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Pharmaceutical supply chains: key issues and strategies ...

Computers and Chemical Engineering 28 (2004) 929 941 Pharmaceutical supply chains: key issues and strategies for optimisationNilay Shah Centre for Process Systems Engineering, Department of Chemical Engineering, Imperial College of Science, Technology and Medicine, London SW7 2BY,UKAbstractSupply chain optimisation is now a major research theme in process operations and management. A great deal of research has beenundertaken on facility location and design, inventory and distribution planning, capacity and production planning and detailed a small proportion of this work directly addresses the issues faced in the Pharmaceutical sector. On the other hand, this sector is verymuch ready for and in need of sophisticated supply chain optimisation the supply chain design stage, a particular problem faced by this industry is the need to balance future capacity with anticipated demandsin the face of the very significant uncertainty that arises out of clinical trials and competitor activity.

Keywords: Pharmaceutical industries; Supply chain optimisation; Pipeline management 1. Introduction The pharmaceutical industry can be defined as a complex of processes, operations and organisations involved in the discovery, development and manufacture of drugs and med-ications. The World Health Organisation (WHO) defines a drug or

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Transcription of Pharmaceutical supply chains: key issues and strategies ...

1 Computers and Chemical Engineering 28 (2004) 929 941 Pharmaceutical supply chains: key issues and strategies for optimisationNilay Shah Centre for Process Systems Engineering, Department of Chemical Engineering, Imperial College of Science, Technology and Medicine, London SW7 2BY,UKAbstractSupply chain optimisation is now a major research theme in process operations and management. A great deal of research has beenundertaken on facility location and design, inventory and distribution planning, capacity and production planning and detailed a small proportion of this work directly addresses the issues faced in the Pharmaceutical sector. On the other hand, this sector is verymuch ready for and in need of sophisticated supply chain optimisation the supply chain design stage, a particular problem faced by this industry is the need to balance future capacity with anticipated demandsin the face of the very significant uncertainty that arises out of clinical trials and competitor activity.

2 Efficient capacity utilisation plans androbust infrastructure investment decisions will be important as regulatory pressures increase and margins are eroded. The ability to locatenodes of the supply chain in tax havens and optimise trading and transfer price structures results in interesting degrees of freedom in the supplychain design problem. Prior even to capacity planning comes the problem of pipeline and testing planning, where the selection of productsfor development and the scheduling of the development tasks requires a careful management of risk and potential the operation stage, it is often difficult to ensure responsiveness. Most Pharmaceutical products involve primary active ingredient (AI)production (often multi-stage chemical synthesis or bioprocess) and secondary (formulation) production. Both of the stages are characterisedby low manufacturing velocities and are hampered by the need for quality assurance activities at several points.

3 It is not unusual for theoverall supply chain cycle time to be 300 days. In this environment, supply chain debottlenecking and decoupling strategies together withco-ordinated inventory management are crucial for quick responses to changing market trends. A good understanding of what actually drivesthe supply chain dynamics is also required. As often as not, erratic dynamics are introduced by business processes rather than by externaldemand, and may be eliminated by the re-design of internal business processes or supplier/customer paper will consider important issues in supply chain design and operation drawn from the literature and from our collaborative researchprojects in this area. The main features of the problems will be reviewed as will the literature to date. Some strategies for solution will beidentified, as will some future research needs.

4 2003 Elsevier Ltd. All rights : Pharmaceutical industries; supply chain optimisation; Pipeline management1. IntroductionThe Pharmaceutical industry can be defined as a complexof processes, operations and organisations involved in thediscovery, development and manufacture of drugs and World Health Organisation (WHO) defines a drug orpharmaceutical preparation as:any substance or mixture of substances manufactured,sold, offered for sale or represented for use in the diag-nosis, treatment, mitigation or prevention of disease, ab-normal physical state or the symptoms thereof in man or Fax:+ (N. Shah).animal; [and for use in] restoring, correcting or modifyingorganic functions in man or is a very wide definition, and correspondingly, thereare number of key players in the Pharmaceutical industry,including:(i) The large, research and development-based multina-tionals with a global presence in branded products, bothethical/prescription and over-the-counter.

5 They tend tohave manufacturing sites in many locations.(ii) The large generic manufacturers, who produceout-of-patent ethical products and over-the-counterproducts.(iii) Local manufacturing companies that operate in theirhome country, producing both generic products andbranded products under licence or $ see front matter 2003 Elsevier Ltd. All rights Shah / Computers and Chemical Engineering 28 (2004) 929 941(iv) Contract manufacturers, who do not have their ownproduct portfolio, but produce either key intermediates,active ingredients (AI) or even final products by pro-viding outsourcing services to other companies.(v) Drug discovery and biotechnology companies, oftenrelatively new start-ups with no significant manufactur-ing of the material in this paper is particularly relevantto the first group.

6 This group dominates the marketplace and,due to the global nature of the enterprises involved, tends tohave the most challenging supply chain The changing circumstances of the industryIn the recent past, the high returns on investment andhigh turnovers from blockbuster products resulted in thefollowing regime (Booth, 1999): good R&D productivity, often creating compounds to treatpreviously untreatable diseases; long effective patent lives of these compounds; ability of these patents to provide technological barriersto entry; a limited number of product substitutes in a given thera-peutic area; and a low price sensitivity; supported by the separation be-tween prescribing and paying resulting corporate strategy was to ensure high mar-gins by exploiting the price inelasticity and invest a largeproportion of the resultant profits in R&D (approximately25% of sales), in order to ensure a healthy product more recent circumstances are much more challeng-ing: R&D productivity (in terms of numbers of new chemicalentities (NCE) registered per unit amount of investment)is declining; effective patent lives are shortening; even while active, patents provide lower barriers to entry; there are many product substitutes in many therapeuticareas; either alternative compounds ( me-too drugs ) oroff-patent generics; and the payers of healthcare are exerting strong price pressureand influencing prescribing practices.

7 This means that inorder to be approved, new drugs must address new thera-peutic areas or have very significant cost or health benefitsover existing the one hand, the global marketplace has becomemore liberalised, exposing products to competition. On theother, governments and other agencies have tended to in-tervene more as they become concerned at every increasinghealthcare costs associated with ageing populations. Mea-sures taken include strict controls on the prices of new drugs,more cost benefit analysis, and encouragement of the useof generic substitutes or alternatives where further weakness that will hamper the large playersin the area is the historical dependence on blockbuster drugs. A recent report by Datamonitor predicts that only 4of the 19 companies currently selling blockbuster drugs willbe able to maintain double digit growth between 2001 and2008 (Butler, 2002).

8 This dependence is illustrated by thefollowing figures (Butler, 2002): Eli Lilly s net profits dropped by 20% after Prozac cameoff patent. Overall, Eli Lilly s sales in 2002 were down4% and the sales excluding Prozac were up 8% (Eli Lilly,2003). BMS patent on Glucophage (with previous annual salesof $2bn) has expired and its sales are down by 87% inthe first 3 months of 2002 after the launch of genericsubstitutes. Losec represented 34% of AstraZeneca s sales in 2001and it might come off patent this year if the company isunsuccessful in its legal battle in which case genericsare expected on the market in late Drivers in the Pharmaceutical industryProbably the single most important driver in the pharma-ceutical industry is the time-to-market. Companies securevery significant returns in the early life of a successful drug,before any competition.

9 The competition-free life is short-ening, typically from 5 to 1 2 years. Competition in thissense relates to similar (rather than exactly the same) example, Bayer s anti-cholesterol drug Baycol waswithdrawn in 2001 due to safety concerns, and the two laterentrants Pravachol (from BMS) and Lipitor (from Pfizer) arenow the biggest sellers for their companies (Butler, 2002).Given the significant potential for adverse health effects,the industry is subject to very stringent regulation. This startsfrom the processes used to evaluate the safety and efficacyof the chemical compounds, through to the details of theprocess and plant design and manufacturing operations. Theprimary regulator that the companies must satisfy is the USFood and Drug Administration. It may be the case that theexistence of regulatory protocols has hindered innovation inthis sector; with companies blaming regulators for their owninnate regulatory process tends to be slow and expensive;both these effects must be borne by the industry.

10 Further-more, the complex chemical compounds involved havemore complex manufacturing processes, and the activitiesof route investigation, process development, scale-up plantdesign/retrofit, commissioning and qualification are eitherincreasing in duration or proving stubborn to estimate of 200 400 m is required to launch a newdrug, and an average of 8 12 years elapses from patent filingto first sale (see, , 1997).There is a general trend for companies to divest excesscapacity that came about from having many local manu-facturing sites, and move towards a global supply chainN. Shah / Computers and Chemical Engineering 28 (2004) 929 941931management process. This brings with it many complexco-ordination issues and much tighter capacity , the logistics cost in the sector is relatively high(Booth, 1999).


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