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Growth Spurt

Pharma must change its supply chain model to maximise on future growth opportunities resulting from a global surge in product demand

A close-up of grassBy 2020 the global pharmaceutical market is predicted to more than double in value to $1.3trn, and the E7 countries (Brazil, China, India, Indonesia, Mexico, Russia and Turkey) could account for as much as one-fifth of the sales, according to a report  by PricewaterhouseCoopers (PwC) entitled Pharma 2020: The Vision - Which Path Will You Take?

The report predicts that chronic conditions in the developing world will increasingly resemble those of the developed world and that an emerging middle class in these countries, with a greater capacity to spend, will open many new opportunities. However, weak pipelines, poor financial performances, rising sales and marketing spend, increased legal and regulatory constraints, and tarnished reputations, point to an alarming reality: the current industry business model is both economically unsustainable and operationally incapable of acting quickly to produce the types of innovative treatments this new global market demands.

In order to make the most of future growth opportunities, the industry must change fundamentally the way in which it operates, the report claims. To achieve this objective, various operational transitions are predicted, such as an increased focus on outcomes and outcomes measurement, a shift from treatment to prevention strategies, new technologies that drive R&D and a move from the linear phase R&D process to in-life testing and live licensing.

It is in this context that the current supply chain model becomes an important point for discussion, particularly with regards to how pharma can maintain margins and manage costs. Experts at PwC believe that the future supply chain will not only need to be responsible for the distribution of all products and services, it will also have to create new channels through which to market products.

By 2020 this is likely to give rise to 'made-to-order' therapies rather than 'made-to-forecast' using just-in-time manufacturing and delivery techniques learned from other sectors (such as automotive), which will be key components of future success.

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Pricing pressures continue to increase and we can assume they will track in the direction of more and more reductions for pricing by governments. With the obvious pressure on margins, the implication is that we must not just manage the price, but also manage the costs, says Todd Evans, director, Pharma/Life Science, Health Advisory, PricewaterhouseCoopers LLP.

In addition, the technologies and sciences involved in the drug discovery process are pushing innovation into sub-population drugs and suggest that we will move away from the blockbuster model. Increasingly, Ä300-400m per annum products are coming into favour. These drugs serve smaller populations and, more often than not, are showing up as biological products rather than the traditional chemical compound, which puts a greater burden on the supply chain.

Many of these compounds are temperature-controlled, and maintaining product stability can be a major issue. The transportation of these products is challenging, especially given that the infrastructure in many developing markets is not mature. Companies that are able to glue together, validate and integrate elements of the supply chain that preserve a product's stability and authenticity, will triumph over those that rely on blind intermediary relationships where controls are loose, quality management lax and a host of risks to brand reputation can arise, says Evans.

Battening down the hatches on the supply chain relative to reliably supplied, authentic products being distributed on a global basis (particularly in emerging markets) will thus become a key competitive differentiator, Evans asserts.

This transition is naturally aligned with a shift in the investment profile of the industry in its pursuit of capital for further R&D. Companies are beginning to identify and focus on areas of core competency and are moving towards a division of tasks across the industry. Some are choosing to specialise in the discovery and development process, others have chosen to be growth accelerators specialising in sales and marketing, and a third class emphasises low-cost, high-quality, agile production capabilities.

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Evans envisages a firm that has chosen to be a production platform for the industry. Suppose my company has the agility, technology and know-how to produce (at short notice) complex lots of product and then distribute worldwide with a high degree of quality and reliability, at a low cost. This is a revenue generating enterprise within the constructs of the supply chain that provides a reliable source of production for others in the industry to use.

It not only provides the opportunity for my company to maximise its capacity, it also extends the excellence of my production reputation to others in the industry that might find it too costly to build such expensive assets as these production plants. The conversation changes a bit when you consider a traditional primary care branded product versus a biologic versus a generic, but the general point is that we are beginning to see migration towards areas of excellence and competence at the manufacturing company level.

Globalisation is having a tremendous impact on how the pharma company of today views itself in terms of its primary mission; the expansion of markets, the diversification of portfolios, industry consolidation and the need for lower cost platforms, is imposing a supply chain model that pharma has not seen before. Secondarily there is the notion of gaining versus losing a sale through service. If you are an unreliable source of supply or you don't have it under control in terms of being able to authenticate a drug product, you will ultimately lose revenue, says Evans.

As such having a reliable supply chain is an increasingly important point of competitive distinction - accelerated by globalisation. In terms of service policy, the one-size-fits-all approach is not appropriate because customers are not the same, markets and rates of return vary and all opportunities for growth differ, therefore, all country formulas cannot be the same. 

CHANGING LANDSCAPES
One trend in this process is the break down of vertically integrated business models. This notably introduces new dimensions of management complexity that manufacturers must master quickly: collaborative integration between strategic partners.

Another trend is the acquisition of off-shore platforms and/or joint ventures or exclusive relationships with firms in India and China predominantly, where low-cost production and ubiquitous PhDs are a strong incentive.

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A huge portion of active pharmaceutical ingredient is already sourced from China so the evolution of the Indian and Chinese markets into key sources of supply is a natural progression, be it at the ingredient or even the finished product level. There are obvious implications in terms of regulation, intellectual property protection and product safety/product stability; however, the general trend is unmistakable: globalisation and cost imperatives are driving a distributed supply chain model. 

Another key driver of pharma globalisation is the intellectual PhD density of the Chinese and Indian markets, which suggests increasing concentration of innovatative discovery capability outside of traditional Western research areas. Pharma companies in the West are more aggressively aligning themselves with both research and supply chain producers offshore.

The changing market conditions have brought with them a new openness towards partnering and alliances. In the past there was a bias towards the vertically integrated entity, however, the emergence of a network pharma model that binds best of breed capabilities into a virtual discovery and supply chain network can now be seen.

Many aspects of the value chain are now eligible for outsourcing or subcontracting, with contract manufacturing in a high growth spurt. Evans says that third-party logistics companies have been aggressively courting the pharma industry in the last 10 years and that their capabilities are becoming far more advanced. He believes this allows pharma a great deal of agility and less capital intensity to be tied up in lower performing assets.

Pharma is getting wiser about how to use its capital, particularly in an environment where introducing commercially innovative products is more challenging.

The partnering trend includes everything from procurement through to production and co-packing operations, as well as how pharma services the global market of customers, says Evans. Differentiating and segmentating the customer base and aligning service policies that are germane to discrete market segments - as opposed to the one-size-fits-all approach - has become the hallmark of customer service excellence and intelligent resource alignment.

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The coup de gr‚ce is delivered in the rapid portfolio diversification we see in many big pharma companies where legacy chemical compounds are joined by the biologic products that may be in-licensed or acquired - we then see a significant amount of complexity being introduced to the supply chain arena. The management is suddenly challenged by diverse needs and multiple chains with highly discrete solutions required for success.

Those that manage it well will gain competitive advantage, particularly in cases where we are not dealing with orphan drugs but where the company competes with three or four drugs in class and part of the success story is supply reliability and lowest total landed cost.

REQUISITE SKILLS
Manufacturing focus used to be on regulatory compliance, as well as excellence in the quality of product produced in a self-owned and managed environment. But with globalisation and outsourcing as drivers of complexity, there is a greater demand for integration and collaboration, ranging from the sharing of information through to the integration of process, priorities and the weighting of criteria for decision making.

Compared to other industries such as aerospace and automotive, pharma is playing catch up. One might ask how well placed is pharma to manage this transition? There is no doubt that managing external relationships and alliances will demand a different management mindset and basket of skills to those required for the effective management of self-owned plants.

As markets become increasingly complex - geographically as well as in terms of the product profiles - the production and delivery demands are changing. There is increasing reliance on service, and the sales and operations planning process. There are now tough decisions to be made with regards to where to put your capital on a week-to-week and month-to-month basis.

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To meet these new mission objectives, we are seeing more people entering pharma companies with non-pharma backgrounds than ever before, says Evans. There is an awareness that other industry verticals have gone through this evolution and have wisdom to bring in terms of how to manage strategic alliance relationships and a globalised and widely disbursed base of supply, as well as demand points.

This is intended to accelerate the integration capabilities where collaboration across the supply chain is necessary. There are a lot of moving pieces and pharma is beginning to accept knowledge from outside the industry, he notes.

Pharma is currently focused on building basic capabilities around this new model. The question is, will the industry remain synchronised with the speed of globalisation and market changes to maintain present rates of return? While finance departments are putting pressure on organisations to keep costs low, there is the added burden of having to redesign and revamp all the infrastructure and processes required to extend the supply chain over a 10,000-mile band of territory.

Many organisations underestimate the size of what needs to be done, says Evans. The lowest common denominator road blocks tend to defeat many a supply chain. You can have a great product and excellent manufacturing only to have it fail at a poorly operated international trade chokepoint in a Third World country or with any bureaucracy that doesn't respect the rule of law. Then there is the ever present threat of currency volatility as regards transfer pricing when dealing with emerging markets.

Pharma's trade intermediaries are also seeing seismic change.  Classically, the role of the drug wholesaler was to buy product and buffer volatility associated with thousands of retail dispensing points, but as portfolios migrate from blockbusters to new products which are more in line with speciality drugs, those dispensing points become more concentrated. In turn, the role of inventory buffer against demand volatility becomes less obvious as dispensing points become national as opposed to localised.

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Typical retail pharmacies are not carrying many of these products in inventory, says Evans. These specialty products are high-value, complex and often require specialised storage conditions which combine to make them unattractive retail dispensed product. This calls into being the need for an evolving value proposition for value chain intermediaries. There will no doubt be business cases that auger in favour of direct selling to pharmacy channels for specialty drugs, as well as new and innovative service delivery models that adapt to the complexities of these products and their patients.

Some drug wholesalers, and in the US specialty pharmacies in particular, have diversified their service offerings to better serve these complex drug value chains. However, the traditional product portfolio of chemical compounds with mass-market reach will continue to rely upon drug wholesalers, especially as we see a growing use of generic meds. Diversification has created the need for purpose built supply chain solutions, as opposed to trying to homogenise everything and use solutions that will eventually become cost prohibitive or service inappropriate.

Pharma cannot avoid a metamorphosis: it is a case of adapt or die. If companies want to survive the next stage of the evolutionary process, they will need to take heed of the growing healthcare dynamics and adapt their processes accordingly from discovery through to distribution. And the sooner the better.

As companies vie for competitive differentiators in the ever-increasing globalised marketplace, the ability to be flexible, and focused masters of change and to keep one step ahead, will be the defining criterion for success.


The Author
Natalie Uhlarz is editor of Pharmaceutical Marketing

10th April 2008

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