As patents on proprietary medicines increasingly continue to expire, the pressure on pharmaceutical supply chains continues to rise to meet business expectations and outcomes.

In late November, the very popular cholesterol-lowering drug Lipitor, which at its peak, generated over $12.9 billion in global revenues, became open for production by generic drug manufacturers. Generic drug producers Ranbaxy Laboratories, based in India and Watson Pharmaceuticals made plans to produce and distribute generic versions of Lipitor during 2012.  Drug maker Pfizer, the original patent owner came up with a novel idea to continue promoting the drug while piloting a direct distribution model to patients and their insurance carriers. To hold market share, the company made plans to sell Lipitor directly to patients at generic prices by partnering with Diplomat Specialty Pharmacy to mail the drug directly to patients via online prescription fulfillment.  A dual tier pricing model would be maintained, with generic pricing for Diplomat and higher pricing for existing Lipitor channels. The feeling at the time was that if Pfizer’s model was successful, it could become a model for other drug makers whose popular drugs came off patent. According to a recent Wall Street Journal article, after spending more than $87 million promoting Lipitor, Pfizer is quietly suspending its efforts to negotiate new contracts to sell this drug to health plans because these same health plans are signing up generic versions of Lipitor at far lower prices.

Another important area in proprietary drug development and production has been the area of cancer fighting drugs.  As we all know, these drugs have been extremely expensive, not only because of their rather large research and development investments but also the rather complex production and quality requirements involved in the drug’s supply chain. Many pharmaceutical manufacturers view the large populations and emerging economies of China and India as a new revenue growth opportunity for these drugs.  However, recent announcements from generic producers point to other challenges.

One of India’s largest generic drug makers, Cipla Ltd., recently announced that it would cut prices on its cancer medications by as much as 75 percent. According a Wall Street Journal report, the company indicated it would cut the price of its generic version of liver cancer medication Nexavar to $128 for a one month supply. Drug maker Bayer’s proprietary drug costs the equivalent of $5236 per month. Cipla also reduced the price of lung-cancer drug Iressa by as much as 60 percent, and the generic version of brain-cancer drug Temozolamide by 75 percent. Cipla’s chairmen attributed the cuts as a means to bring less costly cancer drugs to world populations, similar to what the company accomplished ten years ago for HIV medications. Cipla also indicated its plans to sell these generic versions in other developing countries where there are no intellectual property restrictions.

Supply Chain Matters recently called attention to an announcement from Samsung BioLogics, a division of South Korea based Samsung, that plans to produce generic versions of certain monoclonal anti body drugs by 2015. The company is targeting the opening of a new Korea based manufacturing plant by June, and seeks international regulatory approvals for the plant by the end of this year. A Samsung executive made note that while certain pharmaceutical companies excel in drug innovation and sales strategies, they may lack volume and process based manufacturing expertise. Governments among economically challenged populations are willing to support price disruptors in order to provide affordable healthcare for their citizens.

Many other medicines have drug patents expiring this year including Diovan, for the treatment of high blood pressure, Plavix, for the treatment of blood clots, Singular, for treating asthma, and Tricor, for treating high cholesterol.  Each has been a high revenue generator, generating large numbers of patients.  With current building global-wide pressures directed at health care cost control, each of these medicines can be lucrative for volume oriented generic producers.

To combat these trends, some pharmaceutical companies have turned toward a merger and acquisition strategy to replace or augment their proprietary drug pipelines.  Some manufacturers have called for a tiered pricing strategy, offering a drug at different pricing, depending on a country’s level of economic development.  That, however, provides an opportunity for an increase in grey market supplies, as drugs purchased in lower-priced countries are re-distributed to more lucrative higher priced countries.

Generic manufacturers are also shifting to meet increased scale value-chain efficiency challenges. Watson Pharmaceuticals recently announced a $4 billion acquisition deal with European based Actavis Group, with the potential to become the third largest global generics manufacturer.

In all cases, pharmaceutical and drug supply chains will have to rise to the challenges of an increasingly disruptive market place reflecting higher levels of global competition and innovation in supply chain production and distribution. In addition to M&A Supply Chain Matters advises the industry to also consider additional investments in global supply chain value-chain efficiencies, business intelligence and response management.

Manufacturers may gain by adding a new proprietary drug to their product portfolio, but will always need globally competitive supply chains to sustain industry competitiveness and agility.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog.  All rights reserved.

We provide a brief but important update regarding Supply Chain Matters ongoing commentaries addressing significant supply breakdowns of critical life-saving drugs within pharmaceutical and drug supply chains.

Yesterday the U.S. Food and Drug Administration (FDA) approved two additional suppliers for two life-saving cancer drugs that have experienced short supply because of the unplanned shutdown of contract producer Ben Venue Laboratories, a division of Germany based Boehringer Ingelheim GmBH.

To respond to the critical shortage of ovarian cancer treatment drug Doxil, distributed by Johnson and Johnson, the FDA has approved temporary importation of the replacement drug Lipodox as an alternative to Doxil.  The FDA has authorized a limited arrangement specific to Mumbai India based Sun Pharm. Global FZE and its authorized distributor, Caraco Pharmaceutical Laboratories Ltd., based in Detroit. In its press release, the FDA reinforces that temporary importation of unapproved foreign drugs is considered in rare cases when there is a shortage of an approved drug that is critical to patients and the shortage cannot be resolved in a timely fashion with FDA-approved drugs.

Another drug that is in critical short supply in the U.S. drug supply chain is the drug methotrexate, prescribed to treat many forms of cancer and chronic disease. Their have been recent media reports indicating that only two weeks of supply of the drug remained to fulfill patient demand. The FDA has additionally approved a preservative-free generic equivalent manufactured by Illinois based APP Pharmaceuticals, a division of Fresenius Kabi AG based in Germany. Drug maker Hospira additionally expedited release of additional 31,000 vials of methotrexate, described as the equivalent of one month’s demand for this drug. The FDA is also working with other drug producers to free-up additional supplies.

The FDA also issued additional guidance to drug manufacturers regarding more detailed requirements for both mandatory and voluntary notifications to the FDA regarding future drug shortages or potential drug shortages.

Supply Chain Matters applauds these latest actions coming from both the FDA and the industry.  The fact remains however that the potential for stockouts of any critical life-saving drug remains unacceptable, and the industry continues to find itself in a situation of too much sourcing risk, without contingency plans for augmenting supply.  We also strongly suspect that the new FDA directives regarding notification of short supply will only increase the visibility to other drugs in short supply, adding more embarrassment, patient and healthcare provider mistrust concerning the U.S. drug supply chain.  We fear that this will only add to the growing problem of counterfeit and grey market supplies of critical drugs.  We hope that we are proven wrong.

Bob Ferrari

Supply Chain Matters provides yet another update regarding our ongoing series of commentaries as to why pharmaceutical and drug supply chains are failing to deliver reliable and life-saving supplies to doctors, hospitals and patients.

The specific problem concerns generic, injected drugs which are utilized in chemotherapy and other life-saving treatments and the shortage supply situation is getting more critical with each passing day.  It unfortunately remains rather clear that for this category of necessary life-saving drugs, supply chains are failing, and the reasons are becoming much more visible.  The time for industry action remains long overdue.

For background, readers can reference our previous updates by clicking on the following web links:

Initial commentary

Commentary Two

Commentary Three

Commentary Four

Commentary Five

Probably the most visible aspect of this problem concerns the ongoing global shortage of Doxil, a generic injectable drug utilized to treat ovarian cancer in women. The drug itself is marketed and distributed by an operating division of Johnson and Johnson, but the production of this critical drug was contracted to Ben Venue Laboratories, a subsidiary of Boehringer Ingelheim.  Significant ongoing production quality problems that occurred at the Ben Venue production facilities in Bedford Ohio forced the complete voluntary shutdown of that facility pending the need to reconstruct a new wing of the facility.  According to the U.S. Food and Drug Administration, plant personnel failed to investigate more than 1,200 microbial contaminants over a 14-month period which presumably led to this situation.  A recent posting on FDA News.com notes that the full resumption of production at Ben Venue’s plant will not take place for another nine months as reconstruction of a new wing continues.  Meanwhile, the CEO of J&J has indicated to press and analysts that the company continues to seek other production alternatives, but also cautions about an extended shortage for the remainder of 2012. As we have noted in all of our previous commentaries, Doxil is not the only problem, and a discernible trend involving multiple generic injectable drug supplies is evident. The American Society of Health System Pharmacists reported shortages of 251 drugs in 2011, mainly generic injectable medications.

To add more credence to major symptoms of this problem, an article published in the Twin Cities Pioneer Press notes that according to FDA, nearly half of the existing shortages stem from quality problems at manufacturing facilities. Manufacturing and shipping delays, as well as shortages of active pharmaceutical ingredients, explained another 25 percent of shortages. Business decisions by manufacturers to halt production were factors in 8 percent of cases.  Experienced sourcing and operations management teams can easily conclude that over 75 percent of current problems are traced to supplier related operational effectiveness and quality processes.

One of the more insightful perspectives regarding this ongoing situation comes from a commentary penned by Catherine de Fontenay, Associate Professor at the Melbourne Business School in Australia. In this commentary, Risky Business: the human cost of outsourcing drug production, Fontenay rightfully concludes that many of the current shortages can be attributed to a classic problem involving other industry supply chains, that being outsourcing strategies.  The problem however is more acute since the production of these drugs is far more specialized and expensive, while capacity has become extremely tight. She notes: “For more traditional (non-biological) drug lines, the motive is cost-cutting. In-house production facilities do not always feel the same pressure to keep costs down as do external suppliers. With large drug batches, the pharmaceutical company can play several contractors against each other, and get very good prices.”  Professor De Fonternay also observes: “After a decade or so of outsourcing, one could argue the core competencies of pharmaceutical companies are now research and development, helping drugs through the regulatory approval process, and marketing, rather than manufacturing.”

That is a rather significant statement and more to the core of today’s problems. Certain pharmaceutical providers have concluded that operations and supply chain oversight are best outsourced under the umbrella of cost avoidance.  Rather than invest in increasingly more expensive in-house owned production and quality monitoring processes, outsourcing to contract manufacturing providers provides more favorable financial options.  The concept is similar to the semiconductor industry, where expensive owned fabrication facilities became too cost prohibited in favor of today’s outsourced fab facility.  Unfortunately, the pharmaceutical industry has far more quality and human health considerations.  Supply chain risk, namely having only a single source of global production, is another apparently overlooked consideration, as J&J has discovered.

As the current shortages continue into 2012, unscrupulous and unconscionable grey market operators take advantage of the supply and demand imbalance by offering hospital pharmacies outrageous pricing and highly questionable supplies. Supply Chain Matters praises the ongoing efforts of hospital and cancer treatment pharmacy teams in their extraordinary challenges to find safe and adequate supplies of these life-giving drugs.

More importantly for all of us as a global citizenry, patients continue at-risk.  Certain pharmaceutical supply chains need immediate fixing.  Procurement and sourcing teams no doubt have foreseen these problems occurring. The time for investing in production and supply chain related operational controls and balanced sourcing is way overdue.  If the industry deems that outsourcing continues to be a viable strategy than procurement teams need to be supplemented by experienced operational management and regulatory control resources. Conversely, if the industry feels that outsourcing to global regions where regulatory controls are less burdensome, than there will be more issues to deal with. Our view is that there needs to be a risk balanced strategy to assure continuous supply and lack of supply disruption.

One thing is certain. If the industry continues to not feel or demonstrate an overt sense of urgency, then government agencies should do all in their power to demand that sense of urgency.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters, all rights reserved.

Supply Chain Matters provides another update regarding our ongoing series of commentaries as to why pharmaceutical and drug supply chains failing to deliver reliable and life-saving supplies to doctors, hospitals and patients. The specific problem concerns generic, injected drugs which are utilized in chemotherapy and other life-saving treatments. Readers can reference our previous updates at the following web links:

Initial commentary

Commentary Two

Commentary Three

Commentary Four

The latest developments relate to the U.S. Food and Drug Administration (FDA) becoming very concerned about unscrupulous and grey market suppliers taking advantage of the ongoing critical drug shortages. The FDA is now directly warning clinics and healthcare providers to only procure drugs from approved sources both within and external to the U.S… The advisory warns that “In these cases, patients were unknowingly placed at risk when they received medications of uncertain purity, storage, handling, identity, and sourcing.” The FDA also warns that importing these medications from foreign sources is in violation of the Federal Food, Drug, and Cosmetic ACT.

According to a posting by Phil Taylor on Securing Pharma, the FDA has indicated that it is aware of promotions and sales of unapproved injectable cancer medications being distributed direct to U.S. clinics including unapproved sources of AstraZeneca’s Faslodex (fulvestrant), Amgen’s Neupogen (filgrastim) and Roche’s Rituxan (rituximab) and Herception (trastuzumab). The Secure Pharma posting also makes mention of a federal General Accounting Office (GAO) report that concluded that the FDA lacks proper authority to tackle this issue including a means to require drug manufacturers to report actual or potential shortages. The web link provided takes you to a GAO site that notes that the report is no longer available. We found that strange and interesting. Supply Chain Matters feels that the FDA does have some teeth in these matters, but perhaps not all that is required.

The important takeaway is that the prime U.S. regulatory agency has now publically acknowledged that unregulated and uncontrolled sources of these critical drugs have now entered drug and healthcare supply chains and buying authorities must be diligent to not utilize these sources, despite the enormous pressures to secure life-saving supplies of drugs.

We continue to find this state of affairs rather disturbing.  The FDA now has to warn healthcare professionals and their procurement teams to buy only from approved sources and to openly question whether a price sounds too good to be true, that deep discounts may equate to a product that is stolen, counterfeit or unapproved. Procurement teams should and are most certainly attune to this condition.

As this crisis continues into 2012, we believe that there is likely to be a call for pronounced industry efforts directed at traceability and pedigree of drug supplies and the pressure on drug companies to get more serious on supply chain identity and serialization efforts. While the industry may feel that traceability is an expensive or unacceptable alternative, the fact that healthcare providers cannot insure a reliable and safe supply of life-saving drugs could prove to be a far more expensive alternative.

What is your view?  We once again implore industry participants to weigh-in on this important issue.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters. All rights reserved.

As we transition into the final month of 2011, we are revisiting the Supply Chain Matters 2011 Annual Predictions for Global Supply Chains which were outlined a year ago.  Our annual process is to first re-visit past projections made for the current year, in this case 2011, and declare some projections for the upcoming 2012 year, which will come in a later series of postings before the end of the year. In this Part Four and final posting, we will revisit predictions eight through ten. Our earlier scorecards can be accessed by clicking on the following links:

Part One- Predictions One and Two

Part Two-Predictions Three and Four

Part Three- Predictions Five through Seven

Prediction Eight: Two industry sectors, B2C and healthcare, will be especially effected by significant supply chain process impacts in 2011.

Both the B2C retail and pharmaceutical and healthcare industries were significantly impacted by supply chain related process impacts in 2011, making our prediction right on the money.

In the brick-and-mortar and E-Commerce sectors, a more sophisticated consumer has absolutely altered the retail buying landscape. Throughout 2011, consumers are exercising their ability to significantly influence product selection choices, perform real-time price comparisons, and easily place orders via the Internet and smartphones. According to comScore Inc., U.S. online e-Commerce spending is expected to grow to $162 billion in 2011, up from $142 billion in 2010, an increase of 14 percent. This motivated brick-and-mortar, as well as online retailers, to significantly enhance their online shopping, multi-channel commerce and operational capabilities throughout 2011. An article featured in the Wall Street Journal in mid-November (paid subscription or metered free view) noted that the hottest thing on retailers Christmas lists this year are finding experienced directors of e-commerce. Those that are highly experienced with solid track records are commanding total compensation packages upwards of $1 million.

For the online channel, Amazon continues to set the bar for services and price aggressiveness, causing retailers in many sectors to heavily invest in augmenting online capabilities in order to protect market share. Two of the most visible aspects of online impacts were the announcement by Wal-Mart that its CEO of global E-Commerce would retire in July after disappointing results in the online channel. The retailer who continues to have aggressive expansion plans related to online presence promises to announce a replacement in early 2012.  Retailer Best Buy has experienced five consecutive quarters of declining sales growth as consumers visit that retailer’s brick-and-mortar stores to touch and view products but often order goods online from the most price advantaged sites.

Another highly visible impact was that of Target. The retailer had previously outsourced its online site to Amazon, but made a decision to roll out its own internally sourced online site Target.com in August, only to experience a five hour breakdown in September when premiering a highly marketed promotion of Missoni clothing. The after-effects of this incident have motivated that retailer to also seek a new director of online activity.

The massive shift to more online retail capabilities and services is forecasted to have noticeable impacts to retailer margins this year, particularly in the upcoming 2011 holiday buying season.  Most retailers are offering free shipping, and many have considerably expanded the availability of products available for online purchase.  The implications to retailer inventory management and added costs will be interesting to observe when the final year-end results are tallied.

Pharmaceutical and Healthcare

The second significantly impacted industry Supply Chain Matters predicted for 2011 was that of pharmaceutical and healthcare related value-chains. The reason was what we viewed as the cascading effects of the significant changes in strategic business models causing too much leaning toward reduction in supply chain costs, healthcare reform initiatives emanating from multiple countries and desires to grow sales in emerging markets.  We feared all of these forces would cause noticeable supply chain impacts.  What we did not anticipate was the severity, which turned out to be a complete breakdown in certain industry segments.

In July, we posted a Supply Chain Matters commentary, Why are Pharmaceutical and Drug Supply Chains Failing?, noting financial media headlines that a vast majority of U.S. hospitals were facing severe shortages of life-saving chemotherapy and intravenous drugs used in critical care.  We followed up with a commentary in August noting that the ongoing complexities of pharmaceutical global supply chains have become greater than these companies abilities to control them. Critical shortages of life-saving drugs spilled over to areas of pet care, and in September, we noted that 2011 was tracking to be a year with the largest number of severe, life-saving drug shortages causing hospitals and healthcare providers to resort to gray channels to secure supplies. While industry concerns were primarily focused on increased regulation and cost managing costs, value-chains in certain segments have broken down in 2011. Causation points to generic producers and contract manufacturing sources, but that may be symptomatic of other problems. Suffice it to state that this industry remains in supply chain related crisis and that the situation will continue into 2012.

Prediction Nine: The landscape for the global outsourcing of components and finished goods production will shift again in 2011.

The essence of this 2011 prediction was that two fundamental business forces, ongoing fierce competitiveness forces directed at lowest product cost and continued needs for access to booming emerging markets, would compel manufacturers and retailers to pay much more attention to outsourcing strategies and to analyzing all the pertinent factors motivating these strategies.  We anticipated further shifts in component and finished goods product sourcing, particularly in low margin or highly sensitive IP product areas.

This prediction also turned out to be generally correct but the most compelling motivation for re-examining sourcing in 2011 relates to vulnerabilities to natural disaster when product production is too concentrated in a single geographic region.

Significant inflationary pressures brought about by explosive increases in labor costs, along with raw material and commodity costs, forced many manufacturers to revisit their sourcing strategies for China and other emerging economies. The building clouds of currency risk ebbed and subsided in various points in 2011, only to surface again late in the year with the ongoing Eurozone sovereign debt crisis and threats to the Euro. Manufacturers of lower costs and lower margin products continued to shift sourcing strategies away from China in favor of other countries.

Of more lasting impact, one that will continue in 2012 was the reminders that the northern Japan earthquake and severe monsoon floods in Thailand brought in 2011.  The motivations for low cost sourcing may have exposed significant vulnerabilities to strategic capacity and risk.  Having upwards of 30 percent of global hard disk drive manufacturing sourced within one country, along with the hundreds of bill-of-material related component related suppliers is cause for concern.

In the area of market access, intellectual property protection and increased concerns among senior executives regarding increased barriers for doing continued business within China have cast a less aggressive perspective for sourcing within China, and those companies that are compelled to stay the course, are constantly revising or modifying sourcing and value-chain strategies.

We believe that the landscape for global outsourcing of components and finished goods shifted in 2011, and will spillover again into 2012, perhaps at a much more aggressive rate.

Prediction Ten: Supply chain related green and sustainability programs will continue in 2011 and beyond, but at a slower pace.

Entering 2011, supply chain wide green and sustainability initiatives had been primarily directed at achieving reductions in resource use as well as in saving costs. Saving energy, water consumption or packaging resources all related to the bottom line and at the same time, provided customers and consumers a positive persona of a green and sustainable brand and company.

While a positive sustainability profile often makes good business sense, we had predicted a slowdown in green and sustainability program momentum during 2011. Our prediction was predicated on the continued effects of global recession and that consumer buying decisions would not in the end, favor a green or sustainable product over a lower-cost product.

That did not turn out to be the fact since consumers continued believe that companies can provide green and sustainable products at competitive prices. Rather than a slower pace, many companies, especially those with a B2C presence, increased their investments in green initiatives. The efforts and initiatives of multi-industry supply chain dominants such as Wal-Mart, Procter & Gamble, Kraft Foods, Nike and others no doubt kept momentum moving and expectations high. In one example, Wal-Mart is deploying its Supplier Energy Efficiency Program (SEEP) to improve the energy efficiency of its suppliers by passing along learning the global retailer has gained from its own internal initiatives.

The standards for green and sustainable supply chain are high, and we are pleased that our 2011 prediction in this area turned out to be more positive.

This concludes our complete series of scorecard updates related to the Supply Chain Matters 2011 Predictions for Global Supply Chains published at the beginning of this year.

Of the original ten predictions, by our count, five were on the money, three came about partially, and two were a miss.  We rate our 2011 predictions good, but readers are certainly welcomed to chime in and share their observations of global supply chain events in 2011.

Predictions aside, 2011 was a significantly challenging year for global supply chain teams and it does not get any easier in 2012. In December, we will declare and publish our 2012 Predictions for global supply chains so keep your browser favorites pointed toward Supply Chain Matters.

Bob Ferrari

©2011, The Ferrari Consulting and Research Group LLC and Supply Chain Matters, all rights reserved.