FEATURE — Fall 2004

Jackson Nickerson, associate professor of organization and strategy at the Olin School of Business, and his Georgetown University colleague Jeffrey T. Macher, assistant professor of business, are researching the manufacturing of pharmaceuticals from a business and organizational perspective.

Drug Manufacturing Overhaul

In a collaborative FDA study of the pharmaceutical industry, Associate Professor Jackson Nickerson is researching innovative ways to improve pharmaceutical manufacturing—to ensure the safety and efficacy of drugs and drive down production costs.

by Betsy Rogers

If Jackson Nickerson's current research in pharmaceutical manufacturing bears the fruit he hopes it will, U.S. drug costs will come down, manufacturers will become more profitable, and government regulators will more effectively ensure drug safety and availability. "If we're successful, it's a win-win-win for everyone," says Nickerson, associate professor of organization and strategy at the Olin School of Business. "It will have a real impact on the real world."

Jackson Nickerson and his Georgetown University colleague Jeffrey T. Macher, assistant professor of business, have launched a research project that takes a dramatically new tack in studying the pharmaceuticals industry. "We found that no one in academia was studying pharmaceutical manufacturing from a business and organizational perspective," Nickerson notes.

"We found this to be particularly odd," he says—odd, because the stakes are so high. Pharmaceutical firms with stock registered in the United States spend $112 billion to manufacture drugs annually, averaging about 35 percent of revenue.

Furthermore, empirical research holds hope of strikingly useful findings. In many conversations with both Food and Drug Administration (FDA) officials and manufacturers, "to a one they all said if we could change the regulatory environment a little bit, if we could change the way manufacturers behave with respect to the regulatory environment, production costs could go down by 15, 25, as much as 50 percent," Nickerson says.

A sharp rise in FDA actions against the industry in 1999 and 2000 first caught Nickerson and Macher's attention. Warning letters and penalties had jumped dramatically. And for the first time, the FDA imposed a penalty of half a billion dollars on the New Jersey firm Schering-Plough. "They shipped a large number of inhalers without any active ingredients—an indication that something was very, very wrong in their manufacturing process," Nickerson observes.

Nickerson and Macher formulated a two-pronged research proposal, targeting both the FDA and the manufacturers for study. Budget constraints have made the FDA's required biannual inspections at every facility impossible, so the researchers proposed finding ways to help the agency target its resources for greatest effect.

Right now, he says, the FDA views any substantial change in manufacturing processes as high risk, no matter how long the process has been used. "It seems that one possible benefit is to develop a risk-based model in which we can assess the risk based on past experiences across the entire population of firms and drugs," Nickerson proposes. It might be "that there is a broad class of products for which large changes might not be high risk. That should allow the FDA to focus its scarce resources on those changes that are in fact high risk."

At the same time, the pair realized that "to change the equilibrium between the FDA and industry, we also have to study the industry, so we've initiated a benchmarking activity to understand how organizational structures and incentives within manufacturing impact performance," Nickerson continues.

For instance, Nickerson and Macher are investigating technology development and transfer. "We're studying how manufacturers develop their practices," Nickerson explains. "We hope to be able to identify those practices that can speed development, so that production costs are lower initially."

"We hope to be able to identify those practices that can speed development, so that production costs are lower initially," says Jackson Nickerson.  

One firm might have a team that develops a new process, goes with it to the laboratory, stays with it and scales it up in a pilot plant, and, finally, takes it to full production. Another firm might have independent teams working with the process at each stage. Is one approach more effective than the other? "We're trying to study—create some empirical data—to help manufacturers figure out the best way to develop these processes," Nickerson says.

Nickerson and Macher chose a propitious time to take their proposal to the FDA. The agency had just begun a project called "Good Manufacturing Practices Initiative for the 21st Century," and the pair's research has become a key part of that initiative.

"It's a very important contribution," says Janet Woodcock, director of the FDA's Center for Drug Evaluation and Research. "There's a tremendous opportunity for improvement in pharmaceutical manufacturing, and we think improvement will reduce the costs of producing drugs.

"This is a very important and groundbreaking and timely project," she adds. "We are very grateful for the opportunity to collaborate with them."

With high hopes for the research, the FDA has given Nickerson and Macher "unprecedented access to their internal databases," Nickerson says.

Nickerson gives the FDA credit for tackling the problem head-on. "Some of these things are already taking place in the FDA," he says of the agency's initiative. "We are an important piece of the puzzle to suggest the new trajectory that will guarantee not only the safety and efficacy of drugs, which I think is a very necessary and important activity, but also the opportunity to innovate, which will drive down costs and increase availability."

Pharmaceutical firms are also supporting the project, in part because they're hopeful it will yield a more productive relationship with the FDA and in part because they know they need to improve their manufacturing processes.

Because of regulatory hurdles and uncertainty about approvals, producers tend to delay any manufacturing improvements that might bring down costs until the end of the approvals process. Then, because any future changes require additional approvals, they are loathe to tinker with procedures, even if they could be substantially improved. "They have no incentives to drive those costs down," explains Nickerson. The attitude becomes: "Once we get that compound out there, we shouldn't touch anything."

But this mindset has cost the industry. "Comparing the manufacturing environment in pharmaceutical firms to any other industry, you find that pharmaceutical manufacturers are substantially behind the curve—a laggard compared to the cutting-edge manufacturing technology present in many other industries," he notes.

Participating pharmaceutical firms will also receive a confidential report comparing the productivity of their plants to those of their competitors, though with the rivals' names masked. The reports will include suggestions for improving current performance.

Another potential reason why both the government and industry are participating: Nickerson and Macher are accepting no money from either side. "So we're legitimate as an impartial player," Nickerson says. Research funding comes from several University sources, including the Olin School, Boeing Center for Technology and Information Management, the Center for Research and Economics and Strategy, and the Center for Health Policy; from Georgetown's McDonough School of Business; and the National Bureau of Economic Research.

Olin Dean Stuart I. Greenbaum says the promise of Nickerson's work is clear in "the enthusiasm with which the FDA has embraced the research," he notes. "The government is trying to find a way to maintain standards without being stifling. It's a very, very important issue given the incredible cost of health care these days and what it means to the budgets of ordinary people."

Greenbaum also has high praise for Nickerson as a teacher. Indeed, Nickerson consistently wins teaching awards along with honors for his research and writing. "He's a superb teacher," Greenbaum says, noting that Nickerson has taught undergraduates, MBA students, and business leaders in the Executive MBA program and is "consistently outstanding" across the board.

"He is a gifted presenter," Greenbaum concludes, "and he does extraordinary research as well. He's been published in the most selective academic journals. His interests are expansive, his work is highly regarded, and he's as much a star in research as he is in the classroom."

Betsy Rogers is a free-lance writer based in Belleville, Illinois.