Cost Reduction in Pharmaceutical Industry

What is meant by reducing costs in pharma industry

Cost reduction in the pharma industry is the practice of discovering, developing and manufacturing drugs at a cheaper price and, at the same time, maintaining the required standards of product quality, regulatory compliance and therapeutic effects. Cost reduction activities must help organizations advance towards their goals, such as increased market share, enhanced product portfolio and less time to market. If the cost reduction measures fail to support an organization in fulfilling its goals, the initiative will fail in its outcomes.

Among many factors, theincreased competitionin the pharma industry is enabling many major players to consider reducing costs. Additionally, increased R&D, increased medicine availability and government control on drug prices are driving pharma manufacturers to find ways to reduce costs.

Cost reduction in pharma, like other industries, requires extensive planning and testing. It identifies the target area/ product/ department and the level of extent to implement cost reduction measures. Additionally, to make the activity realistic and successful, the participation of all stakeholders is necessary.

Why it is necessary to reduce costs in pharma

Let’s discuss shy reducing costs makes this activity valuable

Improve Financial Conditions of a pharma drug manufacturer

Cost control measures are an integral way an organization, including the pharma, improve its financial condition. It can offer more flexibility for a pharma organization to spend more on development, regulatory compliance and new technology.

The pharma industry remains under constant pressure to prove its efficiency and credibility to its users and regulators, which is a function of manufacturing technology & investment. Increasing their market ratio is a major concern, which constantly keeps a pharma organization in a state of hurry, which also comes at a significant cost. Finally, keeping itself inspection-ready is critical for its survival, and an organization cannot neglect it.

All the measures mentioned above, and alike, can only be implemented when an organization indicates strong financial health and profitability. With many players in the market and globalization in the pharma industry, increasing market share and product portfolio depends on how the pharma organization manages its costs.

Competitive Advantage

Pharmaceutical companies are constantly seeking ways to remain ahead of their competitors, as it helps to create a solid pharma brand. The patients create a mindful relationship with the brand, which if it has been made, becomes difficult for other brands to break. Among many advantages, drug creates a solid market base, as compared to the drug of a non-competitive organization.

With the overall increase in pharma product prices worldwide, cost reduction in expenses helps a pharma organization remain competitive. The quality and reliability of a low- cost product keeps the pharma organization on the tables of the patients.  

Cost reduction also supports the competitive edge of a pharma organization when there is economic fluctuation. In these times, when common people face difficulties running their businesses and suffer from a declined routine lifestyle, a cost-effective pharma drug product significantly helps to fulfil patients' requirements.

Investment in growth areas

The pharmaceutical industry has a high potential in many of its areas, which directly improves an organization's profitability and increases market footprint. Fortunately, there are a number of technologies that the industry can focus on, depending on available resources, potential and business interest. Examples include supply chain, AI & automation and R&D.

These technologies, still in developmental stages, require constant testing before they can be realized practically. A key requirement of testing and development is an investment, which an organization can be self-sufficient in if it has implemented cost-reduction measures in applicable areas.  

Due to initial design of these technological application in pharma, it can take time until it reaches the maturity level.

The cost reduction serves as a lifeline for growth investment, given the uncertainty in the economic condition of the worldwide. 

How to implement cost reduction in the pharmaceutical industry / Cost reduction programs

Let's discuss some meaningful strategies for reducing costs in the pharmaceutical industry.

Make your goals achievable.

More important than setting targets is to make sure and validate that the targets are achievable. From the beginning, it is necessary that cost reduction activities, must be validated against realistic conditions, aftermaths and results. The concerned department must spend time analyzing in-depth saving proposals, rather than proposing goals on the go.

The cost reduction activities must be divided into micro levels for each department or area. Specific details or initiatives for every department must be highlighted and considered in detail. The more time spent detailing every initiative, the more confidence it will offer regarding its success.

One major advantage is that personnel working on those initiatives, especially those working at lower levels, such as at the execution level, will have more confidence in those measures.  This will enable them to understand more about the organization's goals towards cost reduction and will impart more meaningful efforts.

Area-specific goals

When defining your cost reduction targets or techniques, the applicable approach is to know your department's needs. Focusing on an entire organization and devising generic measures will make the activity less practical and more of a virtual thing.

Every pharma department or area is different from each other and has definite & specific requirements. Although there are some overlaps, as a whole, they work and operate differently. Similarly, cost reduction arrangements cannot be used for every other department. They must be specific to a particular department by individually studying each department's requirements and areas of improvement.

For example, temperature control is a function of both manufacturing and supply chains, but both have different natures of operation and hence require dedicated measures.

What are your costs?

Without knowing your actual costs, you cannot implement cost-reduction measures. It gives you an overview of the efforts needed and where to start. Additionally, analyzing historical spending in a particular department is also beneficial in composing cost reduction activities.

In this step, every spending is analyzed in a detailed manner. It begins with categorizing them in different manners, such as external vs internal or dividing them w.r.to equipment, area or material basis, and similarly, many categories can be made.

Without determining your actual costs, you cannot identify which are essential, which are not and which can finally be used for performing the activity. It can help to devise customized measures without affecting the overall productivity with the desired quality.

What changes will it impact?

After you have identified your costs, it is imperative to estimate their impact on daily businesses. It helps to determine whether your efforts are driving in a positive way or compromising your product or its quality.

There can be many ways of doing so, and select the one that best suits your objective. Tracking the different parameters, such as quality, total productivity, market fulfilment and customer satisfaction, before and after the measures, will help in this case.

By comparing these and others over time, you can have better visibility of your efforts and the extent to which they have been successful.

Time for implementation

After you have performed a detailed analysis, as discussed earlier in this section, now it's time for implementation. It can include different stages, depending on the level of measures.

One critical point is to involve employees at all levels in your cost-cutting drive. While employees at the supervisor level find it easy to implement, it can become difficult for the personnel at the plant or lower level. Because cost reduction cannot be solely performed by key top management but requires active participation of the lower level, who have actual responsibility for driving these measures.

Because they would think that it will increase their workload, performing work differently from the previous method or routine, or simply because they are not fully trained to execute the process differently.

One way to tackle this condition is by including them in the organization's decisions and effective training plans, which could make them capable of understanding the new system and doing things differently.

Some practical strategies could include but are not limited to

· Appointing dedicated personnel.  The dedicate personal will specifically work on those measures without doing other duties. It will act as a focal person, and be a part of constant feedback until these measures become practical.

· Appointing dedicated personnel.  The dedicate personal will specifically work on those measures without doing other duties. It will act as a focal person, and be a part of constant feedback until these measures become practical.

· Creating harmony among different departments or areas of the organization. Because decentralized efforts and techniques can pull the program in many directions.

· Divide your goals into the short-term and long-term. The success or failure of short-term goals can enable you to re-think or re-align your strategy.

· Adequate monitoring from all stakeholders, especially from the management, to keep it on the right track and under schedule.

· Allocating sufficient resources to make the activity realistic.

· Allocating work according to the function, qualification and capabilities.

· Effective communication to all stakeholders, such as management or board, to keep them informed of the activity status and to discuss if required.

· Keep track of regulatory regulation during cost reducing efforts. Because, regulatory compliance is necessary, and any effort not validated by regulatory regulations, will fail cost reduction efforts.