Globalization and Pharmaceutical Industry
Increasing competition driven by economic globalization has become a natural part of the business environment, especially over the last couple of decades through direct effect. Rapid evolution of dynamics and processes in the emerging markets have been fostering competition, so firms are destined to focus on how to improve their profit margins through productivity increases along their entire supply chains, regardless of their sizes. In addition, other benefits like market share increase and effectiveness of customer relations are achieved as well. Accordingly, the significance of supply chain management has been increasing both as a tool and guide for the firms in general.
Historically, the focus of attention in the pharmaceutical industry has been given to product discovery and development, as well as investments to sales and marketing, recently, increasing global competition has brought supply chain management into a position of higher priority. Being influenced by local policies in regulatory and market access processes, supply chain management has gained an increasing significance with its ability to generate economic value for both the customers and hence to the shareholders through considerable opportunities found in improvements on the operational supply chain side.
Apart from this intensive competition, other factors such as declining research and development (R&D), high number of generics entries, as well as the emergence of new markets in middle-income countries, and social pressures, changed the focus for the pharmaceutical companies to the relationship between volume and costs. At this point, supply chain management is being implemented as a factor of advantage for cost reduction through productivity increases in the end-to-end scope. For this purpose, the industry’s generally preferred mechanism has been to increase investment in current business activities, primarily R&D and sales, which are shown as the two extreme ends of the supply chain.
In this highly competitive environment, efficiency in supply chain is a key factor. It is needed to achieve competitive advantage, especially through ensuring product availability, which strengthens a company’s image at the doctors, as well as patient’s access to prescribed medicines. Accordingly, the dependency of a company’s marketing strategy on its supply chain can be emphasized. In this context, supply chain structures of companies are becoming the focus of attention with all of their existing nodes currently.
As a result of the globalization process, pharmaceutical companies will be required to supply multiple geographically dispersed locations, among which new markets will push an increase in product variety with shorter life-cycles and smaller volumes based on the rapidly evolving technology landscape. Easy access of patients to the products will become the key factor for competitiveness, even as there will be an increase in product complexity, which will require supply chains to provide increased affordability. Furthermore, restructuring of supply chains can enable advantages in the pricing process of pharmaceuticals, where changes in pricing models may challenge pharmaceutical manufacturers to adapt their supply chains to more cost effective and flexible structures.
Evolution of the Pharmaceutical Ecosystem
The pharmaceutical industry is going through a profound transformation. This transformative change has been created by technology, demographics, regulations and shifts in wealth. Declining productivity challenges the transitioning of existing, classical business models and the growth of emerging markets as key revenue contributors. A new pharma ecosystem is evolving through the change in strategic focus, realignment of R&D footprint, as well as the shift from primary care toward specialty drugs and biologics.
As a result of this process in the highly dynamic context, pharmaceutical companies are under extensive pressure. Accordingly, their business models have been transitioning to achieve competitive advantage in this new ecosystem by moving more to multichannel and omnichannel structures. These types of multiple business models must be facilitated by the companies, adapting their approaches to the market by placing the patients at the center, where expansion of their access to products and services has been set as the primary objective. In line with this progress, commercial excellence has become a fundamental goal for the companies through aligning their value propositions and commercial models.
The evolution of the pharmaceutical ecosystem can be described in three stages. The first one is the traditional “Pharma 1.0” model, which is built on producing and marketing blockbuster drugs. This has made way for a more diversified “Pharma 2.0” model predicated to bring broader, more diversified product offerings to a more global market. The next phase of development is “Pharma 3.0.” having service components that enable companies to deliver health outcomes at the center and achieve commercial excellence through understanding of value drivers, taking an agile approach to the market, and becoming an enabling organization.
Agility in the Pharmaceutical Supply Chain
In conjunction with this evolution, to ensure long-time competitiveness and survival, it is required for the companies to implement new strategies based on agile, responsive and flexible supply chains, which are evolving from hierarchical and classical structures to dynamic ones. In order to increase competitiveness and responsiveness to current challenges, pharmaceutical supply chains are required to improve their capabilities of manufacturing and delivering finished goods, creating new strategies through channels, and driving revenue and profit margin. In this regard, the pharmaceutical supply chain must be low-cost, lean and flexible.
Agility is the fundamental characteristic of a supply chain needed for survival in turbulent markets, where environmental forces create additional uncertainty resulting in higher risk in the supply chain management. It is basically defined as the ability to move quickly and easily; in terms of utilization in the business context, organizational agility means the capability of a company to rapidly change or adapt in response to changes in the market. Consequently, supply chain agility has been termed as enabling to match supply and demand at an acceptable cost under uncertainty caused by turbulence and volatility.
In today’s business environment changes are encountered with a pace higher than our ability to respond under conditions defined as VUCA (volatility, uncertainty, complexity and ambiguity). In this regard, an agile supply chain has become a basic competitive requirement, which profits by responding to rapidly changing, continually fragmenting global markets through being dynamic, context specific, always adaptable to change and growth oriented. The main objectives of supply chain agility are to respond to short-term changes in demand or supply quickly and to handle external disruptions smoothly. Agility, which is achieved through a highly responsive supply chain reacting quickly to changes in the business landscape, can support pharma companies for faster new product launches, life cycle extension of existing product portfolio, quick entry to new markets. In addition, it makes companies act responsively to demand changes, as well as new business opportunities. Agility further helps providing the right product, at the right time to the consumer.
The pharmaceutical supply chain is highly sensible and complicated. The exposition of pharmaceutical supply chain processes to disruptive events and volatile demand shifts as never before, puts agility into the position of being the key driver for success. For pharmaceutical plants, agility is the ability to switch rapidly from one product to another, but this is challenging when products require specialized equipment.
Transitioning to Local Production in Pharmerging Markets
The growth of emerging markets has been a key driver for big pharma, so the concept of “pharmerging markets” has been established, which covers the countries having pharma sales with higher growth in comparison to mature markets. Although offering rapid growth in high rates, these emerging markets will also present extra risks and uncertainties depending on their properties and circumstances. They are mainly classified in three tiers as Tier 1 having China only; Tier 2 consisting of Brazil, Russia and India; as well as Tier 3 including Algeria, Argentina, Colombia, Egypt, Indonesia, Mexico, Nigeria, Pakistan, Poland, Saudi Arabia, South Africa, Turkey and Vietnam.
The rise of pharmerging markets was boosted by the Pharma 2.0 model, and now the transition to the Pharma 3.0 model requires agile approaches through development of new business models and dynamic channels. As an example to agile approach, the transition to local production can be given as an example, which was brought in as an initiative in Turkey by the local Health Authority (Turkish Drug and Medical Devices Institution - TITCK) in March 2016, demanding all pharmaceutical companies to switch from imported goods to local production through assessment of generics availability in market shares per product group, as well as requesting their commitments accordingly in terms of timelines. This process called localization, which is driven by technology transfer, is still under application in Turkey, Russia and Algeria, as well as it is expected to deploy to Saudi Arabia, Egypt, UAE and Tunisia in the mid-term.
The relationship between local production and company performance was investigated in one of my studies, covering Turkey as an emerging market having the 16th rank overall in the world and 6th in Europe. The outcomes indicate significant relationships between local production in the context of finished goods production both in their own production site and in a contract manufacturing organization (CMO), and company performance. In this regard, localization of production can be argumentatively supported, where the technology transfer process constitutes the basis.
Technology transfer can be defined as a process by which a developer of technology makes its technology available to a commercial partner that will exploit the technology. It is the practice of transferring scientific findings from one organization to another for further development through a broad set of processes covering flows of know-how, experience and equipment for mitigating and adapting to business climate change amongst different stakeholders such as governments, private sector entities, financial institutions, non-governmental organizations (NGOs) and research/education institutions, so that new products such as medicines, educational tools, electronic devices, safety equipment and health services can become available to the public. Basically, it can be said that technology transfer is the intersection between business, science, engineering, law and government. The goal of technology transfer activities is to transfer product and process knowledge between development and manufacturing, and within or between manufacturing sites to achieve product realization. This knowledge forms the basis for the manufacturing process, control strategy, process validation approach and ongoing continual improvement.
Technology transfer can be in various ways such as know-how delivery, contract research and development, establishing joint ventures, setting up plants, establishing production processes, quality control procedures, and licensing patents, designs and other forms of IPR. The pharmaceutical industry having the characteristics of being technology driven, research intensive, high-risk/high-profit, tedious, cumbersome, and consisting of long processes, is constantly looking for reducing the cost of drug discovery and development, for which technology transfer provides an opportunity. Pharmaceutical technology transfer consists of planned and controlled actions that are based on well-defined acceptance criteria to convey a manufacturing process, analytical method, packaging component, or any other step or process along the pharmaceutical drug lifecycle from an originator site, known as a sending unit (SU), to a new site, the receiving unit (RU).
Localization of production initiatives requires companies to execute technology transfer projects between sending and receiving units through building setups with certain capabilities. Principally, project management is the major capability needed for both units. In addition, key requirements for a successful implementation are the contractual framework to be determined precisely, assessment of technical capabilities and determination of investment needs, detailed planning, determination of process steps, as well as establishment of project teams on both sides with clear roles and responsibilities. The main benefits can be listed as higher responsiveness in VUCA environment through volume and product flexibility, better deal with uncertainty via adaptation to market supply and country versions, capability to supply niche markets, better operational performance, possible cost reduction between 10 and 30 % on SKU basis, improved quality and contribution to green footprint.