Is Pharma’s Goal to Serve Patients Per Billion or Million?

In the pharmaceutical world, week of September 21, 2015 was interesting. Martin Shkreli ⁽¹⁾ of Turing Pharmaceuticals raised the price of an old drug (Daraprim) from $13.50 to $750.00 per tablet overnight. Suddenly the high price move is being abhorred. Shkreli’s move and rationale has been equated to greed and arrogance. This has led to all kinds of pro and con comments in press ^(2,3,4,5,6). Even politicians, who generally are significantly influenced by the pharma lobby jumped out and called for price restraint ⁽⁷⁾. His explanation for the price increase included from need to make money irrespective of the past selling price to pay for his acquisition of the drug license, lack of customer service and need to pay for high R&D costs to customer service ⁽⁸⁾. Most likely Shkreli has no clue of the manufacturing cost and what is involved. Having been around for the last sixty years, no R&D is involved. I am not sure what kind of customer service was missing.

Question “why suddenly drug prices are being increased by high multiples?” Dr. Peter B. Bach ⁽⁹⁾ from Sloan Kettering makes interesting points “To criticize drug pricing is to raise a more difficult question: Is any price too high to save or extend a life? But in the U.S., prices are rising not because they must, but because they can. No entity holds them down. Instead, state and federal regulations require nearly every insurer to provide access to all cancer drugs, which means the companies can charge what they like. Doctors, meanwhile, are trained not to consider the cost of a treatment when making medication choices.” He makes very constructive suggestion on drug pricing “If we want innovation, and we certainly do, the solution to affording it lies in paying only for its value.”

Recently other companies have joined to increase their prices ^(7,10). Suggested global price variability ($900 to $30,000) for six month Tuberculosis course is astounding ⁽¹¹⁾. There have been other price increases over the years but they were not publicized.   

Most of the pharma conversation in press is generally about preservation/increase of revenue, profits and justification of high R&D costs to develop new drugs even if they were for less than 100,000 patients (about 14 patients per million) worldwide. Drug with sales of one billion dollars per year is considered a blockbuster success even if there are 10,000 patients worldwide (one to two patients per million) paying $100,000 per patient.

Like in every business, pharma also has R&D and manufacturing costs. R&D costs are considered the untouchables. No one wants to accept any other explanation of these high costs as the press information, even if it is wrong, is considered sacrosanct. Discussion of inefficiencies in R&D is off-limits from any conversation.

At times pharma’s high cost are blamed on manufacturing and regulations ⁽¹²⁾. There is no mention of any effort to lower manufacturing costs or marketing costs. Very few understand the cost breakdown. This is due to lack of understanding of how to calculate the factory costs of the APIs and their formulations. Every inefficiency cost of manufacturing process is passed on to the patients. Patients pay, as they want to live.  

Irony is that in the last few years pharma companies have not developed many drugs for a large patient base (e.g. more than five million) worldwide. Whatever has been developed, as stated above, is for small patient base. They are expensive and covered by mutually subsidized healthcare systems or pay from their own pocket. Some physicians and pharmacy benefit managers are balking to prescribe or cover these drugs ⁽¹³⁾. Price of Hepatitis C virus has been questioned.

In the United States, due to political influence, Medicare cannot negotiate prices. In many other countries, there are price controls and negotiated pricing with national healthcare purchasing. Pharma companies definitely do not like that. Generics love the high prices they can get for their products in the developed countries even after repeated product quality mishaps.

There is no question that innovation is needed in pharmaceuticals. However, the question is “are these innovations for the selected elite?”

Drugs are supposed to be beneficial for masses. However, with current drug prices, pharma companies while making profits are driving families to bankruptcies. High prices are definitely not giving pharma a good name. Is this the legacy pharmaceutical companies want? I do not believe so.  

It is my conjecture that for pharma to move from about 10-15 patients per million (=about 85,000 patients out of 7.2 billion global population) and high priced drugs to 7,000 patients per million or higher number (=about 5 million patients out of 7.2 billion) and affordable drugs, significant effort would be needed to discover drugs that are highly effective (no me-too) for common diseases. If such drugs are discovered they would also be an opportunity for significant manufacturing technology innovations.

Pharma ⁽¹⁴⁾ might achieve its projected $1.3 trillion sales in the next few years but it would have to pick its patient base. Would it be 10-15 patients per million, mostly in the developed countries or 7,000 patients per million worldwide? Do you think the later would happen?  

Girish Malhotra, PE

EPCOT International

1.     My Lunch With Shkreli: What We Should Learn From Pharma's Latest Monster: http://www.forbes.com/sites/matthewherper/2015/09/24/my-lunch-with-shkreli-what-we-should-learn-from-pharmas-latest-monster/ accessed September 26, 2015

2.     Turing to Cut Price of Drug Daraprim After Increase Sparks Outcry: http://www.wsj.com/articles/turing-to-cut-price-of-drug-daraprim-after-increase-sparks-outcry-1442970732 accessed September 26, 2015

3.     The Assault on Drug Innovation: http://www.wsj.com/articles/the-assault-on-drug-innovation-1442964103#livefyre-comment, accessed September 26, 2015

4.     New Weapon in Push to Lower U.S. Biotech Drug Prices: http://www.wsj.com/articles/new-weapon-in-push-to-lower-u-s-biotech-drug-prices-1442965627?tesla=y accessed September 26, 2015

5.     What Cancer Doctors Don’t Know About Cancer Drugs: http://www.wsj.com/articles/what-cancer-doctors-dont-know-about-cancer-drugs-1442961874 accessed September 26, 2015

6.     Biotech exec Martin Shkreli has history of tough tactics: https://www.bostonglobe.com/business/2015/09/25/how-martin-shkreli-biotech-pariah-put-cancer-patients-risk/fxjUV8alj28LESmmOF7IbO/story.html accessed September 26, 2015

7.     Lawmakers Seek Answers on Valeant’s Price Increases http://www.wsj.com/articles/congressional-democrats-seek-subpoena-of-valeant-over-drug-prices-1443468385 accessed September 29, 2015

8.     Drug Goes From $13.50 to $750 Overnight: http://www.bloomberg.com/news/videos/2015-09-21/why-turing-increased-price-of-daraprim-over-500- accessed September 26, 2015

9.     Bach, Peter M. Seeking a cure for drug-price insanity, Fortune Magazine http://fortune.com/2015/09/17/rising-drug-prices/ Accessed September 25, 2015

10.  Lupin diabetes drug price up by 200% in US http://www.business-standard.com/article/companies/lupin-diabetes-drug-price-up-by-200-in-us-115092400935_1.html accessed September 29, 2015

11.  Dishman to supply API for Janssen Pharma's TB drug Sirturo: http://www.business-standard.com/content/b2b-pharma/dishman-to-supply-api-for-janssen-pharma-s-tb-drug-sirturo-115092900626_1.html?src=email accessed September 29, 2015

12.  Gottlieb, Scott: A Clintonian Misdirection on Drug Prices, http://www.wsj.com/articles/a-clintonian-misdirection-on-drug-prices-1443568738 Accessed September 30, 2015

13.  Top U.S. doctors say pricey cholesterol drugs best for limited group: http://www.reuters.com/article/2015/09/24/us-usa-healthcare-cholesterol-idUSKCN0RO2DD20150924 accessed September 29, 2015

14.  Malhotra, Girish: Manufacturing technologies and their part, Chemica-Oggi-Chemistry Today, Vol. 33(5), pg.28-31, September/October 2015

Sun Pharma’s Exotic Challenge: How Real?

Since Sun’s acquisition of Ranbaxy Business-Standard, Economic Times and other papers have published many stories related to good and wonderful nature of the deal. I am sure everyone in India wants this to be a success and recoup the lost pride in Ranbaxy’s demise. However, no one wants to address or publish or discuss anything about the challenges Sun will face to get everything running full speed. Some of issues, especially personnel, Sun will have to deal with are generally considered taboo.   

In India businesses started are generally passed on to the coming generations. Before the launch of economic revolution in 1991 handful of companies were interested in India. Not very many companies are bought and sold in Indian culture. A sale to a competitor basically meant the entrepreneurs had failed, a setback in community. With that context acquisition of Ranbaxy by an Indian company has caught everyone by surprise and even pride. Ranbaxy has come home. Ranbaxy was part of the elite; the biggest pharma in India and its sale to Daiichi Sankyo was a loss. 

Sun’s acquisition of Ranbaxy besides financial benefits creates unprecedented opportunities to change the global landscape. It will face significant issues that any other Indian companies have not encountered on its scale. For its success it will have to deal with them. How they will manage and handle assimilation will determine Sun’s success.

Sun’s highest priority is get the sites approved from USFDA and other regulatory bodies ASAP to earn the trust and revenue it needs to implement changes. To achieve success Sun will have to deal with technology and human side of the organization. They will have to be dealt with very gently. I believe such an endeavor on this scale that has global implications has not been dealt in Indian business. 

On human side, personal and personnel issues may become the biggest hurdle. Colleagues of yesterday could challenge boss-subordinate relationships of tomorrow and that may impede assimilation. Sun’s way of managing and cajoling Indian psyche would be put to ultimate test. It might have to invent new and different ways and methods to develop strong and cohesive teams that will deliver on its goals.

On technology side Sun has to figure out how to move from every pharma company’s practice of “regulation centricity” to “process centricity” i.e. have complete command of the processes so that they can exceed regulations. This is a unique opportunity and not very many get it. It could be called once in a lifetime opportunity to change the global pharma playing field by showing how quality can be produced while lowering costs and improving profits. Complete and parallel review of the business model could create a model that could deliver quality and quantity on patient demand.

Benefits of process centricity if adopted can change the playing field in many ways. Stakeholders will have command of the processes and that means they will be able to rationalize global businesses for their products. Economies of scale will lead to commercialization of the best technologies which in turn would mean the producers will know that they have control of every aspect of manufacturing, quality and supply chain. Used technologies will exceed regulations and that would be something new and unheard of especially in pharma. Quality will be built in their processes rather than achieved through “trial and error” process.

Sun could step out of the pharma’s “me-too” model box and show how “process centricity” can change the playing field as it exceeds regulations and produces quality products with minimal in-process analysis. Such an achievement could change the global playing field forever. Ranbaxy had this opportunity in 2008 but did not take advantage of the opportunity. May be Sun will avail the opportunity and put the pride back for Indian management.

For assimilation to happen perfectly each wheel will have to turn at speeds to deliver the combined expected result. I am sure Sun’s team is well aware of the challenges they will face and were part of the acquisition consideration equation. I hope they have the resources and are willing to tap into resources to achieve their objectives. 

What Do The Recent Ranbaxy Citations Teach Us?

Recent Ranbaxy citation (UCM382514) is worth the review as it gives us cause and effect relationship between state of pharmaceutical manufacturing and regulations. Information can be used to improve pharmaceutical manufacturing whether it is API manufacturing or their formulations and how to avoid some of the common mistakes. It also gives us perspective of the regulators. Views expressed here are my own and are not any recommendations.

Involvement of Daiichi Sankyo as claimed may be coming but it may be too little too late.

Ranbaxy (Toansa) citation focuses on the following.

1.     Raw materials, intermediates and finished API failing specifications.

2.     Repeated analysis of the samples.

3.     Lack of procedures and adequate record keeping

Not being associated with or visited any of the Ranbaxy facilities, my first observation is that the manufacturing and supply chain management are out of control. These are also manifestation of a business model being practiced and are inadequate to meet the ever-changing needs at a plant site.  

Re-analysis of raw materials suggests that the company’s supply chain process needs significant review and edits. My conjecture is that the focus is on getting the cheapest raw materials that might come close to the desired specifications. Since these raw materials are converted to the desired API, process purification could be used to remove the impurities. If this is the case it is suggestive that there are serious issues and finally they have culminated in the current state.

Repeated sampling and analysis suggests that the manufacturing processes are out of control and yields are a variable. Product quality will be variable and in order to meet the desired specifications batch cycles would be variable. With lower asset utilization the overall plant capacity is lower than planned and costs will be higher than desired. This suggests that plant or the company profitability is a variable.

Lack of procedures also suggests that with changing raw materials, process conditions, methods and results plant personnel do not know how to analyze samples and then it becomes a fly-by-night operation and that is what the regulators found.

Since all such costs are absorbed, it means that the selling price of the salable API and the formulated products, to ensure profits, are much higher than what could be achieved by having optimum processes. All this could have been eliminated if Ranbaxy had complete command of their processes and they are repeatable. From a financial perspective this would mean that the site profits would be much higher from the current levels, a significant opportunity. In addition, asset utilization would improve resulting in higher production capacity with no or minimal investment.

Regulators in their citation/s are confirming that the processes are out of control. It is understandable that the regulators cannot and will not suggest corrective measures to comply. However there is an underlying question “Do the regulators know the cause and effect of what is happening when they are visiting/inspecting API manufacturing and their formulation facilities?”

Ranbaxy citation clearly indicates that there is tremendous opportunity to lower pharmaceutical manufacturing costs i.e. healthcare costs. Lower costs can mean larger customer base that can result in incorporation of better manufacturing technologies. Having command of the processes can be a global win.

Ranbaxy and Daiichi Sankyo have given significant lip service with every citation and consent decree suggesting they are in control of the situation but it seems that neither of them has been able to “walk the talk”.

Actually FDA citation of the API manufacturing facility is a heightened salvo and heads up warning to every API producer and formulator in India not to overlook cGMP practices. cGMP can only happen when companies will have command of the processes. Till that happens, with every inspection every company should be looking out for potential citations.

Girish Malhotra, PE

EPCOT International