Pharmaceutical Supply Chains Seen Due for a Radical Overhaul

New PwC report outlines six trends that will change the way drugs are manufactured and distributed, offers four potential ways to restructure the pharma supply chain

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New York — February 24, 2011 — Pharmaceutical supply chains are due for a radical overhaul, but to date pharma companies have invested comparatively little effort in updating their manufacturing and distribution operations, according to a new report from consultancy PwC.

The report, "Supplying the Future: Which Path Will You Take?", released today by PwC US, notes that while recent attention has focused on issues such as the challenges associated with drug discovery and the regulatory review process, pharmaceutical companies manufacturing and distribution operations often are inefficient, under-utilized and ill-equipped to cope with new medicines, cost pressures and health reform expectations.

Representing a significant amount of the cost base of most bio-pharmaceutical companies, the supply chain is the link between the laboratory and the marketplace and includes everything from sourcing raw materials to manufacturing and packaging to inventory warehousing, transportation and distribution.

As demand grows for more customized products and services — and as the nature of those products and services becomes more complex — "next-generation" supply chains will become an increasingly important source of differentiation for makers of medicines, and will be a more prominent part in the strategic thinking of industry leaders, according to PwC.

6 Key Trends

In the report, the consultancy outlines six trends that will fundamentally change the way pharmaceutical companies make and distribute their products.

1. Health reform shifts emphasis from product features to patient outcomes: The government's emphasis on health outcomes as a basis for payments will require pharmaceutical companies to not only manage the manufacturing and distribution of medicines and companion diagnostics, but also to combine product offerings with data and supplemental services that add value through improved outcomes and efficiencies.

2. New products types: The growth of biologics, bioengineered vaccines and advancements such as stem cell research and nanotechnology are diversifying pharma's portfolio with products that have a shorter shelf life and require more complex manufacturing and distribution processes than shelf-stable pills and conventional medicines.

3. Incremental product launch alters the sales curve: Both the U.S. Food and Drug Administration (FDA) and the European Medicines Agency (EMA) have shown interest in limited label approvals, granting "live licenses" contingent on ongoing testing versus the all-or-nothing phase I through IV approach. Current processes support revenue projections for "big bang" product launches, with peak sales upfront. Pharma companies will need more adaptable cost structures that preserve gross margins at each stage of the product lifecycle.

4. New modes of healthcare delivery: Greater use of electronic health records, e-prescribing, mobile health applications and remote monitoring are moving healthcare delivery, including medication management, beyond hospitals and physicians offices into homes, communities and direct to patients. Pharmaceutical companies will need real-time information to manage wider distribution networks and demand-driven manufacturing and distribution processes.

5. Growing importance of emerging markets: The growing importance of the emerging markets will require pharmaceutical companies to understand patient needs and preferences in the developing world and modify cost and design of product offerings and services accordingly.

6. Greater public scrutiny: Globalization, the foreign sourcing and manufacture of regulated products, and an increase in the volume and complexity of imported products have increased the need for supply chain control to identify the risk of contamination and fake medicines. Regulators are raising the bar on supply chain safety, demanding sophisticated technology solutions to track and trace product throughout the supply chain.

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"The current pharmaceutical supply chain worked well when the 'blockbuster' paradigm prevailed, but pharma's focus in a post-health reform world is shifting from products to patients, and their supply chain processes need to adopt the speed and agility of other, more consumer-oriented industries such as consumer electronics and mass retailing," said Wynn Bailey (LinkedIn), head of supply chain strategies with PwC. "In a world where outcomes count for everything, health organizations need to acquire a much deeper understanding of patients and their healthcare needs. Information is the new currency, and the data behind the product may soon be as valuable as the product itself."

3 Key Changes

PwC predicts that the pharmaceutical supply chain will undergo three key changes over the next decade. It will become fragmented, with different models for different product types and patient segments; It will become a means of market differentiation and source of economic value; and it will become a two-way street, with information flowing upstream to drive the downstream flow of products and services, and the management of information transferred between the pharma company, the patient and healthcare provider will become as important as the movement of product.

"The most successful pharma companies will be those that recognize the underlying value locked in their supply chain and can leverage it as a value and brand differentiator rather than just a cost," said Steve Arlington (LinkedIn), global advisory pharmaceutical and life sciences leader with PwC. "Companies that recognize information is the currency of the future, will be those that go the final mile and stand out by 2020."

4 Ways to Restructure

In its report, PwC outlines four potential scenarios that pharmaceutical companies might explore as a way to restructure their supply chains. Depending on their product and channel portfolio, most companies will have to manage to more than one scenario simultaneously.

Companies that concentrate on specialist therapies might exit from manufacturing altogether and, instead, become a virtual manufacturer, outsourcing the entire supply from production of the earliest clinical batches to full-scale manufacturing, packaging and distribution through a network of integrated supply partners. Alternatively, they might position themselves as service innovators, building supply chains that are capable of manufacturing and distributing complex treatments as well as managing multiple suppliers of integrated, valued-added health management services.

Mass-market manufacturers, such as the makers of generics, might position themselves as high-volume, low-cost providers, borrowing lessons in lean manufacturing, strategic pricing and inventory management from the consumer products industry. Another option for mass mass-market manufacturers is to turn their supply chains into profit centers that combine economic manufacturing and distribution of satellite services, such as direct-to-patient delivery, secondary packaging or distribution to hospitals and pharmacies, and then to franchise it as a stand-alone offering for both internal and external customers.

The report provides an in-depth explanation of these scenarios and is available for download (registration required) at