The pharmaceutical industry is experiencing a period of major changes. The age of the blockbuster drug seems to be over, and many major products have lost patent exclusivity in recent years. The focus now is on niche therapies designed for smaller-volume, targeted patient populations. Drug manufacturers are also under increasing pressure to reduce costs. As a result of the shift to smaller-volume products and as a consequence of large acquisitions over the last decade or so, there is significant equipment/facility redundancy, and companies are looking to achieve cost recovery through the proper management of these assets. Matt Hicks, chief operating officer of Federal Equipment Company, a supplier of used processing equipment and asset management services to the pharmaceutical and other industries, spoke with Cynthia Challener, editor of the Pharmaceutical Sciences, Manufacturing & Marketplace Report, about different strategies for surplus asset management and provided real-world examples of how they were implemented.
Pharmaceutical Sciences, Manufacturing & Marketplace Report: What changes in the pharmaceutical industry are impacting asset management for manufacturers?
In terms of pressures to lower costs, pharmaceutical manufacturers that have redundant manufacturing capacity for blockbuster drugs can no longer afford to sit on idled equipment for market-demand or manufacturing risks that may never materialize. Then, losing that blockbuster to generic competition creates a hole in the manufacturers’ production schedule. Ideally, they fill that hole with the next branded product. However, new products and processes generally require new equipment. Finally, as the dust settles from many of the industry’s mergers and acquisitions, many of the larger manufacturing companies are finding redundant manufacturing capabilities within their networks. They realize that they may not need 10 different sites making tablets. So they transfer products and reduce the number of manufacturing sites.
A choice of three strategies
Pharmaceutical Sciences, Manufacturing & Marketplace Report: As the industry restructures, what are the different asset management strategies available to pharmaceutical manufacturers?
Hicks (Federal Equipment): There are three primary strategies for dealing with manufacturing equipment surplus—often referred to as “investment recovery services.” We see some clients managing their surplus assets with an in-house team dedicated to investment recovery. Others outsource investment recovery services via their purchasing departments. Finally, some use a combination of an in-house, global investment recovery program manager with external service providers.
Finding the resources
Pharmaceutical Sciences, Manufacturing & Marketplace Report: What are the challenges that pharmaceutical manufacturers face in pursuing these different strategies?
Hicks (Federal Equipment): An in-house program requires personnel, physical storage locations, an advertising budget, and systems for handling and managing the surplus inventory and transactions. Investment recovery as an outsourced service will put almost all of the burdens of an “in-house” program on the service provider. The challenge then becomes identifying the service provider that is the best fit for the program and determining who owns and manages the program site-by-site – will it be purchasing, engineering, manufacturing, etc.? If a combined strategy is employed with an in-house, global program manager and external service providers, some resources are required internally to manage and champion the program while placing the burdens for managing transactions, advertising, and the movement and storage of inventory on the service provider.
Pharmaceutical Sciences, Manufacturing & Marketplace Report: Where/how does selling/buying of used equipment fit into these strategies?
Hicks (Federal Equipment): The actual selling/buying of equipment is best handled on a case-by-case basis. There are several key factors to consider with each new project, including location, project timeframe, removal costs, and the return that the owner expects from the equipment. The investment recovery provider (whether in-house or outsourced) should be able to customize a plan for each project and propose the best solution that will maximize the goals of the program – from demolition and scrap through complete plant and single machine sales.
Cases in point
Pharmaceutical Sciences, Manufacturing & Marketplace Report: Do you have any specific examples you can share that demonstrate these different strategies and issues?
Hicks (Federal Equipment): We can apply these general principals to specific case studies for solid-dose pharmaceutical manufacturing. In 2012, a major pharmaceutical manufacturer lost patent exclusivity on one of the top branded drugs in the market. The company correctly anticipated the loss of revenue from this product and planned for the surplus manufacturing equipment, which included an entire production facility with multiple production lines dedicated to that product. Several months before the loss, the company commissioned a study and created and launched a marketing campaign to sell the entire primary production facility as a going concern. They were unsuccessful, and the decision was made to liquidate the equipment.
Once the facility was closed, a team of investment-recovery providers was able to bring several buyers to the site and sell over 70% of the equipment with value. Most of the laboratory and facility equipment was sold via online auction while production equipment was sold by private sales. The remainder of the equipment was removed and shipped to a warehouse managed by the investment recovery service providers, where it is currently being marketed and sold piece-by-piece on a consignment basis. The real estate and building were then sold to one of the site’s physical neighbors. The project returned millions to the owner.
In a different scenario, an over-the-counter products manufacturer restructured its manufacturing operations to reduce redundant manufacturing capacity. In all, three manufacturing sites were designated to be closed and liquidated. Each site has managed its own closure and liquidation with its own request for proposal, service provider evaluation, contract, and marketing process. Two of the three sites have had successful liquidations to date with good returns to the owner and quick wind-downs of activities at each site.
Finally, after many acquisitions, a major pharmaceutical manufacturer determined that there was a great deal of redundancy within its global manufacturing network. A plan was created to close certain sites and reduce manufacturing capacity at other sites. A global investment recovery manager was appointed to oversee this multiyear investment recovery project.
This manager developed a set of rules and processes for the sites to follow, including internal redeployment and external sales. Service providers were selected matching the needs for different classes of equipment (lab equipment and production equipment). The team developed the disposal program for each site slated for reduction or closure. Additionally, the team presented the investment recovery platform to other sites within the network in order to encourage redeployment of surplus equipment, which has saved the company millions of capital expenditure dollars by avoiding the purchase of new equipment. The program has returned millions to the owner annually.