Financial Performance in the Life Sciences: Costs Are Moving from an Afterthought to the Forefront (Jan 28, 2008)

Changing market conditions, increased competition from generics, difficulty bringing new products to market, high regulatory costs, etc. are putting intense pressure on life sciences companies. The recent headline in the Wall Street Journal, “Drug Maker Wyeth May Cut 10% off Work Force Over Three Years,” (1/25/08) is just the latest in a string of news reflecting the economic realities facing this industry.

The article mentioned Effexor, one of the Wyeth’s leading drugs as facing generic competition. In a coincidence of geography, Effexor is manufactured in Ireland, which was the setting the day before for a talk given by James O’Sullivan, Managing Director of Menawat & Co. Ireland at a MESA International working group meeting hosted at Bausch & Lomb in Waterford. James’ research focused on the opportunities of MES in contributing to financial and other performance in the life sciences (see presentation).

Traditionally, reasons to implement MES include: optimizing production efficiencies for increased profitability, increasing asset utilization by reducing downtime and unscheduled maintenance, improving product quality, and reducing waste. Yet, in the life sciences, there are more compelling reasons to implement MES.

Historically, companies have approached enterprise IT solutions, whether MES, PLM, etc. with a tactical mindset. However, in today’s intensely competitive global environment, the expectations of the returns on such investments are changing dramatically. Tactical improvements are often no longer enough to justify such investments; they must also help the company achieve its strategic priorities. Choosing the right tactical path is still imperative, but it is critical to frame the opportunity in the larger strategic context to be successful from a business perspective – and to receive the project funding.

The most striking revelation of James’ research is the true cost reduction opportunity of MES solutions in the life sciences. If you look at the “Cost to Add Value” (direct costs minus materials) in industrial manufacturing, it represents about 44% of the business. This presents a large field of opportunity to optimize production, quality, costs, and so on. Even a small change can have significant improvement implications due to the size of the improvement pool.

In contrast, the Cost to Add Value in the life sciences shrinks to approximately 10% of the business. Other cost drivers, such as increased R&D and regulatory requirements expand dramatically compared to other industries. In other words, once you design the process, make the capital investments, and obtain certification, the research shows that 90% of the costs are outside of manufacturing. Thus, the promise of a “big” cost improvement may not percolate up given the small opportunity relative to other cost drivers in the organization.

Implications for Life Science Companies: Optimize the Business not Operations

Forward thinking companies are elevating MES, PLM, and other related investments into strategic advantage. Compliance and product development are prime examples. MES and PLM represent significant investments, and their potential value expands vastly when couched in terms of strategic priorities. For example, reducing service and warranty costs, improving traceability, increasing speed to market, and so on are “business” issues of central importance to corporate management, which transcend plant level operational issues.

This kind of integrated business thinking (i.e., strategic + tactical = success) can be a challenge for operational personnel who have not traditionally been pressured to think beyond their local domain. These are not simply efficiency tools that reduce process, supply chain, and product development costs. They support regulatory and strategic priorities. It appears that MES and PLM vendors are catching on to this new message and are beginning to talk about how they serve the business goals, not simply how their tools help plug local tactical gaps.

What are some of the “takeaways” for operational managers? Think in terms of planning and aligning investments to strategic value. Right size deployment and support efforts and costs to where they will have the greatest business impact and avoid investments that will not provide sustainable business improvement. To do so, one must validate the business value before implementation. Most importantly, maintain a clear focus on the business objectives before, during, and after installation. This will help facilitate a change in thinking from process improvement to optimizing the business. Profit Mapping provides a structured and holistic approach for accomplishing all of the above.

MESA International’s rapidly expanding membership is perhaps a reflection of this new integrated thinking. For instance, what does the term MES mean to you – Manufacturing Execution System? MESA is short for Manufacturing Enterprise Solutions Association. If we take their lead and substitute the word Enterprise for Execution, Manufacturing Enterprise System (MES) takes on a completely new strategic meaning – one that companies can choose to ignore at their own peril.

Look for an expanded business optimization talk for the life sciences by James in the April timeframe in Ireland. It promises to generate some lively discussion.

It seems that the more things change from industry to industry, the more the fundamental competitive issues remain the same. At least, that is what the life sciences industry is painfully discovering about their costs and business improvement opportunities.

Adam Garfein






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