Supply Chain Management in the Drug Industry: Delivering Patient Value for Pharmaceuticals and Biologics

By Hedley Rees

This book bridges the gap between practitioners of supply-chain management and pharmaceutical industry experts. It aims to help both these groups understand the different worlds they live in and how to jointly contribute to meaningful improvements in supply-chains within the globally important pharmaceutical sector. Scientific and technical staff must work closely with supply-chain practitioners and other relevant parties to help secure responsive, cost effective and risk mitigated supply chains to compete on a world stage. This should not wait until a drug has been registered, but should start as early as possible in the development process and before registration or clinical trials. The author suggests that CMC (chemistry manufacturing controls) drug development must reset the line of sight – from supply of drug to the clinic and gaining a registration, to the building of a patient value stream. Capable processes and suppliers, streamlined logistics, flexible plant and equipment, shorter cycle times, effective flow of information and reduced waste. All these factors can and should be addressed at the CMC development stage.

• Language: English
• Publisher: Wiley
• Release date: Apr 6, 2011
• ISBN: 9780470922842

Hedley Rees

Hedley Rees is managing consultant at PharmaFlow Limited, a UK based consultancy specialising in operations and supply chain management within life science. Assignments span early stage clinical trial supply chains up to complex multi-product supply networks covering global territories. Hedley held senior positions at Bayer UK, British Biotech, Vernalis, Johnson & Johnson and OSI Pharmaceuticals. His skill set covers the range of competencies from strategic procurement, production and inventory control, distribution logistics, information systems and improvement. As an expert in production systems design and implementation, Hedley is a zealous advocate of the regulatory modernisation frameworks of FDAs 21st Century Modernization (Janet Woodcock MD) and the International Council for Harmonisation (ICH). He graduated from the University of Wales as a production engineer and holds an Executive MBA from Cranfield University School of Management. Hedley lives in Bridgend, South Wales.

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PREFACE

I was staying at a budget hotel on the outskirts of London when I checked my Blackberry for email. It was probably around 3.00 a.m., so my sight was less than perfect. Squinting allowed me to make out the opening: My name is Jonathan Rose, the Wiley editor for pharmaceutical science books. Jonathan went on to say: With interest, I note that you are leading the coming workshop ‘Supply Chain Management in Pharma/Biotech.’ Given the importance of managing supply chain procedures and costs during drug production and manufacture, I believe that a book explaining the concepts, methods, and applications of supply chain management to the pharmaceutical industry would make a timely and well-received text. Such a book would be an important reference and resource for professionals involved in drug development and manufacturing, quality assurance and control, chemical and biological engineering, and regulatory personnel.

That is what I hope to have achieved with this book. I have attempted, of course, to contribute the maximum possible from my own personal databanks; along with this is supplementary commentary from what I can best describe as expert witnesses. The contributors have been hand picked by me to reinforce, support, and move forward the sentiments in the book. Their powerful contributions are of varying length and depth.

I hope that you enjoy what we present here. The style is meant to entertain as well as to inform; and by informing, the hope is that the overall theme of the book will strike home—the pharmaceutical industry must change in radical ways if supply chains of the future are to meet stakeholder expectations.

Acknowledgments

The learning that goes into a book is so varied and random, how can anyone credit all who have contributed? To those forgotten, I apologize, and if you will contact me, it will be rectified in my next book.

First, of course, I owe the contributors a huge debt of thanks, as I do John O’Neill, former director of operations at Bayer Manufacturing in Bridgend, South Wales (Chapter 16), currently VP of manufacturing operations at Bayer Healthcare, Consumer Care, who taught me, by demonstration, what strategic thinking was about and how it should be executed, as well as for sponsoring my executive M.B.A. This leads me to the Cranfield University School of Management, for providing the faculty and environment for that life-changing program. Leo Murray, who headed the school in those days (1994–1995), seemed to know every pupil personally and certainly made me feel part of things. They worked on the whole person, not just the business boffin in us.

Next is Michael Carroll in his time as director of manufacturing at British Biotech (later to become head of technical operations at Novartis, Horsham, UK), whose incisive approach to pharmaceutical manufacturing strategy pushed me to incorporate new ways of thinking about supply chains; also Malcolm Hughes, formerly at Roche, who I worked with at British Biotech, for reviewing Chapter 4 and staying connected all these years.

The people at Vanguard Medica, one of the pioneers of virtual drug development, comprised a special team of high-caliber drug developers and business folks with a deep sense of pride in their work. Nick Heightman was a perfect boss, and special thanks to Sally Waterman, then VP of nonclinical development, now COO at PolyTherics, whose training notes in drug development I still use; and Michael Gamlen, owner of Pharma Training Services and Pharma Development Services, the company that commissioned the workshop cited earlier by Jonathan Rose; and Peter Worrall, then CFO, now CEO of Pharminox, who provided a spot on quote for my newsletter on the value of procurement, which is included in the book—I still owe him a pint!

At Ortho-Clinical Diagnostics, John Gethin, general manager of the Cardiff site, demonstrated true understanding of the lean methodology as he unleashed improvement potential that the tool-heads had failed to unearth. He helped me move on to better things, which may be the subject of another book one day.

From OSI Pharmaceuticals, I must thank Bob Simon, executive director of regulatory affairs and manufacturing, who had the patience of a saint with me and others around him. Without his sponsorship and forbearing, my experience at OSI could have been very different; also to Geraldine Chapman, human resources director, for being so supportive on the UK side of the pond.

As an independent, those contributing to my learning opportunities for the book are almost too many to mention. Frank Wheeler, of the now defunct Entrepreneur Action, planted many of the business idea seeds; Chris Barnett, expert consultant in pharmaceutical quality and compliance, who reviewed Chapter 4 and made some excellent comments; Judy Callanan, who organizes training courses (including mine) for Pharma Training Services and does a difficult job with aplomb; and David Cotterell, managing director of Apex Healthcare Consulting, who was my first client and paid his invoices on time, which is so vitally important to an independent consultant.

Recently I have joined Alacrita Consulting. My skills sets are not in much demand for Alacrita, since they are experts in drug development, and as you will see throughout the book, supply chain management competencies are little sought after in this territory. They have been brilliant to network with, though, and my thanks go to Anthony Walker and Rob Johnson for inviting me to join them; also, thanks again to Anthony for reviewing some chapters (he did not agree with all of it!) and hooking me up with Pat Crowley, who did such an excellent job in Chapter 3.

Ram Balani, CEO of FDASmart, has been incredibly interested in what I am doing, and I thank him for that and also for introducing me to Jennifer Miller of Pfizer (Chapter 17) and to Michelle Hoffman, editor of Pharmaceutical Technology.

A final thank you goes to my colleagues on the UK Bio-Industry Association’s Manufacturing Advisory Committee (BIA MAC), especially the following people, who have been massive advocates of quality by design and modernization: Brendan Fish, our chairman, formerly of Medimune, now at GSK; Rob Winder, communications manager at BIA; Jim Mills, formerly at Xenova, now CEO of Cantab Biopharmaceuticals; Mike Hoare, professor of biochemical engineering and co-director of the Advanced Centre for Biochemical Engineering (Mike is the godfather of bioprocessing in the UK); and Dean Chespy (another member of the Welsh contingent, along with Mike Hoare, Steven Ward, and myself), development manager for life sciences at Siemens; also thanks to Robert Mansfield, former CEO of Vanguard Medica and Neuropharm, who proposed me for membership in the committee, and Tony Bradshaw, previous head of bioProcessUK and now co-director of the HealthTech and Medicines Knowledge Transfer Network, who accepted me; and Mark Bustard, head of bioProcessUK, for maintaining such an important link with BIA MAC.

HEDLEY REES

April 2010

PART I

Surveying and Mapping the Territory

Chapter 1

Setting a Transformational Agenda

1.1 AIMS AND ASPIRATIONS OF THE BOOK

The skill and coordination required of scientific, technical, and business experts in bringing new medicines to market is immense. There is, however, the potential to make those efforts significantly more productive by thinking in supply chain management (SCM) terms from the earliest stage of drug development. Our intention in this book is to help readers to reach that potential by working on a number of levels.

1.1.1 A Practical Guide for the Industry

First, the book aims to be a practical guide to the application of SCM processes and practices in a pharmaceutical setting. The objective is to provide information to those in the industry wishing to contribute to improved supply chains. The key aim, therefore, is to help individuals and teams appreciate the impact they have on working supply chains; experience shows that this is a far broader spectrum of involvement than may initially be appreciated. Then, armed with that appreciation, readers can identify specific ways in which they can make a vital contribution to an organization’s success in supporting patient needs for pharmaceutical products and services. With enhanced understanding among all the stakeholders, there is a real opportunity to help reduce the astonishingly high attrition rates with which this industry lives on a daily basis.

1.1.2 Understanding Constraints for SCM Practitioners

The second aim of the book is to provide SCM professionals, both inside and outside the sector, with a deeper understanding of the special constraints that operate in this industry. The regulations that apply are designed specifically to protect the health and well-being of patients. There is often confusion, however, as to what is or is not acceptable to industry regulators. The default position often becomes change nothing. The message must be that although change is not straightforward and can be time consuming, it is necessary in order to continue to provide patients with products that are fit for purpose and meet their requirements as to quality, cost, and delivery lead time. To date, many talented supply chain professionals have avoided this sector or are not able to fully exercise their skills within the sector. This needs to change—and by providing more insight into the constraints, it is hoped that innovative ways of working can be adopted in a fashion similar to that of other safety-critical sectors. All the evidence suggests that industry regulators are now positively encouraging this approach through modernization initiatives, which we discuss in detail throughout.

The basis for achieving the two goals above is my own work, founded on everyday experiences of bringing drugs to clinical trial sites and markets. These experiences are based on work from early-stage drug development through to large-scale phase III and postmarket (phase IV) trials and commercial sale in global territories. The emphasis is on understanding and utilizing simple and effective ways to build, manage, and improve the performance of the supply chain. The simple approach is essential in that complexity abounds in both pharmaceuticals and SCM. Simplicity, in combination with effective working methods that focus on meaningful outcomes rather than on tools and techniques, can be extremely powerful.

I believe that these goals are achievable. There are, as well, several more ambitious goals that could be a by-product. The first of these is to help inspire and catalyze a step change in culture and attitude that must take place in the pharmaceutical industry.

1.1.3 Catalyzing Change of Culture

The manufacturing and distribution supply base of this sector has many issues before it, but this has always taken second place to the search for new blockbuster products and markets. The world is now changing its attitude to prescription medicines, with issues of cost, integrity (adulteration and counterfeiting), quality, efficacy, and safety all moving the supply chain center stage. The changes required are at the roots of the industry, and in this book we dig down deep.

The scientific community of pharmaceuticals has historically held innovation in manufacturing at arm’s length, focusing attention on discovery research. Jon Clark, associate director of policy at the U.S. Food and Drug Administration’s (FDA’s) Center for Drug Evaluation and Research, observed at the Marcus Evans Summit Manupharma conference held in 2005: The pharmaceutical industry has one of the most technically advanced discovery organizations, but remains more conservative when it comes to using ‘cutting edge’ technology in manufacturing. This quotation from Clark’s presentation at that summit is a suggestion of ways in which the pharmaceutical industry could improve by adopting process analytical technology and quality by design approaches. There will be more on those subjects later in the book, specifically in Chapter 14, but for now, readers should simply understand them to be methods of introducing improvements into the supply chain using principles founded in best manufacturing practices.

1.1.4 Engaging Pharmaceuticals in Supply Chain Management

My last aim or aspiration, call it what you will, is to encourage engagement of the huge intellectual resource within pharmaceuticals and SCM in a search for increasingly effective processes to manage complex supply chains. That scientific attention in discovery research has resulted in rapidly developing technologies in the modeling and analysis of complex biological systems. As will become clear throughout the book, supply chains are less complex subjects than humans but have the added complication of the more unpredictable person component. The discipline of SCM could benefit significantly from the intellectual rigor of the pharmaceutical sector. As readers new to the discipline will begin to understand, SCM is by no means well defined or fully understood, even by the many experts operating in the territory. There is a dire need for continuing research and discovery of ways that are sustainably better, rather than chasing tools, techniques, and information system gimmicks that add little or no value, yet still attract the attention of many.

1.1.5 Examining the Two Worlds

To stand a chance of achieving these goals, it will be necessary to examine the two very different worlds of pharmaceuticals and SCM in some detail. I do not apologize to experts in either or both fields for striking a baseline at fundamentals. When visiting these settings, the level is pitched at first principles to provide a foundation for further research or investigation. It will be for the reader to follow an interest or curiosity into further depth beyond the needs of understanding SCM in pharmaceuticals.

1.2 BOOK FORMAT

The focus of the book is on factual information about the pharmaceutical industry and SCM. To aid readers’ understanding of some of the less straightforward concepts or issues, the presentation is supplemented by three distinct types of auxiliary material.

1.2.1 Guest Contributor Slot

The guest slots are inputs of varying length that aim to inform and underscore the messages in the text. There is no particular pattern to the inclusion of these speakers other than the fact that I encountered them at some point and recognized that they had valuable tales to tell in relation to the book’s content (as an aside, see Section 16.4). The speaking panel includes long-term colleagues and friends of the author, eminent professors, industry colleagues, and contacts made in the course of doing business, where a particular shared view or interest has prompted dialogue. They are taken from a broad spectrum of industrial, academic, and consultancy backgrounds. The unifying theme is that they have particular insights or expert knowledge that is of direct importance to the aims of this book. The style is particular to each speaker, but the messages are clear and consistent. After each slot, I emphasize an important point or points for reinforcement, but each slot stands alone as a learning opportunity. It should also be noted that the contributors do not necessarily subscribe to all the views that I express throughout the book.

1.2.2 Observations, Views, and Experiences of the Author

In these sections I include particular findings, experiences, and insights of mine during many years of operating in pharmaceutical supply chains and through personal and professional development. This is not to suggest that these views are any better or worse than anyone else’s. We all have a tale to tell and valuable knowledge to impart. The perspective that I bring is from one who rather than entering academia or career consultancy has remained a practitioner. This means that I have been doing throughout my working life, aside from the time taken to study. I have been able to apply that valuable study and use it to determine what works and what does not work in practice. The doing has kept me grounded in the gray mists of ambiguity that pervade all modern organizations.

Some of these sections are recountings of actual events in the form of practical case studies. In the main, they are anonymous, so that, as a colleague used to say, we may protect the innocent. The serious aspect of this is that searching for guilty parties can be a major inhibitor to organizational learning, as people fear for their jobs or career prospects. This circumstance is studied further in chapters on improvement and exemplar thinking, but it is important here to note that the vast majority of participants in organizational mistakes are innocent parties trying to do their best under difficult circumstances.

This is the spirit in which the case studies are examined. They aim to get at the fundamental lessons from situations where things did not appear to turn out well, were handled less than effectively, or did not involve the correct course of action or involvement; and specifically, to extract every last ounce of understanding from examples that demonstrate exemplar ways of working.

1.2.3 A Helpful Metaphor

The aim of using metaphors is to draw out the reader’s identification with unfamiliar concepts. Sometimes, the only way to really identify with another person’s pain or pleasure is to imagine an analogous situation that has similar implications. As with all metaphors, they are not perfect analogies, and the reader could spend time picking out differences that distinguish them from the case in point. They will, though, be close enough to convey a sense of identity with the essence of the concept. Although at first glance it may seem patronizing toward the many highly educated and scientifically gifted people reading the book, it is not, of course, my intention and hopefully, will not be taken that way.

1.3 INTENDED READERSHIP

Most readers will be in one or more of the broad categories described below.

1.3.1 Operating in Pharmaceuticals or Biopharmaceuticals Outside SCM

The responsibility areas involved include the following:

Research chemistry and biochemistry

Chemical and biochemical engineering

Chemistry, manufacturing, and controls

Preclinical development

Clinical development

Regulatory affairs

Quality assurance

Finance

Marketing

Informatics and information systems

Business development

Licensing

Pharmacovigilance

General management

See Chapter 3 for a definition of some of the technical terms.

1.3.2 Working in SCM Outside Pharmaceuticals or Biopharmaceuticals

Areas of responsibility include the following:

Purchasing

Procurement

Supply management

Operations

Production management

Inventory management and control

Production and material planning

Demand planning

Logistics

Warehouse management

Import/export

SCM

General management

1.3.3 Occupying a SCM Role in Pharmaceuticals or Biopharmaceuticals

For example, readers may have the responsibility for planning and management of inventory in a clinical trial supply environment. Their background may be technical, such as in pharmaceutical sciences, and they may have moved into clinical supplies as a career development step. There may well, therefore, be gaps both in aspects of the drug development process and in common practices in SCM.

1.3.4 Off-Label Use

In pharmaceuticals, there is the well-known concept of off-label use, where a medicine is prescribed by a physician for conditions that were not part of the original approval to market and sell the drug. Possibly, there will be an analogous element of off-label use for this book, as prospective readers become aware that some of the principles apply in a complementary sense to their specific interests. This may include some additional categories:

Academia outside SCM, such as marketing, finance, and human resources

Venture capitalists (someone suggested that they would lose interest after the first page!)

Industrial, non-supply chain responsibility areas outside pharmaceuticals (e.g., product design, marketing, finance)

People looking to discover sound principles of SCM, not the surrounding baggage

Others of a curious nature with regard to all things organizational

1.4 A BOOK ABOUT TWO WORLDS IN CONTRAST

It is time to look more closely at these different worlds. The world of pharmaceuticals is complex even on the simplest plane. It is a world populated with some of the most intellectually gifted people on the planet. It is a place of ethics, scientific rigor, personal challenge, human caring, and highly professional standards, but also a world of blockbuster drugs, huge gross profit margins, captive markets, and patent protection—a place where business and science often collide.

The other world, that of supply chains and SCM, is equally complex, although perhaps not immediately obvious to the uninitiated. It is a relatively young discipline, challenged by risk and uncertainty, constant need for innovation, quality improvements, customer choice, cost containment, and delivery deadlines; also often a place of wild demand fluctuations, dysfunctional relationships, problematic defect rates, departmental silos, and customer complaints. Ironically, in many respects, it too is populated by equally talented and intellectually bright and committed people.

So begins a voyage through these worlds in the hope that each can learn from the other to leverage better outcomes for the central character of this book: a patient—the ultimate consumer of pharmaceutical medicines.

1.5 THE PHARMACEUTICAL LOTTERY

1.5.1 Failure Is Never Far Away

Probably the number one preoccupation of anyone working in the world of pharmaceuticals is the risk of failure, and it is this aspect that differentiates it from other industry sectors. Figure 1.1 tells the story of the lottery that is pharmaceutical development. From the point at which a company registers a patent for a promising molecular structure, the clock starts ticking. Every second that is used up from then on represents potential lost sales when the drug is approved. For example, if a patent protection period of 20 years is achieved and it takes 10 years to develop and gain approval for the drug, 10 years remain in which to recover the costs associated plus an acceptable return on investment. Just one day’s extra sales can often mean millions of dollars in the bank.

FIGURE 1.1 Drug discovery, development, and review process.

(From Pharmaceutical Research and Manufacturers of America, in Science, Business, Regulatory, and Intellectual Property Issues Cited as Hampering Drug Development Efforts, GAO-07-49, U.S. Government Accountability Office, Washington, DC.)

This pressure to make the best use of time is in the context of the fact that four of five compounds entering clinical trials fail to gain approval by regulators (as shown in Figure 1.1). As we shall see in later chapters, clinical trials are not cheap to run, and there is the associated manufacture of clinical trial materials to consider as well as many other indirect costs. Even before clinical trials can begin, 250 compounds must pass through preclinical trial evaluation to arrive at five candidates for the clinic. The cost of those 245 lost compounds, again, is not insignificant, given all the testing and data collection and analysis that must take place to determine safety and indications of purity and efficacy. Add to this the 10,000 compounds that need to be identified, selected, and screened for suitability to arrive at the 250 preclinical candidates—and yes, again, someone must pick up the tab.

1.5.2 Chasing the Ultimate Prize

No one is under any illusion that the development of new drugs is anything other than a game of chance. Despite this, the pharmaceutical sector has learned to beat the odds and has been a rich industry, founded on blockbuster drugs delivering jackpot winnings. Historically, the extreme differentiation born out of patent protection meeting patient needs created captive markets, premium pricing, and massive margins. Not just blockbusters but even lesser drugs have been able to generate healthy margins and massive returns. The industry has always argued that profits are necessary to compensate for the risk referred to above, and while gross margins are large, the profits, net of discovery, development, and marketing, plus general overhead costs, are necessary to fuel further research. Up to a point that is probably true, but this industry has always been able to afford the best of everything, which suggests that the balance is skewed toward profits. The industry has become used to a very comfortable financial position through the sale of marketed products facilitated by that vital regulatory approval.

Readers interested in an in-depth account of this area should consult a U.S. Government Accountability Office (GAO) report.¹ This is an enlightening account of drug development and the issues that will emerge in this book as fundamental contributors to SCM failings.

1.5.3 Times Change

In recent years, winnings have become ever more erratic and elusive. Discovering a totally new molecular entity is not something that can be planned and delivered on a schedule, no matter how much money is thrown at it. GlaxoSmithKline’s mammoth research center at Stevenage in the UK was a major European construction project when it was built in the 1990s. How well has GSK’s pipeline benefited from this endeavor? Suffice it to say that GSK is as active as any company in seeking compounds to license from the outside world. Where drugs have been discovered and entered development, the regulatory hurdles have escalated, making it increasingly difficult and time consuming to gain that vital approval. Official figures from regulators show disappointing decreases in approval numbers in recent years, and this is well documented in the GAO report.

Other factors have also been affecting revenue returns. Some governments and payers are pushing physicians to prescribe generic drugs rather than brands as soon as possible after patent protection expires. In fact, in the UK, where there is already a high percentage of generic prescribing by general practitioners (GPs), legislation was proposed to oblige the pharmacist to substitute a generic version if a GP has not already done so. It is not clear whether this will become law but does indicate that the pressure is on to move to less costly generic versions wherever possible. For innovators and patent owners, generics lead to shorter product life cycles and revenue erosion through lost sales. Innovators have retaliated through product life-cycle management aimed at producing extensions and re-presentations of the brand that can extend patent cover.

Branded products are also being attacked on price from stakeholders across the board. So far, that pressure is taking its toll, and strong stakeholder negotiation is likely to continue that trend. The pressure is on, therefore, for innovators to reduce costs and margins. The supply chain is one area where the spotlight is turning to seek out a cost advantage, and this is a key area for consideration in this book.

1.5.4 Costs Escalate

Although the potential rewards are still high, so is the development stake required to take part, and those costs continue to escalate. Estimates vary as to the cost of bringing a new drug to market, but $850 million to $1.9 billion seems to be generally accepted as a reasonable range. The major portion of this cost is the cost of failure: the failure to meet the demanding requirements for safety, efficacy, quality, and purity of a potential drug before it is allowed on the market. Understandably, then, the entire industry is concerned with avoiding costly failures, and business strategies and models have developed with this in mind.

1.5.5 The Driver for Changed Business Models

So in an environment of higher costs and lower returns, how has the industry evolved in response? Until the late 1970s/early 1980s, pharmaceutical companies tended to own much of the infrastructure required to bring a drug to market. From then onward, this concept of a traditional, vertically integrated business model was challenged severely as the big pharmaceutical companies began a wholesale exit from activities that were regarded as noncore to their business. The guiding principles were to reduce fixed costs and to release funds to channel into activities perceived to be more strategic, such as discovery research and marketing. The potential in this was to reduce the cost impact of compound failures while increasing spending on pipeline improvement and competitive positioning. Some more cynical commentators argue that the end game was to achieve higher, more predictable margins for shareholders in an already high-margin environment.

Manufacturing (including analytical testing) activities and distribution logistics were quickly identified as noncore, leading to a spin-out of people, facilities, and equipment into a rapidly growing contractor base. So began a massive and ever-spiraling move toward outsourcing in the industry. Plants and facilities that had previously been part of the larger pharmaceutical companies suddenly found themselves as third-party contractors having to survive alone beyond any transitionary arrangements that had been negotiated. They became service providers, charging fees for services to what were now their sponsors. For these companies, the profitability of the contract rather than the success of the sponsoring pharmaceutical company had to become the first priority. So began the wave of outsourcing and third-party commercial relationships, which has followed an upward trend to this day.

The existence of this contractor base also made it possible to develop drugs without actually owning any of the facilities. From this, the business models now known as biotech and virtual pharma (because of their need to outsource to conserve cash) were spawned. In essence, these models are founded on compact teams of scientific and technical experts using contract manufacturing organizations (CMOs) and contract research organizations (CROs) to undertake the operational and transactional activities. The scientific and technical core team then sponsors and manages the transition of compounds through one or more stages of development. The value added is then offered for licensing in exchange for royalties and milestone payments, providing investors with an exit strategy.

There is a matter of definition to be clarified here before moving on. It is not unusual to witness conversations in which biotech has different meanings to the participants. For one person, it means a company operating in the arena of biological compounds. An other conversationalist will have in mind a small to medium-sized company developing drugs based on either chemical or biological compounds, the unifying factor being their dependence on investors for cash to operate the business. The definition used here refers to the latter, which is the way in which the trade associations are organized. For example, the majority of members of the UK Bio-Industry Association are companies working with small-molecule compounds.

Observations, Views, and Experiences of the Author

My first experience of biotech was when joining the company British Biotech in the mid-1990s. My principal responsibility as head of logistics was to establish a pan-European supply chain for two upcoming compounds in clinical development. Both compounds were small molecules and failed to reach the market. It was, however, an incredibly valuable experience for me personally because I learned a tremendous amount about drug discovery and development. The company had assembled an impressive team of scientific and technical experts, many from big pharma companies wishing to seek new and exciting challenges. This allowed me to learn about drug development, and how it affects SCM, from some of the best people in the field.

Readers can research the company history themselves. I mention it here because British Biotech was initially a European model for the biotech industry. Significant amounts of money were raised from investors (Including NASDAQ and NYSE investors). The share price rocketed as the investment was turned into clinical studies and data that showed apparent promising, even spectacular, results. That promise was dashed when the first compound failed to achieve regulatory approval and the second was found to have data that did not support further development in the direction intended. The critical mass of financial resources was not available to weather such a reversal of fortune, and the company was stopped in its tracks, becoming a shell of the company originally intended. Shareholders lost their investment, and the entire sector shuddered in response. This clearly exposed the risks as well as the opportunities associated with developing drugs with relatively limited resources. Nonetheless, although the appetite for investment in biotech companies has diminished, this is still a widespread business model to be explored here in a little more detail.

1.5.6 Biotech and Virtual Pharma

Table 1.1 is based on work that is contained in the UK government’s commissioned report, Bioscience 2015: Improving National Health, Increasing National Wealth² [affectionately known as the Big-T Report after the team that compiled the report: the UK Bioscience Innovation and Growth Team (BIGT)]. The report foreword, written by the then UK Prime Minister, Tony Blair, demonstrated the importance attached to the bioscience sector as a driver of future economic growth. Although the description in the table taken from the report is aimed at bioscience (i.e., principally the biological and bio-processing sectors), it applies equally well to small-molecule companies.

TABLE 1.1 Biotech Company: Stages of Evolution

This shows the progression that biotech companies make to fund a move through the phases of drug development. Companies have demonstrated that it is possible to develop a drug to market using the virtual model (Vanguard Medica was an early achiever, with Frovatriptan), but there are also potential issues that must be addressed. A major aspect is having sufficient funds to weather any of the delays that may occur due to unexpected safety issues. Under these circumstances, cash can run away quicker than the time required, and companies are at risk of going to the wall. This encouraged a refinement of the biotech model aimed at reducing exposure to risk and so make it easier to attract investors. Enter the specialty pharma company. Such companies deal only in already licensed products or re-profile existing compounds with known safety profiles into new indications (e.g., disease areas) and thus reduce the risk of failure due to unexpected safety or efficacy issues.

The net impact of these changes is that the industry structure has transitioned. Large companies developing and manufacturing drugs to market for themselves have been replaced by complex networks of independent companies operating through contractual arrangements that aim to limit risk and maximize reward. As biotech and big pharma companies seek to work more closely together to help fuel discovery research, this situation is only likely to be exacerbated. This has far-reaching implications for pharmaceutical supply chains. By way of exploration of this comment, I would like to introduce the first guest contributor, Dan Barreto. These views were captured from a conference call that I had with Dan one Sunday morning in between his frequent visits to Puerto Rico for his current company, C. R. Bard.

GUEST CONTRIBUTOR SLOT: DAN BARRETO

Responsibilities of Small and Medium-Sized Companies in Drug Development

I wish to speak about SMEs [small and medium-sized enterprises] researching and developing drugs but aiming to exit by handing over to big pharma (Johnson & Johnson, GlaxoSmithKline, Pfizer, etc.). The work done by an SME can set the future for the supply chain and affect the entire product life cycle. This work is the foundation that allows for a smooth transition from one stage to another. Going into a phase without completing all the tasks associated with the previous tasks creates additional work, forces parallel activities, and diminishes the strength of the process due to the multiplicity of priorities added to the process.

GMP [control of manufacturing; see Chapters 3 and 4] does not apply with full rigor in earlier stages [phases I and II], so reduced emphasis on meeting specific quality requirements is acceptable. However, the level of flexibility applied to a specific activity should be based on a good understanding of the need for control and management of current activities, and the potential need downstream of the data and intelligence gathered. When an SME hands over the baton to big pharma, if it is not in good shape, there can be major implications. Avoiding these potential consequences requires SMEs to take a longer-term view of GMP and also to consider characterization of the molecule, scalability, dosage-form selection, specification of materials, selection of suppliers, and so on.

When an IND [application to perform clinical trials in humans] is submitted and accepted, it is often difficult to change some potentially critical aspects. The reason for this is that the life cycle is perceived as a one-way approach in which any reassessment of work done previously is considered unnecessary, overwhelming, taxing, an indication of poor performance, and a potential showstopper for the project. This is a complete mistake, in my opinion. There should be an obligatory Retrospective review to assess any impacts on big pharma project time lines when issues are found. Time lines are often impossible to change, which can lead to taking risks to meet time lines and hope for the best.

This retrospective review should include documentation of notebooks (e.g., as scientists leave and data are lost). Good data and good documentation should be based on the relevance of the data that are being collected, whether they are for present use or for preservation as scientific reference in the future. Most companies do not appreciate that issues with products already in distribution may require a look back all the way to research and development as part of a comprehensive investigation or evaluation of the issues.

Dan’s words are based on direct experience within both the FDA and senior industry leadership positions in quality control. They convey a word of caution for all SMEs developing compounds. They have a great responsibility on their shoulders to get things right before handing over to big pharma. In the same way that quality cannot be inspected into a product, due diligence cannot undo errors and omissions in the development process. Even if weaknesses are discovered, eradicating them is often too complicated to accomplish within time lines, resulting in suboptimal compromises made and undue risk incurred.

The underlying message is that supply chain issues are not just about counterfeit products entering the supply chain or concerns relating to distribution channel logistics—these are symptoms, not root causes. Throughout the book, the early formation of a supply chain will be a primary focus of attention. The point being made here is to place it on the agenda from the start and keep it there. To gain further clarification, it is necessary to examine an aspect of the history of pharmaceutical supply chains.

1.5.7 The Impact of History on Pharmaceutical Supply Chains

Prior to the more recent turbulent industry dynamic, when the world of pharmaceuticals was apparently simpler, the performance of supply chains received little attention. The logic was persuasive. The absolute necessity was to develop a supply chain capable of producing test materials to be used for clinical trials for regulatory scrutiny. The thinking behind this was: Why would anyone invest more money than necessary in a drug’s supply chain before knowing that there was an approval to sell? A successful completion of clinical trials and subsequent regulatory approval would then open the door to gross margins that were orders of magnitude greater than the cost to manufacture the drug. For example, it would not be uncommon for a cost of goods to be only a few percentage points of the selling price. The justification for that has been mentioned above, but whether right or wrong, the ensuing mindset became: Why bother about cost? Just do enough to gain an approval.

The results of such a mindset and the associated lack of attention led to the following being common for supply chains in the industry:

Procurement policies and practices not focused on supplier performance

Short-term tactical sourcing and outsourcing decision making

Inflated inventories to protect against any lost sales

Maximization of batch sizes to minimize cost per unit

Extensive off-line testing and document checking

Resistance to changing the status quo

Nor was this only an issue of cost and supply chain performance. The entire industry, through focusing on the regulator, did not connect sufficiently with their end customer in the way in which other sectors do routinely. This meant that there was a kind of take it or leave it approach to the customer. Some may challenge this assertion, but a justification is given in Chapter 2.

1.5.8 Specific Difficulties in Pharmaceuticals

There are, of course, difficulties that other sectors do not face, such as predicting the patient population applicable to a particular compound. For example, Viagra was originally trialed for angina, until reports of unwanted side effects began to appear—and the target market changed overnight! However, that should not be regarded as an excuse for ignoring potential patient needs in the drug development process. The exception proves the rule but does not make it; and the rule is that patient consumption of a medicine and the associated payment by the responsible party is the point at which value is realized. Vitally important though the approval and regulatory compliance aspects are, it is the supply chain that actually converts latent value into products in the hands of paying customers. We explore this in more detail in Chapter 2, where we look at value from the patient’s viewpoint. For now, we should recognize that patients, payers, prescribers, regulators, health care practitioners, and other key stakeholders are demanding more of pharmaceutical supply chains. The bar needs to be raised for SCM in this vitally important sector—so next some background on SCM.

1.6 SUPPLY CHAIN MANAGEMENT IN CONTEXT

1.6.1 A Foundation for Moving Forward

Attention now turns to the second world, the world of SCM. To create a foundation for SCM it is important, first, to build understanding of the nature and characteristics of a supply chain, especially in relation to the generation of value (note that although we focus on the supply chain for products, much is equally applicable to the provision of services). It is all too easy to be taken up by the tools, techniques, and processes of SCM and actually lose sight of the main objective, which is to transfer value effectively into the hands of paying customers. This aspect needs to be addressed, as with many aspects of SCM, at the earliest possible stage.

In the same way that humans have evolved over the years but remain an interconnected network of bones, nerves, muscle, ligament, veins, arteries, and so on, supply chains are similar constructions, albeit millions of times less sophisticated. The issue is that supply chains have become increasingly networked and complex as business and technology have moved forward past the Industrial Revolution.

A Helpful Metaphor

When civilizations were making crude tools to kill, cook, and eat food, supply chains only extended to the fairly immediate surroundings or were within easy walking distance. These were still supply chains, however, requiring the finding and forming of raw materials into finished products. The principles of SCM would have been exactly the same as today. The hunter must know where the best sources of materials are, secure the necessary supply, transport it to the site of manufacture, form tools as required, store the materials ready for use, and maintain them in good order. The only difference is that all this would have been carried out by a single person in a confined area. It was indeed simple compared with today’s challenges, but still a series of stages that needed to be undertaken to produce the end result of a valuable weapon or tool. If a source of supply, such as a particular kind of branch from a tree, was not available, production would stop. The interconnectedness was there then and still exists. Failing to recognize these relationships would be a recipe for starvation.

The message being conveyed here is that to be effective, supply chains do not need to be made up of multiple stages. In fact, imagine if our hunter decided to source his materials in the next village, or even in a different country; or he had his arrowhead forgings being molded in bulk in the next field, then being beaten into shape by a neighboring hunter who sold his services on the open market, then finally, received the beaten heads only to find that they didn’t fit onto the spear shafts, which had been sourced offshore. Wouldn’t you say that he had the best chance of producing a defect-free article if, to the extent possible, he kept it close around him? Rather than debate that now, time to move on. Food for thought, though?

1.6.2 The Impact of Complexity in Modern Supply Chains

Complexity has taken over by virtue of world markets consisting of customers who are demanding a multitude of product variants made from materials sourced in global networks. As far as the supply chain is concerned, though, the basic concept of interconnectedness still exists, as the metaphor aims to illustrate. Management of it is, however, considerably more involved. Perversely, it is only when this complexity is recognized that progress can be made in SCM. With this realization, quick fixes and flavors of the month are discounted immediately. Identification of root-cause issues and sustainable solutions becomes the only meaningful approach. A physician would not use a Band-Aid to treat an open wound requiring stitches. Similarly, corrective actions in supply chains require solutions commensurate with the scale of the injury. If there is nothing else to take from this book other than a clear understanding of the complexity of a supply chain and the need to follow a systemic path for solutions to problems, that will be a major achievement.

1.6.3 The Scope of SCM

By discussing the supply chain in terms of the above, hopefully it becomes clear that the supply chain has a broad scope. Each and every player—manufacturer, supplier, distributor, service provider—is part of the end-to-end supply chain. This may seem obvious, but it is surprising how many times supply chain is used to refer only to the flow of goods between facilities. In consequence, SCM is often associated with the logistics of moving objects from point A to point B. This is particularly the case with pharmaceuticals.

Observations, Views, and Experiences of the Author

I vividly remember a case in point that occurred during a client workshop several years ago. The assembled senior executives were a typical composition for a biotech senior team: a CEO, chief financial officer, VP of business development and licensing, and VP of pharmaceutical development. After the morning session, chatting over lunch, the VP of pharmaceutical development declared that her partner lectured in SCM at a university and could not understand why I had been called in to discuss matters so far ahead of launch (they were planning a phase II study, a critical stage for supply chain development). All through the morning session, I had emphasised the importance of using supply chain thinking in the development phase because the supply chain is registered and locked in after that.

This view appears to be the norm rather than the exception in pharmaceuticals. Mention the supply chain to many and the instant association is with trucks loaded with boxes of medicine moving between warehouses and hospitals, clinics, and pharmacies. As we explain later, this is true but it is only the tip of a massive iceberg. For the sake of clarity, therefore, the scope of SCM in this book is stated explicitly below.

SCM covers the design, management, and improvement of end-to-end supply chains. This includes all the stages and activities involved in moving raw materials through progressive stages to become products in customers’ hands. All aspects of stewardship to achieve the above are included.

Stewardship is the operative word here, as it emphasizes that the entire organization has a role to play in the supply chain. Researchers, developers, manufacturers, and business support must all play their part. To do this, there must be some integrative presence in an organization, something that draws together the requisite strands to make the garment. These are the processes of SCM that should not be confused with the function of SCM. The function should be concerned that these processes are applied successfully and that interfacing roles have clearly defined expectations. It is for the business to decide on the supporting organizational structure to deliver those processes. This is where the SCM function can and should play a stewardship role.

Observations, Views, and Experiences of the Author

In my experience, there are often organizational tensions between personnel in certain key areas that affect the supply chain. Often, their roles are not clearly defined and agreed upon between them and they compete at the interface. These areas might be, by way of example:

Operations vs. production planning

Engineering vs. procurement

R&D vs. procurement

Marketing vs. distribution logistics

It would be good to think of these as creative tensions, but often they are not. Operations will make what they prefer rather than what customers demand; engineers will buy the most technologically interesting piece of equipment rather than the best buy to meet a purpose; R&D staff will use suppliers that cannot provide support on a commercial scale; and marketing personnel will want products in customers’ hands next day without having provided forecasts. And it works both ways. Production planning overstates capacity; procurement beats up potentially great suppliers and fails to see the importance of scientific innovation; and distribution logistics insists on strict lead times that cannot bend to suit the customer.

I have rarely found people operating with malicious intent so as to purposely inflame these interfaces. The conclusion I have drawn from being intimately involved with these tensions over many years is that organizing to manage supply chains effectively is a tricky balancing act. Like a tightrope walker, an organization can only achieve success by keeping its eyes fixed firmly on the other side, which in supply chain terms is the end customer.

At this point I would like to introduce Nick Rich, an acknowledged international expert in supply chains and the associated management processes.

GUEST CONTRIBUTOR SLOT: NICK RICH

The Power of Integrated Supply Chains, by Design

If you look around you, you will probably find that the world’s most successful businesses are part of integrated supply chains. These supply chains, value networks—call them what you will—are the result of design. The best product in the world can easily be eroded when it is matched by a poorly designed supply chain.

While product designers tend to determine what needs to be purchased, it is the supply chain specialist or multidisciplinary team that determines from whom, in what form, and what innovations suppliers and distributors can bring to new generations of products. A well-designed supply chain is therefore a source of innovation, organizational learning, and a continuous blend of improvement. Indeed, beyond the pharmaceutical and health care businesses lie organizations that have learned very well the benefits of a strategically aligned and designed supply chain—Toyota, Dell, Amazon, Tesco, and Wal-Mart being just a few. Equally, many businesses have suffered at the hands of a poorly designed chain that has damaged branding and eroded competitive advantage (just look at the use of exploited labor in the third world and its decimation of clothing and footwear businesses). It has been argued that if they want to maximize the returns on their relationship, no supply chain specialist can ever know enough about a supplier and no supplier can ever know enough about a customer’s business.

With such a direct impact on the profitability, quality, delivery, flexibility, and corporate citizenship (to name just a few contributions to an organization’s performance), it is important that supply chain designers understand the full range of methods and approaches to supply chain design, development, and coordination that are at their disposal and work out for themselves the optimal design. In my personal experience it is rare to find any one model that fits exactly or any individual tool that transforms a supply system. In addition, organizations have long memories, and rarely will supply chains be created from scratch. As such, the design process requires a mastery of adaptation and improvement processes so that any design matches the consumer market served by the product. Regulation also limits an industry in terms of compliance to procedures and governance, and this makes direct emulation of other sectors difficult. The paramount importance of safety in the pharmaceutical and health care sectors creates a three-dimensional puzzle for supply chain designers—a Rubik’s cube if you like—where product needs, the right type of supplier, and the correct level of governance must be aligned with the needs of the market and time compression in serving consumers.

The modern world of the supply chain specialist (and the many other organizational departments that are involved with the design process) is a long way from the traditional images of the company buyer, and with the pace of markets quickening, halving of product life cycles, and deregulation of markets, the role of the supply chain designer has never been more pivotal to the success of any business. If this makes the supply chain designers sound like strategic marketers—they are. They deal with a reverse marketing process and the integration of upstream supply chain operations to deliver what markets need profitably. The differentiator is not luck—in the modern competitive environment it is a new form of design that determines the effectiveness and efficiency of delivering global customer value.

It is likely that a specific optimization formula for any supply chain will require a mix of traditional scientific methods, a team-based approach with high levels of cross-functional management, high quality (total quality management/six sigma) and leaner, waste-free ways of working, whether it is to fulfill orders or to get a product to market more quickly. The strategy, structure, and relationships across the supply chain developed to deliver the highest levels of service are—I think you will agree—definitely the result of design.

This is a perfect scene setter for the SCM messages in this book. To draw particularly on Nick’s final sentence, readers with a pharmaceutical background should contemplate the extent to which supply chains they are familiar with have been designed proactively. In my experience, those defining the supply chain through submission of a regulatory filing have scant experience of, and pay little attention to, the functioning of the final supply chain. It is not difficult or overly onerous; however, it does need people to do it at this stage. Anything later is too late.

1.7 THE HISTORY OF SUPPLY AND VALUE GENERATION

Tracking a detailed history of industrial supply and value generation is a daunting task and will not add value to the goals in this book. There is merit, however, in taking a brief, high-level view.

1.7.1 Division of Labor

At the dawn of the Industrial Revolution, Adam Smith, a well-known economist, wrote a book called The Wealth of Nations³ in which he discussed his concept of the division of labor. Smith made a case for dividing work up into smaller packets so as to achieve the benefit of increased efficiency from specialization (as opposed to the example of the hunter in Section 1.6.1, who completed the entire task himself). It is a famous text and needs to be read to fully understand the reasoning. For the sake of this book, suffice it to say that this was the seed for increasingly complex supply chains to grow as parties to manufacture became disengaged from each other. This sparked a fundamental requirement to join the divided out activities in a coordinated and synchronized manner. This may have been the conception of today’s complex supply chains.

1.7.2 Scientific Management

This idea of breaking tasks down to increase efficiency was developed further by F. W. Taylor in the early twentieth century. Taylor, who became known as the father