How Does the Pharmaceutical Supply Chain Work?
Learn the basics about the current pharmaceutical supply chainA variety of forces are pushing the pharma and healthcare industries into new directions, dictating the need for a different supply chain model. Here are a few examples. The ways that medicines are assessed, approved and monitored continues to evolve. New technologies have emerged that enable greater efficiency to manufacturing and distribution operations, speeding up the interface to the patient.
As the cost of U.S. healthcare and prescription drugs has increased, so has public scrutiny, impacting how risk management efforts and compliance are managed. Today, there is more focus on patient outcomes and access to information on patients is becoming as critical as the drug products. As the United States has added more stringent regulations and environmental controls, pharmaceutical companies are struggling to comply. While these factors affect different aspects of the pharma and healthcare realms, companies are evaluating their options and taking a strategic look at their current supply chain approach.
Although considerable effort and expense has been expended to innovate, develop and market medications more efficiently, there has been only minimal effort to reconfigure manufacturing and distribution operations or adjust the pharmaceutical supply chain network. Industry experts report that most pharmaceutical companies have complicated supply chains that are inefficient, under-utilized and ill-equipped to deal with the products that are being introduced.
Changes are coming to the pharmaceutical supply chain. What is root cause for these changes? Before we examine the likely changes, let’s look at how today’s pharmaceutical supply chain network operates. First, what is a supply chain? A supply chain starts with product development and ends at the end consumer.
How Does the Pharmaceutical Supply Chain Work?
In general, here is basically how the pharmaceutical supply chain works. The major components of the pharma supply chain network are manufacturers, wholesale distributors, pharmacies and Pharmacy Benefit Managers.
Pharmaceutical Prescription Drug Manufacturers
Generally speaking, drug manufacturers fall into the following categories of those that produce:
- Patented (brand name) products (e.g. Pfizer, Merck, Novartis)
- Generic products (Mylan, Roxane, Barr)
- Biologic products
- Biosimilar products (biologically similar versions of biologic products)
Brand name drug manufacturers devote a portion of their expenses to the research and development of new drug therapies while generic drug manufacturers typically do not. Manufacturers of generic drug products are focused on manufacturing generic compounds that compete directly with the originally patented version of the drug product once the respective patent has expired.
Pharmaceutical manufacturers manage the distribution of drug products from the point of production to the drug wholesalers and in some instances, directly to
Pharma Wholesale Distributors (Wholesalers)
The role of the wholesaler in the life sciences supply chain management is to make the process of purchasing drug products from pharmaceutical manufacturers more efficient. Wholesale distributors connect 60,000 U.S. pharmacies and outpatient dispensing outlets. This enables manufacturers to ship bulk quantities of medications to a comparatively small number of wholesaler warehouses versus shipping to thousands of pharmacy and outpatient dispensing outlets. Some wholesalers specialize in dealing with a particular range of products, such as biologics or to specific types of customers, such as nursing care facilities.
By combining their purchasing power, wholesalers can help smaller pharmacies better negotiate with manufacturers of generic drugs. A tightly concentrated industry, in 2013, three wholesalers (Cardinal Health, McKesson and AmerisourceBergen) generated approximately 85-90% of the total revenues from drug distribution in the United States. Revenues for pharmaceutical wholesalers are typically calculated based on the difference between what they anticipate having to pay to manufacturers for life sciences products and the amount they receive in payments for selling the drugs to the retail and non-retail customers. Discounts, such as for prompt payment and fees on services provided to their customers can also be earned.
The wholesale distribution industry has continued to consolidate over the past 30 years. With nearly 200 wholesale distributors in 1975 to less than 50 in 2000, the industry has been forced to alter its revenue model. Because of pressure to reduce costs, wholesale distributors now focus on evolving what was a traditional distribution model into a low-margin enterprise. This is done by maximizing the economies of scale, optimizing physical efficiencies within the distribution model and recognizing financial efficiencies such as prompt payment discounts.
Pharmacies
The pharmacy category can include independent and chain pharmacies, food stores or big box stores with pharmacies and mail-order pharmacies. Specialty pharmacies focus on providing higher cost biotechnology drug products. Internet/Mail order pharmacies have dramatically increased in use, partially due to mandated use by major PBMs in the specialty pharmacy industry. Due to the pending shift in demographics, it is anticipated that mail order pharmacy use will continue to increase significantly.
Serving as a critical interface between manufacturers, PBMs and wholesalers, pharmacies facilitate consumer billing and payments for those who participate in group health benefit plans. Manufacturers of multiple-source drug products compete to sell drugs to pharmacies. Because pharmacies keep a wide range of drugs in stock so that they can be prepared to meet demand immediately, they have less leverage to negotiate rebates or discounts with manufacturers of single-source
Typically, pharmacies purchase prescription drugs from wholesalers at a contracted discount off the WAC. The rate varies based upon the size and purchasing power of the pharmacy. Pharmacies contract with wholesalers to stock their facilities with prescription medicines and use agreements with
Pharmacy Benefit Managers (PBMs)
The role of Pharmacy Benefit Managers in the pharma supply chain is designed to provide an entity which focuses on improving cost savings, access, convenience and safety for consumers, employers, unions and government programs. Pharmacy Benefit Managers originated as basic claims administrators and have evolved to become complicated organizations that provide a variety of services including:
- Claims processing and adjudication
- Reporting
- Developing formularies
- Manufacturer rebate negotiation
- Record keeping
- Drug utilization review
- Determine generic and therapeutic substitution
- Developing pharmacy networks
- Disease management
- Develop quality-focused programs for compliance strategies and clinical expertise which promotes the safe, informed use of prescription drugs
- Consultative services such as helping clients establish their benefit structure
- Providing mail order pharmacy service and prescription drug order fulfillment
Within the life sciences supply chain, PBMs tend to have the most significant leverage in obtaining brand-name medications that have close substitutes. This is because manufacturers typically provide rebates in exchange for placement on a formulary or based on the market share that the manufacturer’s drug receives. Prescription drugs that do not have competition are unlikely to receive rebates or discounts unless the PBM is able to realistically exclude these products from coverage.
Why is the Pharmaceutical Supply Chain Projected to Change?
Here are 5 factors forcing change in life sciences supply chains:
1. New Product Types with shorter product lifecycles are dictating the need for more complicated manufacturing and distribution processes. In addition, this is the impetus for the development of different supply chains for different product types.
2. Greater Public Scrutiny due to increased regulation as well as the increased incidence for more robust risk assessment and risk management capabilities is needed across the extended pharmaceutical supply chain.
3. New Modes of Healthcare Delivery are creating indistinct boundaries between primary and acute care due to the Patient Protection and Affordable Care Act (PPACA). PPACA provides incentives to develop, test and evaluate new healthcare delivery systems. The regulation focuses on the promotion of health and disease prevention and is anticipated to decrease the cost of health care over the next ten years. This will require
4. Increased Emphasis on Patient Outcomes. Pharma companies are increasingly shifting their focus from brand to disease. In changing their focus, pharma companies must find new means of collaborating with payers, providers and patient as well as with IT and technology companies. This will require expansion into
5. Live Licensing is poised to alter the dynamics of the pharma industry. A market disruptor, live licensing alters clinical stages into separate, controlled launches. This will revise the processes of market research, early asset development
Conclusion
From drug development to healthcare providers, the pharma industry is undergoing dramatic changes. In case you are unaware, the digital transformation of the healthcare industry and pharmaceutical supply chain has already begun. Yes, a digital supply chain is coming. As a result of DSCSA, trading partners across the life sciences supply chain will be able to identify and eliminate counterfeit drugs. Pharmaceutical companies are evaluating their existing supply chain strategies to improve efficiency and ensure optimum product quality. This has become a special issue of concern for temperature-sensitive and temperature-controlled drug products such as biologics as they often require refrigeration and specialized handling and monitoring across the cold chain.
Pharmaceutical supply chains will be undergoing massive changes to meet tomorrow’s needs. Factors forcing these changes include new drug product types, live licensing, increased focus on outcomes, new modes of healthcare delivery and greater public scrutiny.
About the Author:
Laura Olson
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