As “Obamacare” continues to plow forward, the effects on the healthcare environment are slowly but surely being felt. One of the biggest recipients of this trend is the pharmaceutical environment.
Several trends have shaped the pharmaceutical ecosystem in the last few years, and Obamacare is only one among many. The issues supply chain executives face in this environment are significant, but also represent opportunities for those who know and think about how to embrace this complexity. A senior executive at a large pharmaceutical manufacturing company spoke on this issue recently, and mentioned several of these trends – and his words spell out a very different ecosystem than the one your mom and dad experienced….
First, the number of prescriptions has significantly increased. In the U.S. alone, the volume of prescriptions has almost doubled in less than 15 years. Looking at global figures, growth in the consumption of drugs has increased 32 percent from $735 billion in 2007 to $965 billion in 2012, and consumption is projected to reach about $1.2 trillion in 2017. We should not forget that over-the-counter medicine consumption has increased at an even higher rate. But it isn’t the volume that is the challenge, but the nature of the pharmaceutical industry that has created the greater challenges. Supply chains have gone from local to global. A single event in the world, such as the Fukashima earthquake, can interrupt the global supply chain for certain products.
In addition to the disruption potential of globalized supply chains, globalization requires products and brands to adapt to local regulations and customs at the last steps in the supply chain. At the very least, this causes changes in packaging to adapt to local language, but in actuality changes can be much more significant. This adds complexity. It also means that many demand signals must be aggregated for planning the early steps in a supply chain, while the local information details must be maintained to inform supply chain planning close to the consumer.
At the same time, the global picture for generics is evolving, positioning generics as the dominant category, especially in developing countries. In the U.S., generics now account for more than 80 percent of prescriptions filled (according to PhRMA). The rise of generic products means the vast majority of products are made by multiple companies. This introduces further challenges in terms of quality, as it is critical to ensure that patients can safely exchange one manufacturer’s product for another (this is a big challenge for regulators). It also means that the competitive marketplace can rapidly shift demand from one manufacturer to the next. Companies respond to demand volatility in two ways: reducing inventories and trying to instill more agility in their supply chains.
Additional pressure on supply chains also includes the need for tight cost controls, as the margins in many countries for generic products is razor thin. Another trend that we are seeing speaks again to globalization. IMS health data reports that in 2011 China cemented its place as the third largest pharmaceutical market in the world – almost 50 percent bigger than Germany in fourth place – while Brazil overtook the United Kingdom, Italy, Spain and Canada to rank sixth. Russia and India enjoyed similarly impressive uplifts. Double-digit growth is forecasted for emerging and developing markets, while the G6 are predicted to show negative growth in revenue and only modest growth in volume. We are also seeing more and more clinical trials occurring in countries where it is difficult to import products, as the supply of patients willing to go through clinical trials in Western countries is dwindling, bio pharma companies are looking more and more to overseas markets for clinical populations. – Another trend is the move towards pervasive monitoring. We are seeing new technologies that will be used to monitor patient’s health conditions, and tracking their compliance to regimented drug prescriptions. The application of analytics to patient compliance is an important development that will result in important medical breakthroughs.
And lastly, we are seeing a move toward specialized products with more complex formulations and processes. Many of these products are for small patient subsets and require special handling and storage. In 1990, there were only 10 specialty drugs on the market, whereas in 2012 there were nearly 300 agents that met the definition of a specialty drug. Even more noteworthy is that approximately 40 percent of current agents in the pharmaceutical pipeline are likely to be considered specialty agents when they are released to the market. There is also a growing focus on so called “Orphan Drugs” which have patient populations of 200,000 individuals or less. The Orphan Drug Act has promoted funding and reimbursement of these drugs, often resulting in very lucrative market for biopharma companies, but greater risks to insurance companies. With all this in mind, let’s now look forward. The trends of the last decades will continue. And furthermore, pressures will continue to mount on big pharma; pressures such as increasing research and development costs with stubbornly low success rates and decreasing margins amongst increased competition and more complex supply chains. Increased R&D costs are partly driven by the added regulatory requirements to demonstrate safety, prove superior efficacy (or safety) and achieve cost effectiveness. There is another reason though – one which we should feel proud about – products developed and introduced over the last 40 years have transformed many areas of healthcare and have raised the bar for efficacy and safety for new products.
In recognition of these trends, big pharma has been revalued. As capital becomes more dear, we see a downward trend in the investment by pharmaceutical companies in manufacturing facilities. And let’s not forget that buyers, which are directly or indirectly controlled by government payors, are pushing down price and installing utilization controls. In short, R&D based pharma business models are under pressure, forcing convergence with generics. At the same time, the growth of generic companies via traditional routes – developing generic product substitutes for branded products as patents expire – is losing steam. Both businesses are growing toward each other, and I believe they will increasingly look like consumer product companies from a margin, valuation and fight for brand recognition standpoint – albeit strongly regulated. This is already happening outside of North America and Europe. So what does this mean? Supply chains will be forced to be more flexible and more cost effective. Many companies will outsource all of their supply chain activities. Many of the major pharma companies have already outsourced much of their clinical research activity, manufacturing, and distribution, and it is likely that this trend will continue.