Pharmaceutical Industry Wastes $50 Billion a Year Due to Inefficient Manufacturing

October 11, 2006

Contact:
Cynthia S. Shaw
(202) 687-4080
css27@georgetown.edu

Pharmaceutical Industry Wastes $50 Billion a Year Due to Inefficient Manufacturing

Study Finds Both Drug Makers and F.D.A. Could Run a Tighter Ship

Washington, D.C. -- The pharmaceutical industry could be wasting more than $50 billion a year in manufacturing costs alone -- according to findings of the largest empirical study ever performed of pharmaceutical manufacturing and the Food and Drug Administration (FDA) monitoring policies. Jackson Nickerson, Associate Professor of Organization and Strategy at the Olin School of Business at Washington University in St. Louis, and Jeffrey Macher, Assistant Professor Strategy and Economics at Georgetown University's McDonough School of Business jointly conducted the study which received no funding from either the pharmaceutical industry or the FDA.

The full study is posted online and available for download.

"We undertook this research project to understand how the FDA and pharmaceutical manufacturers work individually so we could see where the conflicts are that inhibit advances in manufacturing," Nickerson said. "Our policy goal was to understand both sides of the coin so that we could contribute to improving the regulatory environment, thereby altering the pharmaceutical industry's incentives to produce the same quality products that we have now, but for a much lower cost."

The researchers collected data from 42 manufacturing facilities owned by 19 manufacturers. They studied the company's performance in terms of cycle time, frequency of problems, reasons for problems, rates of change, speed in improving cycle time and yield. Their analysis revealed five key outcomes that influence the efficiency of pharmaceutical manufacturers.

  • Information Technology. Companies that used IT to electronically and automatically report, track and resolve deviations; track people; and centrally store all data, uniformly displayed superior manufacturing performance compared to those without such IT.
  • Decision making. The lower down in the ranks that companies allowed employees to make decisions, the higher the overall company's performance. This is especially true when considering deviation management, lot failure, lot review and process valuation.
  • Outsourcing. Facilities that contract their manufacturing functions with other firms generally --although not always -- have inferior performance.
  • Process analytic technology. The use of technology that measures the uniformity of a drug's content prior to the completion of the final product, corresponds to worse performance measures. The correlation doesn't imply causation, said Nickerson. In fact, process analytic technology may improve a drug's quality. However, the F.D.A. had been encouraging the industry to adopt use of the technology using the argument that it would improve overall performance. Nickerson said this finding is causing the F.D.A to rethink their reasons for endorsing process analytic technology.
  • Size and range. The scale and scope of the manufacturing facility have a complex interplay with manufacturing performances. Depending on what aspect of manufacturing is being measured, scale and scope can either be a detriment or a benefit.

Nickerson said that some of the findings weren't necessarily surprising, but the study represents the first documentation of these phenomenon.

The manufacturing project was completed about a year after Macher and Nickerson conducted a similar study that focused on the FDA's regulatory processes.

"Each study in and of itself addresses each side of the coin. But in combination we feel that we are now in a better position to comment on how to improve or change regulations so that they focus on a risk-based environment," Macher said.

Although the report is primarily a benchmarking device, the research is already pointing to important observations that suggest specific areas of conflict and to the direction to take in future research. For example, the FDA study made it clear that individual regulators are not identical in how they inspect a facility.

"If there are differences in regulators and if regulatory agencies randomize who goes out and inspect facilities, then we believe that creates an incentive for manufacturers to be risk averse," Nickerson said. "Manufacturers want to insure themselves against any regulator that comes in. The net result is that because of the regulatory environment, companies have an incentive not to innovate in making their manufacturing processes better."

The professors say that once they better understand the interplay between regulators and manufacturers, then they can make proposals on how to change regulatory policies so that firms do have in incentive to innovate manufacturing processes.

"Doing so could have dramatic impact on global healthcare," Macher said.

Editor's note: Professor Jeff Macher is available for interviews. Georgetown University's faculty experts are available for interviews by national and international media over our high-quality ISDN connection.

About the Robert Emmett McDonough School of Business
Georgetown University's McDonough School of Business is a premier, distinguished business school located in the nation's capital. Founded in 1957 to educate undergraduate business students through the integration of liberal arts and professional education, the McDonough School today has approximately 1,300 undergraduates, 620 MBA students, and more than 500 participants in its executive education programs annually. For more information about the McDonough School, visit msb.georgetown.edu.

About Georgetown University
Georgetown University is the oldest Catholic and Jesuit university in America, founded in 1789 by Archbishop John Carroll. Georgetown today is a major student-centered, international, research university offering respected undergraduate, graduate and professional programs on its three campuses. For more information about Georgetown University, visit www.georgetown.edu.