The pharmaceutical industry has always marched to a different drum from other large manufacturing enterprises in Europe. Research and development dominates spending and is also the main driving force behind a merger and acquisition policy that has seen the larger players swallow up firms of all shapes and sizes.
Arguably, it is one of Europe’s most global industries, with specialist plants turning out products for dozens of national markets. On the other hand, the consumer end of the market is one of the most localised of markets, often with independent pharmacies serving a small town or a handful of villages. National governments also have a much greater say in product packaging and presentation than in most other sectors and, almost uniquely, there are still restrictions on what can and cannot be traded across the EU’s internal borders.
Market segments
In fact, says Roy Lenders, one of the authors of a new Cap Gemini Ernst & Young report (‘EU Enlargement – Driving Change in the European Life Sciences Industry’, free copies available at roy.lenders@cgey.nl, segments of the market are moving at different paces. The research-intensive pharmaceutical manufacturing industry is, he says, the most mature. ‘A lot of the consolidation has already taken place, both of manufacturing plants and distribution centres,‘ he argues. Tax treatment is often an important consideration on where to locate plants – one reason why the Swiss have retained such a large share of the market – along with access to expertise. Transport costs are usually a relatively minor consideration.
But generic manufacturers which manufacture off patent drugs and sell them at relatively low prices, are also changing. At the moment, the typical generic manufacturer is a small firm serving a relatively local market, ‘but consolidation is just taking off’. Another development that could take place are branded manufacturers setting up or acquiring generic operations.
The allied medical devices industry is already globalised, while biotech (often influenced by the location of universities) will move increasingly to the Nordic countries and the Netherlands, he believes.
There could even be some shift to Eastern Europe for manufacturing, particularly among generics, but this will be limited by concerns over patent protection and quality standards. The main attraction of these countries, lower labour costs, do not apply to the same extent in highly automated pharma production as in most other industries.
However, East Europe could start to manufacture more for its own consumption and could also make inroads into the emerging parallel market whereby products made in a country where the price is relatively low are sold in others where the price is high.
The branded manufacturers have done their best to resist this trend, sometimes aided by governments, though many commentators suspect that they will ultimately be unsuccessful.
Governments’ role in all this is interesting. In France, for instance, there is national legislation in place to maintain set prices for medicines. In Germany, though, government policy is to use the availability of generics to force down the prices charged by the branded manufacturers, says Roy Lenders. Some governments have initiatives to encourage more diversity of supply and reduce the influence of pharma salespeople on doctors’ purchasing decisions; the UK has its national Institute of Clinical Excellence while the Netherlands has regional initiatives its government wants to roll out nationwide. That said, points out Lenders, ‘prescribing drugs is still a subjective process’ although governments worried by ballooning healthcare budgets might increasingly force the issue.
Contract manufacturing
Another measure that could start to take off is contract manufacturing, continues Roy Lenders. ‘It is a relatively small sector at the moment, but it’s growing. In the past, a lot of manufacturers have been reluctant because of concerns over patents and quality but this is changing. We’ve already seen this happening in chemicals, which is in many ways comparable.’ A move towards outsourcing could also further drive plant consolidation and lead to more shared user logistics activity.
He can foresee two patterns of contract manufacturing – one where the brand owner is also the supply chain owner and another whereby firms actually contract out the R&D process. In fact, one of the manufacturers’ biggest imperatives is to increase R&D activity which increasingly drives share prices – even to the extent of buying up smaller biotech and other research-orientated firms to achieve the objective.
While contract manufacture has taken off in a big way in personal care products, the much more stringent licensing requirements for pharma have kept many out of this segment, says Mike Peters, managing director of one of the few such firms in the UK, Lancashire-based Universal Products. He is aware of three similar US firms and perhaps a handful across Europe.
Perhaps because of this, Universal is ‘nicely busy’ at the moment, dealing with a variety of UK and international manufacturers. The company will take on work such as manufacturing products to a client along with packaging and labelling. ‘We can also offer a development service – for example, if a client wants a sugar-free formulation of an existing cough syrup.’
Clients come to Universal Products either because they know when their peak demand arises and have decided that it makes economic sense to contract it out, effectively using the contract manufacturer as an extension to their own production facilities, or because of an unexpected demand surge. There are also some pharma firms that prefer to contract out all manufacture of their basic lines, allowing them to concentrate resources on more profitable ones.
‘Our trick is to keep the plant occupied and still have availability,’ Peters explains. But Universal itself does not keep stocks or raw materials except for the basics such as sugars, not least because most have only a finite life. Like any pharma manufacturer, Universal is striving to keep stocks down.
Supply chain may not have been high profile at most pharma manufacturers but many factors are conspiring to change that, say Simon Smith and Sean Tipping, respectively head of process sector and head of analysis at operational consultancy, Celerant. ‘There have been a lot of gains in the supply chain and there are more available,’ they say. ‘Productivity improvements of 30 per cent are not unknown.’
Useful pointers
The fresh food industry could provide some useful pointers, he adds. Many of the issues such as quality, safety, finite shelf life are similar. The pharma industry is also moving towards a customer pull model instead of a push one. ‘In the past, margins were such that manufacturers could afford to make stock – that’s less true now.’
Something else that has changed is that competitors are able to produce similar products much more quickly, so the time during which drugs can demand a premium is less. ‘That means they have to be launched faster, and be launched in more countries simultaneously, whereas before it used to be done sequentially. But simultaneous launches are more complex.’
Even in the mature western markets, there is a lot of work to do on rationalising a still fairly fragmented supply chain by the standards of most other major industries. There could even be a reasonable amount of market growth in the west, given factors such as the aging population and the range of new treatments now available, says Graham Inglis, president of healthcare worldwide at Exel.
Exel recently gave an indication of its strategy in the market when it acquired Pharma Logistics Group and its related operations, based in Italy and Belgium a successful regional business that has already established strong relationships with multinational pharmaceutical and healthcare customers in those markets. Pharma Logistics has already expanded from its Italian roots into a broader pan-European service, with nine facilities and 350 staff.
Exel, along with most of the major logistics and freight firms is active in the international pharmaceuticals markets but perhaps uniquely, has started to take an interest in the pre-wholesaler segment for finished goods in Europe, although it has no desire to become a wholesaler itself. Here, says Graham Inglis, ‘our competitors tend to be smaller regional or domestic services, which has increased the number of service providers manufacturers have had to work with. Companies are looking to rationalise.’ Exel’s strategy is to increase its presence in this sector in eastern and western Europe. In the former, medicines have up to now been dispensed ‘though a variety of different channels’ with quality standards that were, ‘to put it politely extremely variable’.
Even in the more mature western markets, concepts that are commonplace in other sectors – third party outsourcing of warehousing or shared user operations – have not until recently, made much goods under production will be available ex-site and then given a tight timetable for delivery – usually to a wholesaler or distributor. He adds: ‘IT systems are important now and we use them, for example, to look for ways of combining loads moving through Europe.’ NYK in fact handles pharmaceuticals in half a dozen countries in Europe.
Exel’s Inglis says that systems often have to be audited to the industry’s GAM standard – not because this is a legal requirement but because it is industry best practice. In the longer term RFID could have an impact, not least because of the enhanced security it offers. It could also help with traceability of products which might inhibit theft or illegal re-exporting of drugs sold at reduced prices to developing countries.
Inglis has found manufacturers more receptive to headway.
There are good reasons for this. Operation of storage and transport is strictly regulated by government bodies and there are temperature and storage conditions to consider too. Wholesalers and distributors – who usually control delivery to the hospital or point of sale – play an important role. In the UK, the role of wholesaler and high street retailer is often combined. However, there could be a ready market in delivery of pharmaceuticals to hospitals, says Graham Inglis. (The high street/hospital ratio is roughly 80/20 in Europe.) There are also opportunities in delivery to the high street in some countries, particularly Italy.
Precise operations
That the pharma supply chain is fragmented does not mean that supply chains in the industry aren’t operated precisely. Ken Brown, account manager for pharmaceuticals at NYK Logistics describes the operation as ‘tightly buttoned up’. NYK Logistics gets told when the idea of shared user operations. ‘I think they can take comfort in the fact that someone is focussing on their industry, offering a quality operation, and that there are economies of scale. Consider that even a big company will typically have a market share for any one drug of only around five per cent.’
Distribution centres have to be licenced by the appropriate government body in each country which is why a lot of warehousing and storage is still done in-house, although logistics operators can do short term storage or cross-docking operations without special authorisation. ‘Certainly, the industry does do a lot of storage in-house at the moment, though many firms are looking to outsource,’ says Brown.
Monitoring conditions
Too hot or too cold storage can render products useless or even dangerous, and temperature needs to be continually monitored and recorded.
This is one of the leading areas of technical sophistication, says Brown, with increasing use of satellite tracking.
Security, naturally, is also important. Kevin Higgs, NYK Logistics’ systems director, adds that the satellite tracking systems used for security could have consignment tracing capability added relatively easily. While bar coding and RFID have their advantages in certain segments, for logistics companies involved in pharma manufacturing, a simple XML link to systems such as these would probably suffice for most needs.
Even in such a tightly regulated industry as this, there are moves towards concepts such as e-purchasing and procurement says James Anthony director of e-auction enabled enterprise specialist, e- Three. The move toward electronic procurement has started in indirect purchasing and the more commoditised areas such as packaging. ‘Naturally, direct purchases are more sensitive and buyers more reluctant. But if you can define what you want to buy and there is a contested market – both of which often hold true in the pharma sector – there is no reason why e-procurement cannot work,’ he argues.
He adds that the likes of GlaxoSmithKline are running a lot of e-auctions, though not necessarily for purchasing drugs or their constituents.
Demand forecasting is vital in the pharmaceutical industry, particularly for manufacturers. Until now, the industry has tended to lag behind, say, the food retailers in using sophisticated forecasting models and techniques but that is changing. Michael Webster, director of life sciences at software specialist, Ross Systems, says that while one important aspect of his service is MRP, planning and optimisation is equally vital. Pharma manufacturers need to ask themselves questions like: When is the optimum time to carry out a plant cleandown or what batch size should we produce?
‘Quality of forecast information is a huge issue in this industry,’ says Webster. ‘Supply chains are complex – for instance, a medium sized operator might have 90 plants in Europe, some feeding others.’
According to a survey by Celerant, forecasting accuracy can be reduced because markets are split across countries and small tolerances in each can add up to large discrepancies across a production run.’
Tipping explains: ‘As in any consumer goods industry, success depends on functions working effectively together. But there’s a tendency for everyone to try and second-guess each other.’
While drugs companies have adopted systems like SAP, ‘they’re only as good as the information your customer sends you and with the lack of joined up IT systems, a lot of data is re-input, perhaps two or three times,’ he says.
However, adoption of Six Sigma techniques in the industry could help iron out some of the discrepancies and at least ensure that everyone in the supplier base is talking the same language.
Responsive updating
Evant, a major provider of retail management software and services in the US, had its roots in the pharmaceutical distribution industry there and now works with eight of the nine leading drugs wholesalers, and claims 92 per cent of the pharma distribution supply chain. CEO Robert Lewis says that the company sells itself on its ability to use demand data intelligently and to use ‘responsive updating’ to drive replenishment information – in other words, to make sure that you learn from your mistakes. In the drugs market, a common error, elaborated Evant’s founder, Dr Hau Lee, is to determine the level of demand for a drug based on data collected in the flu season, ‘which could end up with you being left with huge inventory’.
However, adds Ross Systems’ Webster, ‘sales input matters a lot as well. It’s not just consumer packaged goods companies that promote through pricing – the pharma companies do it as well. And you’ve got to understand the effect on sales.’ There are probably around 50,000 drug company reps in the US alone and while there are pressures to reduce the number of sales calls, sales promotion is likely to be a big factor for the future.
Ross Systems’ other main impact is in the materials management aspects of the business for manufacturers including detailed costing, routing, financial management and – importantly in this industry – certification and audit trails. While the industry is still strongly wedded to paper-based processes and legacy computers, more advanced systems are gradually gaining ground, says Webster. ‘We can trace what transactions were carried out when, where all the material came from, what machines were used, and by whom.’ Electronic signatures can be used to ensure that only authorised people carry out specific activities.
Andre Grigjanis is MD of specialist software firm IBS whose company literature points out that systems may need to be able to handle 70,000 order lines an hour at peak times and delivery times are measured in hours, not days. Because of the need for absolute reliability, the industry has been slow to use the internet, but at the same time there is a need for absolute precision.
‘At the same time, it’s really demanding as there has been great globalisation,’ say Grigjanis. ‘It’s common to find 30 distribution centres being run by a single server. There is also massive government pressure to bring costs down in the face of ageing populations and the proliferation in the number of new treatments. That means that organisations have to improve their logistics, bring down stock levels and make the picking process more automated.’ A lot has been done in the pharma industry in Europe, but a lot still remains to be done, he says.
Grigjanis continues: ‘A lot of the manufacturers still don’t have good communication systems so there’s a lot of ordering by fax and so on.’ Electronic ordering via the internet has been adopted only slowly, although here he identifies the bottleneck as reluctance by retail pharmacists to invest in PCs.
However, many of the big European wholesalers have been buying up retail chains in Europe ‘so now they will have to care more about the retailers, to optimise goods in the shops as well as in the DCs’.
Direct sales over the internet and parallel imports could also grow, especially for generic medicines, more of which are likely to appear over the next few years as treatments come off patent.
So far, the big pharma firms have managed to keep the lid on the growth in generics in Europe where the proportion is only around 65 per cent compared with 20 per cent in South America.
