As demand shifts from high-margin branded drugs in Western regions to low-margin generics in emerging markets, successful bio/pharmaceutical companies are adopting new business models that include significantly more outsourcing and require a deeper understanding of costs all along the value chain. Enterprise resource planning (ERP) systems that have been effective for the internal management of sourcing and production are insufficient for managing the extended relationships and multidirectional communications needed in this new environment. Bio/pharmaceutical companies are therefore turning to cloud-based services to achieve greater transparency and facilitate collaboration.
The biggest trend driving changes in the market today is the shift from a focus on Western markets to growth areas in emerging regions, according to Diane Palmquist, vice president of product management for GT Nexus, a cloud supply-chain platform provider. “High-margin blockbuster drugs are coming off-patent and mature Western markets are experiencing limited growth. Consequently, the focus has shifted to emerging markets, where the growth rate is higher. However, the demand in these regions is greatest for low-cost, low-margin products, and buying habits are very different (buy the dose, not the bottle),” she observes. The result: bio/pharmaceutical companies need to completely transform their old business models.
The biggest impact can be seen in the higher level of outsourcing now taking place. “Pharmaceutical companies are outsourcing nearly every aspect of the business, including some research-related activities, API manufacturing, drug product formulation, packaging, and logistics,” says K.R. Karu, industry solution director for Sparta Systems, a provider of enterprise quality management solutions. Palmquist adds that currently approximately 40% of industry business is outsourced, and that number is expected to increase to 80% over the next several years.
Loss of control
As outsourcing has increased, companies have lost control over many aspects of the supply chain. “Companies are still trying to manage interactions with suppliers and service providers through personal communications, which is not only inefficient, but ineffective given the number and complexity of relationships and issues that must be managed,” Karu says. The low margins of today also do not support this approach. ERP systems, which in the past have been used to connect purchasing with production operations, are also not capable of managing the complex interactions between service providers and pharmaceutical companies, according to Palmquist. Furthermore, to meet the demand of emerging markets, pharmaceutical companies must be very responsive and need solutions quickly. ERP systems generally take about 18 months to get up and running, and often by that time the opportunity has been lost.
One of the key issues for bio/pharmaceutical companies is the lack of visibility into contract manufacturers. Often pharma companies do not find out about issues that can impact the delivery of API or finished drug product until much later because the suppliers are trying to solve the problem. The common response, according to Palmquist, is to try and stay on top of potential problems by constantly contacting the suppliers via phone or e-mail, which is not a practical, sustainable, or effective approach.
“The challenge lies in the need to manage a whole host of different suppliers at the same time that the customer base is changing dramatically and bringing an entirely new set of customer expectations. The key to this puzzle is to obtain visibility on both the supply side and the value side, from inventory to quality excursions to government fees,” Palmquist asserts.
Cloud-based services give bio/pharmaceutical companies the ability to extend their visibility into all parts of the value chain, while at the same time enabling vendors to access the information they need in order to provide optimum services. Raw materials suppliers, contract research organizations, contract manufacturers, brokers, and distributors can all interact simultaneously under very controlled conditions that ensure that important information gets to the only the right people when it needs to, according to Palmquist.
More benefits of the cloud
There are several other practical advantages of using cloud-based systems, according to Karu. Because cloud-based software systems are developed by software experts, they are consistent for all users. Maintenance and upgrades are provided on a continual basis, as well as any necessary validation procedures to meet special compliance requirements for the pharmaceutical industry. There is also no need for investments in extensive information technology infrastructure; the servers are maintained by large companies (think Google and IBM). In addition, redundant systems located around the world ensure non-stop operation.
Perhaps most importantly, though, is the controlled nature of the interactions through cloud-based systems. “Generally the information that is being shared using cloud-based systems is already being shared via phone calls and e-mails. There are, however, much stronger controls in place in cloud-based systems that ensure that information only goes to the people who should see it. There are no such controls around the use of e-mails with file attachments,” Karu explains
Achieving assurance of supply
Overall, according to Palmquist, cloud-based systems offer bio/pharmaceutical companies assistance with achieving assurance of supply. All business activities can be integrated in the cloud and important issues, exceptions, and problems flagged automatically, so that efforts are appropriately focused on resolving potential issues. Not only purchasing systems, but logistics and quality management systems can be linked through the cloud so that the bio/pharmaceutical company is always up to date on what is happening and can readily share information that impacts multiple vendors.
“Moving an established quality system to the cloud and sharing it with raw material suppliers and contract manufacturers makes it possible for these vendors to exchange information immediately. In addition, these vendors can be directly included in specific activities, such as investigations of excursions and remedial actions, leading to much more rapid resolution of problems,” Karu comments. Similarly, cloud computing can benefit other aspects of supply chain management and aid in the rapid response to any type of possible interruption in the supply, from natural disasters to manufacturing malfunctions to distribution issues.
Collaboration is key
“The key to success for bio/pharmaceutical companies with such complex supply networks is collaboration across the value chain. Cloud computing is an effective way to enable such relationships,” Karu says. “There is definitely a growing realization in the pharmaceutical industry that suppliers must be thought of as extensions of the company. To be truly successful, we believe that the relationships between bio/pharmaceutical companies and their suppliers should be viewed more like joint ventures, with real transparency of information,” adds Palmquist.
The idea of allowing vendors to see into their business operations is the most challenging aspect of cloud computing for biopharmaceutical companies. “Most companies are at least initially very resistant to letting suppliers see their company information. It is not possible, however, for vendors to effectively participate in quality investigations, audits, and remediation efforts without two-way communication. He adds that the pharmaceutical industry tends to be very conservative about adopting new technology, in part due to concerns about acceptance by regulatory agencies, and cloud computing is no exception. “Both pharmaceutical companies and their suppliers are interested in cloud-based solutions, but neither is convinced that the other is willing to implement them. The greatest challenge at this point, therefore, is to convince the various members of the pharmaceutical industry supply chain to take the first step.
Companies that have already moved forward with the use of cloud-based services are those that have been pushed fastest towards emerging markets and have realized that ERP systems are insufficient and leave them “flying blind,” according to Palmquist. Pfizer is one example. “Pfizer needed to figure out a way to not only maintain but grow its revenue stream despite having 9 of its blockbuster drugs lose patent protection¾a Herculean task,” she says. Not only did the company need to better manage the supply side, it also needed help tracking costs (taxes, fees, etc.) on the value side in detail, something that was not a concern in the past with high-margin products.
“We expect that more companies will be in this same position and looking for solutions that enable simultaneous, multidirectional communications with numerous members of the value chain. As that occurs, there will also be greater realization that any dollars spent in the supply chain ultimately comes from the pharmaceutical company,” says Palmquist. In the past, it was easy for manufacturers to separate supplier costs from their costs because margins were high. That will no longer be the case as the industry becomes a low-margin business. “As we see in the consumer electronics industry, where every penny is tracked throughout the supply chain, it will be necessary for bio/pharmaceutical companies to look at supplier costs as their costs in order to maximize profits. Connect with suppliers through cloud-based systems will help not only control costs, but also quality and all other aspects of their operations,” she concludes.
For those reasons, Karu anticipates an explosion in demand for cloud-based services in the pharmaceutical industry. “The many-to-many relationships that are possible with cloud-based systems provide a much more efficient mechanism for processing information and managing interactions, which will be critical to the success of pharmaceutical companies in the increasingly challenging business environment they are facing,” he says.