How Do You Solve a Problem Like Manufacturing?

Aug 31, 2008

A frequent pharma headline these days carries the news that a large cap is restructuring its internal manufacturing operations to generate cost savings. Often, such articles quote executives describing the manufacturing function as "non-core," while reaffirming the centrality of R&D and marketing functions. Take AstraZeneca's dramatic announcement last fall that it would outsource all manufacturing within 10 years. Said David Smith AstraZeneca executive vice president of operations, "Manufacturing for AstraZeneca is not a core activity. AstraZeneca is about innovation and brand-building. ... There are lots of people and organizations that can manufacture better than we can."

The fact that the announcement was partly retracted by the public relations staff indicates the level of confusion and anxiety that an outsourcing decision generates. But with a little effort, even a distracted pharma exec can get up to speed on the mystery of manufacturing, and figure out a rationale to use in determining the best course of action.

The Core of the Issue

It is not common for the head of manufacturing to have a seat on the top-level management committee at large pharmaceutical companies. Manufacturing issues are rarely discussed unless they have to beā€”most often as a result of such painful events as product stock-outs, large capital expenditures, or regulatory compliance issues. Periodically, strategic reviews identify manufacturing as a potential cost-savings opportunity because of the large asset and employment base. The all-too-easy executive decision is "Just outsource it."

Wide-Ranging Results
In part, manufacturing is a victim of its own success. Products are generally available where and when they're needed, and there's little recognition of what it took to make that happen. Marketing and R&D are notoriously poor at forecasting product approvals and commercial success, so manufacturing has to be prepared for wide-ranging demand scenarios (See "Wide-Ranging Results"). As a result, substantial capital is invested to support drugs that may not be approved, or that may have underwhelming sales. On the flip side, demand often far exceeds forecasts, leaving manufacturing chiefs scrambling to keep up.

Immunex's Enbrel is a case in point. Launched in 1998, Enbrel (etanercept) sales quickly approached $800 million annually before manufacturing capacity for the recombinant-DNA arthritis drug became a constraint in 2001. Revenue growth was severely limited as patients were added to a waiting list. Not until Amgen's purchase of Immunex and the rushed construction of a Rhode Island factory did supply meet demand.

Also on the list of nasty surprises is the issuance of an FDA Warning Letter, which always seems to appear out of the blue, threatening a company's ability to ship existing products or gain approval for new ones. In the aftermath of a consent decree, companies can spend billions on remediation simply to get back to their prior position, with new product launches suspended until sufficient progress is made in addressing deficiencies.

The overall result is a limited understanding of the value manufacturing brings to the company as a whole. From the executive suite, manufacturing looks like a black hole that absorbs significant resources. Although it generally produces the required products, it does so at high cost and with periodic dramatic failures. The temptation to simply turn this over to an external organization and focus on the "core" areas of R&D and brand building is absolutely unsurprising.