The changing face of pharma manufacturing

Globalisation, mergers and increasing regulation are having a big effect on pharmaceutical manufacturing. The ABPI's Trevor Jones explains to Sarah Houlton how he sees the sector developing in response to external pressures

With a background in pharmaceutical development, and having been director general of the Association of British Pharmaceutical Industry for five years now, Dr Trevor Jones is well placed to comment on the challenges facing the sector.

'I'm sure the pharmaceutical industry will, as it has always been, be the subject of considerable change. Change is never a choice,' he says. Whereas the last century saw the growth of industry from wholesaling to manufacturing chemists to research-based companies, the first part of this century is seeing consolidation within the industry, driven by the huge differences in the provision of healthcare, and its cost.

The spinning out of non-pharmaceutical healthcare products that took place in the last decade of the 20th century is being allied to a growing amount of outsourcing. 'Much of the manufacturing base can be outsourced to SMEs in a very effective collaboration, as can clinical trials and sales and marketing,' says Jones, 'so the core competencies of the industry are changing very dramatically, and not the least in the area of manufacturing.'

Mergers and acquisitions, pressurised by the economic forces operating on the market, have resulted in excess manufacturing capacity in the merged companies. 'I think it has been suggested that in the mid-1990s there was as much as 50;70% excess capacity around the world. I think this also means that we are going to see companies spin out manufacturing units as they merge, or even as a strategic activity, so to have access to them at the point of need but not to have ownership of them at the time of spare capacity. It's an efficient way to use money and doesn't leave you with all the overheads.'

He thinks that many companies will spin out part of their manufacturing in both the primary and secondary areas to existing SMEs who would specialise in that kind of activity.

The demands being placed on healthcare providers are rising, as the population ages and our capacity to alter the disease process increases. 'We live, in the developed world at least, in a consumer society where wants become reality. So the pressures on government or healthcare providers mean they, naturally, are saying, "We've got to look very carefully at what we can afford". Financial pressures on individual companies to cut costs are thus increasing, and the current trend towards mergers and outsourcing is largely a result of this. These are made viable by the fact that the pharmaceutical industry these days is operating in a global market, and as long as regulatory standards are adhered to, it is irrelevant where a product is made.'

But will this mean the big companies will stop manufacturing altogether? Jones thinks not. Although mergers and acquisitions lead to an increase in outsourcing, we will not see a wholesale move towards virtual companies, he says. 'Virtual companies make the assumption they have very little in-house resource. In order to research a product, a company has to have very competent researchers; in order to manufacture a product you have to have people who truly know what it is to manufacture a product.

'If you rely on a few individuals and a lot of outsourcing, then you will lose the competency to know who to go to, whether what they are doing is right and so on. Your name is on the product you sell, and if there are problems it is your reputation that is at stake, whoever has actually manufactured or researched it. So not having internal intellectual ownership can lead to problems. I think companies will always have a critical mass in-house which allows them to know who to go to.

'I think that's a very different size, though, to the sort of units we still have around,' he adds. 'Companies still have a very large manufacturing capability, and I don't think that that kind of dynamic will be there, especially as it's possible to rationalise it as you merge or acquire. Otherwise, it is more difficult to change internally, but when you have to change, rationalisation becomes easier.'

He adds that the question of whether government incentives are available is interesting. 'There is no doubt the Irish government saw an opportunity about 15 years ago to focus their attention on our industry, and they have done an incredibly good job of it. This has created at least 5,000 entirely new posts in Ireland, solely in our sector, starting with primary manufacture and now moving into secondary.'

He adds, 'The UK has lost the equivalent number of jobs because there have not been the tax incentives here that were available to Ireland as it moved into the European Community. European member states are only able to offer the incentives at the time of accession, and similar incentives drove the industry into Puerto Rico and Singapore. But the single-minded way in which the Irish government decided the pharmaceutical industry was important has been the major factor in its attracting investment.'

Jones thinks the quality of organic chemists being produced in India means the country could have a similar effect on its primary manufacturing industry. 'Its chemists have not all stayed in the US, or wherever they were educated, and there are now very highly skilled groups in good facilities. There are also a number of facilities that require a lot more attention before they become of high enough quality for international use.'

This means that India should become an increasingly significant player in the provision of primary chemicals or intermediates — provided they get their intellectual property right. 'At the moment,' says Jones, 'they are among a small number of countries that do not adequately follow the TRIPS agreement on intellectual property rights. While that situation exists, I think the industry is going to be reluctant to increase its stake in India because it could find itself being extremely short-changed. But if the Indian nation overcomes the patent situation, I think it could become very powerful in primary manufacturing.'

He adds that the significance of China is also growing. 'With the help of foreign firms entering into joint ventures, Chinese companies have established competence, and there are some very high quality products being made in China. It has an immense resource in terms of chemistry and, potentially, biology. I think it will emerge over the next 10;15 years as a powerful challenge to Europe and the US in terms of chemical products, and probably generics as well.'

Jones believes it remains to be seen whether the member states of the EU will give sufficient focus to a technology like primary pharmaceutical chemistry or to secondary manufacture, at a time where public opinion of chemistry in terms of the environment could be better.

He believes the market for products will drive where some of the future investment in manufacturing will be. 'Europe is a potential growing market,' he says, 'but the pressures on healthcare budgets are evident from the cost efficiencies and the presence of agencies like Nice [the UK's national institute for clinical excellence] which add extra hurdles. So, given the choice internationally, is it likely that companies would see Europe as an attractive place to maintain this manufacture if they had a choice either to expand or contract, unless there were tax incentives?'

Jones does not think the future accession of a number of eastern European states to the EU will see a major migration of pharmaceutical manufacturing there. 'The eastern bloc was once very big in chemical manufacture, but its standards tended to be much lower than in the west, particularly in terms of emission control, let alone GMP. East Germany in particular has seen some recapitalisation, alongside major shutdowns, but there is a resurgence of potential value as they have experience in the sector, and standards can be improved by fairly good investment.

'I don't see it returning to the kind of volume size of factory that were there before the Berlin Wall came down, but I do think we shall see factories emerge in places where labour rates are still likely to be very low. Overheads are going to be such that we can't compete in Germany, Scandinavia, let alone Britain. But whether that will be strong enough to compete with an emerging Indian or Chinese market, or even the huge size of the American primary endeavour, I think is debatable.'

He adds that a number of member states have created a feeling that pharmaceuticals are an expense on the nation and something that they control with price decreases. 'Company directors that make decisions are, after all, humans, and they will take into account all the investment equations. But, if a company is constantly being faced with price cuts and having regulation after regulation added on, they will eventually say, "Why do we want to be there?" and move away. I think that's a challenge for Europe.'

The European Commissioner for competitiveness, Erkki Liikanen, commissioned Prof Pammoli from the university of Siena in Italy to report on whether the European pharmaceutical sector competes adequately with the US. The conclusion of the report was that it does not. The commissioner was so concerned by the report that he called a meeting in late December between member states, the industry and his officials to establish whether this is really the case, and, if so, work out what can be done about the situation. 'If you look at the investment in r&d, there has been massive upwards movement in the US, and not the same expansion in Europe. There are pockets — the UK is still holding its own — but what can be done about it? For example, could the Sixth Framework programme for research provide an emphasis towards chemical and pharmaceutical sciences? This would, perhaps, be a distortion against other sciences, but it would be vital if we are to continue our competitiveness. Can we have investment policies that would ensure that emerging companies, biotech or otherwise, are encouraged to operate here rather than go to the US?'

Licensing arrangements will also have an effect, he believes. 'This all has to be looked at in terms of whether the products that we research and develop will be accepted. On the whole nowadays, a new product goes straight into the market in the US, while it takes years in Germany, even longer in the UK, and so on, as Europe in general is a very conservative prescribing group. And governments have pushed for the formation of new hurdles as well. So I think Europe is indeed losing out to the US, but we have a chance to address the situation, and hopefully correct it. I'm anxious that we play our part in that, and I shall contribute through my involvement on the board of EFPIA, the European federation.

'Intelligent regulation rather than just regulation for its own sake is essential in this, and it would be ideal if there were some deregulation where it is getting in the way of our competitiveness. It simply takes longer to do things here than it does in the US. I don't think the standards are any lower, but it just takes longer because of the bureaucracy. In a global industry it doesn't really matter where products are researched and manufactured, but I think Europe has every right to be a part of it and involved in future expansion.'