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Pharmaceutical manufacturers walk a fine line balancing contradictory forces. They must think about new regulations versus increased outsourcing and expiring patents versus the expectation of sustained profitability, for example.
The bad news is that the rules imposed on the industry aren’t getting less complicated. And while it may keep compliance officers busy, regulations are just one of many forces eating away at manufacturers’ bottom lines. As brands go off-patent, pharmaceutical companies lose the luxury of high margins and are faced with fierce competition. As a result, they are forced to increasingly rely on outsourced active pharmaceutical ingredients (API) and expand into emerging markets to maintain and grow their revenue. That increased reliance on outside manufacturers, however, represents a loss of control – a concept which seems to run counter to tightening regulation. Movement into emerging represents another series of complications and challenges, including cost to serve new segments, security and traceability.
With this landscape in mind, it begs the question of what pharmaceutical manufacturing will look like in the near future and how it will evolve to further bolster compliance and reduce risk, while enabling growth for an evolving industry. Let’s first examine a few notable changes taking place in the industry that are changing how manufacturers function.
Pharmaceutical Companies Becoming Brand Companies
Over the last several years there has been an evolution among the biggest pharmaceutical companies, one in which industry leaders are shifting away from research and development and are beginning to look more like the consumer packaged goods industry. Pharmaceutical companies are now becoming more like brand companies. Less production and manufacturing in-house, tighter margins and a need to focus more intensely upon specific customers and segments are changing the game of how pharmaceutical companies operate.
Less Emphasis Placed on R&D Today
The current wave of expiring patents has also given way to another fundamental change in the business. Manufacturers are exploring new avenues to make the most of diminishing margins, including outsourcing and the expansion into emerging markets.
Throughout most of history, pharmaceutical companies manufactured their own API. However, today major pharmaceutical companies outsource as much as 60% of their manufacturing. They’re accomplishing this by divesting in factories, finding lower cost producers and moving some of production and packaging to less expensive regions such as Asia, Latin America and Africa.
The cost to bring a new drug to market is about $2.5 to $4 billion according to Tufts Center for the Study of Drug Development and can even reach $11 billion, according to recent reports from the InnoThink Center for Research in Biomedical Innovation. The cost to get a new drug in front of prescribers who ultimately decide whether that chemical is a viable treatment for patients is staggering. In fact, it has led some of the major pharmaceutical players to grow through acquisition instead. We’ve all seen the massive wave of merger and acquisition activity occurring during recent months. This ultimately allows the brand to sidestep some of the development costs and champion the drugs they believe are already on their way to becoming winners.
These fundamental changes within the industry are transforming what it means to be a pharmaceutical manufacturer today and adding several degrees of complexity to the process of getting products into the hands of consumers. At no time has assurance of quality and supply been more critical to keeping businesses running; however, the squeeze on margins means manufacturers can’t afford to sit on a lot of inventory and wait for demand to come.
Outsourcing – and to some extent new acquisitions – shifts more production outside the walls of the company, and as a result, adds new risk. It leaves pharmaceutical companies surrendering a significant amount of control over the manufacturing process in return for lower costs. And it opens the door for diminished transparency throughout the manufacturing cycle.
Manufacturing Stretched Across Greater Distances
Amid this shift in manufacturing strategy, the supply chain stretches out and grows more complex. As more control is handed over to contract manufacturers and a more diverse set of suppliers, pharmaceutical companies seek to regain some of the visibility they’ve lost as a result of all the change. In fact, end-to-end supply chain visibility is likely to become the top initiative for pharmaceutical manufacturers this year.
Supply chain visibility provides the system of checks and balances that often go missing when a company moves critical stages of its manufacturing process to outside vendors. The desire to improve visibility can only be met if companies begin to see the supply chain’s potential as a competitive differentiator, and most companies aren’t quite there yet.
Visibility comes though technology. It starts with a hyperconnective network that can connect multiple partners in a fluid cloud environment. It’s the injection of Big Data and analytics along the value chain, through that network, to foster collaboration and transparency among manufacturers and suppliers globally. This opens up the ability to measure processes, ensure compliance standards are met and exceeded, reduce risk, find anomalies or opportunities for improvement and act upon them.
The Future of Pharmaceutical Manufacturing
The pharmaceutical industry is facing numerous headwinds from serialization and patent expiration to product safety and counterfeiting. Outsourcing production to low cost markets will be a big part of business over the next several years. Margins were once so high on on-patent drugs that they could afford to skip over the granular details around cost to serve markets and segments. But growth opportunities are limited today and pharmaceutical companies have to keep a tight handle on costs, margins and customer demands.
The key to solving these challenges is a shift in the underpinnings of the pharmaceutical supply chain. Operating business as a network allows suppliers and trading partners to become directly tied into the central nervous system of the pharmaceutical company. Visibility can be achieved beyond tier one suppliers and silos between parties, regions and within the pharmaceutical manufacturer are broken down. This becomes the foundation for reducing risk, ensuring compliance, and enabling smart business growth into new markets.