Launching a first product in Europe is not an easy undertaking.  Over the past few years, AIM and our parent company, Blue Matter Consulting, have addressed the many considerations and challenges associated with entering European markets. For background, some of those resources are available here:

Those resources and others extensively discuss the regulatory, strategic, commercial, supply chain, and other requirements involved in a European launch.  They also stress the importance of local expertise and early preparation (related to strategy as well as the organizational build-out). 

In this paper, however, we focus on a relatively narrow topic:  the costs of setting up and operationalizing a supply chain in Europe.  Specifically, we outline the key cost drivers, along with the “levers” that can affect those costs.

For higher-priced specialty products, supply chain costs will not be the core driver when deciding whether to bring a product to Europe, but they are important. For more traditional products, supply chain costs are likely to represent a larger percentage of the cost of goods sold (COGS) and sales and distribution (S&D) costs and can factor more heavily in the launch.

In situations where there is a competitor already on the market and pricing and reimbursement may be extra-challenging (especially if the competitor is a large manufacturer with an established supply chain), cost can become extremely important.  Regardless, it’s helpful for decision makers to understand how supply chain costs can vary and be influenced.  As we discuss these cost drivers below, it’s important to remember that some are relevant in any commercialization scenario, whether the company intends to “go it alone” or partner in some way.

Some General Thoughts on Supply Chain Set-Up

Before exploring some specific cost drivers, it’s helpful to take a brief look at some various approaches to supply chain set-up, which can impact costs.  Here, we make some broad generalizations, so remember that distinct differences can apply to the various regions (such as the Nordic region, Iberia, the DACH (Germany, Austria, Switzerland) region, CEE (Central and Eastern Europe), and even specific countries.  Local expertise will be critical to success in such a complex and variable environment.

Central vs. Localized

We often see companies starting off with a relatively straightforward set-up, selling from a central EU trading company into various EU markets. This structure allows for simpler tax, accounting, external reporting, and order-to-cash processes and it’s often combined with a centralized distribution system. In our view, however, these are distinct decisions to be made. A central distribution system may not always be the most cost-effective solution, particularly if product must be shipped over long distances under rigid temperature and service requirements.  In such cases, a more localized set-up can sometimes improve service levels and cost-effectiveness.

Use of Limited Risk Distributors (LRDs)

While a set-up with a single EU trading entity is the mandatory minimum, a pharmaceutical company may decide to add LRDs to their set-up. LRDs will assume some of the decision making and financial risk.  However, their presence will drive up the complexity of order-to-cash processes and with that, supply chain expenditures.  While LRDs don’t have any other direct impacts on supply chain expenditures, they do result in higher compliance costs and fees.

Lean vs. Comprehensive Trading Infrastructure

A lean trading infrastructure that relies heavily on third party vendors will minimize the need for pharmaceutical and trade licenses in a number of countries. For example, outsourcing instead of employing mandatory roles (e.g., Qualified Person or Responsible Person) can reduce complexity. Sound analysis is required to determine whether it would be more cost-effective for a given company to retain more functions in-house vs outsourcing them.

Cost Drivers and Trade-Off Options

When planning to commercialize a therapy in Europe, there are some key decisions that leaders must make.  These decisions can have profound implications on the supply chain and related costs.  Unfortunately, it’s usually challenging to pick the optimum path forward, as decision-makers must understand, quantify, and evaluate the trade-offs involved.  Below, we offer some general commentary on each.

Launch Sequencing

In most cases, a company will not launch an asset into all its targeted European markets simultaneously. Commercial, access and reimbursement, and resourcing constraints often prevent that. A first product launch in Europe typically takes several years from the moment of EMA approval until the product has launched in the majority of EU markets.

Early Access Programs (EAPs), Compassionate Use (CU) programs, and others can be good pathways for initial launches in some markets, which can enable the company to begin laying the groundwork for a fully-fledged commercial distribution system that can scale as more launches occur. 

The sequencing and timing of market launches depends on a wide range of strategic factors.  From a supply chain standpoint, there are several considerations.

  • Faster launch sequencing or phasing can be resource-intensive and require more up-front investment in supply chain development.
  • Proper launch phasing also impacts hiring needs.  Initially, certain must-have roles can be established in-house while others can be filled via outsourcing.  As the supply chain matures, more capabilities can be brought in-house. This can help control up-front costs and reduce financial risk.
  • Once revenue starts coming in, the company can scale up the supply chain infrastructure as needed, enabling volume growth to bring down post-launch per-unit distribution costs.
  • For complex geographic markets, a company may decide to use a partner or distributor to enable faster development and control risks.  The company can reevaluate the need for those partnerships after several years.  In smaller markets, international pharmacies could be useful.  Clear, robust analysis is needed to determine the optimal approach for each market.
Distribution Channels

The basic distribution channels that can be used for a therapy (wholesale vs. hospital vs. retail pharmacy vs. direct-to-patients) can significantly impact various factors that relate to costs. Also, it’s important to remember that some channels are more suitable for certain products or product types than others.  Table 1 provides a brief overview.

Table 1 – Relationship of Distribution Channels to Various Cost Factors

Retail Pharmacy
Relative Cost Implication
Number of Customers to Manage
Relative Order Sizes
Relative Order Frequency
Accounts Receivable Risk
Level of Specialized Services

It’s important to remember that decisions regarding which distribution channels to use are not always made by the biopharma company.  For example, some higher-priced specialty products must be dispensed via the hospital channel. For example, this is often the case in Spain and Italy.  In Spain, wholesalers are only active in the retail chain, meaning that if your product is only supplied to hospitals, the wholesale channel will not be a viable option.

There are also markets, such as the Nordics in which the wholesale channel is very dominant. For a launching pharmaceutical company, it would make little sense to implement a different channel. The flip-side, however, is that the company has very limited negotiation leverage in contracting with such parties. This is an area where having the right local knowledge and support is essential.

Distribution Network Models

Above, we briefly contrasted centralized vs. localized distribution models.  Here, we add a few more thoughts on the topic. Shipping from a single warehouse location to any customer in Europe (centralized) vs. shipping from regional or local warehouses (localized), typically implies:

  • Longer distance shipments
  • Potentially cross-dock or infeed needs requiring time, bringing extra risks for product integrity
  • Only one warehouse partner to be found, contracted, and managed
  • Single reporting a data feed
  • Lower service levels to be offered (on average)

Ultimately, the company must make decisions regarding the most appropriate network model to use by weighing the trade-offs between storage and transport costs, the typical order frequency, average order size, and most critically, the product requirements.  From a practical standpoint, the cost of adding and managing an additional third-party logistics (3PL) partner can often be lower than attempting to transport directly to end customers from a central location. Cost and service levels don’t always have to be in opposition to one another.

For start-up companies with a single product, it makes sense to look at the expected pipeline development over time, considering the supply chain features and capabilities that upcoming products—or new indications or dosage forms—might require.  It pays to stay ahead of the curve.

Product Configuration Choices

Determining the optimum product configuration for use across multiple markets can be very tricky indeed, sort of like a complicated puzzle.  Simply put, a company typically needs to maximize the number of markets for which a given stock-keeping unit (SKU) is fit for use (as opposed to country-specific SKUs). Doing this reduces the overall number of SKUs that the company must manage and should also imply:

  • Larger, more cost-effective batch sizes
  • Less volatility in demand (as demand fluctuations “average out” across markets and stock can be shifted as needed, since it can be used in multiple markets)
  • Easier inventory management
  • Reduced out of stock and expiry risks
  • Potentially enhanced ability to negotiate exemptions on certain requirements with some local authorities (especially in small markets and for “hospital only” products)

SKUs that can be used in multiple markets do, however, increase the risk for parallel trade. This is of course perfectly legitimate, but it may counteract some of the above mentioned benefits when taking only the manufacturer viewpoint.

Internalization or Externalization Choices

As mentioned earlier, a company’s choice to take on more burden in-house vs to rely more heavily on outsourcing can have major implications on supply chain cost and risk, as well as other factors.  Table 2 outlines some key factors and the relative impact of in-house resourcing vs. outsourcing.

Table 2 – Key Implications of In-House Resourcing vs. Outsourcing

FTE / Staffing Requirements
Access to Knowledge
Mid / Long-Term
Fixed Costs
Variable Costs
Ease of Scale-Up / Scale-Down
Harder in near / mid-term
Easier in near / mid-term
Level of Direct Control

From a process perspective, there are plenty of tasks to outsource, mainly those of an operational nature. Storage and distribution of the physical product are obvious ones, but there are many 3PLs that also offer varying degrees of service in the order-to-cash or order-to-invoice space. Finding the right “fit” and truly outsourcing are key. For any company, there is a thin line between having appropriate oversight of outsourced services and inadvertently introducing “flowstoppers” by injecting itself too much into the operational process. Our recommendation is to have proper oversight over supply chain partners, but to delegate operational execution leveraging the core competencies of such partners.

Service Levels

Service levels are another factor that can drive costs.  Strategically, the company will need to determine if it wants to out-perform competitors from a service level standpoint or basically conform to market norms.  Obviously, providing a premium level of service will often require “white glove” partners and drive costs upward, and the company must determine if the competitive advantage to be gained is worth the cost. One approach is to provide a premium service for a patient’s first-time use and/or for the titration period, if applicable, then to move to a standard service for the maintenance phase.

To help evaluate whether the added cost is justified, the company must consider the nature of the required service (e.g., urgency level, first use vs. maintenance, “on the shelf” availability needs, etc.). Such factors play a major role in determining the required fulfillment speed, transport solutions, and so on.

Parting Thought

This brief article only offers a high-level view of the cost drivers associated with biopharma supply chains in Europe.  It is imperative that companies begin considering these drivers and factors early, several years before launch.  Too often, supply chain questions are left unaddressed until late in the process, unnecessarily putting companies a few steps behind when the initial launch dates start coming into sight.  If your company is planning to launch a new product into European markets, then please connect with AIM. We can help evaluate your specific situation and ensure that you proactively identify and follow the optimum pathway.