When a patient receives a prescription from his or her doctor, the expectation is fairly straightforward:  the pharmacy will have the medicine in stock and will be able to fulfill the prescription in short order.  Of course, there are a host of “unseen” players operating behind the scenes that make all of that happen, including the biopharma company, wholesalers, distributors, transportation companies, payment processors, regulators, and so on, but from the patient’s standpoint, it just happens.  And that’s how it should be.

However, making that “simple” process work so seamlessly is becoming increasingly difficult for biopharma companies. A combination of economic and regulatory factors are ramping up the complexity involved.  Often, companies must contend with factors that are beyond their control just to maintain a secure supply, driving up their costs and stress levels.  The prevailing environment is boosting the likelihood of out-of-stock (OOS) situations while also raising the stakes of those situations for manufacturers.  Being able to predict and prevent them is more important than ever.

This article is the first in a three-part series that will address the challenges biopharma companies face when it comes to ensuring a secure, reliable supply of medicines in a market with increasing requirements and reduced financial attractiveness.  In this installment, we focus on the challenge.  In particular, we explore the causes behind the rising complexity and the resulting impacts on the biopharma companies that must navigate it.  In parts two and three, we will dive more deeply into the solutions.

The Economic Factors

The economic drivers of complexity are well known individually, though many people may not be aware of how they can affect pharmaceutical supply chains and costs for biopharma companies.

Aging Population and Rising Healthcare Costs

In 2012, 18% of the EU population was aged 65 years or older.  By January of 2022, the 65-and-older contingent had risen to 21.1% of the population.  The trend is expected to continue, with that segment expanding relative to the overall population at least until 2100.  At that point, the World Economic Forum predicts this group will comprise 30% of the population.  Related to this trend, the EU Dependency Ratio was 32 in 2021, meaning that for every 100 working age people, there were 32 elderly people.  That ratio is also rising and is expected to reach 57 by 2100.

The impacts of these trends are predictable.  An aging population means, on average, a less vital population with more diseases, more comorbidities, and a greater demand for pharmaceutical therapies.  This greater demand is already a well-known reality.  The resultant increase in supply chain volume that biopharma companies must manage is just one aspect of the challenge.  It’s compounded by the increasing diversity of dosages and dosage forms that are becoming available for many therapeutics.  This challenge is further boosted by the broader introduction of personalized medicines and therapies.

Greater demand for pharmaceuticals is also one of the factors that contributes to higher healthcare costs.  As costs rise, policy makers and national payers push back, working to control costs and keep their budgets in line.  A good example of this is Germany’s effort to tighten pharmaceutical pricing and reimbursement laws.

Efforts such as those result in downward pressure on drug prices, the increased use of public tenders when it comes to acquiring medicines, and a greater emphasis on biosimilars and generics.  All these factors work to constrict biopharma companies’ margins at a time when they must invest more resources to maintain supply in the face of growing demand and complexity.

Parallel Distribution

Parallel distribution, also known as parallel trade,  is a well-known factor.  Due to different pricing policies from country to country, the EU enables parallel distributors to purchase therapies in lower-priced markets (such as Italy or Greece) and resell them in markets that are higher-priced (such as Germany).  Even though parallel trade is a perfectly legalized activity, it has several less desirable effects.

On the positive front, it can reduce healthcare spending in higher-priced markets.  However, there are downsides, the most visible being more frequent shortages and OOS situations in lower-priced markets.  In an environment of rising demand, these situations can be especially acute.

Parallel trade’s negative effects are not limited to lower-priced markets, though.  The supply dislocations it causes make market demand more unpredictable and harder to manage across lower- and higher-priced markets.  A few real-world examples show how confusing it can be for a biopharma company to manage this.  We have seen:

  1. Product that was originally packaged by the manufacturer in the Netherlands, then sold through Greece, and repackaged in the Czech Republic, only to end up back in the Netherlands due to pricing differences.
  2. Customers in Italy order 100 times more product than they need for their local patients, all destined for parallel distribution to other markets.
  3. Product in Germany being 5 times more expensive–in some cases–than in neighboring Poland (which shows how strong the incentives for parallel distribution can be).

For the biopharma company, it can be very difficult to predict how much parallel trade will take place in a given area and adjust raw material allocations, production schedules, and inventories to accommodate local demand.  Regardless, it’s imperative that companies get highly proficient at analyzing parallel trade and market demand to properly scale their inventories and meet their responsibilities as Marketing Authorisation (MA) holders.  OOS situations often happen because of actions taken by other players (upstream or downstream) in the supply chain, but the biopharma company will always get the blame in the court of public opinion.

The Regulatory Factors

As the frequency of product shortages and OOS situations rises, regulators have acted in an effort to address the situation.  While the effectiveness of any given action is typically open to debate, one thing is not:  they almost always increase complexity for biopharma companies, who must invest in processes, people, and technology to comply.  Below, we describe a few examples that stand out.

The Falsified Medicines Directive (FMD)

The FMD was developed to help ensure a safe, properly controlled drug supply.  It has been in existence since 2011, though the serialization requirements outlined below came into effect in 2019.  The FMD bears mentioning here as a key driver of supply chain complexity.  It requires tamper evident packaging on pharmaceutical products, as well as unique identifiers for each package that identify the medicine’s name, dosage form, strength, package size and type, expiry date, batch and serial number, and so on.

While the FMD does help provide a safer drug supply for patients, it also generates additional cost and complexity for biopharma companies to manage, e.g. the requirement to manage alerts.  In addition, because the information flow is only one way, it does not help biopharma companies better analyze the flow of their goods.

OOS Risk Reporting

In a more direct effort to combat shortages, the EU is using and proposing measures that would require manufacturers and their downstream business partners or channel partners to hold larger reserve inventories and implement systems to predict upcoming shortages and issue warnings.  Much of this is related to Article 81 of EU Directive 2001/83 EC.

While this could help on some level, critics of such measures argue that they fail to address the root of the problem:  rising demand in an environment that forces downward pressure on prices, which ultimately makes it cost-prohibitive for manufacturers to boost their capacity.  It can cause a sort of vicious circle on product availability until the balance between demand, price, and supply is restored.

Making the situation more complex, is that rules regarding OOS reporting–and even the definition of what constitutes an OOS situation–are not uniform across the EU, as each country (and even regions within countries) can interpret rules differently and/or add more requirements.  The EU and individual countries sometimes work independently to solve the same problems, and the efforts can be counter-productive.  The resulting patchwork of regulations can be very difficult to understand and manage, and working with multimarket SKUs results in even more complexity.

Mandatory Digital Ordering

To keep better track of the real-time movement of medicines through the supply chain, some countries (such as Poland and Bulgaria) want to see daily reporting on pharmaceutical transactions.  Others, such as Italy, are mandating the use of digital ordering through centralized databases.  As with OOS risk reporting, the lack of uniformity across country markets makes it even more challenging for companies to manage.  In the end, the added complexity of these measures can bring more visibility into stockouts, but they don’t give biopharma companies the additional tools and analysis needed to prevent them.

“Green” Policies

The push to implement more environmentally friendly policies related to biopharma supply chains is another factor driving complexity.  Just-in-time (JIT) inventory management approaches have been used for a long time to help drive efficiency and deliver high service levels.

Unfortunately, these approaches involve making many smaller shipments of product over time, which tend to be “carbon intensive.”  As companies face pressure to reduce their overall “carbon footprint,” they are exploring the use of fewer—but much larger—shipments.  This may reduce carbon emissions, but it can also make inventory management less efficient and potentially drive up inventory carrying costs.

“Going green” also raises questions about how inventories should be stored.  Maintaining a large, centralized inventory can make it easier to be flexible when dealing with unpredictable demand (e.g., with regards to repurposing, repackaging, creating multi-country packs, etc.).  But, it increases the typical distance and duration of shipments, which is carbon-intensive.  On the flip-side, maintaining many localized stock points could help address the carbon issue, but it makes inventory management more complex and, in general, slightly increases overall inventory levels and the associated carrying costs.

Interestingly, we’ve also seen that local in-country retail pharmacies and wholesalers often refuse to hold significant stocks, especially for slow-moving expensive medicines.  They do not like the risk of having to write off inventories that do not sell before they expire.  This is not driven by “green” concerns, but it’s worth mentioning here, as it relates to inventory management.  As a result, it typically falls back on the manufacturers to install <24-hour delivery systems throughout Europe to deliver the service levels that patients expect as well as to meet local service compliance regulations.  Maintaining this level of service is not only expensive, it also circles right back to the challenge outlined in this section:  it can be carbon-intensive.

What to Do?

All the factors mentioned above combine to push up inventory levels (which brings added costs and risks) and increase supply chain complexity.  The added complexity drives biopharma companies to invest more in tracking technologies, Sales and Operational Planning (S&OP) / Integrated Business Planning (IBP) processes, and other components of supply chain infrastructure, which is also costly.  As a result, profit margins for biopharma companies are constricted, and they can’t just raise prices to recover.  In a sense, biopharma companies appear to be caught in a financial vise.

This situation not only drives complexity for existing companies in the market, it also acts as a significant barrier to entry for new players and therapies.  Given these challenging realities, what should biopharma companies do to meet the market’s needs and regulatory requirements while remaining profitable?  In the next installment, we’ll explore some high-level strategic approaches.