Archive for the ‘Pharmaceuticals’ Category

Have you ever thought about how drugs get made? Not your Walter-White kind of drugs but proper ethical pharmaceuticals. As the Wall Street Journal tells it, major players in the industry like Novartis and Johnson & Johnson are taking new approach to producing drugs (Drug Making Breaks Away From Its Old Ways, Feb 8).

For decades, drug makers have used cutting-edge science to discover medicines but have manufactured them using techniques dating to the days of the steam engine. …

Under the new approach, raw materials are fed into a single, continuously running process. Many other industries adopted such a “continuous-manufacturing” approach years ago, because quality can be checked without interrupting production—with weeks shaved off production times and operating expenses cut by as much as 50%.

Until recently, pharmaceutical companies have been stuck making drugs the old-fashioned way, mixing ingredients in large vats and in separate steps, often at separate plants and with no way to check for quality until after each step is finished. Any desire to modernize was partly blunted, industry officials say, by the high margins netted on the industry’s string of billion-dollar-selling drugs.

To give you an idea of the scope of what is happening, the article reports that J&J is aiming to have 70% of its highest volume products produced under a continuous-manufacturing approach within eight years. (more…)

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Why invest in automation? The answer to that question is often to cut cost — a straight up move to replace labour with capital. That has the obvious implication that firms in high-wage locales like the US should be willing to invest heavily in fancy machinery while those in lower-wage countries like India should be more cautious in doing so. That may not always hold, however. As the Wall Street Journal tells it, there is one Indian industry that is investing heavily in automation and it’s not really about shaving costs. The industry in question is generic pharmaceuticals and the driving force behind the capital investments is maintaining high quality standards (India’s Drug Makers Move Toward Automation, Jun 5).

Despite an abundance of low-cost laborers in India, all of [Dr. Reddy’s Laboratories’] plants are moving toward fully automating their production process “to avoid good manufacturing practice pitfalls from regulators,” said Samiran Das, head of Dr. Reddy’s generic drugs manufacturing.

In the past decade, India’s pharmaceutical companies have blossomed into multibillion-dollar companies that now account for 40% of the generic drugs sold in the U.S. Those companies, however, have come under increased scrutiny in recent years from the U.S. FDA, for manufacturing, testing and other safety issues that are often the result of human error.

To ensure that their products don’t get banned from the U.S.—the world’s biggest drug market—many companies that can afford it are spending hundreds of millions of dollars to automate. …

Mr. Venkatanaryan, the head of the Dr. Reddy’s Bachupally plant, says the drive toward automation is meant to make the manufacturing process “mistake-proof.”


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I spent this weekend in Miami (OK, Coral Gables) teaching the core Ops class for an executive MBA section. One of the topics we usually cover in the core (especially with execs) is the cash-to-cash cycle. The cash-to-cash cycle (intuitively) measures how long it takes a firm to capture the gain on its investment in inventory. Mathematically, it consists of days of inventory plus days of accounts receivable minus days of accounts payable. Thus when a firm purchases inventory, it takes a while for those goods to sell. It may then need to wait to collect cash from its customers. However, it may get credit from its suppliers so time in inventory may be offset by the time it has to pay its suppliers. Taken together, these measures give an idea of how effectively a firm uses its working capital. It also may suggest where the firm should target improvement. For example, benchmarking might show that its accounts receivable is out of whack with industry norms so that could be a real opportunity to pursue.

As I said, I had to teach this stuff this weekend. Fortuitously for me, Supply Chain Insights just happened to publish a whole report on the cash-to-cash cycle packed with data and eye candy (Supply Chain Metrics That Matter: A Closer Look at the Cash-To-Cash Cycle (2000-2012), Nov 11). To start with, here is some data on how cash-to-cash cycles vary across industries and over time.



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It is hard to think of a more challenging problem: How do you distribute necessary medicines in a developing country lacking infrastructure? That is question tackled by Simon and Jane Berry, two Brits trying to reduce childhood deaths from diarrhea in Africa. Diarrhea is the leading cause of death for children under five — which is tragic since it is not some mysterious disease. It is completely treatable by standard and (in the grand scheme of things) cheap medicines. But you need to get the medicines out to rural areas. The Berry’s solution was a packaging innovation that lets them piggyback on existing, super efficient supply chain. Whose supply chain? Here’s a hint, their not-for-profit is called ColaLife (ColaLife: Turning profits into healthy babies, BBC, Jul 22).

Simon Berry and his wife Jane had come up with a strikingly-simple idea – a package for medicine that slotted into the empty space at the top of a crate of soft drink bottles, fitting neatly in between the bottlenecks.

A dazzling idea, to piggyback the delivery of the diarrhoea medicine for babies onto one of the most efficient distribution systems in the world. Go anywhere and you will find a shop selling Coca-Cola. And the plastic packaging is ingenious – once opened it becomes a measuring device.

Here is what ColaLife’s anti-diarrheal kits look like sitting in the crates.

Here is how the crates get out to villages.



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So last year everyone was nervous about a flu pandemic — and with good cause. The H1N1 virus was an unknown protagonist and it was not out the realm of possibility that it could lead to a devastating public health crisis. We now know it didn’t. Yes, some people got sick but the forecasts of overwhelmed hospitals and massive numbers of deaths never really materialized.  Hey, we even ended up with some excess vaccines.

The last point has now led to some finger pointing as people go back and examine how various governments handled the crisis. An independent commission in Britain has just released a report evaluating the UK’s response and generally has good things to say except for all those left over vaccines (Swine flu vaccine contracts ‘lacked get out clauses’, Jul 1, BBC). Dame Deifre Hine, the commissions chair, discusses the findings:

Vodpod videos no longer available.

Here are the details on the excess vaccines:

More than 30m doses are thought to be left over after one of the manufacturers, GlaxoSmithKline (GSK), refused requests for the contract to be torn up.

The other manufacturer, Baxter, agreed to a “break clause” allowing the government to cancel its order. …

A spokeswoman for GSK said because of the demand at the time for its vaccine from governments across Europe it would not have been “ethical” to offer one country a break clause when others were not able to have all the doses they would have wanted.


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What happens when a newsvendor decision goes bad?  It depends on what the contract says.  That is what Novartis is now finding out (Novartis Seeking Vaccine Payments, Wall Street Journal, May 6). Novartis was one of the major pharmaceutical firms scrambling to produce flu vaccine. When the flu proved relatively mild, many countries canceled orders, leaving some ambiguity over who was owed what.

About half of the 15 governments that ordered H1N1 vaccine from Novartis AG ended up canceling part of their orders, and some are still negotiating with the company over payment, according to Andrin Oswald, head of Novartis’s vaccine business. Dr. Oswald said Novartis will seek clearer cancellation terms in future pandemic contracts. “We would need…more clarity in the contract about what happens in the situation we have right now, if a government feels it has too much vaccine,” he said in a phone interview, “because the debates we have right now are not helpful.”

The French, apparently, offered to pay only 16% of the contract price, terms that the Novartis ultimately accepted.  The US meanwhile ordered nearly 230 million doses (not all from Novartis) and has used something like 91 million.  The Department of Health and Human Services right now is  “in discussions” with suppliers about the excess.


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American’s are fascinated by Canadian drug prices. The Great White North is seen by many as the home of reasonably priced pharmaceuticals.  Much of that is due to having provincial health care plans with purchasing and regulatory clout that dictate prices. Now Ontario is aiming for lower prices of generic drugs by trying to restrict a particular type of supply chain contract. As the Globe and Mail explains (A bitter pill to swallow, Apr 17), the contracts in question involve professional allowances:

The fight with the province over drug prices has exposed a business model that the pharmacy industry has counted on for decades. Ontario plans to eliminate professional allowances – payments that generic drug manufacturers make to pharmacies as an incentive to use their products over those made by a rival drug company. These payments, which amount to hundreds of millions of dollars a year for the retailers, are how the pharmacy operations of most drugstores make their profits. But while some drugstores call the payments rebates, the Ontario government says they inflate drug prices, and eliminating them will cut its annual generic drug tab of more than $1-billion in half.

A CBC report has a little more detail on these allowances (‘Professional allowances’ and the price of generic drugs, Apr 9):

What are “professional allowances?” It depends who you ask. Ontario Health Minister Deb Matthews compared the payments to “kickbacks” that generic drug makers pay to pharmacies so they will stock their products. Drug prices are regulated. When Ontario last changed the rules on generic drug pricing, in 2006, it said generics could be priced at no more than 50 per cent of the price of their brand-name counterparts. It also said drug companies could not offer pharmacies discounts off the invoice price to encourage them to carry their products. That practice is allowed in several other provinces. Ontario did allow the drug companies to provide “professional allowances” to pharmacies — but only under strict guidelines. The money is supposed to be used for direct patient care.

So what counts as “direct patient care”? It is supposed to be things like delivering drugs to seniors or running a flu clinic. The province’s gripe is that the money isn’t being used as its suppose.  According to the CBC,

The province argues that they’re subject to abuse and they keep generic drug prices artificially high. Among the problems the health ministry says its audits have found are:

  • Pharmacy owners have reported that 70 per cent of professional allowances have gone toward fringe benefits, bonuses, overhead costs and boosting profits instead of patient services.
  • As many as 100 individual pharmacy owners have failed to disclose any documentation related to professional allowances collected, and over 650 provided incomplete reports in 2009.
  • At least one pharmacy and wholesalers have been involved in a “resale” scheme that triggered the payment of professional allowances multiple times for the same product.


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Manufacturing can be hard.  It can take lots of little decisions to get everything right.  Throwing in living, unpredictable organism, and it gets even harder.  I am not talking here about assembly line workers.  I’m talking about microorganisms.  That’s the problem that Genzyme has had.  Genzyme specializes in biopharmaceuticals and thus depends on tiny organisms to get things done.  When those things catch a virus, it can shut down an entire factory. We wrote about this back in October, and now the New York Times reports that they have yet to fix the problem (Genzyme Drug Shortage Leaves Users Feeling Betrayed, Apr 15).

Last June the company temporarily shut its main factory in Boston because of contamination from a virus. Such problems can arise in biotechnology factories, which use living cells to make drugs, and few faulted the company at the time. But Genzyme, which initially predicted that the drug shortages would last six to eight weeks, has repeatedly backtracked on when supplies would be fully restored, as it has run into further manufacturing problems. At one point, particles of steel, rubber or fiber were found in some vials of the drugs.

The company has paid a pretty serious price for this.  It’s stock has been hammered, and it has Carl Icahn making noise. Further, other drug firms have begun to produce competing medicines that may cut into Genzyme’s long-term sales. And these are small markets. The affected medications are for rare genetic conditions.  When Wyeth makes  a bottle of  Advil, they have effectively no idea to whom that medicine is going. Genzyme, however, is essentially on a first name basis with its clients.

That is in part because there are only 1,500 Cerezyme users and fewer than 1,000 Fabrazyme users in this country. It is also because the drugs are so expensive — about $200,000 a year. Many patients turn to a Genzyme case worker to help them secure insurance or financial aid.


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Let’s start with a chart.  The Economist recently ran this spiffy graphic based on European Commission data showing which companies spend the most on research and development (Research and development Hey, big spender, Nov 20th 2009):

In some ways, the list contains some likely suspects.  Pharmaceutical firms and large technology companies are well represented.  I, however, was a little surprised to see Toyota atop the list by a non-trivial amount.  Further, many other automakers up there as well.  In some ways, this makes some sense.  Developing a new vehicle is very expensive and all of the big car makers are now trying to expand globally.  That means developing a car for [Name Your Favorite BRIC Country] while still tending to home markets.  On the other hand, the last few years have been tough on auto makers.  And look: General Motors is 5th!  How did that happen?  How did a firm that is basically a ward of the state end up investing so much in R&D? (more…)

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Flu vaccine production has been a research topic of some interest over the last several years.  Broadly speaking this work has two prongs.  One regards the challenges of production planning when yields are highly uncertain.  The other deals with how to dole out the vaccine when supplies are limited.  Some recent articles show that these are very practical questions.  From today’s Wall Street Journal, we have a report that shipments of the H1N1 vaccine have fallen way short of forecasts (Vaccine Output Falls Short, Oct 24, 2009).

By Friday, 16.1 million doses of vaccine for what is also called H1N1 flu had been shipped to warehouses, the CDC said.

The total is far below the government’s most recent estimate that by the end of this month, about 28 million to 30 million doses would be ready.

That estimate itself is a revison, made last week, from a prior expectation of about 40 million doses by the end of the month. However, the number of doses shipped is steadily increasing. (more…)

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