Pharmaceutical companies can improve their manufacturing processes through use of root cause analysis and optimization and pass the cost savings on to the consumer.

I’m sure if you are an investor, your portfolio contains stock from at least one pharmaceutical company. If you’re lucky, you got in before the latest blockbuster drug (e.g., Viagra, Cialis) hit, or got out before the latest product withdrawal (Vioxx, Baycol). No doubt there is a lot of money to be made yet from pharmaceutical companies, either through the stock market or class action lawsuits.

The pharmaceuticals industry spends millions of R&D dollars looking for and screening molecules for therapeutic benefit. Molecules can range from naturally occurring substances (e.g., Tamoxifen is derived from a pine tree) to custom-made. Hundreds of thousands of molecules are evaluated in the lab (the process is called high-throughput screening) – only 1 compound in 100,000 actually proceeds to market. Pharmaceutical companies refer to potential products as in their “pipeline” in their journey from lab to human. The more products that are in the pipeline, the greater long-term potential for the company, and the stockholder.

Patents. Once a pharmaceutical company finds a promising molecule, they will patent it to prevent the competition from developing it (you might think the odds of this are incredibly low, given how many compounds exist, but also think corporate espionage). This then, starts the 8-year clock counting down the lifetime of the patent. Pharmaceutical companies work very hard to bring drugs to market as quickly as possible to maximize return on their R&D dollars while they maintain their grip on the product. (I remember one product whose patent was very poorly written. A generic company was able to work around the patent and produce a generic product well within the 8-year patent lifetime. Rather than have a lower price generic on the market, the patent-holding company actually paid off the generic manufacturer to keep their product off of the market during the patent lifetime. Recent product withdrawals are pressuring the industry to increase the size of their clinical trial efforts, at significant additional expense.

New drugs in the marketplace drive revenue, stockholder satisfaction, and equally (more?) importantly, provide the fuel to stoke the R&D product fires.

There are several problems with this setup – first, the number of blockbuster products to come along are few. It is more likely that newer products will have a smaller market and end up being very expensive per dose, part of the cost to recoup that pesky R&D investment.

The bulk of R&D costs are on the shoulders of Americans — we subsidize drug costs elsewhere in the world. In most cases, the only difference between a drug sold in the U.S. and the identical drug in Canada, both manufactured by the same US company, is (1) the price (negotiated, apparently more effectively, in Canada and elsewhere), and (2) the package insert (the tightly folded piece of paper with incredibly small print sometimes found inside the prescription bottle).

As loudly illustrated by the uproar over price differences with our northern neighbors, pharmaceutical companies are now facing pressures to reduce prices domestically. How are drug manufacturers doing this? Let me back up and explain about drug manufacturing. I remember learning on the job that the margin on some drugs is so high, and the cost of manufacture so low, that for many drugs, it is easier and cheaper to toss out product that doesn’t meet specification and to try again rather to figure out what went wrong.

Those days are drawing to a close. Price and regulatory pressures, work force, raw materials, clinical trials, energy costs and liability costs (someone has to pay for all of those class action lawsuits) are at odds with each other. Pharmaceutical companies are now looking closely at ways to reducing costs wherever possible.

How? By applying the very handy concepts of process optimization and root cause analysis, two techniques long used in commodity industries where in some cases a nickel per ton cost savings meant a significant competitive advantage.

What is process optimization? Simply put, it’s figuring out how to make the most product for the least expense. For pharmaceutical companies, this translates into maximizing yields, minimizing reworks and rejected lots, and doing it in the shortest amount of time with the fewest people and equipment necessary to make it and still comply with FDA regulations. This involves making sure that the drug recipe produces an acceptable product easily, reliably, and repeatably without wasted steps; that there is sufficient testing along the way to show that the drug product is being made to the correct specifications; and that the process is adequately documented. A real challenge for pharmaceutical companies is to be willing to “tweak” their process in light of the FDA reporting requirements for process change.

Early in my career, I was able to increase the output of a pharmaceutical facility by 4% simply by improving the way in which they schedule use of their equipment. This may not seem like much, but to this company, 4% translated into $7 million/year in “no cost” additional production capacity. What’s not to like about this approach?

And root cause analysis? Suppose you have standard procedures for making your drug but 10% of the time the drug does not meet your release criteria and has to be discarded. The obvious approach is to figure out what goes wrong one time in 10. If you can find the cause of this failure, you can increase your capacity. Is it a contamination problem? Raw materials not of the proper purity? Training? When you find and correct the root cause, the problem will go away. That said, it might not be possible to reduce or eliminate the cause. Why? It may not be cost-effective to find or to fix the problem.

While consulting with a major pharmaceutical company, I was asked to participate in numerous manufacturing task forces, because of my chemical engineering and statistics background. In one situation, the product, which had been made for years and years, suddenly began to be unstable. While no problem product ever left the facility, they were destroying 30-40% of a very expensive product. I believe that the root cause of this problem was a change in the raw material. Correcting the problem required a reworking of the manufacturing process to account for this change. There was considerable reluctance to make any changes to a process that was developed back in the 1940s. The result? No process changes.

The second most important resource within Pharmaceutical companies is their manufacturing data (the most important resource is their staff). Conducting root cause analysis or optimization almost always requires the analysis of manufacturing data. The catch is that while the FDA requires pharmaceutical manufacturers to maintain exhaustive documentation, many pharmaceutical companies maintain this documentation in paper form. This adds the daunting task of collecting data from paper documents and entering it into a computer database, adding another barrier to improved productivity.

An answer to this dilemma is to maintain manufacturing data in electronic format (also known as electronic batch record systems). While a number of larger Pharmaceutical manufacturers are using such software, the cost to implement can be in the millions of dollars, a significant investment for smaller biotechnology-based pharmaceutical companies. In recognition of this dilemma, my company is developing a next generation electronic documentation system for Pharmaceutical manufacturers that is reasonably priced, well supported, simple to implement, and most importantly, makes the most of invaluable data.

Given pricing pressures, Pharmaceutical companies can no longer operate the way they have. Many companies are moving towards root cause analysis and optimization to reduce their costs. Whether these savings are passed on to the consuming public has yet to be seen.