3PL Pharma Services Boom with the Expansion of Specialty PharmaceuticalsSpecialty pharmaceutical popularity increases use of 3PL pharma services
Over the past decade or so, the pharmaceutical industry has changed dramatically. As costs have risen, pharmaceutical manufacturers have scaled back operations and outsourced manufacturing, drug development, research, testing and laboratory functions as well as the warehouse storage and transportation of their goods. With the changes in regulations and move to serialization, new challenges have arisen across the pharmaceutical supply chain. Add to this the meteoric rise of specialty pharmaceutical products including biologics, biosimilars, new oncology therapies and orphan drug treatments-most of which are highly fragile and expensive, requiring special care and handling.
Specialty pharmaceuticals are now moving through alternative distribution channels, different from traditional models. By their very nature, specialty pharmaceuticals are delicate, expensive fragile marvels of testing and pharmaceutical engineering, requiring specialized monitoring, handling, storage and transportation. Because many specialty pharmaceuticals must be administered through infusion, alternative sites of dispensation including outpatient clinics, physician offices, specialty pharmacies (SP) and infusion centers are required.
The direct distribution model involves the movement of specialty prescription drugs from the manufacturer to either the healthcare practitioner’s office or possibly directly to the patient. For specialty pharmaceutical products that must be compounded or customized for patients, a specialty pharmacy is used. In some cases, the SP provides additional healthcare services to support the care of the patient. This model has resulted in the development of limited or exclusive distribution networks. In this instance, the specialty drug product is available only through a small number of SPs, and they, in turn service local, regional or national markets.
Third party logistics providers (3PLs) are essential actors in the biopharmaceutical supply chain. Not only do 3PLs handle the storage and transportation of prescription drug products but also act as the product owner’s agent. They sometimes receive and fulfill orders, manage payments and usually do not assume ownership of the product except in specific circumstances.
Growth in Specialty Pharma Leads to Need for New and More 3PL Services
For quite some time, almost every major US wholesaler-distributor has had a 3PL service offering, supplementing national transportation and distribution services. Often these 3PLs consolidate goods from multiple clients going to the same destinations, including specialty pharmacies, wholesalers and the central pharmacies of hospital networks. This saves the clients money on transportation and streamlines the process so that touchpoints of transfers of conventional LTL delivery can be eliminated. The result is lower returns due to damage during shipping.
With the renewed concentration on reducing costs across the pharmaceutical supply chain and across the American health care system, more services are now outsourced. U.S. healthcare and pharma businesses are joining forces to find new combinations to enhance patient care and squeeze out costs to keep patient care affordable. 3PLs play a vital role in this evolution.
Value-Added Services Offered by 3PLs to the Pharmaceutical Industry
Reverse Distribution and Returns Processing of Pharmaceutical Products
According to the Healthcare Distribution Management Association (HDMA), 3 to 4% of the product going out from pharmaceutical warehouses ends up getting returned. Not all pharmaceutical goods can be redistributed. Some pharma goods are returned for disposition and destruction by a third party processor or manufacturer. Of the returned pharma products up to 2% of the drugs that are manufactured will be returned for destruction and a credit will be issued to the trading partners of the drug manufacturer.
According to HDMA, 20 to 25% of dispenser inventory is non-productive and may be deemed to be excess inventory. By collaborating with pharmaceutical supply chain trading partners, namely manufacturers, wholesale distributors and dispensers, financial savings may be realized through inventory management process improvements and other factors.
According to the HDA Research Foundation report “The Role of Reverse Distribution”, this channel has been estimated to account for 3.5 to 4% of all pharmaceutical sales, over 120 million product units, more than $13 billion in pharmaceutical product value. The process of reverse distribution incorporates the movement of unsold saleable inventory or removing unsaleable inventory from the pharmaceutical supply chain. Unsold saleable inventory adds cost and wastes money. Outsourcing returns processing to 3PLs helps control costs and recoup revenue for the pharmaceutical industry.
Proper returns processing and reverse logistics provides protection for consumers, safeguarding human and animal health and also helps to protect pharmaceutical brands. New regulations have been designed to have an impact on the incidence of counterfeiting and product diversion in the pharmaceutical industry. With the rise of unique product identifiers at the smallest saleable unit, trading partners across the pharmaceutical supply chain have new tools and systems in place to detect and monitor for counterfeit and diverted drug products including authentication of products in the field and during the reverse distribution cycle.
Some 3PLs that specialize in handling goods in the pharmaceutical industry offer additional value-added services and technology for returns processing and reverse logistics including:
- Itemization of prescription drug products including shipment identification
- Inventory management, including disposal of unsaleable product returns
- Delivery of product analytics to provide valuable insight to improve processes
- Screening process to determine suitability for return or disposition
- Workflow-driven reverse logistics process with the option for destruction of goods off site
- Waste accountability and necessary documentation
Pharma 3PLs need advanced IT capabilities, systems and processes to efficiently verify and process returned drug products on a daily basis. Without the correct technology, it is unlikely that a 3PL can process returned goods at the required pace. Returned drug products must be scanned and processed so that data is collected for use in determining if a credit needs to be applied to the respective trading partner. The time and accuracy of information in reporting is critical in this process and to ensuring regulatory compliance.
For manufacturers with a relatively small number of products that are mandated to comply with DSCSA requirements, opting to outsource to a logistics service provider can bring needed savings. The investment cost for upgrading hardware, software and equipment plus the cost of added training to meet the pharmaceutical serialization requirements is daunting for some smaller pharmaceutical manufacturers. This may also be true for manufacturers that have chosen to outsource critical functions to contract manufacturing organizations (CMO), contract development manufacturing organizations (CDMO) and/or contract packaging organizations (CPO).
3PLs that offer 3PL Serialization-as-a-Service programs receive non-serialized goods at the 3PL warehouse then disassemble the original packaging. The goods are then re-packaged and re-labeled onsite using serial numbers from the manufacturer’s own Level 4 serial number repository. The 3PL sets up and manages the serial number repository on behalf of the client as well as the trading partner data transfers that are involved in ensuring the DSCSA compliance requirements.
One example of this is pharmaceutical third party logistics provider Woodfield Distribution. Experts in helping to ensure DSCSA compliance, Woodfield Distribution offers 3PL Serialization-as-a-Service as well as a suite of other services for pharmaceutical manufacturers. One of the primary benefits of selecting their serialization service is that the manufacturing client owns the Level 4 repository. This enables the brand owners to simplify product traceability by ensuring comprehensive traceability of ownership across the pharmaceutical supply chain.
3PL Title Model Services
In some instances, it is advantageous for the drug product owner to cede the title of the goods to a 3PL, effectively meaning that the 3PL has purchased and now owns the goods. The third party logistics provider then handles the warehousing, distribution and order-to-cash management on behalf of the manufacturer for a specified period of time, enabling the manufacturer to leverage the existing state licenses held by the 3PL. In most cases, this occurs when the manufacturer lacks the appropriate licensing for national distribution but wants to utilize the capabilities of the 3PL to provide dedicated specialty services in delivery and handling. Emerging pharma companies tend to run into this problem, easily resolved by using a 3PL to ensure that regulatory compliance is maintained.
The 3PL Title Model has become popular as it facilitates the ability of emerging therapies or new companies to bring products to market faster. As there has been a spate of mergers and acquisitions in the pharmaceutical industry over the past decade, the number of companies that have ended up with newly acquired products ready to launch but lacking all the state licenses needed for distribution has expanded. Rather than wait for months to meet the licensing requirements of each state, many manufacturers have opted to expedite their product launch by using the 3PL Title Model.
State manufacturer licensing requirements can prove problematic for pharma companies with limited internal resources to manage licensing and regulatory affairs, causing additional time delays, lost revenue and loss of market share at a critical time. As the 3PL owns the product and manages the invoicing, payment collection, management of bad debt risk, the third party logistics provider owns the account receivable (A/R) risk. This serves to mitigate the risk for the drug manufacturer.
The 3PL Title Model is a manufacturer-branded program, unlike exclusive distribution programs that are offered through drug wholesalers. This means that the drug manufacturer can remain at the center of the customer interaction via branded invoices, web portals used for managing orders, customer service, etc. The manufacturer is able to control the messaging, brand, drug product positioning to customers and the flow of information.
In the 3PL Title Model, the third party logistics provider fulfills orders on a “just in time” (JIT) basis as the orders arrive. In many cases, the 3PL serves as the exclusive distributor of its client’s products by purchasing a quantity of goods established by mutual agreement, the days inventory on hand (DIOH).
This strategy enables the inventory management to be more efficient and carry less inventory. Because less goods are in warehouse storage, there is a lower rate of returned goods as the likelihood of drug product expiration diminishes. Manufacturers are able to retain additional drug product inventory on consignment in the 3PL warehouse.
Typically, pricing of 3PL Title Model services may be somewhat higher than those for traditional 3PL services, however the expanded range of services offsets the cost that manufacturers would expend building these capabilities internally in their organizations.
The 3PL Title Model has proven to be popular both short and long term. As a long term distribution strategy, the 3PL Title Model is sensible for pharma manufacturers that desire more control over their supply chain but lack either the resources or infrastructure to manage it internally. This is common with smaller pharma manufacturers that produce specialized medications which require specialized handling, storage and transportation or which have risk evaluation and mitigation strategy (REMS) requirements. Some manufacturers lack the expertise or resources to manage pharmaceutical supply chain processes and prefer to outsource this to 3PLs to take advantage of their network, experience and unique expertise, especially important in dealing with regulatory issues on various levels. Outsourcing to a 3PL can prove liberating for drug manufacturers as it allows them to focus more intently on their core competency: developing and commercializing pharmaceutical products.
Third party logistics providers may handle order-to-cash (commonly known as OTC or O2C) processes for pharmaceutical manufacturers which may become complicated when drop shipments are added to the mix. OTC services may include a combination of any or all of these services:
Orders may be received via EDI, online web portals, internal systems, customer service and via other channels
Inventory management through order processing, shipment, etc.
Billing and cash collection:
Invoicing, extension of billing options, tax and collections management
Provision of credit management services and payment terms
Whether you have a 3PL in Los Angeles on the West Coast or operate across the United States in New Jersey, the 3PL pharma business is expanding rapidly, taking on new challenges and offering a wider variety of value-added services to pharmaceutical companies. From offering advice on regulatory affairs to helping with drug development, new distribution models for specialty drug products and providing service to the contract manufacturing industry, 3PL pharma companies are taking advantage of the need for outsourced services and are thriving.
3PL providers are now getting involved in cold chain-as-a-service, important for specialty products that are temperature sensitive as well as in business processes that support clinical drug trials. With the advent of the patient-centric models in healthcare, 3PLs are providing services that aid in patient adherence to drug therapies, new models for specialty drug distribution and are relying on innovative information technology solutions to provide real time data for use in clinical trials.
The development and use of specialty pharmaceutical products is expected to continue for the foreseeable future. With the increased attention on new pharmaceutical and healthcare synergy and attempts to reduce costs, 3PL pharma companies are anticipated to thrive and increase the range of their services further.