Ensuring a safe and reliable supply of needed therapies is critically important, but the rising cost and complexity of managing supply chains in Europe has biopharma companies straining to handle the pressure.  In part 1 of this 3-part series, we introduced the economic and regulatory factors that are driving the situation.

The major economic factors include Europe’s aging population, rising healthcare costs, and the impacts of parallel distribution.  The regulatory factors include the EU Falsified Medicines Directive, growing requirements regarding out-of-stock (OOS) reporting, the increasing mandatory application of digital ordering, and various green policies.

These factors combined push up inventory levels and increase supply chain complexity while also requiring biopharma companies to invest more in tracking and reporting technologies, Sales and Operations Planning (S&OP) / Integrated Business Planning (IBP) processes, and additional supply chain infrastructure components.  As a result, biopharma companies face rising costs and eroding profit margins. These factors also create additional barriers to potential new entrants.

The remainder of this series will outline some strategies that biopharma companies can use to manage this complexity.  Part 2 focuses on “upstream” supply chain strategies while part 3 will focus on “downstream” strategies.  For our purposes here, “upstream” refers to the manufacturing and packaging steps in the value chain, while “downstream” refers to all that happens when transferring a packaged and labeled product to the point of dispensing it to a patient.

In this paper, we discuss a range of potential upstream strategies.  This list is not intended to be fully comprehensive. However, we think it represents a robust range of ideas for helping mitigate complexity, cost, and risk.

Manufacturing Strategies

To Outsource…or Not?

A company must plan its approaches to manufacturing and packaging—as well as risk mitigation in those areas—very early.  This is true regardless of whether the company plans to manufacture in-house or rely on outsourcing.  Obviously, creating in-house manufacturing is a time-consuming, complex, and lengthy process.  However, the same is true for outsourcing.  Identifying, evaluating, selecting, contracting, qualifying, and ramping up a contract manufacturing organization (CMO) takes a lot of time and effort. 

Moreover, once choices are made, they will be essentially fixed for a number of years.  Manufacturing and packaging steps must be included in the regulatory dossier submission process, and making changes can result in dossier approval delays, launch delays, or supply issues after launch.

Determining what to keep in-house vs. external is not always easy to do.  Such decisions require leaders to explore capabilities, conduct analyses, build business cases, and shepherd their decisions through vetting with executive leaders and even the Board of Directors in some cases.

Building in-house capabilities requires high up-front investments and potentially involves a long learning curve, but it allows the company to keep control over its technology / intellectual property and the manufacturing capacity of the asset.  Outsourcing can offer more flexibility, faster ramp-up, and a lower financial burden, but it makes the company fully dependent on its external vendor(s).  It also requires intensive and ongoing vendor management once things are up and running. 

Single-Sourcing vs. Multi-Sourcing

Apart from the outsourcing question, the next question is whether to use single sourcing or dual (or even triple) sourcing approaches.  Single sourcing, although the “leanest” and easiest to set up, also means a single potential point of failure with limited opportunities for back-up.

On the other hand, it’s more likely to afford the company better volume leverage, a faster learning curve, and the chance to build better partnerships. Dual/multiple sourcing allows for better risk mitigation, cost negotiation leverage, and higher available capacity for demand surges.

The Need for Understanding Risk and Business Continuity Planning

When planning for manufacturing and packaging, leaders must make well-informed decisions, with a strong understanding of the potential implications of their choices.  It’s always advisable to perform a thorough risk assessment, weighing in on best and worst case scenarios.  Ultimately, any decisions should be backed up with a strong business continuity plan (BCP).

A good BCP should allow a manufacturer to understand and manage risk across the full manufacturing and packaging chain at any time. BCPs might include elements such as capacity reservation, inventory policies, dual sourcing, options to extend capacity (e.g. by increasing production shift hours), set up of back-up vessels, mixers, lines, etc., and also well-informed location choices (e.g. one CMO in Europe and one in the US).

Finally, for Europe, the Manufacturing & Importation Authorization (MIA) strategy must be well thought through. This is essential to fulfilling GMP requirements. A MIA can be obtained by biopharma companies but can also be outsourced (which is often the case with start-up companies) to a CMO. Outsourcing, however, limits the ability to change if a second  source is sought and also increases the dependency on the CMO.

De-Bottlenecking Strategies

Another method for ensuring a secure supply is to address bottlenecks in the process. Here, we highlight three ways to “de-bottleneck” upstream:

1. Decoupling manufacturing from packaging
2. Applying a kind of “takt time” concept
3. Optimizing batch-sizes for packaging runs

Decoupling Manufacturing from Packaging

When we refer to “decoupling manufacturing from packaging,” we basically mean two things:

1. Having different entities or work centers manufacturing active pharmaceutical ingredients (API) and/or bulk drug product (DP)—whether in-house or via a C(D)MO—vs. performing labeling, packaging, and serialization operations
2. Splitting the manufacturing step from the packaging step; For example, a company may produce tablets in bulk and then store them in inventory before placing them in bottles or blister packs followed by packaging them in cartons and applying labeling and serialization, which would make them country-specific.

API and bulk DP manufacturing processes are heavily governed by GMP, often involving long lead times and resulting in batches that bring fairly long forward demand coverage. Process hiccups are somewhat common, resulting in deviations and delays, hence schedule adherence is always a big challenge.

Labeling, packaging, and serialization are not as strictly governed by GMP, more distinct, and organized per stock keeping unit (SKU).  They can be planned on short notice and—once set up—are easily repeatable.  Unlike DP and manufacturing, they don’t typically come with many deviations and corrective and preventive actions (CAPAs).  This allows for more agility and can result in specific and smaller batches for certain markets or groups of markets. Furthermore, rework is fairly easy to organize.  Ideally, packaging runs are automated, but rework can be set up semi-automated or even fully manual.

Hence, this final step in the manufacturing process is where a company can gain flexibility for reacting to changing market dynamics.  Of course, that assumes that the prior steps resulted in sufficient stocks of base material (in particular API and DP bulk stocks).

Applying a “Takt Time” Concept

The “takt time” concept basically sets the pace and rhythm of a manufacturing process and aligns it with customer demand. As a metric, it represents the amount of time “budgeted” to manufacture each part—in this case an SKU—such as producing one part every x seconds. It is typically applied in discrete manufacturing environments, of which drug packaging is an example.

A company can “tune” its packaging operation to market demand by (for example) creating a concept much like a bus schedule.  This involves mapping distinct SKUs across the available scheduling hours per packaging line, with regular timeslots that can be used, reserved, or remain flexible.  A key condition for success is to have a sufficient inventory of packaging components at all times. That’s a fairly low-cost investment, and ordering lead times for packaging components are relatively short (typically 4-6 weeks). 

Optimizing Batch Size

Optimizing the batch size for packaging runs can be achieved, for example, by combining smaller volume SKUs with larger volume SKUs, based on market forecast. This means that multi-market packs need to be created, which is allowed within the regulatory frameworks. A key element to watch is the available space on the artwork components, which is not unlimited.  There must be room to fit all the required languages or pictogram components as well as to fulfill serialization requirements.

Strengthen (or Develop) S&OP / IBP

An essential enabler to recognizing and mitigating potential supply chain challenges, especially in the mid- to long-term, is to have some form of a Sales and Operations Planning (S&OP) process in place.  In its most mature form, which few companies actually achieve, such a process is referred to as Integrated Business Planning (IBP).

Even though the process is not always liked—typically because it requires a significant level of commitment across functions—it can be key to driving the right executive, tactical, and operational decisions to prevent situations with short supply, whether due to unexpected high demand, manufacturing or distribution issues, or other unexpected disruptions.

Proper S&OP / IBP identifies upside / best case scenarios and downside / worst case scenarios and evaluates their likely respective impacts on the organization, supply chain, and so on.  Via a cross-functional process, planners document the desired expectations and outcomes, then develop action plans (complete with supporting business cases) for achieving their goals. 

This type of cross-functional planning provides a forcing function that drives leaders to think through possible scenarios ahead of time, be proactive about how to deal with them, stay focused on generating the desired results, and be more conscious of the trade-off decisions required.  It integrates perspectives related to product development, regulatory needs, commercial issues, technical operations, supply chain needs, and finance. 

In simple words, “to govern is to predict.” S&OP / IBP builds in preparation time, helping the organization to be proactive and ready to act, rather than reactive and always trying to play “catch-up.”

SKU Clustering and Artwork Exemptions

There are various packaging and SKU-related measures that could be used to ensure a more reliable supply.  A quite common approach is to create a single package design that can be used in multiple countries, thus reducing the total number of independent SKUs that the company must manage.  For example, one larger country could be combined with typically one or two smaller countries to ensure supply in each of the markets.

However, that solution might not be as simple as it seems, as there could be differing serialization, distribution, blue box, and other constraints that make it difficult to create packaging that satisfies the requirements of multiple countries.  A thorough analysis is needed to identify the best opportunities for clustering and working out the details.  Having the right combination of countries clustered will help to level out demand fluctuations in different markets.  As we will explore in part 3, it is essential to keep stock in the right places to ensure the company’s ability to leverage SKU clusters as much as possible.

Another strategy that can help limit the number of SKUs or increase cluster size could be to request exemptions to the labeling and package leaflet obligations based on Directive 2001/83/EC article 63.  Although there are limited formal regulations to fall back on, companies may request translation exemptions or ask to omit part of the information on the artwork.

For example, an English or German language package could be made available in the Czech Republic, provided the relevant authorities approve and certain local measures are taken to safeguard the safety of the product.  This may involve providing the package leaflet in the local language separately.  Especially in early access, ultra-low prevalence, or unforeseen stock-out situations, this could be a feasible solution to ensure supply.

A manufacturer should do the necessary work to understand its opportunities for clustering and for exemptions.  It should then develop a clear plan of action and request exemptions in a timely manner.  Both strategies can help reduce SKUs and complexity while serving to proactively smooth out supply issues.

Coming Next

In part 3, we will explore “downstream” strategies.  Specifically, we will offer some perspectives on topics such as

• Active SKU management
• Product life cycle management
• The potential to apply direct delivery models
• The introduction and management of supply allocation models

That’s a relatively extensive list.  The key to success for any company will likely be finding the right combination of upstream and downstream strategies.

Note: To connect with AIM to discuss strategic and operational issues related to biopharma supply chains, please click here.

Part I:  Understanding the Challenge

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.