Enrico Polastro08.23.05
I would like to discuss how drug substance sourcing can be leveraged for a competitive edge. Such leverage can provide companies with a "broad stroke" overview of the ap-proaches followed in the industry. I shall also highlight the challenges and some of the commonly observed pitfalls. But before entering into the depth of the subject, it may be useful to take a step back and have a look to the situation facing the pharmaceutical industry at large. The challenge in pharma is well known: R&D expenditures have escalated during the past few years and now account for more than 15% of total pharma industry sales. However, despite these increasing outlays and the investments undertaken in new forefront technologies—such as genomics, rational drug design and high throughput screening, to name just a few—the number of new molecular entities reaching the market has been stable at best, if not declining. The past two years (2001-2) have been a drought for the industry! This dearth of NMEs has combined with other factors to create a challenging environment. These factors include:
Going back to the issue of pharma R&D productivity, a brief analysis shows that, over the past few years, speed and time-to-market have been the main rallying themes in drug development. In fact, the industry has succeeded in reducing time-to-market by around one-third in the last decade. See Figure 1 for a more detailed illustration of this. This remarkable result has been achieved through various avenues, including:
The most important thing to keep in mind is the extreme complexity of developing a new pharmaceutical product. See Figure 3 to get an idea of just how complicated a process it all is. Developing a new drug is probably one of the most complex processes invented by man. It involves undertaking a myriad of activities, some in parallel, other sequentially, with a proliferation of key decision points. In fact, the complexity of new drug development has no parallel . . . except perhaps in the aerospace industry! In light of this—and without being facetious—the popular expression "rocket science", currently used to designate something extremely complex, and barely achievable by common persons or unsophisticated organizations, could well be replaced by "pharmaceutical science"! But how does this pertain to my subject—namely the access to the drug substance and its impact on gaining a competitive edge in pharmaceuticals? Accessing Substance Effective access to the drug substance is of paramount importance at all stages of the product lifecycle. In the product development phase, having an effective access to the drug substance often plays a decisive role in time-to-market, particularly given the combination of compressed development cycles and increasing complexity of the NCEs being developed. Some industry observers have stated, "Everything simple in small molecules has already been developed!" Similarly, in the launch phase, where the exact timing as well as the volumes required are still unclear, access to the drug substance can play a make-or-break role. Clearly, none of us wants to lose a single cent of revenues because of inadequate bulk availability. In this respect, an interesting example is represented by Enbrel of Immunex (a large molecule drug), when bottlenecks in the production of the drug substance resulted in a major revenue shortfall. The product was put on an allocation scheme given a restricted supply availability. Sunset In the later stages of the product life cycle, effective access to the drug substance can often play a critical role in ensuring a competitive cost-of-goods sold, as an example against "me-too," second generation products or generics. While cost-of-goods considerations are increasingly important in the maturity and sunset phases of the product life cycle, it would be wrong to ignore their importance also in the earlier phases, given the combination of:
Another consideration associated with the access to the drug substance is the contributions it can play in effectively extending the period of market exclusivity. For example, some companies achieve this by developing new patented processes or finding other stumbling blocks to hinder generic competition! But what is the typical impact of drug substance accessibility for an average integrated pharmaceutical company? As suggested by Dupont's analysis of the financial performance drivers (see Figure 4), access to the drug substance plays substantial roles at two levels:
But why is there such a substantial asset base? Simply because, until recently, most pharmaceutical companies have been glad to invest in an extensive number of plants—often too small to be operated efficiently—due to considerations such as market access or tax optimization! Strategies What then are the attributes expected from the ideal strategy for accessing the drug substance? Developing the ideal strategy for accessing drug substance represents a very difficult exercise. It involves finding a subtle equilibrium between various factors, some of which appear to be in opposition to each other. These include:
Not surprisingly, the quality department wants to have access to the most modern production facilities. This is reflected in the design principles applied by the engineering department, which often cannot conceive of settling for anything less than perfection. Senior managers often prefer to have little to do with the access to the drug substance—a rather different world from what they are used to—starting from the unit of measure applied, namely kg or lbs., as opposed to dollars or the number of dosage forms. In-House Concerns But how has the industry fared in terms of access to the drug substance and how have the strategies applied been able to meet the various attributes? Traditionally, the emphasis of integrated pharma has been to maintain extensive in-house synthesis capabilities, based on market access and tax optimization considerations. Within this framework, effective capacity utilization and capex efficiency considerations rarely represented a main issue. They were often overruled by other factors, such as security of supply or control of technology. However, as suggested by the various arrows on the spiderweb represented in Figure 5, increasing attention is given to elements such as flexibility, capex and cost effectiveness, as well as barriers against competition through effective life cycle management. Tax optimization considerations are being reassessed somewhat. Generic Developments At the other extreme, generic marketers are following quite different approaches. With the salient exception of Teva, most, if not all, generic companies have no in-house bulk production capabilities. They outsource the entirety of their drug substance requirements. Such a setup is dictated mainly by the ready availability of most off-patent drug substances they need on the merchant market. Other considerations, including flexibility and cost effectiveness—generic marketers typically carry extremely broad and diversified product lines often characterized by short life cycles—make in-house drug substance production both unpractical and often uncompetitive for these firms. See Figure 6 for an illustration of the concerns of generic marketers. However, it is interesting to note that several generic marketers are reviewing their access to drug substance in the quest of creating some form of competitive edge. Some are establishing privileged links with suppliers, for example. Against this background, a number of factors are impacting access to the drug substance. These include:
All these elements are further compounded by the increasing pressures on prices, as well as the harsher competitive environment, facing the pharmaceutical industry. So it comes as no surprise in such a context that pharmaceutical companies are proactively reassessing their strategies in terms of access to drug substance. Best In Show Some "best in class" practices are emerging under this new model, a focus on closer coordination of the entire supply chain as opposed to delegation. Until recently, the various national subsidiaries of Pharma companies led to a less-than-holistic view on the supply chain. The new approach starts from process development up to the supply of the packaged dosage form. Also, companies are relentlessly pursuing optimization initiatives and monitoring performance; they are following implementable action programs by:
The idea advocated in the mid-1990s, calling for full outsourcing and a move towards virtual operations, where pharma companies would fully delegate their chemical production to a vendor, has largely failed to materialize—at least for the time being. This is due to a number of practical considerations, as well as frozen mental models on issues such as technology ownership and control of product quality. Similarly, the model of full vertical integration so popular in the 1980s, where the pharma company sources on the open market only simple standard intermediates, performing all synthesis processes in-house, appears to be obsolete, given the imperatives set by Economic Value Created used as metrics by senior management, as well as simply common sense. Indeed, why perform all chemistries in-house when third-party vendors can do it more effectively? Rather, most pharmaceutical companies are now skillfully combining in-house production with outsourcing from third-party vendors—companies systematically formulate "make-or-buy" decisions based on a number of factors (see Figure 7). These include:
Few companies have explicit sourcing strategies—Wyeth being a salient exception. In most companies, outsourcing is driven by short-term tactical considerations—including the availability of in-house excess capacity—as is unfortunately the case for several industry majors today! Vendor Relations In parallel with this increasing emphasis on strategic sourcing, pharmaceutical companies are reassessing their mode of interaction with vendors. See Figure 8 for a description of these various models. The antagonistic model is increasingly viewed as an obstacle to the imperative to compress lead times and the trend to go beyond the outsourcing of just basic intermediates, given the hurdles associated with qualifying suppliers. At the other end of the spectrum, the strategic partnership model, with the emergence (as in the automotive industry) of Tier-1 suppliers providing ready-to-use full components to the customer and managing discrete chunks of its supply chain (as originally envisaged by some pharmaceutical companies in the mid 1990s as a logical corollary of virtual operations) also appears to have fallen out of fashion. Companies like SmithKline Beecham eventually moved out of it after it failed to meet their value expectations. Today, the à-la-carte model—where pharmaceutical companies draw from a short list of "core-prequalified" vendors selected on a project by project basis—appears to be more robust and most suited to meet the quest for value and expectations of excellence vested by pharma companies in their vendors. Another important trend among large pharma is to reconfigure their chemical production assets. A consistent vision appears to emerge for these assets when companies invest heavily in the following areas:
These launch facilities are complemented by some dedicated, larger scale units located in tax havens. Parallel to these investments, peripheral plants are being divested. A web of cooperation agreements with selected third-party vendors is often established in the process. Emerging Pharma How can these considerations be of value or even simply be of interest to us, Emerging Pharma companies? The implications may be far-reaching! For Emerging Pharma, effective access to the drug substance is of outmost importance, as it is to their large Pharma counterparts! In fact, effective access to bulk is probably one of the most critical elements for Emerging Pharma to eventually capitalize on its innovation track record. Emerging Pharma has to rely extensively on outsourcing for several tasks and processes associated with drug development. The reasons are simple: most companies falling in this segment do not have the resources nor the intention to develop all the capabilities of an integrated Pharma player. Otherwise they would lose some of their key sources of competitive advantage: reactivity and agility! However, for Emerging Pharma to be successful, it is imperative to effectively manage outsourcing, including particularly for the drug substance. They must make sure of several things: The best vendor is actually retained for any given activity and task! Value for money is clearly achieved: be careful to note that this parameter does not necessarily go in parallel with the lowest price offer! The deliverables provided by the various vendors are fully compatible and meet the expected deliverables on:
Can you imagine the consequences of an amateurish approach to outsourcing? For example, try subdividing the tasks between some poorly selected vendors chosen based on the apparent lowest price offer? Do not even think about what could (or rather, will) go wrong. Think also in terms of incompatibility between the inputs provided by the various vendors and the inevitable "their fault, not ours" disputes that will emerge when the focus will be on CYA rather than finding productive solutions! For start-ups, it is important to learn from best industry practices that managing access to the drug substance leads to competitive edge. Some elements are worth remembering. They tend to be deceptively simple, deriving from common sense, not rocket science (oops: "Pharma science"!):
Rather, it is important that the vendor also achieves a fair return on his investments and is able to predict his revenue stream with a certain level of certainty. After all, we are all in the same boat and your successes are also your vendors' successes (and vice-versa)! |