Brendan Ryan takes us through the challenges and opportunities that exist in supply chain in the
midst of the ongoing upheaval in the pharma industry.

Current market valuations put the pharma industry at over
$1 trillion ($1,0004bn) with many of the bigger pharma
companies with extensive manufacturing operations in
Ireland. While the branded drugs sector remains strong,
many expensive “Blockbuster” branded drugs have gone off
patent. This ‘Patent Cliff’ has curtailed industry growth and
the value of branded dollars in the market as more affordable
Generic and Biosimilar drugs replace branded drugs that
were priced initially to recover very expensive R&D start-up
costs.

Generics have grown steadily to a value of $350bn and
Biosimilars have grown to a value of $100bn. The Generics
and Biosimilars markets are heavily promoted by
governments with growing populations and “urbanisation”
issues within the less affluent regions of the world to create
more cost effective and reliable supply networks. South East
Asia including China has emerged at the largest growth
cluster. These strategies and market events are shaping the
pharmaceutical industry, they eat away at patented drug
share, shrink the brand dollars of leading drugs and reduce
the overall market value.

Companies that fail to recognise the impact of these
strategies and the need to adopt new business models will
be left behind. It’s not a case of missing the train – it’s a case
of time to build a robot! Regulatory requirements will
continue to be enforced by the World Health Organisation
(WHO), the US Federal Drug Administration (FDA) and
international medicine boards and such standards cannot be
used as an excuse to restrict industry specific innovation and
growth. New “Pharmerging” markets have emerged, “Channel
Push” is being replaced by “Customer Pull”, the “Smart
Factory” with Automation and Big Data Analytics replacing
large batch multi-site manufacturing networks. Contract
manufacturing continues to grow and will provide more
cost-effective capacity but also knowledge and competence
in development, commercialisation, production, lifecycle
management and packaging. 3PLs are moving up the value
chain, they are restructuring networks and they are bringing
forward innovative solutions particularly around cold chain
distribution and serialisation.

“Pharmerging” Markets and New Manufacturing
Networks
The US, European and Japanese markets remain as the strong
traditional global leading markets but their respective
compound annual growth rate (CAGR) are between 2% – 4%.
The key growth cluster, “Pharmerging” market in the world is
South East Asia because of urbanisation, growing
populations and the emergence of new and chronic diseases
due to lifestyle changes. China is poised to be the world’s
largest market by 2030 with a CAGR of 15%, while Vietnam,
Indonesia and India show equally demanding CAGR growth
patterns in the region of 10% – 13%. Interestingly over 60% of
India’s pharma output comes from generic manufacturers
– Sun Pharma, Dr Reddy, Lupin and Ranbaxy are the
companies leading this growth in India. These companies
have ambitions to prosper in the lucrative North American
market but quality issues and failure to meet FDA regulations
is an ongoing issue.

Another “Pharmerging” market is South Africa. It’s wealthy
middle class support branded drugs and contribute to its
staggering compound annual growth rate (CAGR) of 22%.
The South African government is encouraging local
production of generic drugs to provide employment, to
reduce costs and to support the HIV / Aids epidemic. The
African region overall remains problematic from a supply and
a drug counterfeiting perspective and in many cases top
pharma multinationals have opted to supply the region from
Regional DCs in Dubai as such mirroring the Singapore
model for South East Asia. Other countries on the radar of the
larger multinationals include the BRIC countries (Brazil,
Russia, India and China) and the MINT countries (Mexico,
Indonesia, Nigeria and Turkey)- the common theme being
large populations with growing disposable incomes.

On Demand Customer Centric Delivery
Big Data analytics is helping the healthcare industry to
predict demand more accurately and to optimise supply
chains. Bayer AG uses predictive analytics to know when and
where to ramp up production of its hay fever blockbuster
drug “Claritin.” Roche have rolled out a self-administering
device to allow patients to monitor blood levels at home.
Results are passed online to doctors to allow them to manage medicinal requirements.
Similarly, Apprecia Pharmaceutical’s 3D Printing solution for the manufacture of
its Zip Dose epilepsy drug shows how the patient is now at
the heart of industry innovation.

Online pharmacies have also emerged in the market. Alibaba
and JD.com have developed an online market in China
valued at $1.1bn. Medtronic’s End of Life pacemakers and
defibrillators are sold online through their spin-off company
Nayamed. This online market which reduces cost to the
‘value-oriented’ end customer bypasses the wholesale
channel, a process known as “Disintermediation” and is
considered to have the potential to grow to $250bn – but it
needs serialisation solutions and regulations to manage the
threat of counterfeiting and self-harm. Home deliveries of
vaccine drugs by Uber in North America is another innovative
example of direct to patient services.

Hospitals are also looking to practice “Disintermediation”
through Just-In-Time Delivery (JIT), delivery of medical
devices and surgical equipment. 3PLs with global networks
and warehouse management systems that can kit out
devices at hubs local to the hospitals can be major players in
this localisation and postponement activity. Similarly, the
adoption of home delivery Business-to-Consumer (B2C)
network solutions to Good Distribution Practice (GDP)
standards and the application of supporting IT systems to
provide transparency and traceability, accurate information
throughout the distribution process is an ongoing area of
development in the 3PL world.

GMP & Advanced Continuous Manufacturing
Pharma manufacturing is presently completed under Good
Manufacturing Practice (GMP) requirements and through
large batch production techniques. Individual sites
contribute to each section of the supply chain and the
manufacturing process. Granules are manufactured in one
site, crystallisation is completed in the next site, blending and
compression in the next site and tableting and packaging in
the final site before shipping finished product through the
GDP channel distribution process.

This process is changing due to cost pressures and supply
chains driven by value-oriented customers. Continuous
manufacturing and the ‘Smart’ factory is now a reality.
Drones, automatic unmanned vehicles (AUVs), robotics,
artificial intelligence (AI) and augmented reality (AR) are
actively employed throughout global sites. Processes
heretofore managed manually on the production floor will
now be automated. “Internet of Things” (IOT) is impacting
and shaping the future of pharma manufacturing and
‘push-driven’ large batch manufacturing is being replaced by
multi SKU smaller lot manufacturing processes and
techniques to meet specific client demand. Johnson &
Johnson employ IOT sensor technology in the manufacture
of their HIV blockbuster medication Prezista – sensors
monitor and test production flow outputs at each stage
without stopping the process. Similarly, in shipping and
distribution new IOT and GPS enabled technologies allow
shipments to be managed in real time, with management
being alerted to temperature reports and any deviations, a
welcome development to GDP for the management of
temperature sensitive and cold chain products.

Contract Design Manufacturing Organisations
Aligned to the development of the “Smart Factory” and
continuous manufacturing has been the emergence and
development of outsourced manufacturing. Contract Design
Manufacturing Organisations (CDMOs) are now valued at
about $60bn and are growing annually at a rate of 8.5%. This
growth is due to demand driven by increased usage of drugs
in the emerging markets, increased number of start-ups with
insufficient capacity and knowledge to bring new drugs to
market and finally the growing number of Biologic drugs in
development with many traditional pharma companies
lacking the biotechnological expertise.

Counterfeiting & Serialisation
Despite quality being at the forefront of all manufacturing,
the issue of counterfeiting, which costs the industry over
$100bn and 70,000 deaths annually, is according to the WHO
a catastrophic problem. Pfizer use Radio-Frequency
Identification (RFID) tagging to address counterfeiting issues
with its blockbuster drug Viagra. Each tag has a microchip
which stores the electronic product code (EPC) that can be
scanned and verified by distributors and pharmacies. The
WHO advocates and promotes such initiatives but in general
technology has not kept up with crime. For this reason –
Serialisation – whereby product can be tracked ‘end-to-end’ in
the supply chain has been evoked industry wide. Blockchain,
the practice whereby all transactions are decentralised is a
potential solution. Every transaction will be cryptographically
digitised so that the full history of the product can be traced.
Through blockchain, every over the counter product will
potentially be scanned by a smart phone and the full history
of the product confirming its legal status will be accessible
and on hand. Augmented Reality can also appropriately
address counterfeiting by reading encrypted codes on the
packaging.

Price Erosion and the Patent Cliff- drivers of
Industry Consolidation and M&A
All the world’s top pharma corporations have experienced
revenue decline. Generic manufacturers, unburdened by R&D
costs or bringing new drugs to market, simply file for the
right to manufacture more cost effectively when a drug
comes off patent. Teva, Mylan and Sandoz are the largest
generic companies and their growth has challenged the
traditional branded drugs industry leaders.

M&A activity has therefore been at the heart of strategic
growth initiatives as company CEOs try and maintain healthy
financial earnings-per-share figures. Pfizer lost $16bn of
revenue when its two blockbuster drugs Viagra and Lipitor
went off patent. Many other drugs followed to reduce the
annual revenue of the industry giant. Accordingly, in 2014,
Pfizer launched a bold $120bn bid to acquire Astra Zeneca, in
part to get access to its innovative oncology medicines but
primarily to maintain revenue and global leadership. The deal
was rejected for reasons related to tax inversion. Similarly, in
2016, Pfizer launched the creative ‘Pfizergen’ deal whereby
Pfizer bid $150bn to acquire Allergen and co-locate its
corporate HQ in Ireland where both companies have very
significant infrastructure investment. The deal would have
increased Pfizer’s annual revenue from $48bn to $70bn and
increased its market value to $350bn. This was also rejected
by authorities for reasons of tax inversion, prompting Ian
Read, CEO of Pfizer to decline further initiatives until the rules
of the game are defined.

Price Erosion and the Patent Cliff- drivers of
Industry Change & Turf War
On the one hand Industry leaders have been accessing new
technology to bolster their pipelines, while on the other
hand they have been actively deploying survival tactics, even
against other brand leaders. The most compelling examples
are with Abbvie and Amgen for the blockbuster “Humira”
product that treats rheumatoid arthritis. Humira has a value
of $18bn for Abbvie but the FDA have approved Amgen to
manufacture the generic version. After much legal dispute,
Amgen have been given access to the European market for
2018 and the North American market for 2023. Abbvie, in the
interim, like many other multinationals is challenged with
finding the next blockbuster to fill it’s $18bn revenue gap.
For similar reasons, the leading industry giants Johnson &
Johnson and Pfizer have become embroiled in legal dispute
and controversy. “Remicade” is the $10bn anti-inflammatory
blockbuster drug manufactured by Johnson & Johnson.
Pfizer have received FDA approval for the Biosimilar version
which is 15% cheaper. Pfizer who are anxious to fill the
revenue gap from its blockbuster drugs that have gone off
patent have accused Johnson & Johnson of delaying tactics.

Summary Conclusion
The industry is continuing to grow globally but the branded
dollar market is being attacked by the growth of cheaper
generics and biosimilar substitute products that have FDA
approval and in many cases local government promotion.
Traditional pharmaceutical branded drug companies are
addressing this challenge of the Patent Cliff by looking to
new emerging markets with high disposable incomes. The
growing pipeline of Generics and more complex Biosimilar
drugs is funding the ongoing growth of CDMOs and Contract
Manufature Organisations (CMOs). Rather than switch to
cheaper global manufacturing locations, the pharmaceutical
industry is consolidating and investing in advanced
technology and continuous production solutions in countries
with proven quality capabilities. The main global exporting
countries of Germany 15%, North America 12%, Switzerland
11%, France 8% and Ireland 7% will invest in Continuous
Manufacturing, Internet of Things and Smart Factory
technologies.

The customer is now at the front of solution
design and supply chains. Fulfilment networks will
increasingly compete based on cost and service as
Disintermediation, Direct to Client B2C solutions coupled
with creative localisation and postponement solutions
influence new business model designs and take hold within
the supply chain. Serialisation and Blockchain will positively
impact the Industry and potentially remove issues related to
counterfeiting. 3PL providers will increase Earnings Before
Interest & Tax (EBIT) by partnering strategically with clients
and identifying creative opportunities to move up their
respective value chains. As the industry continues to evolve
and robotics and automation replace human labour,
outsourced partners will need to embrace Big Data Analytics
and make changes that justify partnership.
The Rocket is taking off ……… All on Board!

Brendan Ryan is a global logistics consultant with over 25
years of experience in designing and implementing end to
end solutions. Brendan has worked in the pharmaceutical
and technology sectors for global and leading edge
companies such as Pfizers, IBM , Flex and Syncreon. A
Thought Leader in Global Logistics, Brendan specialises in
designing growth and route to market strategies, keeping
clients abreast of game changing developments and
technologies such as “Blockchain” and “Serialisation” and
works with clients to translate conceptual ideas into specific
sales and operations plans.