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Delivering value

DTP and innovative discount schemes can unlock the supply chain and promise RoI for mature brands

A blue van with the word 'VALUE' on the sidePricing pressures from government and inefficient distribution (which has affected both the quality and safety of medicines), coupled with shrinking pipelines and revenues, have caused many manufacturers to streamline their distribution and take steps to manage their mature brands more efficiently. In several such companies, despite rounds of restructures and consolidation which have resulted in staff reductions, it is interesting to note that the supply and commercial teams have actually grown.

Managing mature brands
Patent expiration has been the knockout punch for many pharmaceutical products. There are countless examples of the sales revenue and market share of brands dropping significantly, almost overnight, following less expensive generic alternatives coming to market. In fact, it is not unusual to see the sales of branded medicines drop by more than 70 per cent after a single year of generic availability.

Over the last decade, the UK has become the most competitive market in Europe for products that have lost exclusivity, with the use of generic alternatives encouraged through various policies. Generic substitution is likely to become a reality from January 2010. As part of the Pharmaceutical Price Regulation Scheme (PPRS) negotiations, the Department of Health and the ABPI have agreed that pharmacists will be able to dispense generic medicines, regardless of whether a prescription is written for a branded medicine or a generic alternative (with notable exceptions, such as for anti-epileptic drugs).

There is a range of commercial strategies that can be employed following loss of exclusivity (LOE), such as defending patents, launching line extensions and over-the-counter options. Ideally, companies will implement a number of these – either in isolation or in combination – to armour themselves against generic competition. To reduce damage from LOE, manufacturers should also tackle pricing issues. Several defensive pricing options are available and the one to choose depends on a number of factors such as the way in which the brand relates to the company's portfolio, the company's commercial capability and the degree of price sensitivity in the market. The potential to maintain different prices for different customers and the level of competition expected should also be considered.

Brand discount schemes (BDS) can be part of a successful strategy to maintain market share of branded products. Also known as brand equalisation schemes; when a brand loses its patent, this pricing defensive strategy can be implemented as a means to compete with generic alternatives. The brand originator sells a proportion of its product at the generic market price, hence the term equalisation, allowing pharmacists to dispense a branded product against a prescription written and reimbursed generically without suffering any commercial disadvantage.

BDS offer significant benefits to the customer, including:
1. Consistency of supply and reduced time spent sourcing stock
2. Stability of price, which allows easier business planning
3. Security of supply, reducing the risk of counterfeit medicines
4. Consistency of quality assured with the brand product
5. Patient loyalty by supplying them with a recognised brand.

In addition, when managed effectively, BDS have the potential to generate significant revenue for the manufacturer. However, these schemes have been fraught with management issues in the past, particularly when it comes to feeding the unauthorised grey trade. 

Selecting the most suitable customer groups with which to work, identifying the target price and implementing the deal effectively are all obstacles that must be overcome to defend the brand successfully. 

Another potential challenge that companies can encounter with these discount or equalisation schemes is that compliance to the deal is usually poor (around 55-60 per cent). The deals are set assuming that a brand will be dispensed against 100 per cent of generic scripts, so if it is only dispensed against 55 per cent, the manufacturer loses 45 per cent of its potential revenue. This has a significant impact on the profitability of the deal. Small increases in compliance to the agreed deal can have a strong effect upon returns. Driving compliance through pharmacy level independent audits that look at dispensing data on the PMR system and shelf count of stock is one way of ensuring compliance is increased.

Customers, the national and regional pharmacy chains and supermarkets, are all keen to work with pharmaceutical companies that own significant LOE brands.

External expertise
Products that are soon to be off patent must have a clear and effective commercial strategy in place to minimise the impact of LOE. While many 'significant' products that are post-patent have 'discount' schemes available, plenty do not. Often this is because a company does not fully understand how to select the most suitable customer groups, identify the target price, implement the deal effectively and drive compliance through independent auditing to defend the brand successfully.

Some pharmaceutical companies have opted to engage the support of external or outsourced commercial expertise to manage their mature brand portfolio, particularly when it comes to driving compliance and, therefore, profitability of the deals. The services provided can range from basic consultancy through to hands-on commercial strategic planning and implementation; an area in the pharmaceutical industry that often receives less focus than the highly dynamic product launch and in-patent development phases. To be successful, however, it is paramount that product managers, marketers, commercial teams and external expertise work together to find the most effective solution.

 

Managing the deal

Diagram showing how to manage the deal

Direct-to-pharmacy supply
Ideally, drug supply should be a simple and transparent chain that connects the manufacturer and patient in as few steps as possible. However, in practice it can be a winding route that includes passing through several intermediaries before reaching a pharmacy. This increases the risk of counterfeit drugs and facilitates parallel trade, both of which result in lost sales for the manufacturer.

Manufacturers are thus looking to gain greater control over the drug supply chain, to make it more efficient and to safeguard against counterfeit entry. UK firms have been progressive in this regard; GlaxoSmithKline (GSK) pioneered direct-to-pharmacy (DTP), with Pfizer, Eli Lilly and AstraZeneca (AZ) all following suit with their own DTP models. Some manufacturers, such as UCB and Pfizer, have selected just one wholesaler to distribute their products, while others, including Eli Lilly, AZ and GSK, have selected two wholesalers. Still others have employed a reduced wholesaler model, like Bayer Schering, which uses Phoenix in addition to AAH and Alliance.

The DTP model provides a range of benefits to pharmaceutical companies. Under the new scheme, the pharmaceutical manufacturers enter into agreements with particular wholesalers to make them the sole suppliers of their medicines. In effect, the company sells the drugs directly to pharmacies, paying the wholesaler a set fee to deliver them. This new model starkly contrasts with the traditional model, where medicines are distributed through a network of wholesalers who competed between themselves to supply pharmacists at discounted prices. Now a wholesaler must demonstrate to pharmacies that it can offer a better service than its rivals and provide assurances on its delivery services before it receives payment.

One of the key drivers behind DTP distribution is the requirement for manufacturers to produce sufficient quantities of product to meet UK demand, enabling them to allocate sufficient supplies to each pharmacy account based on its specific and genuine needs. This is a major challenge as this information is not readily available and manufacturers' hands are tied when it comes to questioning pharmacy customers directly. It is also difficult to know the actual number of accounts that order stock quantities outside the normal range (known as outliers') and few companies have the resources available to audit that many businesses. Some manufacturers have turned to independent, outsourced expertise to audit these outlier accounts in order to help them establish genuine product demand and to understand the business model and drivers behind ordering.

Many outlier accounts actively request audits from companies with DTP distribution to ensure their quotas are sufficient to meet their patient demand; some of these customers are very entrepreneurial and their businesses and product demand can change significantly over a short space of time. Typical DTP audit customers include traditional retail pharmacies, internet dispensers, dispensing hubs, dispensing doctors, specialist manufacturers, dentists, prisons, Ministry of Defence and hospitals.

New world
There is no doubt we are in a new world of pharmaceutical distribution where the traditional model is being replaced by DTP and the threat of generic erosion is being countered through innovative discount schemes. Such methods are the key to unlocking the potential in the supply chain and delivering commercial value to mature brands.

The Authors
Ian Welburn is managing director and Stephen Dunn is commercial services director at 4Sight RSD

30th October 2009

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