Managing Cost Without Sacrificing Quality

Andrew D. Skibo

December 1, 2012

11 Min Read

Over the past decade, significant pressures have threatened the future of many pharmaceutical and biopharmaceutical companies. Increasing drug development costs, declining research and development (R&D) productivity, mounting regulatory setbacks, and looming patent expirations — with fewer blockbuster therapies on the horizon — are collectively challenging many businesses to stay profitable and competitive within the industry. Many companies are intensifying their focus on reducing operating costs, particularly within manufacturing operations. This trend is almost an omnipresent feature of management articles, seminar topics, and even direction from company boards of directors.

Throughout this same period, we have witnessed another trend across our industry. Media coverage of product recalls, contamination issues, drug shortages, and even good manufacturing practice (GMP) settlements is almost weekly. Those are no longer one-off examples. This represents a dramatic and troubling rise in quality issues that are becoming pervasive across the pharmaceutical and biopharmaceutical industries, even affecting those companies that once were seen as prominent examples of best-in-class quality.


Beginning around 2006, drug shortages began steadily increasing year after year — rising to an astonishing 267 medications in 2011 alone. Beyond the lost revenue and impact on corporate reputation, product recalls lead to such shortages, putting undue burden and stress on both patients and physicians working to manage acute or chronic illnesses. Importantly, the US Food and Drug Administration (FDA) has noted that manufacturing deficiencies are the leading reason for drug shortages. Unfortunately, according to a 2011 report from the US Government Accountability Office, the agency is “constrained in its ability to protect public health from drug shortages” (1).

Recalls are also plaguing the industry. In 2009, the FDA reported more than 1,700 drug recalls — four times greater than what the agency had listed in 2008. Many of these product recalls, according to an FDA inspection report, were linked to particle contamination, unsanitary equipment, or a failure to follow GMPs (2).


The biopharmaceutical sector is particularly at risk. Efficacy of even well-characterized biologics cannot be conclusively demonstrated through quality testing of a finished product. Unlike small molecules, biologics are still defined by their manufacturing processes and environment. Moreover, the complexities associated with manufacturing such products — handling of raw materials, the manufacturing environment, specialized technologies, and expert techniques — puts biotechnology companies at even greater risk of quality issues than those producing small-molecule classical drugs. Regardless of product type, the pharmaceutical industry must ensure that quality does not suffer as we constantly look for ways to reduce manufacturing costs.

Losing Sight of Good Value–Risk Modeling?

What is happening? Has our industry’s decade-long struggle for survival by cutting costs pushed it inadvertently to a point at which the quality of the products and services weprovide is suffering? And if that is the case, then what can we do to maintain our competitive edge without sacrificing quality performance?

Taking proven steps to ensure that we are maintaining a high standard of quality begins with better decision making, and that requires understanding the value–risk model in drug development and commercialization. This will help companies better evaluate and uncover strategic and logical cost-saving measures with an ultimate value measured against the true range, weighing cost benefit against risk to the enterprise. As in other high-risk industries, companies within our industry cannot afford to take a narrow and generalized approach to evaluating cost-saving initiatives based solely on how they affect day-to-day manufacturing costs. That may work in some industry sectors (e.g., apparel manufacturing), but it does not apply to sectors such as biopharmaceuticals, aerospace, or oil and gas production, in which the risks of product or process failure represent risk to human health and life.

Risk Tolerance: Before a company undertakes cost-savings targets within its functional sites, management must first understand both its corporate tolerance for risk and its true cost structure at the enterprise level. Risk tolerance can be driven by both industry focus and market focus within an industry.

The risk tolerances within the pharmaceutical, aerospace, and off-shore oil exploration industries are very different from those for the automotive, apparel, or footwear industries. And they may differ even within a specific industry. For example, the risk tolerance for manufacturing quality of Porsche, BMW, or Mercedes is certainly different than that for automotive manufacturers targeting market segments at much lower price points. The glue holding the soles onto a pair of sneakers can fail without loss of human life or even reputational risk to the company. But the glue holding the carbon fiber panels together on a Boeing Dreamliner tail section cannot ever fail. So decisions regarding pursuit of lower manufacturing labor or material costs and outsourcing to emerging markets for some companies must absolutely consider the enterprise risk–value proposition if the enterprise is to survive.

Cost Structuring: Management also must understand a company’s true cost structure at the enterprise level. Evaluating costs only as profit and loss (P&L) reported cost of goods manufactured (CoGM) is not sufficient. Doing so can easily obscure highly leveraged opportunities for cost savings or significant risk exposures.

Product costs need to be evaluated from top to bottom on a “cost-as-made” basis, not as reportedin a P&L statement. For example, manufacturing scrap has the same cost at any stage in manufacture as material at the same stage that would be eventually released for sale. On most P&L statements, the value of manufacturing scrap disappears into CoGM. Sales scrap — otherwise sound inventory that is lost due to short dating or expired dating — similarly has the same cost as released material. On most P&L statements, that too disappears into cost of goods sold(CoGS), CoGM, or even the bottom-line P&L. Neither form of scrap would be visible on a P&L statement, but both represent significant, addressable areas for cost reduction.

On the other hand, training costs, recruiting costs, direct staff labor, and temporary or contract labor may be visible on a P&L or CoGM analysis. But how are their interactions known? As we replace expensive full-time employees (FTEs) with a less expensive seasonal or contract workforce — or as we outsource work to contract manufacturing organizations (CMOs) or eme
rging markets — how can we determine what will happen to training, recruiting, and retention costs? Can we track scrap rates or quality nonconformance rates (NCRs) against such changes in line-item costs?

A Case Study

Recently, MedImmune applied the above ideas to its seasonal flu vaccine manufacturing, a relatively low-margin business that involves yearly licensing, a difficult manufacturing process, and strong quality control and assurance (QC and QA) interactions. The influenza vaccine business is seasonal by nature. In MedImmune’s earlier, low-volume years in the business, the company applied a labor structure that favored a high ratio of seasonal workers to FTEs (1.3:1). When shown only as the labor cost line item on a P&L statement, that always appeared to be the most cost-effective approach. Recently, however, as the MedImmune team looked at the situation from a cost-as-made perspective, we got a much different view. Operating at our current higher volumes, that high ratio of seasonal to full-time workers actually added significant cost on several fronts rather than saving the company money. Resulting high process variability led to significant and frequent interventions to ensure ultimate product quality.

High seasonal worker attrition rates required the company to hire 140% of its seasonal workforce at the beginning of the season just to maintain 100% of workers needed throughout production. All those people had to be fully trained, an investment that would be lost on 40% of the temporary staff within a few months. Manufacturing vaccines requires process-intensive and high-technology steps that are nearly impossible for someone to master with only a few months of training. So high employee turnover led to complex manufacturing or machine setup steps being executed by new staff with little experience on the line. New-hire training, no matter how intensive, cannot make up for years of experience in setting up complex equipment. And the scrap rate was four times higher than desirable on average. Because scrap does not appear on P&L spreadsheets, the company had not taken it into consideration when originally reviewing its seasonal labor structure. In considering as-made costs, MedImmune found that scrap accounted for 16% of CoGM.

When faced with an issue such as cost, many companies simply apply formulaic solutions from other industries, believing for example that outsourcing work to cheaper labor markets always leads to a direct cost savings. And that may be a certain solution in the apparel industry, in which labor costs represent a high percentage of CoGM and quality models are different from those in pharmaceutical manufacturing. But it may not be the right answer in all cases for the biopharmaceutical industry, in which labor costs represent a low percentage of CoGM and the costs of a quality failure (or failure to supply the market demand) are severe.

As illustrated in MedImmune’s seasonal flu vaccine example, our industry must first understand the risks associated with cost–benefit decisions. The quality of many manufacturing processes is closely tied to highly trained workers and a reliable, top-to-bottom company focus on quality as a first priority. Although seasonal labor directly cost MedImmune less than did FTEs, that labor savings came at a higher indirect cost.

So my company made a radical move to change that structure by significantly reducing the seasonal labor ratio for both of its seasonal flu vaccine manufacturing sites. Although seasonal workers are still used, all “product-contact,” machine set-up, and QC/QA roles are filled by FTEs. At the Pennsylvania fill–finish operations, for example, MedImmune had a temporary/permanent ratio of 3.21:1 in 2009; this year it is 0.65:1. The results were immediately positive. Scrap rate dropped by 75%, and safety improvements were seen both in total recordable incidence rates and in lost-time incidence rates.

Production also rapidly improved. The first commercial lot of flu vaccine was released six weeks earlier for 2011 than in previous years, which provided MedImmune with an ability to get its vaccine to health-care professionals and patients faster than ever before. Following those changes in 2011, yield variance improved by 44%, requiring four fewer production lots overall. Investments in the vaccine franchise delivered quality and manufacturing improvements. The company is now on track to deliver a >50% reduction in total deviations year over year.

Get Everyone Involved Because Quality Matters

In the past, plant managers knew all the costs that went into making their products. Today, many plant managers are separated from cost analyses. In a sense, they are paid simply to make the product. MedImmune’s plant managers and franchise managers are the ones who understand the true costs that go into making products. They are also the leaders who have first-hand knowledge regarding which factors will affect quality. So they must fully understand the cost structure of their business.

Cost-savings and operational-excellence (OE) teams must be fully cross-functional in both their composition and mindset. Their charter is to deliver enterprise value, not simply line-item savings. These teams (and their management) also must be incentivized when improvement in enterprise value isconfirmed — not when a potential cost savings approach is first implemented. The recent passage of the Prescription Drug User Fee Act (PDUFA V) reauthorization legislation by the US Congress makes our job of ensuring quality even more vital because it gives the FDA more regulatory jurisdiction over all related issues (3). With PDUFA V, there is now a clear tie between cost and risk, and the regulatory agency can make manufacturers more accountable for quality-related problems such as market shortages.

We Can’t Trade Quality for Cost

Certainly, pharmaceutical and biopharmaceutical companies need to uncover ways to reduce costs on all fronts. As an industry, we are under enormous pressure to survive in a rapidly shifting healthcare and economic environment. Cost containment and reduction strategies will always be important to our continued business. But this industry requires and assumes 100% reliable quality as a foundation for enterprise survival. Unlike many other industries, we cannot make a product that fails, and we cannot fail to make the product.

So the drug industry must ensure that product quality is not reduced along with manufacturing costs. This comes from a systematic, company-wide mindset that recoils from the thought of a poor quality outcome. Reliable operations and reliable quality together deliver the best costs. Ultimately, this is not about rules, standard operating procedures (SOPs), or punishments for personal infractions; it is about the environment and atmosphere in which we ask our people to work. As part of the biotechnology industry, we are manufacturing potentially life-saving and life-changing medicines. Quality clearly cannot be a trade-off for cost.

About the Author

Author Details
Andrew D. Skibo is executive vice president of operations at MedImmune, One MedImmune Way, Gaithersburg, MD 20878; 1-301-398-0000.


1.) 2011. Drug Shortages: FDA’s Ability to Respond Should Be Strengthened, US Government Accountability Office, Washington.



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