Pharmaceutical Industry Supply Chain Management

The Pharmaceutical Value Chain

The pharmaceutical value chain is only partially synonymous with the pharmaceutical supply chain
Discovery / Development / Commercialization
Target Selection Lead Def & Expression Candidate Selection Pre-Clinical Phase I-II a Phase II b Phase III Regulatory Review Launch REALIZED VALUE

Mfg., Marketing / Sales /

The value chain describes how the addition of knowledge to a specific molecule through transformational processes of R&D, pre-clinical, clinical trial, manufacture, marketing and sales activities generates commercial value to a pharma/biotech company The supply chain refers to the activities involved with planning, sourcing, manufacturing and distributing your products as it does for any other company
There is also a clinical supply chain which addresses sourcing and provision of materials to clinical trail investigators Its still Source, Make and Distribute with Plan at the head of each major supply chain domain
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Pharma Supply Chain Considerations

What business requirements differentiate pharmaceutical SCM from other manufacturers?
End-user (patient) safety Anti-counterfeiting requirements Product integrity Quality assurance Fraud prevention and detection Electronic signature requirements Records access and retention requirements Product tracking

Regulation!!

Class 2 pharmaceuticals must carry unique identifiers at the item level Chain of custody tracking from manufacturer to distributors and point-of-use (pedigree requirements) CRM doesnt focus on the patient (yet)
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End-consumers are not the principal product customers

Source - End-User Safety Considerations

Define the Material

Source Make Deliver

Buy

Foremost of all the considerations in the pharma supply chain

Qualify the Material Audit the Supply Chain

Approved Vendor List

Major Problems? Delist the Vendor

Are the materials provided by our suppliers safe? Are the products manufactured by our company safe? Are all the products being manufactured reaching the distributors? Are any of our products being adulterated or counterfeited?

The supply chain begins with the material supplied for product manufacture
Key ingredients need to be covered by Supply Agreements
Price, Source, Quantity, Quality, Delivery Defined Specification Control, Change Control, Complain Resolution

Qualify the Vendor

Quality Agreements Pre-purchase Usability Tests Toxicity Requirements Know where starter materials are manufactured Know who tests it and how 4

Monitor the Vendor

Source - Supplier Materials

Source Make Deliver

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What materials/resources do pharmaceutical suppliers provide?

Biologic suppliers
Chemicals Farm products (plants, eggs, animals, animal by-products) Laboratory animals Growth media, cell cultures Pathogens Proteins Test organisms Equipment Computers, software Databases (e.g., target molecules, DNA sequences) Clinical trial supplies Clinical trial subject population information
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Non-biologic suppliers

Source - Supplier Strategies

Single source materials

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Reduced supplier management issues Facilitates relationship-building Risk of supply issues in the event of
Supplier raw materials disruption Supplier production issues Supplier delivery issues

Higher supplier power (Porter)

Multi-source materials
Improved pricing and competition Minimizes risk of supplier issues Higher vendor management costs

Make Clinical Trial SCM

Source Make Deliver

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Requirement to manage the supplies involved in supporting clinical trials

Trial medications/drug kits Multiple locations Multiple investigators Data collection/reporting devices (e.g., PDAs, cell phones, remote sensors)

Need to coordinate delivery of supplies to sites that are actively recruiting and enrolling patients
Flexibility Speed of delivery Consideration of special packaging and handling requirements (e.g., cold shipping)

Clinical supply teams typically use the performance of older trials to understand how much material is required in a new study and to determine their supply chain requirements
Variability in the number of patients enrolled, number of investigators, geographic distribution of trials will create larger variability in inventory and distribution of drug kits
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Make Clinical Trial SCM Important Considerations

Drug kit pack types

Source Make Deliver

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How many different types of drug kits are needed? Local depots vs. centralized supply Need for import licenses for specific countries can delay shipments from central depots to local depots Some study centers may need to recruit patients very quickly and begin trials within a day or a week while others may require months Randomization of medication administration may trigger resupply at variable intervals, requiring safety stock

Supply logistics

Subject enrollment

Medication management

Monte-Carlo simulation being used to optimize supply chain for large (1,000 patient) studies

Make - Manufacturing (Commercialization) SCM Strategies

Source Make Deliver Buy

Standardization of manufacturing processes

Terminology Metrics Product process toolkits Grouping plants with standard equipment and processes geared to specific product types (e.g., dry products, freeze-dried, parenteral) Redundant facilities (security, shifting of work between plants) Global demand management center Centralized ownership of all forecasting tools and databases Use of ERP web-enabled global planning capabilities

Managing network assets

Improved demand forecasting

Judicious use of contract manufacturing (e.g., packaging) Joint planning between product launch team and SCM team at least 1 year before NDA submission to FDA
Cross-functional development, marketing, clinical, SCM and regulatory teams for each product
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Distribute The Current Supply Chain

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Five large drug wholesalers (Big 5) dominate the business

McKesson Bergen-Brunswig Cardinal AmeriSource Bindley-Western 90% of the market

Many smaller wholesalers partial product lines, regional players

More than 6,500 licensed wholesalers in the U.S. Stock small target list of medications provided to a limited customer set Sell to other wholesalers Specialize in discounted products

Secondary wholesalers

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Distribute The Current Supply Chain Models

Three principal models of distributing drugs today
Model 1
Manufacturer Repackager

Source Make Deliver

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Retailer

Model 2
Manufacturer

Wholesaler

Retailer Repackager Wholesaler Wholesaler

Model 3
Manufacturer Other Sources of Drugs (foreign, private mfrs) Retailer

Secondary Market Major source of counterfeit drugs

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Distribute The Drug Counterfeiting Problem

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A complex, organized crime activity with multiple distributed players secondary wholesalers a principal mechanism The World Health Organization estimates that 5-10% of all pharmaceuticals are counterfeit
35% in Third-World countries

U.S. Customs and Canadian Border Patrol inspected 1,153 shipments of drugs into the U.S.
88% contained unapproved, counterfeit or harmful goods

China is considered by U.S. Customs to be the worst offender in exporting counterfeits

Counterfeit Chinese-origin Viagra has been found in every corner of the globe

More than 200,000 bottles of counterfeit Lipitor have been found in the U.S. in the past 3 years The total economic impact is estimated at $1 billion - $12 billion Low risk of being caught or punished
Source: FDA Consumer Magazine, March-April 2005

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Distribute Types of Counterfeit Drugs

Identical copies

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Least common Made with same ingredients, formulas and packaging but not by the same manufacturer High-quality packaging and labeling; very convincing appearance Little or no active ingredients Drugs rejected for quality reasons by the manufacturer Authentic drugs that have passed their expiration dates Distributed by foreign sources

Look-alikes:

Rejects:
Re-labels:

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Distribute Counterfeit Drugs

Counterfeit Viagra was found in the Summer of 2004 in two retail pharmacies in California. Bottles were for 100mg, 30-counts.

Source Make Deliver

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Cost < $1/bottle

Cost $270/bottle
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Distribute Supply Chain Security

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FDA Counterfeit Drug Task Force created July, 2003

"FDA will not rest until we have strong protections in each link of the drug supply chain ... ." Mark McClellan, Former FDA Commissioner Average of 5/year through late 1990s Now averaging 20/year Most recent cases involved fake Lipitor and Procrit RFID tagging of all prescription and OTC drug items by 2007 Authentication technologies (color-shifting inks, invisible bar codes 10 years in prison for counterfeiting the drug label 3 years in prison for counterfeiting the drug

Increased number of counterfeit drug investigations

Recent support for new technologies to ensure drug pedigrees

Tougher criminal penalties

Increased demands on pharma companies for scrutiny of business partners

Source: FDA Report, Combating Counterfeit Drugs, February 18, 2004

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Distribute Pharmaceutical Pedigree

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Pedigrees track product flow from regulated entity to regulated entity Major concerns are how (electronic or otherwise) and cost
20%

Pharmaceutical Manufacturer
1,500 (Top 30 = 80%)

80%

Distributors
100 (Top 3 = 85%) 2-3% Simplified US Pharmaceutical Supply Chain

Providers
100,000+

Source: FDA Report, Combating Counterfeit Drugs, February 18, 2004

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Distribute Pharmaceutical Pedigree

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Some states are not waiting for a national solution Florida has enacted a Pharmaceutical Pedigree Papers law that goes into full effect in 2006 A paper pedigree must be maintained through the entire supply chain back to the manufacturer Eleven states are using the Florida statute as the template for proposed legislation Required information includes: product identity, lot number, quantity and distribution or pharmacy licensure for each change of possession Estimates on the distribution side alone indicate that pick efficiency will be reduced by 85% A paper solution will be very costly to the industry

Source: FDA Report, Combating Counterfeit Drugs, February 18, 2004

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Distribute Product Diversion

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The diversion of licit drugs for illicit purposes

99% price differential between price charged by manufacturer to wholesaler and price charged to the retailers

Prescription drugs account for 30% of the U.S drug abuse problem 6.2 million people over 12 years of age (2002) Common methods of diversion
Theft of drugs from the manufacturing plant Theft of drugs in transit from plants to distributors Theft of drugs from distributors warehouses Call-ins of fake prescriptions to pharmacies Forged prescriptions, doctor shopping Health care professionals (doctors, nurses, hospitals, pharmacists) Vicodin, Lortab, Lorcet, Norco, Tylenol #3, Diazepam, Xanax, Stadol (NS), Valium, Phenergan with codein, Tussionex, OxyContin, Ultram, Ultracet, Soma
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Most commonly diverted products

Source: Task Force on Drug Diversion Through Institutional Outlets, Council of State Governments

Distribute Product Diversion

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Number of emergency-room treatments for opiates other than heroin

Source: National Drug Intelligence Center

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Distribute Product Diversion

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Thefts of pharmaceuticals from pharmacies, manufacturers, distributors, manufacturers and importers/exporters in dosage units; 2000 - 2003
Drug 2000 2001 2002 2003

Codeine
Dilaudid

569,425 37,531 100,548 686,197 260,688 421,063 14,646 117,408 171,883

1,223,205 22,647 540,997 451,091 519,597 127,525 12,704 123,720 176,280

596,972 23,072 126,451 340,325 587,168 193,085 9,151 74,541 145,070

622,132 41,668 360,115 738,584 464,312 278,581 34,102 67,751 146,683

Lorcet Lortab

OxyContin Percocet Percodan

Ritalin Valium

Total
Source: National Drug Intelligence Center

2,379,389

3,197,766

2,095,835

2,753,928

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Distribute Institutional Diversion

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Manufacturers are not required to, and often do not, verify that a pharmacy is actually servicing the population they claim to be servicing in order to receive a discount Closed door pharmacies (since they do not service walk-in patients), resell discounted pharmaceuticals at a significant profit to secondary source wholesalers who resell them at a significant profit to other secondary source wholesalers, or even to primary wholesalers, who purchase them for less than they can purchase the products from the manufacturers Experts have estimated that between 50% and 80% of closed door pharmacies are participating in these diversion schemes Inconsistent state laws prohibiting this practice, and Federal regulations have a loophole that defines medical entity in ways that allow this Federal requirement that a drug pedigree be established and RFID may address much of this form of diversion along with strengthened Federal and state laws limiting resale of products by closed-door pharmacies

Source: Task Force on Drug Diversion Through Institutional Outlets

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Distribute Addressing Diversion

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DEAs Automated Reports and Consolidated Order System (ARCOS)

Requires manufacturers to track specific drugs from plant to distributor and to ultimate end-user DEA analyzes data and provides it to state agencies at no cost Looks for doctors and pharmacists who receive unusually large quantities of certain drugs Requires any medical professional, manufacturer or distributor who works with any of the substances listed by the DEA to register with them Five schedules (I V) of substances DEA authorized to prevent diversion of drugs identified under schedules II through V Proposed national database of all patients consistent with HIPPA Practioners can access for all patients National monitoring of all Schedule II-IV drugs
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Controlled Substances Act

National All-Schedules Prescription Electronic Reporting (NASPER)

Distribute DEA Drug Schedules

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Distribute Continuous Replenishment

What is it?

Source Make Deliver

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Automated replenishment of pharmaceuticals driven by utilization Just-in-time inventory An end-to-end automated process for pharmaceutical procurement

Whats so different about distribution to pharmacies?

Pharmaceutical products are dynamic (contract pricing, brand/generic, package size) Product is used in a different unit of measure than acquired (unlike POS) Many products are interchangeable Product availability changes constantly

Source: Cardinal Health

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Distribute Continuous Replenishment

They perform order fulfillment

Source Make Deliver

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Distributors are integral to this SCM concept: Five core components

Site-level perpetual inventory system Automated inventory replenishment engine Store level inventory management and reporting Central office inventory management and reporting Dispensing transaction Interface (non-HIPAA)
Pharmacy Mgmt & Reporting Central Mgmt & Reporting Shipments Communications Interface Store Perpetual Inventory

Pharmacy

Rx Data Summary

Product Sales History

Auto Replenishment Engine

Orders

Distributor DC

CIM
Source: Cardinal Health

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Buy The Retailers

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Pharmacy Group Purchasing Organizations (GPOs)

Alliances of pharmacies, hospitals and other healthcare systems Leverage buying power to obtain manufacturer discounts

Often turn to secondary distribution channels when manufacturers or major distributors cannot supply critical drugs when needed
Drugs often stockpiled by secondary distributors for economic reasons Drug markups can be 500 1,000% during shortages (e.g., a vial of flu vaccine purchased by a wholesaler for $23.65 was resold to an end-user for $147 in 2003)

Temperature-sensitive products, when diverted, are often not kept at the appropriate temperatures Retailers attribute 48 percent of pharmaceutical inventory loss to employee theft Emerging requirements for secondary distributors to provide a drug pedigree that can be tracked back to the original source (manufacturer)
Clear chain of custody Cost of maintaining custodial information will fall on manufacturers
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