All opinions are my own.

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