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Silver Linings

Who would be a global pharmaceutical company today? Margins and markets are eroding, while R&D costs are increasing and regulatory pressures are growing. By 2015 the market for global pharmaceutical companies could be severely challenged; 18 of the top 20 highest earning drugs today will have lost patent protection, which equates to 40 per cent of the global drugs market (1).

The traditional way for a pharma company to deal with the loss of a patent was to develop a new drug to replace the revenue stream that was likely to be lost to generics. But this is a brave new world, and two factors make this approach much more problematic.

First, there is R&D. New drugs are not so easy to find. The low-hanging fruit – medicines that address the needs of large markets – are already harvested. The increasingly stringent, and widely different, requirements for regulatory compliance in individual countries or trading blocs throughout the world add substantially to costs.

In 2000, global pharmaceutical companies spent $54 billion on R&D. That figure has grown to $130 billion (2). At the same time, pharmaceutical companies are getting fewer bangs for R&D bucks. In fact, according to Nature Reviews Drug Discovery, the decline in drugs is little short of incredible (3). In 1950, almost 80 drugs were approved by the Food and Drug Administration for every $1 billion spent in R&D. Less than one new drug was approved for the same amount of spend in 2010, and that is adjusted to account for factors such as inflation.

Put simply, new drugs are not easy to discover and they are even more difficult to bring to market. This brings us neatly to the second obstacle, a replacement strategy for patent loss.

Branded versus Generics

Over the counter and generic drugs have been around for years, but they have a much greater level of prominence and importance to the global market. Generics are not simply accepted, they are increasingly demanded as a low-cost alternative. According to IMS Health, in 2010 75.4 per cent of prescriptions written in the US were for generic drugs (4). The National Health Service in the UK has implemented mandatory substitution of generic drugs and price cuts over branded alternatives.

This last fact illustrates a growing trend that is leading to increased price pressure. The traditional pharmaceutical supply chain was quite straightforward, consisting of pharmaceutical companies, wholesalers, retailers and insurers. This is now being extended as health services, pharmacies and individual hospitals or health practices begin to purchase directly more and more. In addition to greater price pressure, it significantly affects demand patterns and complicates demand planning.

The outcome of all of this is to disrupt traditional business assumptions. Where previously an increase in upstream development costs would trickle down to increase downstream customer pricing, this is no longer always possible. High margins allowing for over-stocks and write downs are no longer the norm, so business efficiencies are becoming far more important. The supply chain, rather than being a necessary cost of operations, is elevated to a strategic tool for business differentiation and, longer term, business health.

Opportunity or Challenge?

This presents a new world of opportunities for pharmaceutical contractors. Contracting out greater elements of the R&D, manufacturing and logistics process provides global pharmaceutical companies with a means to better control costs, by outsourcing production to a third party with lower labour costs: to improve supply by moving production closer to markets (especially emerging markets) where feasible.

Contractors can cost-effectively and efficiently provide key elements of the manufacturing process such as active pharmaceutical ingredients (API), but also deliver greater degrees of productivity by running small, efficient plants, compared to large manufacturing plants that drugs firms have operated at almost 40 per cent asset utilisation (5).

However, this opportunity is also a major challenge. Efficiency in the global supply chain must cover a wide number of factors in order to be successful. It must allow for the lower costs of production; faster delivery; reduced waiting time for patients to receive drugs; reduce inventory and write-offs; and more efficient payment and orderto- cash cycles. In short, pharmaceutical companies, whether branded or generic, must become much more demandfocused. That requires efficiency and visibility across every aspect of an increasingly extended and multinational supply chain.

Beyond EDI

As late as the 1990s, the vast majority of business processes within the supply chain were still manual when it came to document exchange. Orders were received by email, phone or fax, and invoices despatched by mail. As large companies moved towards electronic data interchange (EDI), they discovered the benefits of trading electronically in terms of business efficiency and improved customer service.

These trading relationships were primarily one-to-one relationships between larger organisations in a fairly simple supply chain. Each trading partner – whether they were a manufacturer, wholesaler or retailer – had the in-house capability to develop and support their own EDI solution. However, issues began to appear with this approach as supply chains started to expand worldwide and trading relationships became more complex.

As pharmaceutical companies contracted out elements of their business or outsourced production and distribution processes to companies – sometimes within emerging markets – a one-to-one relationship trading a very basic range of documents electronically became insufficient. The expansion of trading networks meant that organisations were trading with companies of all sizes and increasingly across multiple geographies.

No matter how big the company, when it came to EDI, it would struggle to maintain a one-to-one trading relationship with every one of its partners. There were simply too many standards, communications protocol, and partners with wide-ranging technical capabilities and regulatory environments to manage this.

Industry Exchanges

The first response to this evolving situation was the development of industry exchanges, usually on a national basis. For example, the DAFNE exchange was established in 1991 and today includes over 200 hospitals, buyers, suppliers and distribution organisations that together account for over 90 per cent of the Italian pharmaceutical market (6). Most were established with a simple objective of addressing the manual nature of the ordering process to ensure that orders were filled accurately, in a timely fashion and not duplicated.

These industry exchanges enabled trading partners to move away from a series of separately managed one-toone relationships. They showed that the pharmaceutical industry’s supply chains could be effectively digitised, translating the multitude of in-house data formats and transmitting them between trading partners, regardless of the communications protocols they used.

The history of almost every pharmaceutical exchange is that once the first document begins to be exchanged successfully, the community starts to broaden out to include as many business documents as they can. In the case of the Phoenix Clearing Service in Germany, standardising from the Electronic Data Interchange For Administration, Commerce and Transport has allowed the community to create new documents that better support their specific supply chain requirements (7).

New Strategies

Industry exchanges have proved extremely effective at increasing supply chain efficiency, as well as lowering inventory and improving response times to patients. However, as supply chains become ever more global and as pharmaceutical companies engage with new partners, more document standards and a wider range of technical capabilities are required. One way for the pharmaceutical industry to access new supply chain needs is via cloud-based B2B outsourcing.

Today, we have reached a point where buyers and sellers within the pharmaceutical supply chain can share a comprehensive range of business documents electronically, such as product catalogues, inventory reports, invoices, shipping notices and remittance advices. We can digitise most business processes within the physical and financial supply chains to provide greater productivity and, importantly, complete real-time visibility.

Managed Service Approach

The question becomes how every organisation involved in the supply chain can access and benefit from this level of automation, regardless of their location or size. Taking a managed service approach allows all trading partners to achieve the first objective for any trading community. It enables them to benefit from electronic trading without having to worry about the technical complexity. The cloud-based nature of major B2B managed services today means that organisations have access to a large worldwide trading community from day one, with new trading partners quickly brought on-board.

The technical element of a B2B managed service is only part of the reason that pharmaceutical companies should consider this approach for their global supply chains. These services can also embed expertise in dealing with national and international regulatory compliance, as well as crossborder trade and distribution. As risk management becomes an ever-more prominent part of pharmaceutical business, a managed service delivers the ability to minimise or mitigate risk, while increasing the capability to predict and plan for demand in a complex operating environment.

Making the Difference

There is no doubt that the pharma industry is experiencing change. An industry that was once driven by R&D and sales must now find ways to make its supply chain the strategic differentiator if it wants to be a leader of the future. It needs to address the challenge of the extended supply chain as new suppliers and buyers become prominent, and business operations become ever more global. By deploying cloud-based B2B managed services, pharmaceutical companies have a fast and cost-effective means to create global supply chains that deliver increased productivity, efficiency and visibility in a flexible, adaptive and secure manner.

1. Visit:
2. Visit: IFPMA_-_facts_and_figures_2012_ lowressinglepage.pdf
3. Scannell JW, Blanckley A, Boldon H and Warrington B, Nature Reviews Drug Discovery, March 2012
4. Visit:
5. Visit:
6. Visit: profile-.pdf
7. Visit:

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Denise Oakley is the International Marketing Director at GXS, a leading provider of B2B integration services, and is responsible for marketing outside North America, primarily in Europe, the Middle East and Africa, and also in the Asia-Pacific region, and Latin America. She is also a company director of GXS UK Ltd. Denise is on the board of EDIFICE, a global user forum for high-tech companies, as well as leading their marketing group and initiatives. She has extensive international marketing experience with technology companies including Fujitsu, IBM and AST. She has an MA in Marketing and an MBA.
Denise Oakley
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