How to fix the pharma supply chain
Angelo DePalma explores how drug firms can re-invent the pharma supply chain to add value to drug developers and benefit for patients
By on Aug 22, 2011
Traditional pharmaceutical supply chains are characterized by linearly sequenced competencies like discovery, chemical development, preclinical/clinical studies, manufacturing, and distribution.
Under this scheme, the first few links are internal, while the last becomes a black box of sorts, through which product is pushed to wholesalers and the vast beyond of the distribution chain.
According to IMS Health, pharmaceuticals bounce as much as 20 times between plant and patient, among wholesalers, distributors, and warehouses.
This chaotic system provides numerous opportunities for diversion, counterfeiting, re-labeling, and arbitrage (“parallel trade”).
Counterfeiting alone costs the industry $46 billion (2006 estimates), not to mention negative effects on patients. (For more on counterfeiting, see ‘Future pharma: Pharma’s new high-tech toolkit’ and ‘Future pharma: What near field communication (NFC) means for pharma’.)
Despite calls to tighten the supply chain, and regulations that followed, serious inefficiencies remain.
How did this crazy state of affairs come about?
The unique challenges of distributing pharmaceuticals are oft-cited reasons for the evolution of drugs’ labyrinthine distribution system.
Low manufacturing velocities and the need for quality checking at every stage stretch cycle times to nine or 10 months and drain efficiency from the outset, while regulation, high cost of goods, and product line inhomogeneities operate at every stage.
“Unlike the trade in blue jeans and tennis shoes, the pharmaceutical supply chain was not conceived by smart people sitting around a table cooperating for their mutual benefit,” says Tom Loker, chief operating officer at Ramsell Holding, a pharmacy services company.
Rather, it fell into place through a series of accidents resulting from what Loker refers to as “predatory relationships.”
In its 2011 report, Pharma 2020: Supplying the Future, PricewaterhouseCoopers (PwC) makes the case for re-inventing the pharmaceutical supply chain as a source of value to drug developers, and benefit for patients.
Fighting fragmentation
PwC defines a supply chain as “the means by which a company transfers its products from development to the marketplace … cover[ing] everything from new product development through to delivery to the hospital, retail pharmacy, or patient.”
The report’s recommendations are based on three premises: The supply chain is fragmenting, with different models for different product and patient types; tomorrow’s supply chain will provide economic value through market differentiation; supply chains should be responsive to data from the point of use.
“The supply chain was historically viewed as a burden, necessary evil, another risk to be managed,” says Johnathon Marshall, director for PwC’s pharmaceutical and life sciences advisory services in the UK and lead author of the report. “That needs to change.”
Fragmentation began decades ago with the advent of temperature-sensitive medicines and has picked up with the introduction of vaccines, biologicals, and other products requiring special handling.
This breakup will intensify as specialized treatments enter the market, particularly stem cells, gene therapies, and biosimilars. (For more on biosimilars, see ‘Forecasting the potential of the biosimilars market’ and ‘Forecasting the future of biosimilars’.)
And as the blockbuster model slowly fades, personalized treatments based on biomarkers or companion diagnostics will further splinter markets, even for common treatment regimens, such as blood pressure and high cholesterol. (For more on blockbusters, see ‘Patent expiration: Innovate or die’; for more on biomarkers, see ‘Biomarkers and oncology forecasting: How to hit a moving target’; for more on companion diagnostics, see ‘Personalized medicine: Regulating companion diagnostics’ and ‘Personalized medicine: Lesson for Oncology’.)
Fragmentation also applies to intra-company activities.
For example, there are three distinct supply chains at vertically integrated companies: one each for discovery/development, manufacturing, and distribution.
Integrating them, so that all departments view the full picture, would enable accurate planning and more cost-effective management of demand.
“The whole value chain has to connect,” says Marshall.
Adding value
As these trends unfold, logistics must adapt to achieve the ultimate supply chain goal of delivering product to customers as efficiently as possible.
But tomorrow’s supply chain, to serve as a source of value, needs to incorporate much more than distribution hubs and high-mileage vehicles that push product into global markets more-or-less anonymously.
“Supply chains have already begun to evolve, but we’re still managing them in the same way, which is to manufacture a product and push it out the door,” according to Marshall.
PwC’s vision includes a fundamental appreciation for what might be termed a “third dimension” in supply chain management, namely what Marshall calls a “service package”—a set of value-added activities that both differentiate the product and extract every last bit of value from it. That’s the theory.
A service package is a set of activities that positively influence health- or economics-related outcomes associated with a drug, such as improved safety or efficacy, or patient or prescriber satisfaction, with the goal of driving higher reimbursement and more desirable patient outcomes.
Companies prefer to design these characteristics into the drug through unique chemistry or mechanism of action, but this level of innovation is rare today.
More common are drug delivery and formulation strategies, for example: needle-free injectors, oral-for-injectible switches, and combinations of drugs with other drugs, diagnostic or prognostic tests, devices, or combinations of the above.
Identifying patient subgroups most likely to benefit (or not be harmed) by a drug—personalized medicine—is emerging as a strategy on its own. (For more on personalized treatments, see ‘Personalized medicine: A kick-start for innovation?’.)
Other approaches are less conventional.
Marshall mentions a generic biologic that received prime reimbursement from Britain’s NICE by employing nurses to administer the drug, track utilization, and monitor patient responses. (For more on the role of nurses, see ‘Nurses and physician assistants: A new pharma marketing channel’ and ‘Why should pharma marketers pay attention to nurses?’.)
Another is a British program that enables follow-up infusions of Herceptin in the home, rather than at a hospital.
In the latter case, the value comes in the form of lower overall cost, a benefit with the strongest appeal in countries where the same entity reimburses for both drugs and services.
Getting closer to the patient
“The supply chain must be pervasive, from the point of development, where products are designed and supplied at the right price to the right market,” Marshall explains.
“The supply chain must get closer to the patient.”
Since direct interaction with patients is forbidden or severely limited in most jurisdictions, drug developers rely increasingly on databases, e-prescription, and point of sale data on outcomes and prescriptions as feedback.
A rich source of such data are databases like Sentinel in the US, which was originally designed for pharmacovigilance but now provides rich outcomes data, for example, which drugs are most effective in which patients.
Yet more information is possible through e-pedigree serialization and track-and-trace. (For more on pharmacovigilance, see ‘Market access: How to get REMS right’.)
The service package idea applies not only to big pharma but to wholesalers as well.
“There’s a lot of discussion in the journals about the value wholesalers bring,” says Marshall.
“They do a lot of things, both valuable and not. They, too, must evaluate the role they play within the value chain.”
Consolidation and shrinking margins have been the rule for wholesalers for some time.
In the US, just three—McKesson, Cardinal, and AmeriSource Bergen—handle 97% of the business.
Yet, according to Ramsell Holding’s Loker, their distribution trade is barely profitable.
That may change as their distribution channels evolve towards specialized and personalized treatments.
In Europe, wholesalers already manage recalls and pharmacy inventory issues.
In the future, their role as data aggregators—essentially, feedback conduits on supply issues, under the PwC vision—will increase as well.
Similarly, with their credentials recently upgraded to the doctoral level, stateside pharmacists will begin to provide medical services to augment shrinking (and, in many cases, nonexistent) margins for prescription-filling, as they already do on the Continent and in the UK.
Some of these services will involve specific medicines, as in the US with pharmacist-administered vaccines. (For more on the role of pharmacists, see ‘The pharmacist's role in patient adherence’, ‘The pharmacist as an ally in patient adherence’, and ‘‘How pharmacists can help improve patient compliance’.)
One take-away from Supplying the Future is the recommendation that big pharma copy other industries in their approaches to supply chain.
This argument has been made before, for drug discovery and manufacturing, with mixed results vis-à-vis supply chain responsiveness and value. (For more on drug discovery, see ‘Will big pharma become a collection of marketing and distribution firms?’.)
The paper states that Johnson & Johnson has applied supply chain lessons from its consumer and over-the-counter operations to its prescription drug business, but this claim is difficult to verify.
Some degree of knowledge transfer is possible, at some level, but one wonders how much supply chain savvy derived from selling bandages and hand cream applies to monoclonal antibody drugs.
Ironically, when asked independently about supply chain crossover, Loker cited the difficulty with which firms (specifically Johnson & Johnson) that straddle consumer and prescription drug sectors apply supply-chain knowledge from the former to the latter. (For more on supply chain issues, see ‘Forecasting and supply chain optimization’, ‘Forecasting and total supply chain inventory’ and ‘Pharma forecasting: To offshore or not to offshore?’.)
Perhaps the first true test of this will come over the next few years, as electronics giant Samsung’s $389 million investment in biosimilars plays out.
“If pharmaceutical companies think struggling against their peers is a problem, wait until they come up against a proven, effective organization that’s managed low-margin commodity products,” comments Marshall.
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