Costs of Switching - Competitive bidding has historically been used to reduce the cost of purchased materials. In the case of active pharmaceutical ingredients, it is not always clear that lower ingredient prices will generate a satisfactory return on the effort to qualify an additional source of supply. Steven Harvey of PL Developments examines the costs of a switch.

Drivers And Impediments

There is more than one reason to change or add new API suppliers. Drivers of change may include quality or performance improvements, better assurance of GMP and regulatory compliance, increase reliability of supply or to reduce costs, lead time and/or working capital.

On the other hand, there are several impediments to changing or adding new API sources. Whenever making a change from one source to another, pharmaceutical regulations require a stringent process be undertaken to qualify the new source. This process must be repeated in part for each product form or SKU utilizing that ingredient. This effort may involve additional opportunity costs if resources are borrowed from other value adding activities to carry it out. The benefits from the change must justify the cost.

The change effort requires resources. Research and development; quality control; quality assurance; production; and purchasing all play key roles in qualifying ingredient sources. In this case, "source" means the actual manufacturer of the API. But how do we estimate the cost of applying the necessary resources? Traditional financial accounting does not routinely quantify and report such costs of supplier qualification by ingredient.

Estimating Costs

One approach well-suited for estimating costs not tracked by traditional account is activity-based costing. The approach works like this: 1. Determine the activities that drive work for each cost center; 2. interview the people who do the work or supervise it and estimate resource requirements; and 3. convert man-hours to cost and total the costs by activity.

For example, key activities for research and development will involve clarifying ingredient specifications, requesting and testing preliminary samples, requisitioning and testing larger quantities in process characterization batches and production trials, assisting in validation runs and setting up stability testing. Purchasing will assist R&D in the early stages by identifying potential sources and prescreening based on information collected from published sources, requests for information and meetings with suppliers.

Quality Control must develop any needed analytical procedures, test pre-formulation lots from R&D, approve protocols for the testing of process characterization runs, validate test methods for validation lots, set up protocol for product stability testing, package samples and initiate testing, monitor all and report on findings. Quality assurance will likely send out questionnaires to the new source to survey them on their manufacturing and quality processes, review the responses and prescreen (eliminate) sources that are suspect. Next, QA will conduct a physical Q7A audit of the manufacturing site and related support activities/infrastructure.

Assuming a potential source passes initial hurdles, material is purchased for validation trials (normally three separate lots), those trials are conducted in production, the results analyzed and product produced is packaged for stability testing. After successful stability results, purchasing will negotiate a supply agreement, QA will negotiate a quality agreement, finance will accredit the supplier and the process will be complete.

Total Cost

The total cost will vary by technical complexity of the ingredient, the cost of the ingredient, the process used to produce it, the number of SKUs that incorporate the API, by the cost per kilogramn of the API and by the location of the manufacturer relative to the buyer. Typically, the costs of the R&D and quality control efforts make up 60% or more of the total qualification effort, followed by validation and quality assurance activities. Costs of purchasing effort are normally less and the finance effort is minimal, relatively speaking.

In PL Developments' experience, (experience of a private label pharmaceutical manufacturer), costs of switching API sources generally ranges from $50,000 to $500,000. Abbreviated new drug application (ANDA) drugs tend to fall at the high end and monograph products in the middle to lower end of the cost range. Excipient sources can normally be qualified at less expense that APIs. However, it is difficult to generalize. Each project is different.

If the objective is to improve quality or assure supply reliability, then qualification efforts may be a necessity. If the objective of switching is to reduce costs, then the savings need to justify the effort and generate a suitable return on resource investment.