methods because I want the companies to find their own justifications. Pride of ownership is an excellent driver. I have, however, eluded on “how to” methods and ways. In this article I have further expanded on my perspective and source of QbD justification funding.
Unless QbD related costs are financially justified, especially for the existing products, not much will change. One source of funding is to pass the costs through drug sale price increase. That might be very difficult. The other source of funding can be the savings achieved from lower compliance cost expenditures once the QbD processes are in place. I expect that once the QbD based processes are in place and companies have rationalized their manufacturing practices and strategies, they will have significant savings which will offset their QbD effort. Regulatory bodies and the regulators at the companies might not agree with me about lowering compliance costs but besides yield improvements this is an area in the manufacturing hemisphere where I believe significant cost saving opportunities exist. There are other cost saving areas and each company has to define and identify them.
Companies have to think QbD for the new products from the start. If it happens, it will be a win-win for the companies and patients.
Basic premise of regulations is that we have to be able to track everything we do in the manufacture of drugs and the processes have to be reproducible and repeatable. Pharmaceutical industry should have taken the lead to track, control and monitor their processes. Since self-policing did not happen on a dependable basis, regulations had to be established to ensure product consistency and quality. With the establishment of regulations companies have focused on how to satisfy the regulatory requirements and in turn have lagged and are stifled on manufacturing technology innovation. Since the associated regulatory and compliance costs are passed on to the customers, need to have the best and sustainable manufacturing technology has not been a primary concern.
Since pharmaceutical products are for human consumption, they have to have the highest quality. However, the producers have not been proactive in exceeding quality or regulatory standards. To achieve quality for the active pharmaceutical ingredients and formulated drugs they have relied on QbA (repeated analysis) methodologies. This practice has delivered quality product but it is an expensive way to comply. Even with such effort poor quality products have ended up in the market, had notable recalls and product shortages are an ongoing saga.
Due to lack of significant movement toward QbD based processes, regulatory bodies are establishing additional regulations. These regulations will force the industry to have robust processes that are optimum and sustainable. Industry will blame regulations but will have to comply, increasing drug costs. Had the industry seen value in QbD it would have seen touting the benefits in print.
Industry has spent money on “how to comply” rather than how to innovate and have processes that will exceed the regulatory guidelines. The current regulatory guidelines are minimal at best and the industry should not have any trouble complying or exceeding but has had on going issues as discussed above.
In order to offset QbD associated costs, total “compliance costs” incurred at a company site or associated with every drug have to be completely understood. It is my conjecture that majority of the “C” and “E” levels do not know their actual compliance costs including costs associated with every quality related mishap. They are probably buried in the accounting maze and different department budgets.
For QbD to happen and if it happens, it is very possible that eventually it could result in some thinning of the workforce. The very thought of such a scenario in the current environment is not an exciting perspective. Could the work force reduction possibility be a QbD deterrent? I do not know the answer. I believe that QbD implementation will presents opportunities at the pharmaceutical companies and should create jobs at universities and companies who create methods and products to advance manufacturing technologies.
I believe that going the QbD path could also reduce the workload of the regulatory bodies and actually allow more to be done. Approval process could be shortened. Penalties for poor product quality and non-compliance have to be stiffer than what they are today.
Strategic manufacturing, technology innovation, higher profits and shortened time to market are the QbD drivers. Industry should have been there fifty plus years ago. The current blockbuster business model absorbed all of the manufacturing deficiencies. Shareholders got accustomed to the fast paced introduction of new drugs and profits. With the drying product pipeline, companies are looking at different methods to shore up their profits. Higher profits through better technologies and lowering compliance costs could be one additional and simpler way.
Biotech processes have to be carefully reviewed to ensure that they do not fall into the existing manufacturing technology mold that has been around for the small molecule drugs. What I have read so far does not seem very innovative. We have to have processes that produce quality products by design rather than analysis.
Is it time to relinquish the current practices?
Are the recent increasing recalls, 483 citations and plant shutdowns due to lack of industry’s proactive stance to produce quality products or their stance to barely meet regulatory guidelines? These incidences suggest that the industry is having a difficult time meeting the minimum established guidelines to manage their manufacturing practices. This clearly begs a question. Does the industry fully understand their raw materials, equipment and manufacturing practices or have they put a square plug in a round hole with the hope that all will be OK at the end if they monitor every step of the manufacturing process? If all the above is true then the pharmaceuticals are the prime candidates for creative destruction (4) and/or disruptive innovation (5) or their combination.
As long as humans will live they will need drugs. Costs related to drug approval will not go away. Costs related to regulations outlined in 21 CFR 210& 211 and others that control and track manufacturing are here to stay. Pharmaceutical industry has to figure out how to innovate, manage and control these costs while complying and/or exceeding what is expected. Pharma might have to move from the “blockbuster model and “me-too model” to some other model (3). Strategic bets are needed (6).
Manufacturing processes that are based on fundamentals of chemistry, chemical engineering and sound economic principles do deliver quality products. They could fit the QbD definition. Processes that are inefficient require repeated quality analysis and their products cost more. To lower compliance costs companies have to have complete command and control of their manufacturing practices. This can only happen if they understand physical and chemical properties of the chemicals they use, their nuances and implication of any raw material changes. In addition, they have to be able to exploit them to create economic and sustainable processes. Understanding and exploitation starts as soon as the process development begins in the laboratory and stays through the life of the product.
Funding for QbD
If regulations become mandatory companies will need funding to move their existing processes to QbD mode. There are two sources for such funding.
1. Pass the costs to the patients
2. Pay for the costs through cost reductions
The first alternative is not going to work in today’s increasing government cost controls, declining/drying new product pipeline and the customers asking for lower prices. The other alternative is to offset some of the current expenses. This can be achieved by having processes that are efficient (improved yield, sustainable and better asset utilization) and do not require current levels of handholding. Processes will have to exceed current regulatory guidelines at lower cost.
Record keeping is not going to go away. With that in mind, manufacturing processes, strategies and technologies need a total revamp. Industry has to take the lead rather than someone outside the organization i.e. a regulatory body telling them how to walk. Companies have to sprint the course and win the race regulatory bodies are asking to walk. It will reduce quality issues, recalls, shortages and many of the 483 and other citations (7) if we do prepare for the race correctly. QbD also will improve cash flow and un-necessary and unproductive capital investment.
Since I have not seen any published cost of compliance monetary numbers, I am presenting my perspective as to where the savings can come from. They are based on certain assumptions. Companies can plug in their own numbers to see what is possible and doable. Global pharmaceutical sales are expected to be around $1.1 trillion (8) in 2014. Table 1 illustrates saving based on my assumption.
I have used 30% sum of cost of sales and R&D as cost of compliance. I believe this to be a conservative number. It can include costs related to current methods of achieving quality, paper work, quarantine costs, cost of inventory, cost of recalls, infrastructure costs to quarantine materials and litigation, recall, rework and disposal costs. If I have missed any other item, the costs will change accordingly. If any one has a better number, I would appreciate knowing about it.
If through better process technologies i.e. improved yield, reduced in-process quality checks (elimination/reduction of QbA), sustainable processes, plant consolidations (economies of scale: batch vs. continuous), improved asset utilization (e.g. moving from 30-40% to 60-75% asset utilization) and better record keeping companies can save 40 to 50% of the “cost of compliance” as speculated in Table 1, we could be saving between $60.00 to $75.00 billion per year.
As I stated earlier, if my assumption can be on the lower side and the savings dollars could be higher. If anyone has a better number for cost of compliance, it would be wonderful to share. These savings relative to the total pharmaceutical sales revenue might not seem much but still raise a challenge to all of us “Has the time to excel and exceed quality using innovative manufacturing technologies come in Pharmaceuticals?” I believe so. Magnitude of savings outlined above can create many new millionaires. It might even create few new billionaires.
It is my firm belief that if we incorporate fundamentals of chemistry and chemical engineering in our processes to manufacture products from the day we start developing new manufacturing processes our products will meet quality standards the first time and every dollar that is not spent on compliance will drop to the profit before tax line. Pharmaceutical industry has to change its modus operandi. There are no alternates left.
Girish Malhotra, PE
1. Malhotra, Girish: Who or What killed QbD? And is there hope for resuscitation? Pharmaceutical Processing, May 2011, pg 10-14
2. Malhotra, Girish: A Guide to QbD for APIs, Pharmaceutical Processing, Volume 27, No. 4 May 2012, pg 46-49
3. Malhotra, Girish: Focus on Physical Properties To Improve Processes: Chemical Engineering, Vol. 119 No. 4 April 2012, pgs. 63-66
4. Schumpeter, Joseph A. Capitalism, Socialism and Democracy, Chapter VII: The Process of Creative Destruction 3rd Edition 1950, Harper Torchbooks, New York, 1962
5. Christensen, Clayton M., The Innovator's Dilemma: The Revolutionary Book that Will Change the Way You Do Business, Harvard Business Press Books, Jun 11, 1997.
6. Charan, Ram and Sisk, Michael, Strategic Bets, Strategy+business May 24, 2011
7. FDA Citations FY 2010 Inspections, Compliance, Enforcement, and Criminal Investigations Accessed May 15, 2012
8. Global Pharma Sales Steadily Growing Despite Rise of Generics Accessed May 15, 2012
9. Based on Annual reports of different Pharmaceutical companies.