Over the past five decades, the returns generated by the life sciences industry have exceeded the S&P 500 for more years than other major sectors, including telecommunica-tions, semiconductors, computers, oil, defense, chemicals and paper. Indeed, the industry has more than doubled its revenue during the past 20 years alone and its overall profit has expanded more than threefold. It is therefore safe to say that the pharmaceutical industry has been amongst the best-performing industries. However, in recent years, the industry has found itself at a crossroads. Its revenues and returns have been rapidly decreasing, thus forcing it to ex-amine and respond to emerging market trends and upcom-ing challenges. In this article, we will take a look at some of these factors and how they affect the life sciences sector.
Emerging sector trends and their impact on operations in the life sciences industry
Competition and marketplaceIn many ways the market outlook looks good for the sector as a whole: the increased healthcare needs of an aging population will play a key role in all developed markets and also in the main emerging markets such as China and India. These emerging markets are poised to bring in a billion new consumers, almost all of them currently un-served or at least under-served. While the largest new markets are in BRIC countries (China alone will soon represent nearly a third of the world’s pharma sales), there is also great
potential in the next wave of emerging markets in Africa, Asia, and Latin America.
Additionally, the market is demanding a higher focus on patient-centricity (for example, personalized medicines and lifestyle drugs), which means that biotechnologies will continue to flourish and provide an innovation engine for the industry, this being especially important as product differentiation becomes more valuable.
However, although the market is strong and expanding, it is also being transformed by an unprecedented shift towards generics, including the emergence of a small but growing biosimilars market. Generics currently represent more than a quarter of all pharma sales worldwide, and are growing at twice the rate of branded drugs, meaning that they are expected to account for about 40 percent of aggregate pharma revenues by 2015.
As a consequence, pharmaceutical companies have had to focus on niche drugs and smaller emerging markets. Returns on R&D have fallen by more than half, suppressed by reduced value creation and rising R&D costs. Faced with the challenges of maintaining, let alone improving, R&D productivity in the labs, the pharma companies have slowed overall R&D spending. The consequences are worrisome as 60 percent of the drugs launched between 1997 and 2007 have failed due to lack of differentiation. Any innovation is usually invested in secondary product features.
To compound the problems arising from the above market forces, there is also an ongoing evolution of acquisition and shake-out, resulting in much duplication and inconsistency within the network. The M&A process itself often delays and complicates any efforts to influence operating expenses. In addition to this, each merger involves the blending of two very different corporate cultures, and basics, such as the sharing of best practices, may stagnate until restructuring work has been completed.
Furthermore, governments have been driving higher levels of NHS professionalization. Healthcare systems are increas-ingly challenging the prices set by pharmaceutical compa-nies and are implementing radical reforms in organization and funding (group purchasing and tenders are on the up, as are severe cuts in reaction to recent economic condi-tions).
We can observe that the ongoing trend towards global-ization of supply chains and the fluctuation in corporate ownership in this industry is creating a continuous process of change. Since fewer blockbusters are being produced, success depends increasingly on achievement in new mar-kets, often with niche products of smaller quantities. Supply chains in the sector are also becoming far more fragmented as companies attempt to establish their presence in new markets and develop global networks of suppliers and distributors. If we then add to this the greater complexity of the products to be evaluated, often without precedent or clear legislative framework, and the demand by healthcare systems for improved cost, quality, safety and access, the enormity of the challenge faced by the life sciences sector becomes clear.
Supply Chain As the pharma industry shifts its focus and becomes more conscious of its operational processes, the importance of cost and manageability of excessive inventories is rising. In an attempt to address operational inefficiencies, most major pharma companies have introduced aggressive cost reduction programs. Lean transformations and continu-ous improvement initiatives are now commonplace in the industry.
A widespread global supplier network could be the key to increasing reliability and responsiveness. However, trans-actions which are relatively straightforward in other indus-tries are anything but that in the world of pharma. As the network is driven by regulatory constraints, it is intrinsically inflexible and rigid. It is also intrinsically difficult to move the manufacturing of products between sites – technology transfer can take up to seven years.
Moreover, the requirements of different markets are very diverse: the growth curve in mature markets such as North America, Western Europe and Japan has flattened out,
and the emergence of generics has forced companies to adopt a supply strategy based primarily on cost. However, the picture is completely different in emerging markets. There, companies often lack basic logistics infrastructures or adequate systems for handling temperature-sensitive products, although their potential for growth is far greater than that in more established sales areas.
The ideal situation is to match the supply strategy to the customer segments. This can allow a company to em-phasize agility, cost, service or a combination of the three, depending on local requirements. In this way, the supply chain can compete with generic drugs through maximum efficiency and cost control, as well as local innovation and customer centricity.
Regulatory and technologicalDespite the growing competition on the market, new tech-nologies offer companies a ticket to a whole new level of agile manufacturing and cost-saving opportunities. It is now a question of who will exploit the leverage of automation, wireless control, innovative sensor and PAT technologies, continuous processing solutions, quality data management, etc., and be first to reap the rewards.
The production plants of the future will profit from cost-effective wireless mesh networks. These will enable the entire network, including sensors, controllers and opera-tors, to efficiently work together without the need for costly hardware management. Consequently, process equipment will be connected to the control system, enabling real-time data transmittance to an operator’s device. Line managers or operators will monitor line performance or production data from any point in time or anywhere on site.
Within Quality Management, the next decade will see nano-technology and process analytical technology (PAT) implemented to a greater degree, thus assuring rather than controlling quality and efficiency. The sensors of the future will be so small that they will be part of a manufactur-ing process, similar to the technologies used in tornado research. There will be no more need to delay production while waiting for a certain test to complete, because direct process data will be used to adjust the process and assure quality in real time. Quality control of liquids and solids will use SD (Static Division technology) or high-speed cam-eras for particle inspection, and machines based on x-ray technology can detect quality, size and weight control of capsules fast and in real time.
Another trend will be that the facilities of the future will be designed around a modular footprint. With mobile equip-ment being the central component of a new pharma floor plan, fixed workstations or hardwired control will become a thing of the past. Moreover, operators will be able to move freely on the floor with a tablet PC or a hand-held device.
The switchover from desk-based to hand-held devices is already underway, while cloud-base technology offers readily-available back-ups for all mobile equipment. Fixed locations that generate unnecessary travel and inhibit effec-tive line management are gradually on the way out. Mobile technology will effectively increase a plant’s reliability while decreasing downtime and process disruption by enhancing efficiency, flexibility and product consistency.
However, despite the positive outlook for the market due to these efficiency-enhancing trends, there are also certain new regulations which will pose a challenge to companies.
As regulatory authorities increase the pressure for compli-ance, companies will struggle to bridge the gap between managing risk and eliminating risk. This will create a patch-work attitude to risk, where some functions will be pushed towards higher, tighter levels of control, and others will be pulled to more process-centric structures and cultures, with high levels of employee empowerment and responsibility.
The demand for new Health & Safety and QC inspection techniques and technologies will increase the pressure even further. As a consequence of industry safety regulations, there is a shift towards smaller batch sizes and demand for greater flexibility, plus a growing trend for single-use com-ponents. Disposable items, such as plastic bags instead of stainless steel (especially for changeovers), have an immense potential to revolutionize the manufacturing and quality control processes, increasing corporate agility and reducing costs.
We can see therefore that rapid technological development, coupled with regulatory frameworks, will not only create opportunities but also force companies to keep pace with the innovation engine in order to remain successful. Indeed, future pharmaceutical producers will need to embrace agile manufacturing techniques, designing their facilities around a modular footprint, operating and monitoring from wireless networks, leveraging mobile technology and using innova-tive sensor technology.
Some of the conflicting challenges faced by pharmaceutical companies
Right every time vs. risk-basedThis issue of risk management is higher than ever before in the healthcare industry. It is imperative that corporate leadership teams gain a deeper understanding of this and work to embed agile mindsets in their organizations, while helping them to manage risks systematically, proactively, and cost-effectively. Is it possible to substantially reduce or even eliminate supply chain risk exposure and if so, how?
A systematic and structured risk management approach will cost-effectively mitigate risks and proactively reduce the likelihood and negative consequences of disruptive events.
The essence of a risk based approach is:1. A well-structured and devolved risk management process: assessment, control and review2. Error-proofing: risk “designed-out” as much as possible, through simpler products, simpler processes, and in-line process control3. Proximity: where testing is necessary/unavoidable, move it as close to the source of error as possible4. Responsibility: People feeling accountable for the work they do; single points of accountability, well defined escalation processes5. Organizational culture: holistic, system-wide approaches, involving customers, marketing, QA, production, engineering and purchasing6. Continuous improvement: processes and structures that enforce continued efforts in lean and six sigma, to opti- mize processes, product development approaches, etc.
By taking advantage of these risk management techniques, companies can save millions of dollars in reduced supply chain costs whilst simultaneously assuring higher compli-ance.
In this increasingly complex and competitive sector, “com-pliance by inspection” is no longer the optimum solution. The sector can only improve by implementing cross-in-dustry best practices in quality assurance. Organizations must be prepared for this evolving regulatory environment. Across the globe, regulators are developing smarter and leaner ways of working, becoming increasingly sophisti-cated in their use of standards, best practices, and proven methods. Pharma executives need to be vigilant about this new regulatory mindset in order to sustain their financial performance, brand image, and long-term competitiveness.
A more structured approach to risk management can reduce both the risk of conventional quality and compliance issues, plus – if part of an overall cultural change – increase the efficiency and effectiveness of the company’s overall operations.
High utilization vs. high flexibility Regarding the infamous trade-off between utilization and flexibility, organizations typically fall into one of four modes of operation:
1. Those with unpredictable demand and operations. They tend to provide poor service, whilst also being underutilized and expensive2. Those with unpredictable demand and high excess capacity, such as the fire & police forces, who are able to respond immediately to requirements, but at huge costs3. Those with high loading, often predictable demand, that exploit their assets to the full and achieve low unit cost, but whose service is considered poor4. Those with high volumes and high service, who succeed in achieving high asset utilization and therefore low costs, but are also well planned and reliable
It is often assumed that companies need to choose be-tween the two competing ideals of high utilization and high flexibility. For example, if a company needs to become extremely responsive, it might consider duplicating its sites to gain surge capacity. If it simultaneously needs to increase its returns on capital, it might consider rationalizing its sites. However, many companies actually have waste, delay and complexity embedded in their operational practices. The ideal of being reliable and flexible, while nevertheless maintaining a low cost base, can be achieved by working to reduce waste, delays, and complexity, combining the “lean” and “agile” philosophies. Indeed, traditional lean concepts must be supplemented with agile planning and operations techniques in order to overcome certain tradeoffs. This philosophy of lean agility must reach beyond issue resolu-tion and fire fighting, to driving profitable growth as a result of faster decision-making, better planning, faster launches, responsiveness to lean stock levels, etc.
Lean-agile transformation programs that drive reliability, flexibility, utilization and cost reduction will focus on many aspects of the supply-chain to address waste, delays and complexity: process improvements and error-proofing, developments such as single use technologies and well-designed modular products, enhanced IT technologies, standardized best practices, group purchasing, a culture of speed and efficiency: all can be implemented to eliminate waste, delay and complexity, thus increasing flexibility and reducing cost.
For individual sites, volume flexibility (the ability to flex volumes based on demand) and mix flexibility (the ability to change products without capacity loss) are typically the most critical flexibility requirements.
Volume flexibility often requires flexible labor and equipment resources. During the recent financial crisis, companies such as Volkswagen, T-Mobile, and Bosch dealt with the drop in demand by adjusting standard work times. When demand rises again, companies should also be able to make small, fast increases in capacity. Solutions beyond la-bor management, for example, external regulatory validation of new equipment, can also be deployed. Pre-qualification of equipment is an alternative, though expensive, solution. Mix flexibility requires flexible production equipment and multi-skilled employees. Automotive players play a leading role here also. BMW, for instance, can produce multiple models on the same production line at its Leipzig plant and can integrate new technologies, such as new engines, within industry-leading cycle times. Translation of this flex-ibility for the pharma sector involves incorporating produc-tion constraints during the product design phase, so as to reduce product complexity (harmonized blister packs and bottle formats that can be handled with fewer changeovers) and increasing equipment flexibility (so changeovers, where necessary, are seamless). The old-fashioned solutions of batching, “smart scheduling” and buffering, that damage value-stream performance, are then no longer required.
Managing fluctuations in demand can also be addressed through active collaboration with other players, as part of capacity-sharing initiatives. Major chemical companies have outsourced their human resource pool, employing the shared-service philosophy, thus, supplying labor both to themselves and other companies and thereby overcoming their demand fluctuations. Many consumer companies have also pursued these collaborations. In one recent test case, rival FMCG companies joined forces to manage the logis-tics related to the Christmas peak in confectionary sales, while other FMCG rivals operate joint warehouses to level out demand fluctuations.
Adding value to the life sciences industry
Supply chainResponding to the need for flexible, reliable yet cost-effec-tive operations, pharmaceutical companies often need to strengthen their entire S&OP platform, systems, processes and data management. This is frequently the first step in re-inforcing the value-stream’s delivery and cost performance, and includes implementing new planning and aggregation practices, new inventory management and range planning practices, and improved translation of demand into capac-ity and workload.
The next step to take, particularly in the current economy, is to find reasonably priced manufacturing conditions and raw material supplies, and this is where cost-efficient sourcing & procurement strategies can be effectively applied.
A third step, applicable to both major and small regional plants, across the biotech and pharmaceutical arena, is to implement and harmonize best practices, that are simple, efficient and swift to execute. Obtaining tangible support in the introduction of standardized and optimized processes across the businesses or units of pharmaceutical or biotech companies will considerably help streamlining their opera-tions and achieving significant increases in efficiency and cost reductions.
Such programs are holistic and multi-faceted, and should address ‘set-up’ or strategic topics, as well as tactical, op-erational topics. The following framework is recommended:
By deploying such a framework in any focus area, be it in packaging OEE, QC efficiency, supply-chain optimization, indirect functional efficiency, or across the complete site, such a 360-degree approach will ensure that large-scale problems as well as traditional small-step improvements are highlighted. Additionally, because plan-do-check-act (the basis of sustainable improvement) is embedded in the scope, it will help reinforce a culture of continuous improve-ment.
Operation and organizationIn view of the current economic situation and the continu-ous churn of ownership, it is even more relevant now that pharmaceutical companies keep transforming in order to stay ahead of or sometimes even in the game. Operational
excellence and cultural transformation programs hence need to be designed to help companies turn around, sig-nificantly improve performance, and maintain market value. These programs should be able to help companies design the best organization solution for the situation at hand and enable streamlined, efficient processes to be standardized and rolled out across the network. Some of the leading global pharmaceutical companies have recently imple-mented process-centric organizational structures, relying on full partner support along the way, while measuring and monitoring performance improvements. All the way through project implementation, top focus should always be put on change management, cultural transformation and leader-ship. Support should be provided to define the required structure, roles, and responsibilities, boost people skills and add value to the company’s KPIs. Providing full PMO sup-port and training throughout the process helps to embed and improve the internal project management capability within the company. Lastly, to stay on top of the learning curve, pharmaceutical companies should seek innovative support with system integration and advice on the latest technological solutions, to further enhance their perfor-mance. It takes a strong partner to remain a step ahead of the dynamic market and, having helped our life sciences clients for over 30 years to prepare for market challenges and emerging trends in the most efficient and effective ways, we can safely say that this is our mission.
Paulo Ribeirinho, Senior Consultant, Tefen UKJelena Joffe, Senior Consultant, Tefen UKPete Caldwell, Managing Director, Tefen UK
