Case Study Report

Page 1
Case Studies
Bio-Pharm 2020 Report

Copyright NUBS IIM, Udaipur IIM, Calcutta 2

TABLE OF CONTENTS
Part 1: Outsourcing .......................................................................................................................................................... 3
R&D outsourcing in big pharmaceutical companies ..................................................................................... 3
Outsourcing to Chindia ........................................................................................................................................... 20
Part 2 Supply chain design ........................................................................................................................................ 30
Supply chain design for a skin regeneration product ................................................................................ 30
Pharmaceutical distribution in China............................................................................................................... 42
The Clinical Supply Chain and its strategic and operational significance in Pharmaceutical R &
D ....................................................................................................................................................................................... 49
Strategic supplier selection .................................................................................................................................. 62
Transfer of Products to low cost locations and the implications for quality, safety and supply
chain risk management .......................................................................................................................................... 65
Part 3 Supply chain improvement .......................................................................................................................... 85
The SERVQUAL Gaps Model used to assess and improve supplier performance: Evidence from
the pharmaceutical industry ................................................................................................................................ 85
Negotiation and supplier development ........................................................................................................... 99
Streaming the clinical supply chain ................................................................................................................ 102
Trends in Supplier Development: A case study in China ....................................................................... 111
Coping with Patent Expiry and Loss of Exclusivity: Contemporary strategies for life cycle
management ............................................................................................................................................................. 124


PART 1: OUTSOURCING
R&D OUTSOURCING IN BIG PHARMACEUTICAL COMPANIES
Teaching Abstract
This case has been developed for students taking the Operations and Supply Management
module at both the undergraduate and post- graduate levels. The case is designed to achieve the
following objectives:
9 To provide information about the uniqueness of R & D in the pharmaceutical industry
9 To introduce the characteristics of the Asian (China and India) outsourcing market and the
management of knowledge suppliers
9 To illustrate the transition from a vertical integrated R&D model to a network-based model
Structure
9 Introduction
9 The challenges faced by pharmaceutical industry in terms of R&D
9 R&D outsourcing in pharmaceutical industry
9 Historical background
9 Introduction of R&D in pharmaceutical industry
9 The vertical integrated R&D model
9 Description of vertical integrated R&D model
9 Outsourcing: A new network-based model
9 The outsourcing practices in pharmaceutical industry
9 The development of contract research organizations in Asia
9 The competitive advantage of Asian contract research organizations
9 The road ahead
9 Introduction of the big pharmaceutical company
9 Description of the challenges faced by the company
Key Issues
9 The nature of vertical integrated and network R&D models in pharmaceutical industry
9 Analyzing the challenges and opportunities faced by pharmaceutical companies
9 Discussing the pros and cons of R&D outsourcing

R&D outsourcing in big pharmaceutical companies

[Pharmas traditional strategy] is a business model where you are guaranteed to lose your
entire book of business every 10 to 12 years.
J.P. Garnier,
Chief executive of GlaxoSmithKline
1

We live in an age of outsourcing.
Grossman and Helpman
2

Pharmaceutical industries across the globe are facing many challenges due to the rapidly
evolving modern healthcare landscapes which involve pricing pressures and tighter
regulatory requirements. This, coupled with the relative decline of the blockbuster drug, the
increase in the production of generic medicines (Figure 1), and the rising application of
biotechnology, are challenging the traditional vertical integrated R&D (research and
development) model
3
. In particular, the inescapable truth is that it now spends far more on
R&D (Figure 2) and produces far fewer new molecules than it did 10 years ago (Figure 3).

Further challenges include that governments are increasing their pressure on the
pharmaceutical industry over rising healthcare costs for ageing populations in the developed
markets and the regulators are also becoming more cautious about approving truly innovative
medicines. Counterfeit medicines are also creating a major problem for pharmaceutical
profits and patient health alike as globalisation and technological advances enable easy cross-
border trafficking.

R&D productivity has now plummeted (Figure 4) and globalisation has changed the
environment dramatically. Demand for medicine rises in the developing world (Figure 5).
Differences in ethnic origin, diet and environmental factors have produced marked variations

1
PricewaterhouseCoopers Pharma 2020: The vision
2
Grossman, Gene M. and Elhanan Helpman. Outsourcing in a Global Economy. Review
of Economic Studies 72 (January 2005): 13559.
3
PricewaterhouseCoopers Pharma 2020: Challenging business models
in the nature and incidence of the disease subtypes from which these populations suffer.
Today there is rapid growth in the research environment in emerging economies such as
China and India, resulting in closures of R&D sites in Europe and the openings of new sites
in the Asia (Figure 6). Hence, a growing share of R&D migrates to Asian contract research
organizations (CROs) refers to a service organization that provides support to the
pharmaceutical industry and offers a wide range of outsourced pharmaceutical research
services to aid in the R&D process
4
. The Asian CROs have a large pool of well-qualified
professionals, state-of-art and well-equipped support system, and easy access to a genetically
diverse population. This makes them cost effective as R&D locations
5
. The pharmaceutical
industry is in a state of transition globally which means that traditional business and R&D
models need a re-think.
Historical background

During the last 100 years, drug R&D has evolved from a trial and error method to a much
more rational approach based on a large body of knowledge of disease and pharmaceuticals.
Benefiting from new scientific discoveries and a lax regulatory environment, the 1960s
witnessed the rapid expansion of the modern pharmaceutical industry
6
. Advances in both life
science research and chemistry greatly improved the drug R&D process making it less
random. The 1960s also saw the development of the modern process for getting a drug to
market. At that time, the present-day process of elaborate clinical trials was established for
determining the efficacy of candidate drugs
7
.
Advances in molecular biology and biotechnology in the 1970s and 1980s have also
contributed to drug R&D
8
. Biotechnology was first applied to drug development by bringing
about dramatic increases in the production of certain drugs whose efficacy was already
established and then was also used to enhance the search for new drugs. As molecular
biology progressed, these two paths merged so that medical biotechnology is now primarily
focused on the search for new drugs. The new DNA chemistries and new technologies for
analysis and computation also changed the structure of this industry. By the mid-1980s, small
biotechnology firms were struggling for survival. This led to the formation of mutually
beneficial partnerships with large pharmaceutical companies. As a result, pharmaceutical
manufacturing became concentrated.
Since the early 1990s, drug discovery has made use of many disciplines, including
chemistry, pharmacology, microbiology, and biochemistry. Sources for candidate drugs
include natural substances as well as synthetic molecules created by chemical or
biotechnology processes. This has changed the research landscape. A new business

4
Maiti, R., and Raghavendra, M., 2007, Clinical trails in India, Pharmacological
Research, 56:1-10
5
Drabu.S., Gupta, A., and Bhadauria, A. 2010. Emerging trends in contract research in
India, Contemporary Clinical Trails 31:419-422
6
The History and Analysis of the Pharmaceutical Industry,
http://www.verbigena.com/case_studies/history_analysis.pdf
7
National Research Council, U.S. Industry in 2000, 375.
8
National Research Council, U.S. Industry in 2000, 378
atmosphere became institutionalized in the 1990s, characterized by mergers and acquisitions,
and also by a dramatic increase in the use of contract research organizations for clinical
development and even for basic R&D. Numerous small, research-oriented companies have
arisen to specialize in new-drug discovery. Meanwhile, a wave of mergers of large,
traditional pharmaceutical companies transformed the structure of the drug industry
9
. By
2004, eight of the top 10 firms were the product of horizontal mergers between two or more
large drug companies, all of which have occurred since 1989
10
. The pharmaceutical industry
confronted a new business climate and new regulations, born in part from dealing with world
market forces and protests by activists in developing countries.

The vertical integrated R&D model

Most big pharmaceutical companies have traditionally done everything from R&D through
production to commercialisation themselves and placing big bets on a few molecules,
promoting them heavily and turning them into blockbusters
11
. In such a vertically integrated
model, R&D is conducted in a centralized hub, where knowledge flows from the centre to
the periphery
12
. The most strategic and core innovation activities are concentrated in the
central R&D unit in the home country of the multinational. Particularly, the majority of drug
discovery and development processes are done in-house. This is a long, expensive, and risky
process (Figure 7)
13
. A successful drug R&D process takes an average of 10 to 15 years from
the earliest stages of discovery to the time it is made available for use to patients. Out of 5000
compounds that emerge from the discovery phase, only 5 compounds move into clinical
testing, and only 1 receives the necessary regulatory approval by the FDA (Food and Drug
Administration) and is introduced into the market (Figure 8). The average cost of developing
a new drug for the pharmaceutical companies can range from $800 million to more than $1
billion (Figure 9 and Figure 10).
In the vertical integrated model, there are only centralized R&D units, big pharmaceutical
companies rely mainly on one location, i.e. the home country, as the prime and almost only
source of their competitive advantage. Internal research laboratories are engaged in the
discovery, development and clinical evaluation of its pharmaceutical products in all
therapeutic areas. In this organizational setting, the flow of knowledge is mainly in one

9
Patricia M. Danzon, Andrew Epstein, and Sean Nicholson, Mergers and Acquisitions in
the Pharmaceutical and Biotechnology Industries, Working Paper No. 10536 (Cambridge,
Mass.: National Bureau of Economic Research, June 2004), p. 2.
10
A CBO study: Research and Development in the Pharmaceutical Industry
http://www.cbo.gov/ftpdocs/76xx/doc7615/10-02-DrugR-D.pdf
11
PricewaterhouseCoopers Pharma 2020: Virtual R&D
12
Bartlett, C.A. 1986. Building and managing the transnational. The new organizational
Challenge. In M.E. Porter (ed.), Competition in global industries. Harvard Business
School Press, Boston, MA.
13
Colvin, M., & Maravelias, C. T. 2010, Modelling methods and a branch and cut
lgorithm for pharmaceutical clinical trial planning using stochatic programming.
European Journal of Operational Research, 205-215.
direction: from the headquarters, where it was created, to the subsidiaries, where it is further
developed to adapt products and processes to the local market
14
. In the vertical integrated
R&D structure there is no need for stimulating network building among researchers and the
exchanging of managerial solutions as each centre works in isolation with very little
interaction with other R&D units. The big pharmaceutical companies improve R&D
capabilities through purchasing the R&D pipelines of other organizations in order to drive
revenue, while hopefully cutting their own costs (merger and acquisition), or buying the
rights to use compounds that others have discovered rather than relying solely on drugs
developed in-house (in-licensing)
15
.
Outsourcing: A new network-based model

The concept of strategic outsourcing has facilitated pharmaceutical firms to break away from
the existing market setup and develop a new business model. Though USA remains the
primary manufacturing centre for medicines in the world (Figure 11), many industry leaders
are trying to establish a foothold in Asia. Wyeth has, for example, opened a joint early
development centre with Peking Union Medical College Hospital in Beijing; Roche has set
up a research base at Zhangjiang Hi-Tech Park in Shanghai. Meanwhile, Novartis is building
an $83m R&D centre in Suzhou, near Shanghai; and GlaxoSmithKline had set up research
centres in Singapore, a global drug development support centre in Mumbai with Indian
software firm Tata Consultancy Services, and is contemplating a move to China. Similarly,
Novartis has also just embarked on a new clinical research venture in Indonesia and
Singapore
16
.

The portfolio of CROs activities bought by pharmaceutical companies includes
conducting clinical trials (all phases), clinical management, clinical data management and
regulatory affairs advice, amongst others
17
. Recently a lot of CROs are diversifying their
portfolios by getting into core and ancillary contract services like drug discovery (they own
the resulting intellectual property) and product marketing and sales. The growth rate of the
CRO industry is expected to decline from a compound average growth rate (CAGR) of 14%
(2005-2008) to 8.40% during 2009-2015, as an effect of the slowdown in the pharmaceutical
and biotech R&D Market (Figure 12). The pre-clinical market is expected to grow at a CAGR
of 8% and be worth USD 5 billion by 2015 (Figure 13). The demand for CRO services is
expected to improve in Asia as major pharmaceutical players outsource their R&D operations
to these low cost countries (Figure 14). Asia is expected to play a major role in the supply of

14
Criscuolo, P. Transfer of knowledge inside the integrated within firm R&D network:
The case of European pharmaceutical companies
www.sussex.ac.uk/Units/spru/events/KP_Conf_03/.../Criscuolo.pdf
15
Harvard Management Update, 2008, A better way to R&D?
http://blogs.hbr.org/hmu/2008/02/a-better-way-to-rd.html
16
PricewaterhouseCoopers Pharma 2020: The vision
17
Sahoo A, 2006, Pharmaceutical Outsourcing Strategies Market expansion,
offshoring and strategic management in the CRO and CMO marketplace,
Business Insights Healthcare.
pre-clinical research such as animal testing, toxicology, central lab, biomarker testing, cardiac
safety studies, clinical imaging, clinical trial manufacturing, trial supply management,
warehouse/distribution facilities and sample management.

Cost competitiveness is one of the major strengths of the Indian and Chinese
pharmaceutical industry. In addition, they have developed strong reverse-engineering skills as
well as a strong manufacturing base. Logistically, recruitment is faster and easier since the
availability of low cost medical staff, and a large, diverse, and drug naive patient population.
Good health infrastructure and credible, established clinical research organizations are also
the reasons why big pharmaceutical companies outsource to China and India. At present, both
countries now recognize product patents in conformity with the TRIPs (Agreement on Trade
Related Aspects of Intellectual Property Rights), however both continue to present issues of
concern to big pharmaceutical companies relating to protection of intellectual property (IP)
and market access
18
.
India has become an attractive destination for outsourcing because all phases of the
pharmaceutical business discovery, development, manufacturing, and marketing are
increasingly linked with IT services. As in India, historically Chinas local manufacturing
sector specialized in the production of off-patent drugs. Moreover, Indian pharmaceutical
companies already have significant presence in clinical development, which accounts for
about 40 percent of the R&D budget, and as noted earlier, are increasingly entering into drug
discovery, which accounts for about 30 percent of the budget
19
.
Among Asian countries, China is transforming into another attractive location for clinical
trials with its large population and improving economic conditions. With sales up 28% to
$9.5 billion, China has become the seventh-largest healthcare market in the world
20
. The
Chinese government has improved the environment and infrastructure for clinical trials by
implementing a series of important legislative measures. However, people in China are still
unaware of the many issues concerning IP rights and there continues to be persistence in
counterfeit drugs of Western pharmaceutical companies being traded in China. At present the
challenges China is facing are slow regulatory process, lack of qualified central laboratory
and difficulties
21
.

The road ahead
Even the largest pharmaceutical companies will have to collaborate with others and employ
contractors to supplement its own efforts. No pharmaceutical company will be able to profit
alone. It will, rather, have to profit together, by joining forces with a wide range of

18
Cekola, J., 2007, Outsourcing drug investigations to India: A comment on U.S.,
Indian, and international regulation of Clinical trails in cross-border pharmaceutical
research, Northwestern Journal of International Law & Business, 28(1):125-145
19
Mati, R., and Raghavendra, M., 2007, Clinical Trails in India, Pharmacological
Research, 56:1-10
20
Ldid
21
Ning X. Clinical trial in China: opportunities and challenges. www.sabpa.org
organisations
22
. If the company wants access to the basic research it needs, it will either have
to establish a much stronger footprint in Asia or forge close links with the most reputable
centres of scientific excellence in the area
23
.

For instance, a big pharmaceutical company, continuing active in more than 100 countries
and is increasing its presence in emerging economies such as India and China. The firm
employs more than 65,000 individuals, just less than 3000 of whom are located in China. In
2006, the companys sales totalled USD 26.5 billion, approximately USD 200 million dollars
of which were made in China. The firm is headquartered in Shanghai and has 25 branches in
major cities. In 2007, it established the Innovation Centre China (ICC), to focus on
translational science, through an investment of USD 100 million. Modelled on an existing
R&D centre in Boston, Massachusetts, this is a discovery centre with cutting-edge technology.
ICC actives throughout the pharmaceutical value chain but focuses on original proprietary
research and drug manufacture. The firm has established large R&D centres and
manufacturing facilities, including a USD 170 million manufacturing site in Wuxi and the
ICC, in Shanghai.

The China branch focuses on discovering drugs for diseases prevalent in China rather than
targeting global or western consumers. The head of ICC stated that China branch is
differentiated from its competitors through its guiding philosophy to be in China, for China.
A large proportion of its R&D spending is in six therapy areas: cancer, cardiovascular,
gastrointestinal, infection, neuroscience, respiratory and inflammation. The ICC is currently
focusing on cancer-related research. The creation of the ICC was a critical element in the
companys plan to expand its presence in China. One of the key reasons for establishing the
ICC was the discovery of a differential response to drugs according to ethnicity. Whereas
R&D in the west primarily targets lung, breast, prostate, and colorectal cancer, in China, liver
and gastric/oesophageal cancers are much more common. In dealing with diseases in which it
has limited in-house expertise, the company has partnered with leading medical centres,
research labs, and universities. It has collaborative programs and strategic partnerships with
research institutions and hospitals in Beijing, Shanghai, and Guangzhou. About a third of the
ICCs researchers (PhDs and postdoctoral researchers) have a western education. The China
educated researchers often lack practical training in drug discovery. Though change in the
regulatory environment in China could be faster than it is, it is moving in the right direction
to attract the interest of major pharmaceutical companies.

22
PricewaterhouseCoopers Pharma 2020: Challenging business models
23
EFPIA The Pharmaceutical Industry in Figures (2010)
Questions:
1. Analyze the challenges and opportunities faced by pharmaceutical companies in global
market and what implications are likely to have the way future firms should operate.
2. What approaches do you suggest to reduce cost and improve time-to-market?
3. Compare the vertical integrated and the network-based R&D models and what implications
do they have from operations management point of view?
4. Analyze current trends of global CRO arrangements and identify pros and cons of
outsourcing R&D to the China and/or India CROs
5. Do you think Dr. Zhang need to continue R&D outsourcing? If YES, advise him on how
best to select CROs and manage subsequent outsourcing relationships

Figure 1. The impact of generic erosion on Big Pharmas
revenues

Source: Bernstein Research, Global Pharmaceuticals: Extending Models To 2015 A Long Term View Of
The Generic Cliff (March 20, 2008)
Note: These figures show each companys base revenues from products that are already on the market.
They exclude any future pipeline contributions

Figure 2. Pharma R&D expenditure in Europe, USA and Japan (Million of national currency
units*)

Source: EFPIA member associations, PhRMA, JPMA
Note: Europe: million; USA: $ million; Japan: million x 100
(e): estimate
Figure 3. New chemical or biological entities (1990-
2009)
Source: SCRIP EFPIA calculations (according to nationality of mother company)
Figure 4. The decline in R&D productivity

Source: FDA CDER, PhRMA and PricewaterhouseCoopers analysis
Note: Data on R&D spending for non-PhRMA companies are not included here.
Figure 5. Global pharma market by region average growth rate for the period of 2004-2009

Source: IMS Health Market Prognosis, March 2010
Note: IMS audited and unaudited markets, constant average growth rates (constant US $)
Figure 6. Changes in research sites (2001-
2006)

Source: IMI (EFPIA Research Directors Group & IFPMA)
Note: Data collected from 22 global companies
Figure 7. Drug discovery and development
process

Source: Pedroso, M. C., & Nakano, D. (2009) Knowledge and information flows in supply chains: A study
on pharmaceutical companies. International Journal of Production Economics, Vol. 122, pp 376384.
Figure 8. Lead time and success rate in drug discovery and development process

Sources: Drug Discovery and Development: Understanding the R&D Process, www.innovation.org; CBO,
Research and Development in the Pharmaceutical Industry, 2006.
Figure 9. Average cost of developing a new drug
Sources: J. DiMasi and H. Grabowski, "The Cost of Biopharmaceutical R&D: Is Biotech Different?,"
Managerial and Decision Economics, 2007; J. DiMasi et al., The Price of Innovation: New Estimates of Drug
Development Costs, Journal of Health Economics, 2003.
$100M
$300M
$800M
$1.3B
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
1979 1991 2000 2005
Figure 10. Allocation of R&D investment by stages

Source: PhRMA, Annual Membership Survey 2010 (percentages calculated from 2008 data)

Figure 11. Breakdown of the world pharmaceutical production (At ex-factory prices),
2007
Source: EFPIA member associations, PhRMA, JPMA, OECD, IMS Health Estimate (EFPIA calculations)
Figure 12. Global CRO market size

Source: Company internal report
Figure 13. Pre clinical market
size


Figure 14. CRO market- Regional
Segmentation

OUTSOURCING TO CHINDIA
Teaching Abstract

9 To introduce the business environments of India and China related to outsourcing
9 To compare and contrast the two prominent outsourcing destinations (India and China)
9 To take a closer look at the strategic importance of operations and supply management in
this context.
Structure
9 Introduction
9 The importance of China and India in global supply chain
9 The economic development in China and India
9 China
9 Historical development
9 Doing business in China
9 Outsourcing to China: Pros and Cons
9 India
9 Historical development
9 Doing business in India
9 Outsourcing to India: Pros and Cons
9 Chindia
9 A comparison of China and India
9 Collaborations between China and India
Key Issues
9 To conduct SWOT analysis to identify the advantages/disadvantages of outsourcing to
China and/or India
9 Analyzing the possible problems encountered when outsourcing to China and/or India
9 Discussing the issues of supply chain design when outsourcing to China and/or India

Outsourcing to Chindia

My advice to you is: Girls, finish your homework people in China and India are starving
for your jobs
Friedman
24
, 2005: 237
Introduction
In recent decades, a striking feature of the world economy has been increasing globalization.
Driven by the cost saving opportunities and the shortage of qualified labour in the developed
countries, international outsourcing for products and services has grown rapidly and it has
become a common practice for companies in many sectors. Moreover, world-class scientists
and research facilities in China and India have attracted the attention of large multinational
firms from the US and Western Europe. India has become the worlds most attractive
outsourcing location followed closely by China
25
, Chindia
26
(i.e. China and India) has been
invented to describe their prominent roles as outsourcing destinations. Because of the
increasing centrality of Chindia in the global supply chain, understanding the characteristics
of both countries helps business and academic communities to identify and plan for viable
management strategies.
The two countries have built different models and followed different paths to their
current global prominence. Specifically, China is the worlds factory and focuses on
manufacturing industries, while India is famous for service outsourcing. This is because they
have different financial structures, people skills and availability, and business environment
27
.
For example, although both countries have attracted foreign direct investment (FDI) inflows
after the 1990s, China outperforms India more than ten-fold and five-fold in volume and
share of GDP, respectively
28
. The majority of FDI in China did not come from western
countries as India, but was received from non-resident Chinese, especially from Hong Kong
and Taiwan. Moreover, China has long been criticized by foreign investors because its local
governments and courts do not genuinely enforce laws on property rights, especially with
regard to intellectual property protection
29
. Although India's courts are inefficient, they at

24
Friedman, T.L., 2005. The World is Flat: A Brief History of the Twenty-first Century.
Farrar, Straus and Giroux, New York
25
Koveos, P.E., Tang, L., and Zhang, Y. 2007. China and India: A tale of two
entrepreneurial giants, Journal of Developmental Entrepreneurship, 12(4):377-381
26
Sheth, J.H. 2008. Chindia rising: How China and India will benefit your business, Non
Basic Stock Line
27
Alon, I., Herbert, T.T. and Munoz, J.M., 2007, Outsourcing to China: Opportunities,
treats, and strategic fit, Zagreb International Review of Economic & Business, 10(1):33-
66
28
Lo, C., and Liu, B.J. 2009, Why India is mainly engaged in offshore service activities,
while China is disproportionately engaged in manufacturing? China Economic Review 20:
236-245.
29
Huang, Y., & Khanna, T. 2003. Can India overtake China? Foreign Policy, 137, 7481
least comprise a functioning independent judiciary. Property rights are not fully secure, but
the protection of private ownership is certainly far stronger than in China. Furthermore,
China offers cost advantages and workforce availability, but lacks Indias English language
fluency, depth and breadth of management, technical skills and historical ties with Western
companies
30
. China has established technology parks similar to those in India
31
and
substantially exceeded India in investment on research and development (R&D) personnel
and R&D spending in the 2000s. This indicates that China is more capable than India of
narrowing the technology gap that exists between them and the advanced nations and skill
levels have improved steadily
32
.

China
Historical development
As the largest emerging economy in the world, China has been characterized by rapid
changes. Generally speaking, there have been three stages of economic development in China
after World War II: the pre-reform years, the years of rapid development following Deng
Xiaopings economic reform, and the current period of Chinas emergence as a global player
following its accession into the World Trade Organization (WTO)
33
.
In the state planned economy (pre-1978), factories were under the strict control of the
government and manufacturers only needed to follow the state plan. The typical plant
manager was selected for his political savvy, rather than his operations acumen and abilities.
Distribution channels were controlled centrally. The human resource management is
characterized by iron rice bowl employment, which guaranteed each worker his/her job
until retirement. In the economic reform and rapid development (1978-2001) stage, DENG
Xiaoping spearheaded a number of sweeping reforms, including reducing reliance on central
planning, moving factories closer to their markets, stimulating competition between
organizations, developing managers who were autonomous and accountable, restructuring
state-owned enterprises, and establishing privately owned enterprises. The central
government established four special economic zones in Xiamen, Shantou, Shenzhen, and
Zhuhai as the laboratory for its economic reform policy experiments. The government then
opened several coastal cities and established economic development areas within these cities,
including Shanghai, Guangzhou, Tianjin, Qinhuangdao, Qingdao, Wenzhou, Fuzhou, and
Ningbo. By providing preferential treatment and policies in these areas, China was able to
attract significant FDI to establish modern manufacturing facilities. Control of manufacturing
and logistics gradually shifted from the central government to the provinces and

30
Jone, W.O., 2009, Outsourcing in China: Opportunities, challenges and lessons
learned, Strategic Outsourcing: An International Journal, 2(2): 187-203
31
Chanda, R., 2008, India and services outsourcing in Asia, The Singapore Economic
Review, 53(3):419-447
32
Either, W. J., & Markusen, J. R. 1996. Multinational firms, technology diffusion and
trade. Journal of International Economics, 41(12), 128.
33
Zhao, X., Flynn, B.B., and Roth, A.V. 2006, Decision science research in China: A
critical review and research agenda--- Foundations and overview, Decision Sciences,
37(4):451-496
municipalities. Local governments were encouraged to focus on local economic growth and
compete with other regions. During this period, China made major progress in allowing
privately owned enterprise to grow and in reforming state-owned enterprises.
Stage three is the WTO membership and continued rapid development (2002-present). In
December 2001 China became a member of the WTO. Market access has been vastly
improved and there has been a substantial increase in Chinas exports to industrialized
markets. Since then, manufacturing has made the greatest contribution to Chinas stunning
rate of growth. Chinese manufacturers have developed competence in low-cost
manufacturing in the global market based on their inexpensive labour and land.

Doing business in China
China is a very diverse country in development, culture, and traditions. It is an over-
simplification to think of China as one monolithic market
34
. China is instead a collection of
many local and regional markets. The eastern region of China has developed much faster than
the central and western regions. The Pearl River Delta (PRD) area, which includes
Guangdong province and Hong Kong, was the first area that was developed after the open-
door policy. Two of the first four special economic zones are in the PRD area. In this region,
light industry dominates and it has the highest economic growth and export growth rates.
Since 1978, Yangtze River Delta (YRD) area which includes Shanghai, Jiangsu and Zhejiang
provinces was designed by the Chinese government as the region for high technology and
heavy manufacturing. While Hong Kong continues to serve as the gateway to southern
Chinas light industry, the YRD is emerging as the gateway to central and northern Chinas
high-technology and heavy-manufacturing industries. The Bohai Sea Economic (BSE) area
includes Beijing, Tianjin, Hebei, Liaoning and Shandong provinces. Beijing is the capital of
China and Tianjin is the largest port in Northern China with a reasonably good transport
infrastructure and a large manufacturing base. In the 11
th
Five-year plan (2006-2010), the
BSE area was designed as one of the main foci for economic development
35
.
China has been noted to be characterized by rather high power distance, implying a
broad preference for formalized and hierarchy-oriented organization, centralized power, and a
relatively high amount of formality in relationships and communications
36
. It also
concentrates on harmony, group-centeredness, and a deep concern for appropriate behaviours
and values as determined by others, which have implications for personal relationships and
social obligations. Uncertainty avoidance is mid-range for China, with rules tending to be
formal, implicit, and traditional. Communication is highly contextual, with multiple and
subtle dimensions, or with low levels of explicit content. The Chinese value a long-term

34
McGregor, J. 2005, One Billion Customers: Lessons from the Frontlines of Doing
Business in China, Free Press.
35
Zhao, X., Flynn, B.B., and Roth, A.V. 2006, Decision science research in China: A
critical review and research agenda--- Foundations and overview, Decision Sciences,
37(4):451-496
36
66
orientation, yielding priority for continuing and stable harmonious relationship within highly
structured organizations
37
. Guanxi long have been known to play an important role in
conducting business in the Chinese society
38
. It is philosophically aligned with Confucian
values pertaining to the maintenance of relationships, helping those in need, and fully
reciprocating favours. It works to maintain a network of harmony, sets the rules of
cooperation, secures knowledge and resources, and lowers the transaction costs of doing
business. Moreover, western companies should also pay attention to the popular social
obligations in China, such as backdoor practices, red envelopes, and under the table
deals
39
.

Outsourcing to China: Pros and Cons
As a fast-developing country, China has long been recognized as a popular place to outsource
to. Low-cost labour and high-technology manufacturing have made China a leading
destination for outsourcing. With its accession to the WTO, China is in a more favourable
condition to implement its economic reforms and industrial restructuring. The socio-
economic elements of particular interest to outsourcers are a young population, high literacy
rates, increasing level of economic development, low inflation, low unemployment rates, and
high economic growth
40
. Chinas strengths are in its market size, infrastructure, and
manufacturing competence, especially in telecommunication, electronics, and computer
assembly industries. Advanced technology and their applications are becoming another
advantage to be gained in China. The emerging technological centres in China are Beijing,
Guangzhou, Shenzhen and Shanghai
41
. Moreover, science and technology parks help foster
market-oriented development of technologies by providing a location to which academic,
business and governmental organizations are brought.
China's government, from central to local level, are paying more and more attention to
outsourcing and have adopted many incentives in the areas of infrastructure construction,
manpower training, certification, tax incentives, and financial subsidies
42
. In particular,
outsourcing arrangements are viewed by government as (1) a preferred mode for attracting,
demanding, and gaining access to leading-edge technologies from foreign firms; (2) an
economic platform that speeds the introduction of new technologies and investment funds to

37
Ross, D. N., 1999, Culture as a context for multinational business: A framework for
assessing the
strategy-culture fit, Multinational Business Review: 13-19.
38
Luo, Y., 1997, Guanxi: Principles, philosophies, and implications, Human Systems
Management,
16(1): 43-51.
39
Platts, K.W., and Song, N. 2010, Overseas sourcing decisions--- The total cost of
sourcing from China, Supply Chain Management: An International Journal, 15(4):320-
331
40
66
41
DiCarlo, L., 2003, Best countries for outsourcing, Forbes.com
42
Jiang, R. and Chen, Y., 2010, Chinas service outsourcing industry, The Chinese
Economy, 43(3): 37-46
its vast interior; and (3) a means to accelerate its own transition to a mixed economy
43
. In
November 2008, the Chinese government announced an unprecedented RMB 4 trillion
economic stimulus packages focused on stimulating domestic expenditure, infrastructure
development, and internal consumer consumption
44
. This issue deals with various aspects of
economic development, including sustainable development, poverty reduction, health
development, incentive policies in the service industry, rural development, rural financial
systems, education, and economic administration. The stimulus package has been widely seen
as the most important development reshaping the Chinese economic landscape and will
provide new opportunities for outsourcers in the coming years.
Made in China has taken on an entirely new meaning over the course of the last few
years, as many companies marked with such a stamp on their product have been marred by a
growing list of considerable defects that are outright dangerous for consumers
45
. Moreover,
China still has to face important obstacles, such as a limited mastery of the English language
by workers, the sharp cultural differences between this country and its potential Western
customers, and a shortage of qualified labour
46
. Besides this, intellectual property (IP)
protection remains a concern, even with the Chinese governments efforts to implement legal
reforms in accordance with the WTO Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS). The institutions in China for governing competition have not been
well established
47
.
India
Historical background
Indias outsourcing started in the 1980s and grew rapidly in the 1990s. Going back to the
time of Independence of India (1947) can help us understand why India had become a
preferred outsourcing destination
48
. In the License Raj (1947-1981) phase, social and political
activism created an atmosphere of social altruism. This era began with the passage of The
Industries Development and Regulation Act 1951. This Act required existing and proposed
industrial units to obtain licenses in order to operate. In addition, all expansions of capacity
and location changes were subject to government approval. This acted as a barrier for entry,
and had the unintended but natural consequence of weakening competition. The first five year
plan for the development of the Indian economy, which resembles central planning in the
Soviet Union, came into implementation in 1951. The role of government was increased
through the Industrial Policy Resolution in 1956, under which 17 industry sectors were

43
Lei, D., 2007, Outsourcing and Chinas rising economic power, Orbis, Winter 2007, 21-
39
44
Shen, J., 2010, Harmonious economic development during the global financial crisis,
The Chinese Economy, 43(3):3-5
45
Kumar, S., DuFresne, C., and Hahler, K., 2007, Managing supply chain risks in US-
China trade partnership, Information Knowledge Systems Management, 6:343-362
46
Gonzalez, R., Gasco, J., and Liopis, J., 2006, Information systems offshore outsourcing: A descriptive
analysis, Industrial Management & Data Systems, 106(9):1233-1248
47
Delios, A., Beamish, P.W., and Zhao, X., 2009, The evolution of Japanese investment in China: From toys to
textiles to business process outsourcing, Asia Pacific Business Review, 15(3):323-345
48
Gollakota, K. and Gupta, V., 2006, History, ownership forms and corporate governance in India, Journal of
Management History, 12(2):185-198
reserved solely for the government, with private firms barred from participation. Government
created many financial institutions, such as Unit Trust of India (UIT) and Life Insurance
Corporation of India (LIC), to provide industrial credit. In 1969, Indias banks were
nationalized
49
. The 1980s was a knowledge professionalism (1981-1991) phase. During the
1980s, Indian business felt the influence of the Japanese and East Asian business models on
one hand, and the Continental European model on the other hand. Policy makers began to
recognize the power of technology as an entry point to bring about generational changes.
Information technology (IT) was identified as a contributor to the mission of the public sector.
From 1991 onward is the liberalization stage. The reforms did away with the License
Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic
approval of FDI in many sectors
50
. Major reforms are in the area of Jurisprudence, in respect
of restructuring of Patents Act, the Indian Drugs and Cosmetics Act, and the adoption of
Product patents on the lines of TRIPs in 2005. Data protection and data exclusivity
incentives, the exemption of import duty and service tax on outsourcing have been granted on
the part of the government of India
51
. Many industries that had been reserved for the public
sector were opened up. The process of converting state owned enterprises into private
enterprises (called disinvestment in India) was started. Since then, the overall thrust of
liberalisation has remained the same, although no government has tried to take on powerful
lobbies, such as trade unions and farmers, on any contentious issues, such as reforming the
labour laws and reducing agricultural subsidies. By the turn of the 21
st
century, India had
progressed towards a free-market economy, with a substantial reduction in state control of the
economy and increased financial liberalisation
52
. This has been accompanied by increases in
life expectancy, literacy rates and food security. The fundamental changes in
telecommunication infrastructure and economic policy accelerated the growth of service
industries during this period. In particular, during the 1990s, Indias service sector grew at an
average annual rate of 9%
53
. The share of the services sector in Indias GDP has risen
consistently over the years, with an average share of 52% in the 2000s
54
.
Doing business in India
Geographically, the outsourcing industry in India is highly concentrated in a few cities. The
main locations are the National Capital Region (NCR, which includes Delhi, Gurgaon, and
Noida), Bangalore, Mumbai, Hyderabad, and Chennai
55
. The availability of human resources

49
Goswami, O. 2000, The tide rises, gradually: corporate governance in India, paper
presented at the OECD development Centre Informal Workshop on Corporate
Governance in Developing Countries and Emerging Economies
50
Reed, A. 2002, Corporate governance reforms in India, Journal of Business Ethics, 37:
249-68.
51
Darbu, S., Gupta, A., and Bhadauria, A., 2010, Emerging trends in contract research
industry in India, Contemporary Clinical Trails, 31:419-422
52
Kumar, D 2005. The Cambridge Economic History of India, Volume II : c. 1757
2003. New Delhi: Orient Longman.
53
Review, 53(3):419-447
54
World Bank, 2004. Sustaining Indias Services Revolution: Access to Foreign Markets,
Domestic Reform and International Negotiations, South Asian Region. New Delhi.
55
Greene, W., 2006, Growth in service outsourcing to India: Propellant or drain on the U.S. economy? Office of
Economics Working Paper No. 2005-12-A
and quality of physical infrastructure as well as presence of educational and research
institutions have been key determinants in the emergence of these cities as premier
outsourcing locations in the country. Increasingly, there are a number of second tier cities
such as Pune, Ahmedabad, Jaipur, Kanpur, and Patna, where companies are starting to spread
their operations mainly because of the human resource and infrastructural bottlenecks that are
emerging in first tier locations.
India produces 2 million English-speaking graduates, 15,000 law graduates, and about
9000 PhDs every year. At present, India has 840 business schools, which produced 85,000
MBAs. International comparison with regard to skilled workers shows that on average while
just over 5,000 IT graduates enter the labour market in Germany and 25,000 in the US each
year, 120,000 enter the labour force in India
56
. Between 2005 and 2010, India contributes
nearly a quarter of the increase of 314 million in global working-age population; while China
contributes 14 percent; and Europe experiences no increase in working-age population, and
Japan experiences a decline
57
. India will continue to enjoy demographic dividend until about
2025. Moreover, India has the second largest reservoir of trained manpower which is being
constantly augmented by the products of its 290 universities, 1500 research institutions and
over 10,000 centres of higher education
58
.
In terms of infrastructure development, the government launched its Software
Technology Park scheme in 1990. The scheme, operated by an autonomous organization
under the Department of Electronics, was meant to promote the development and export of
software using data communication links or by exporting professional services. The parks are
established at Bangalore, Pune, Bhubaneswar, Trivandrum, Hyderabad, Noida, Gandhinagar,
Jaipur, and Calcutta
59
. Moreover, the government also align education systems with the
requirements of the businesses through educational reforms, labour market reforms, and the
establishment of appropriate social safety nets.

Outsourcing to India: Pros and Cons
Economic liberalization was resulted in a marked shift towards offshore projects. The
outsourcing industry in India has been growing at around 40%50% per annum over the past
decade
60
. The availability of a large talent pool of skilled graduates, a strong base of blue-
chip companies, powerful venture capital investments in growth opportunity, development of
track record of proven delivery and systems/processes, significant government support to the
sector, improved international band-with situation, a number of tax incentives (e.g., export

56
Business India, 2005, From BPO to KPO: The Changing Face of Indias Outsourcing
Industry, Aug 29 Sept 11.
57
Asher, M.G., and Nandy, A., 2007, Demographic complementarities and outsourcing:
Implications for India, IIMB Management Review, June 2007:93-102
58
NASSCOM-McKinsey, 2005, The NASSCOM-McKinsey Study 2005, NASSCOM
Publications
59
Bhatnagar, S.C., and Madon, S., 1997, The Indian software industry: Moving toward
maturity, Journal of Information Technology, 12:277-288
60
Review, 53(3):419-447
services are largely tax free), along with comparative national cost advantage have
contributed significantly to the rapid growth of the outsourcing industry in India
61
. In addition,
India is all set to emerge as the global KPO (knowledge process outsourcing) hub, which
enables India to move towards high value jobs---typical users include market research
agencies, consulting firms, investment banks, legal firms, automotive companies and
corporate planning department. Indias share of the world KPO market reached $17 billion in
2010
62
. The number of KPO employees increased tenfold from an estimated current level of
25,000 to 250,000 in 2010
63
.
On the other hand, India needs to address the internal challenges of wage inflation (12-15
percent per annum), high job turnover (15-30 percent per annum), shortage of professionals
in certain segments, and physical infrastructure inadequacies
64
. The country now faces
critical labour shortages. It may face a deficit of 500,000 workers with 70 percent of the
shortage arising in call centres and other back-office businesses, where proficiency in English
is the most important prerequisite
65
. Moreover, infrastructure problems, particularly
congested streets, frequent power cuts and water shortages in software centres (e.g.
Bangalore) threaten to stall or curtail the industrys growth. The external challenges concern
the emergence of several competitors in all segments of the outsourcing and offshore chain,
the need to improve the branding and marketing of India, and the need for more skilful
commercial diplomacy to expand Indias economic opportunities
66
.
Chindia
The main competitor for India within the Asian region is China. Like India, China has a large
talent pool, with 1.6 million engineering graduates and 9.6 million young professional
graduates
67
. China also has a well-developed domestic IT industry, which is able to engage in
outsourced IT operations. Chinas IT outsourcing and BPO (business process outsourcing)
sectors are well-poised for growth but lag far behind Indias in revenue terms. A country-to-
country comparison shows that India is clearly the leader and will likely continue to dominate
the USA and European markets due to experience, scale and perceptions
68
. Chinas main
markets are Japan and Hong Kong, while the US accounts for a much smaller share of its
exports, clearly indicating Chinas limitations in getting English-language based business. On

61
Budhwar, P.S., Varma, A., and Malhotra, N., 2009, Insights into the Indian call centre
industry: Can internal marketing help tackle high employee turnover? Journal of Service
Marketing, 23(5):351-362
62
Sen, F. and Shiel, M., 2010, From business process outsourcing (BPO) to knowledge
process outsourcing (KPO): Some issues, Human Systems Management, 25:145-155
63
Raman, S.R., Budhwar, P., and Balasubramanian, G., 2007, People management
issues in India KPOs, Employee Relations, 29(6):696-710
64
65
NASSCOM-McKinsey, 2005, The NASSCOM-McKinsey Study 2005, NASSCOM
Publications
66
67
Review, 53(3):419-447
68
Jone, W.O., 2009, Outsourcing in China: Opportunities, challenges and lessons
learned, Strategic Outsourcing: An International Journal, 2(2):187-203
the other hand, Indias outsourcing started in the 1980s and grew in the 1990s with demands
of American and European. In terms of content also, China is not as well-placed as India to
cater to the growing BPO market. Although it is in a better position to do outsourcing work
that relates to its manufacturing capabilities, as is IT and telecom, and related engineering and
design services
69
.
As Indias services outsourcing industry matures and wage pressures begin to erode
Indias competitiveness, and as more Asian countries enter the outsourcing space, India will
gradually move up the value chain to service lines where cost is not the predominant
consideration, while other Asian countries move in to provide lower tier activities. This
implies that India and other Asian countries (China for example) are all participating in the
growing global services outsourcing market but may over time constitute different parts of
the value chain, in effect complementing one another regionally to offer a bundle of services
to client companies. Particularly, China and India do not really compete that extensively for
business segments or markets at present. Their competition is largely limited to the IT
outsourcing segment and to non-voice areas like engineering. The main factor which will
constrain China from challenging Indias leading position in IT and BPO services is talent.
On the other hand, cost savings, operational efficiencies, access to large market and improved
quality are the reasons for Chinas popularity. Hence, firms are already exploring
complementarities
70
. Collaborative arrangements, subcontracting, joint-venture and cross-
border investments, which include sharing human resources and training facilities, could
increase between India and China in the near future. Some forward-thinking Chinese service
providers are already considering how to work with Indian vendors and Indian firms have
also begun to establish footprints in China.

Questions:
1. Conduct a SWOT analysis of the India and China outsourcing market.
2. What kind of operations should be outsourced to China?
3. What kind of operations should be outsourced to India?
4. Supposing you are a supply chain manager in a multinational company, please outline a
plan for selecting the outsourcing destination for R&D and/or production.
5. Identify the possible problems encountered when outsourcing to China and/or India and
develop a plan to tackle them.

69
Meredith, R., 2008, The Elephant and the Dragon: The rise of India and China and
What is means for all of us, W. W. Norton & Co.
70
Lbid

PART 2 SUPPLY CHAIN DESIGN
SUPPLY CHAIN DESIGN FOR A SKIN REGENERATION PRODUCT
Teaching Abstract
9 To provide information about the new product introduction in UK pharmaceutical sector.
9 To study the downstream supply chain design for a new skin regeneration product.
this context.
Structure
9 Introduction
9 The importance of pharmaceutical industry
9 New product introduction in pharmaceutical industry
9 The challenges in pharmaceutical supply chains
9 The pharmaceutical supply chain
9 Description
9 The structure of downstream pharmaceutical supply chain
9 The distribution channels in pharmaceutical supply chain
9 UK market
9 The characteristics of UK pharmaceutical market
9 Skin regeneration product
9 Description
9 The supply chain of skin regeneration product
Key Issues

9 The characteristics of supply chains in pharmaceutical industry. Developing points of
difference or similarity with other industries.
9 Discussing the possible problems encountered during the new product introduction and
develop a plan to tackle them
9 Analyzing the impacts of the downstream supply chain structure on the upstream
supply chain design

Supply chain design for a skin regeneration product

Introduction

The pharmaceutical industry is one of the most important and fast growing sectors in the
world. It is estimated that the global pharmaceutical industry will grow to $842 billion with a
compounded annual growth rate of 6.9% over the next 5 years
71
. Pharmaceutical companies
are placed at the upstream part of the healthcare value chain
72
. The flow of drugs to the
consumer has remained more or less the same for decades but the scenario is changing. At
present, the new product introduction in the pharmaceutical industry has become a lengthy,
risky and high cost process. From the moment a product is developed and patent has been
submitted, until the product is placed on the market takes an average of 12 to 13 years and on
average out of every 10,000 substances developed in laboratories, only one or two will pass
all the stages and become available in the market
73
. Increasing technological improvements,
higher costs of Research and Development (R&D), shorter product life cycle as well as
increased competition make new product introduction a real challenge for the pharmaceutical
companies
74
. Only the companies that introduce and market new products faster than their
competitors can gain a competitive advantage.
The supply chain is becoming more and more complex as companies are growing
through mergers, acquisitions and alliances thus making it important to have a system that is
easy to maintain and integrate across multiple facilities, locations, regions and languages
75
.
Along with this, drugs are now being sent from one country to another which spans distances
thus managing them is becoming more complicated. Traditionally, the supply chains of
pharmaceutical industries are often highly integrated. Pharmaceutical industries used to carry
a huge inventory in their supply chain to ensure on-time delivery. Supply chain congestion
due to the long processing process and high cost pressure will lead to delays in production
and new product introduction, thereby affecting the market share of the products. The supply
chain management of this industry has become much more challenging owing to the
increased competitiveness in the market, changes in competitors and the fight for new global
markets/customers.

71
Flatworld Solutions (2010) A Global Pharmaceutical Industry Report.
http://www.outsource2india.com/kpo/samples/pharmaceutical-industry-report.asp
72
Pedroso, M. C., & Nakano, D. (2009) Knowledge and information flows in supply
chains: A study on pharmaceutical companies. International Journal of Production
Economics, Vol. 122, pp 376384
73
EFPIA, (2009). Pharmaceutical Industry in Figures; Key Data [Online], European
Foundation of Pharmaceutical Industries and Associations, Brussels, available from:
http://www.efpia.eu/Content/Default.asp?PageID=559&DocID=4883
74
Gupta, A., Pawar, K.S. & Smart, P. (2007). New product development in the
pharmaceutical and telecommunication industries: A comparative study. International
Journal of Production Economics, 106, p.4160.
75
International Business System (IBS). (2007). Winning Supply Chain Strategies for
Pharmaceutical and Healthcare Wholesale and Distribution. London: IBS Pharma.
Pharmaceutical supply chain

The flow of drugs right from the initialisation of the idea of the drug to execution and then
distribution of the approved drug is known as the pharmaceutical supply chain. It covers drug
research, development, manufacture and distribution (Figure 1). It starts with procuring the
raw materials from different suppliers then manufacturing them. Next in the supply chain are
the wholesalers with their distribution and dispensing facilities. The hospitals, clinics and
pharmacies are the final step of the supply chain, providing the medicines to the consumer
76
.
The activities involved in this part includes transportation and warehousing logistics of
finished goods inventory, delivery of finished goods, as well as the valueadding activities,
such as final packaging, final configuration of the product, customising it, marketing and
selling, order management, order taking and processing, and information technology
77
. Every
activity in the distribution of these products should be carried out according to the principles
of Good Manufacturing Practice (GMP), Good Distribution Practice (GDP) and Good
Storage Practice (GSP) to maintain the quality throughout the supply chain
78
. The complexity
of the pharmaceutical supply chain increases due to the fact that there are multiple large
independent organisations working in manufacturing different components or chemicals for
the drug. The key stake holders in the supply chain are hospitals, clinics, drug manufacturers,
drug distributors, retailers, research organisations, government agencies and regulatory
agencies of the country where the drug is prepared or going to be launched
79
.
The downstream supply chain consists of a manufacturer, warehouses or distribution
centres, wholesalers or retailers, and consumers. It starts with an R&D process and ends with
the drug reaching the desired customer through various means, including hospitals,
pharmacists etc (Figure 2). Pharmaceutical wholesalers play a significant role in this sector
by providing a link between the manufacturers and retail pharmacy outlets, clinics and
hospitals. The wholesalers are part of the distribution channel and the medication of a patient
is directly dependent on the availability of the medicines in the market. Distribution and
stockholding facilities are provided by the wholesalers to enable the clinics and hospitals to
meet their daily needs
80
. Normally there are two types of wholesalers depending on the range
of pharmaceutical products stored; full-line wholesalers stock a full range (serving mostly
hospitals) where as short-line wholesalers (serving clinics, pharmacists and even hospitals)

76
Shah, N. (2003). Pharmaceutical Supply Chains: Key Issues and Strategies for
Optimisation. London: Elsevier Ltd..
77
Walker, W. (2005). Supply chain architecture: a blueprint for networking the flow of
material. Florida; CRC Press.
78
World Health Organisation: Organisation Mondiale De La Sante, (2005). Good
Distribution Practice (GDP) for pharmaceutical products, Working document
QAS/04.068/Rev.2, Geneva: WHO.
Http://www.health.gov.il/download/forms/a3040_GDP.pdf
79
Singh, M. (2005). The Pharmaceutical Supply Chain: A Diagnosis of the State-of-the-
Art. Boston: Massachusetts Institute of Technology.
80
Anon. (2009, August 26). Rising to the Supply Chain Challenge. from Total Logistics:
http://www.total-logistics.eu.com/news/articles/rising-to-the-supply-chain-
challenge.html
sell only faster moving products
81
. Most manufacturers use more than one wholesaler
depending on the market they need to cover but some manufacturers bypass the wholesalers
and send the drugs straight to the hospitals.
Hospitals, clinics and pharmacies are the final step in the Pharmaceutical supply chain;
they purchase drugs from wholesalers and are responsible for the safe storage and dispensing
to consumers
82
. Independent pharmacists, chain drugstores (e.g. Superdrug), pharmacies in
supermarkets and other large establishments (e.g. Boots) are some of the different types of
pharmacies. Local pharmacies will store very few but common drugs most likely to fulfil the
immediate demand, e.g. antibiotics, pain relief, and asthma
83
. Hospitals and pharmacies serve
as an information link between the consumers and the drug manufacturers; providing
information about the drugs reaction on humans, drug-drug interaction warnings which
allow manufacturers to work on the drugs accordingly.
In the pharmaceutical industry, out of stock situations are unacceptable and companies
will spend anything necessary to stay in supply. The whole supply chain must be arranged
and planned accordingly. Manufacturers must take into consideration factors such as the type
of shipping containers to be used, the distribution carriers to be contracted, types of
refrigeration or humidity control equipment required, types of environmental conditions
expected at each location along the distribution chain, the length and time of the distribution
route. The different distribution channels within the pharmaceutical industry is characterised
by varying degrees of integration. It can be divided into four categories of corporate system
(vertical integration), where manufacturer owns all logistics activities, contractual system,
where the manufacturer outsource distribution to an exclusive distributor, administered
system, where a supply chain conglomerate, distributes products of multiple multinational
manufacturers within a foreign market, and finally outsourced system (least integrated),
where variety of distributors and wholesalers supply most retailers
84
.
UK market
The pharmaceutical sector is one of the UKs leading manufacturing sectors and is ranked
among the top three industrial sectors as measured by trade surplus, which is around 4.3
billion
85
. It spends around 14,000 billion in export and 10,000 billion in imports
86
. Supply
chain integrity is not a challenge in the UK, with its temperate climate and reasonably reliable
road network. There are not many variations in distribution channels in the UK for

81
Anon. (2002). The Wholesale Pharmaceutical Market., from Competition Commission:
http://www.competition-commission.org.uk/rep_pub/reports/1989/fulltext/253c2.pdf
82
The Health Strategies Consultancy LLC. (2005). Follow the Pill: Understanding the U.S.
Commercial Pharmaceutical Supply Chain. Menlo Park: Kaiser Family Foundation
83
Anon. (2008), Normal Supply Chain,
http://www.rxresponse.org/Learn/Pages/normsupply.aspx
84
Blaisdell, P. (2000). TwentyFirst Century Pharmaceutical Development. Englewood:
Interpharm Press.
85
The Association of the British Pharmaceutical Industry (ABPI). (2009). Facts &
Statistics from the Pharmaceutical Industry.from ABPI - The Association of the British
Pharmaceutical Industry: http://www.abpi.org.uk/statistics/section.asp?sect=1
86
Ibid
pharmaceutical manufacturers
87
.The demand for pharmaceutical products in the UK is
divided between NHS hospitals, Private hospitals, dispensing doctors, and pharmacies
(Figure 3)
88
. NHS is the major purchaser of pharmaceuticals in the UK. They also act as a
price regulator, giving it a uniquely powerful bargaining position
89
.The private healthcare
industry is still comparatively small and is focused on niche markets (particularly routine
elective surgery).
The main economic regulation in the UK is called the Pharmaceutical Price Regulation
Scheme (PPRS), which carried out by Department of Health
90
. Members of British
Association of Pharmaceutical Wholesalers (BAPW) supply 90% of the medicines, covering
all of the UK population, and together they represent over 400 manufacturers. The BAPW
estimates that pharmaceutical wholesalers distribute around 2 billion items per year, at a
value of around 15bn, but with a net margin of only 2%
91
.

Skin regeneration product
Skin regeneration and wound management in the Bio-Pharma industry has been an area with
constant research and new product development (appendix). The range of products includes
foams, sheets, sprays, powders, hydrocolloids and gels. The majority of the products that
exist in the market are collagen based products. However, using collagen products is very
expensive and could also have long term risks on patients health. Furthermore, they do not
regenerate the skin to its original shape and texture and thus leave a scar post treatment. As
an alternative to these collagen based products, a more cost effective gelatin based skin
regenerative product is being developed using cutting edge technology. The new product also
promises complete healing of the burnt surface without retaining any marks or scars on the
patient.
In the case of burn injuries and skin wounds, one observed that patients in the UK, for
the primary treatment go to NHS hospitals, as opposed to the private clinicians. This is as a
result of the high standard of NHS treatments, easy access to hospitals and more importantly
there is no cost for the patient. The NHS does not hold any stock at the hospital. Certain
amount of finished inventory will need to be kept at the distribution centre to respond to
urgent orders from the hospital. The skin regenerate products are not OTC products, and can
only be applied at the theatre room through a surgery, therefore options such as direct
distribution (for instance via web channels) or other distribution systems through major and
smaller retailers and pharmacies are not applicable to this product. It can only use either
one-tier distribution (producer to hospitals to patients) or two-tier distribution (via wholesaler

87
Slatter, S.P. (1977) Competition and marketing strategies in the pharmaceutical
industry, Croom Helm (London)
88
BAPW, (2008), About Pharmaceutical Wholesaling. The British Association of
Pharmaceutical Wholesalers.
http://www.bapw.net/about_pharmaceutical_wholesaling.php
89
Fenn, D. (2008). Market Review 2008Pharmaceutical Industry. 6th ed.
90
Ibid
91
BAPW, (2008), About Pharmaceutical Wholesaling. The British Association of
Pharmaceutical Wholesalers.
http://www.bapw.net/about_pharmaceutical_wholesaling.php
and hospitals). In the skin regenerate product supply chain, buffer stock is kept only at one
point, the ordering needs to be placed from the company directly, and the lead-time is 2-4
days for emergency cases and 2 weeks for reconstructive procedures. Once the nurse and/or
the consultant review the patient, consultants secretary would send the order to the plastic
theatre team, who would then order directly from the distribution centre in the UK. Once the
order is received, the distribution centre will dispatch the dressing and send it to the hospital
special delivery service. The dressing will be kept at the theatre room until the day of surgery,
where it would be applied to the patient once all the dead cells are scraped out.
After the initial review if the consultant decides that the epidermis layer (Cell Sheer) is
needed, a sample of the patients cells can be taken to generate a Cell sheet, where it will take
a minimum of 10 days to create 0.006 of an inch in thickness. This could be done either at the
distribution centre, or at the hospital. Additionally, since most hospitals and burn units will
not have the necessary equipment or expertise, the more feasible option is for this process to
be done at the distribution centre in UK. This epidermis layer will need to be applied about 2
weeks after the surgery. Hence the cell sheet would be generated and delivered to the hospital
on time. The characteristics of the skin regeneration supply chain are summarized in table 1.

Questions:
1. Analyze and identify the supply chain characteristics of pharmaceutical industry.
2. Map the downstream supply chain for this skin regeneration product in the UK market and
analyze the pros and cons of different alternatives
3. Identify the possible problems encountered during the new product introduction and
develop a plan to tackle them
4. What approaches do you suggest to reduce cost and time-to-market for new product
introduction?
5. Analyze the impacts of the downstream supply chain structure on the upstream supply
chain design. What implications do they have from operations management point of view?
6. Supposing the pharmaceutical company outsource the R&D/manufacturing operations to
Asia, what are the managerial implications for the downstream supply chain design?


Figure 1. The Components of the Pharmaceutical Supply Chain

Source: Anon. (2008), Normal Supply Chain, http://www.rxresponse.org/Learn/Pages/normsupply.aspx
Figure 2. Channel of Distribution for typical pharmaceutical company

Source: Slatter, S.P. (1977) Competition and marketing strategies in the pharmaceutical industry, Croom
Helm (London)

Figure 3. General outbound supply chain of pharmaceutical industry in UK

Source: BAPW, (2008), About Pharmaceutical Wholesaling. The British Association of Pharmaceutical
Wholesalers. http://www.bapw.net/about_pharmaceutical_wholesaling.php
Table 1 Supply chain characteristics of skin regeneration product
Responsiveness &
Flexibility
Respond to customer request for different packaging, labelling, levels of
customisation, adopting to the doctors needs on time
Speed &
Delivery
Since the patients will need this product within hours of incident, speed is
extremely important
Inventory Level Excessive amount of inventory kept, due to high profit margins & limited
patent life as well as need for 100% product availability
Time to Market 1015 years until launch of product
The earlier product arrives to market, the more competitionfree life
product will have.
Competitionfree life is reducing from 5 to 12 years
Time to Market reduce by 19% can save $100 million
Soon after product is launched, others will start using Gelatine in their
products and reduce prices
Operations
Systems
Hybrid of pull (downstream side) and push
NHS order from distribution centre when needed
Laboratory manufacture according to forecast and keep stock at
distribution centres
Manufacturer forecast the demand
Visibility Visibility in whole supply chain can make them more responsive to
market changes, and new requirements and cost effective
Share data with key vendors and customers
Important to comply to FDA regulation
Power NHS owns the power, as they have the monopoly in the market
Cost 4555% logistics costs & SC costs exceed the R&D costs
Costs will need to be reduced due to:
Specific budget for every department
Will be even more important since, NICE recently approved a
payforperformance contract for new treatments
Total treatment cost maters more than just the dressings unit cost
Regulation Very tight regulations due to high potential for adverse health effects
Primary regulator is US FDA
Slow and expensive process

Appendix
A brief introduction to skin regeneration products
The outermost layer of the skin is called the epidermis. The cells involved here are called
keratenocytes. If the top layer is destroyed it can be easily regenerated. The layer below is a
thicker layer called Dermis. The cells involved here are called fibroblasts. The majority of the
products that are currently available in the market are aimed at healing the damaged dermis
layer of the skin.
During the healing process the major challenge is to prevent infections from occurring. On
successfully doing this 95% of the battle is won. Dressings, including normal band aid, could
be classified under this segment. The different types of burns characteristics could be defined as
follows (www.burnsurvivor.com):
1
st
Degree burns: Involves top layer of skin and hair, redness, swelling. It may peel, generally
heals in 3-5 days. There is no scaring and may cause itching while healing.
2
nd
Degree burns: Involves skin and hair, plus deeper skin layer (dermis), sweat glands, and hair
follicles. It results in blistering, redness, area turns pale when pressure is applied, red color
returns slowly.
3
rd
Degree burns: Involves all thickness of outer skin including fatty layer. Looks dry or leathery,
may be charred. There is little or no pain (nerve endings have been damaged), greater
possibility of infection, since the blood supply to the area is damaged. This results in scarring
post healing.
Skin regenerative template/grafts/tissue engineered scaffolds. The main purpose is to allow
the cells to grow and the wound dressing prevents any infections form taking place during the
healing process. For assisting this regeneration of cell in the affected area a scaffold is used.
Generally, they are 2mm to 4mm in thickness.
The field of skin substitutes has been bombarded with an almost messianic zeal in an effort
to develop the next generation of newer and better skin replacements. These dressings are
made with varied combinations of synthetic and/or biologic substances. Although all may have
some utility and each has its champions, they appear to find more application in the larger and
therefore more lucrative wound market. Few of the popular companies in the market who make
products which are used for treating 2
nd
degree burns and wounds are mentioned in table
below. This research is focused on burn products which are scaffold based.

A comparative study was done to understand the characteristic features of these collagen
based products and how they differ from one another. The results of the study and a broad
overview are mentioned below:
Type Characteristics Drawbacks
Integra x Single layer of Glycosaminoglycan
and a covering semi-permeable
polysiloxane (silicone layer)
x Exceptional Strength and flexibility
x Room temperature storage and long
shelf life
x Provides excellent coverage over
exposed bone, tendon, cartilage and
joints. Of 166 instances of exposed
internal structures that are ordinarily
closed with flaps, Integra closed 90%
of them
x Very Expensive
x Not used globally
x Extreme care must be considered
during packaging and
transportation
Neuskin-F x Collagen dressing derived from
Piscean sources: Biocompatible as
per EN ISO 10093 standards. Non-
Avoid in patients hypersensitive to
fish products. Chances of irritation
and Infection. The remedy for this is
toxic, non-allergenic, non-
immunogenic, non-pyrogenic
x Transparent membrane enables
wound visualization. Reduces wound
pH, infection and fluid loss
x Epidermal substitute for scald burns,
superficial partial thickness burns
(IIA) and mixed burns
Storage: Dry place at temp < 25C. It
is sterilized by irradiation with 3yrs
shelf life
to either discontinue or control with
systematic antibiotics respectively
HeliColl x Type-I Collagen sheet with
transparent membrane enables wound
visualization
x Does not require excessive washing
to remove preservatives. Can be used
with just 2 to 3 min of soaking in
sterile water.
x Reduces wound pain while
accelerating tissue remodeling without
causing irritation
x Helicoll reduces the repeated
dressings, hospital stay and has been
shown to reduce the overall wound
treatment cost by over 40%
x Not advisable for patients
hypersensitive to bovine products.
x Non adherent secondary dressing is
required to maintain moist wound
environment.
x Helicoll may form a caramel
coloured gel, which can be rinsed
away with gentle irrigation.
x Can be used only for 1st and 2nd
degree burns trauma with skin loss,
chronic skin ulcers Skin donor sites


PHARMACEUTICAL DISTRIBUTION IN CHINA
Teaching Abstract

9 To introduce the pharmaceutical logistics and distribution process in China
9 To identify the service gaps in Chinese pharmaceutical distribution channels
this context.
Structure
9 Background
9 Introduction to Chinese pharmaceutical market
9 The importance of distribution in Chinese pharmaceutical industry
9 Drug distribution process
9 Description of drug distribution processes in China
9 The challenges faced by the Chinese pharmaceutical logistics companies
9 ZD Pharmaceutical Logistics Company
9 Introduction
9 Description of the workflow
9 The challenges faced by the company
Key Issues
9 To analyze the operations and workflow of a local Chinese pharmaceutical distribution
company and provide improvement suggestions
9 To conduct a SWOT analysis of the pharmaceutical logistics industry in China
9 To discuss the techniques and practices that the company can use to improve their
supply chain and distribution

Pharmaceutical distribution in China

Background
Since China joined WTO, the healthcare system has changed and the pharmaceutical
distribution system has achieved great development. It has transformed from a planned
system to a market-oriented distribution system. The medical management system is no
longer a centralized management model with unified prices and a single buying and selling
method. In the tenth five-year plan of the pharmaceutical distribution industry, the
government strengthened the regulation of the production of key drugs and promoted
cooperation between domestic and foreign manufacturers. The government decided to make
efforts to encourage pharmaceutical distributors to develop new logistics systems, and also
provided financial support to help major distributors to improve their traditional systems.
According to the data collected by the Ministry of Commerce, there were more than
13,000 pharmaceutical wholesalers and more than 800,000 retail pharmacy stores in China
92
.
In 2009, the total sales of nationwide pharmaceutical wholesalers were up to 568.4 billion
Yuan
93
, with an average annual growth of 15% from 2000 to 2009. The total sales for retail
enterprises were 148.7 billion Yuan with an average annual increase of 20%
94
. The scale of
the pharmaceutical market in urban and rural grassroots communities has significantly
expanded. Although the market size of the pharmaceutical distribution industry is increasing
every year, overall industry profit margins are falling. Some pharmaceutical distribution
companies plan to launch modern medical logistics centres and build their own distribution
and e-commerce platform, however, the majority of pharmaceutical distribution centres have
a low level of software application and lack modern management practices.
The twelfth (2011-2015) national pharmaceutical distribution industry development
plan was published in May 2011. It provided a framework of industry standards and
guidelines, including non-normative behaviour focusing on the industrys retail business,
wholesale business, and distribution companies. The government plan to build up to 3 large
national groups with projected annual sales of over 100 billion Yuan and 20 regional drugs
distribution companies with annual sales of billions Yuan
95
.

Drug distribution process
The drug distribution process includes activities linking pharmaceutical companies with
hospitals and pharmacies (figure 1). Currently the pharmaceutical logistics industry is facing
a huge challenge since the drug distribution model has changed from a simple space and time
movement to an integrated supply chain service including goods flow, information flow and

92
Ministry of commerce, http://english.mofcom.gov.cn/statistic/statistic.html
93
1 USD = 6.4 Yuan
94
National Development Plan pharmaceutical distribution industry, 2005-2010
95
Ministry of Commerce, http://www.mofcom.gov.cn/b/b.html
cash flow. In China, public policy does not allow off-site warehousing. That is, if
manufacturers want to sell their drugs to other regions, it has to use a pharmaceutical logistics
company and their commercial distribution channels. Therefore, the pharmaceutical logistics
company plays an important role to bridge the pharmaceutical manufacturers and end users.
In the pharmaceutical industry, commercial vendors, distribution companies and
pharmaceutical manufacturers have developed joint partnerships. The logistics companys
capability on channel management and market services and other resources have a direct
impact not only on the level of pharmaceutical manufacturers profitable opportunities, but
also on the end-customers satisfaction with drugs. Hence, logistics companies play a
particular and important status in the circulation of drugs.

Figure 1. Architecture of Pharmaceutical Distribution System

Drug manufacturers
Chinese pharmaceutical enterprises are either small or medium-sized. To create large
enterprises with international competitiveness, it must form large integrated business groups.
For the Chinese pharmaceutical companies, merger and acquisition has turned out to be a
trend.

Distributors
Since the pharmaceutical companies cannot directly set up drug sales channels and off-site
warehouses, most of the drugs rely on the wholesalers and distributors to reach consumers.
This emphasizes the importance of supply chain integration from the distribution point of
view. As a main important channel connecting pharmaceutical manufacturers with sales
terminals and patients, distributors take responsibilities for pharmaceutical distribution,
storage maintenance, distribution services, information management, packaging, processing
NDRC manage price
Medicine
Manufacturer
Distribution
Company
Hospital,
Pharmacy
Patients
SFDA manage drugs
entry, production,
circulation
Health state manage
drugs use and
tender
and other business functions. There are very few mature third-party medical logistics
companies, so that distributors have to play the role of integrated logistics and operations
service providers.

Retailers
Owing to the unique pharmaceutical environment in China, hospitals have dual role: one is
the consumers that account for 85 percent of the distribution market; the other is the drug
seller that sells drugs to patients to make a profit. Due to the lack of professionals in the
Chinese pharmacy industry, drug safety and reliability is not as high as in hospital. The
patient cannot buy any drugs they need in pharmacies in China, especially prescription drugs.
Hence, pharmacies cannot compete with hospitals.

Customers, patients, and clinical providers
They are at the end of pharmaceutical logistics, and create the demand for the entire logistics
operation.

Constraint organization
Because the pharmaceutical industry is directly related to life and health, there are a number
of strict standards to supervise and manage pharmaceutical companies operations in terms of
research, development, production, distribution and other links. The related government
regulatory authorities include the National Development and Reform Commission (NDRC),
the State Food and Drug Administration (SFDA), the Ministry of Health, in addition to the
Social Security Department, Environmental Protection Administration, and other authorities.

ZD Pharmaceutical Logistics Company
ZD Pharmaceutical Logistics Company (ZD) is a large-scale comprehensive pharmaceutical
commercial company with a registered capital of 50 million Yuan. Its business includes
pharmaceutical wholesaling, medical logistics and distribution services. ZD has three
logistics subsidiaries in Hebei and Shanxi provinces. The total extant warehouse area is 6,100
square meters. This company is equipped with 18 vendor cars, advanced computer networks,
102 desktop computers units, and 21 sets of mobile business notebooks. Within the Shanxi
province, the network of customers has covered more than 80 counties, 3,700 small and
medium hospitals, township health centers, drug chain pharmacies, and community clinics
(table 1). ZDs business philosophy is to provide a door-to-door direct distribution service
within 24 hours. The company provides extensive coverage of medical services. ZD has
made good partnerships with more than 1,680 pharmaceutical manufacturers in more than
3,000 types of pharmaceutical categories. The supply chain resources have become the
cornerstone and are a reliable guarantee of ZDs development. Figure 2 shows the workflow
of the company.

Table 1. Structural analysis of the downstream customers of ZD
Category Sales (Yuan) Proportion (about %)
Retail store 36,369,250 6.8
Commercial company 469,448,294 88
Hospital 2,471,237 0.5
Chain drug stores 28,445,521 5.3
Clinic 3,191,490 0.6
Health center 3,236,157 0.6
Medical institution 442,250 0.1
Other 1,417 0.01
Total 533,505,616 100

Figure 2. Work Flow of ZD

Procurement
There are two ways for ZD to purchase drugs: one comes from pharmaceutical manufacturers
that accounts for 67%, the other comes from tier one pharmaceutical distributors.

Put-away
According to regulations of GSP, after the suppliers have delivered the product the company
should record and inspect the goods according to the order including the number, size,
variety, and manufacturers etc. If the products are correct, the company will accept and store
the suppliers products according to its own classification criteria. In ZD, the put-away
process starts from the procurement plan and the analysis of the purchase target, through to
the arrival of the truck, unloading, unpacking, and classification of the drugs. The company
must also maintain proper records of all purchasing activities, and finally assigned to follow-
up storage. If the staffs do not handle this operation properly, it has an effect on storage,
picking, and transporting.
Order
Processing
Storage Distribution Procurement Put away

Storage operations
The inventory contains an enormous number of items. Some items are more valuable than
others. Thus, ZD classifies all items based on their turnover. It is a kind of ABC inventory
control technique, in which high turnover items are stocked in the most convenient area.

Order processing
Order processing covers the receipt of customer orders, preparing orders, transmitting orders,
entering orders and fulfilling orders. It includes customer management, confirmation of order
information, inventory queries, document processing, and shipping, etc. As the company
orders increase, manual processing is relatively slow and errors become more frequent. The
company adopts a warehouse management system for order processing, which improves
efficiency and reduces costs. When each customer's order contains more than one kind of
drug, how to determine a picking strategy according to the machine and manpower become
very important. Currently, the company depends mainly on manpower for drug selection this
leads to a longer processing time and has a negative effect on operations such as shipment
and distribution.

Distribution operations
ZDs distribution process begins at receiving the order and ends with meeting all the needs of
the hospital or pharmacy. There are four links in the distribution process: demand generation,
order submission, order fulfilment, acceptance of the order (figure 3).

Figure 3 distribution process

Demand generation: The demand in ZD is generated by the hospital or pharmacy that is
purchasing through ZDs sale force, which transfer demand information to the company.

Demand
Generation
Order
acceptance
Order
fulfilment
Order
submission
Order fulfillment: Once the order is received, staff selects the right products from the
warehouse. They are then packaged and sent to customers. The goal of the order link is to
deliver the correct ordered drugs before deadlines and with the lowest cost. Staff inspects the
completed classification of goods according to the order and load them into containers, mark
them properly, and ship to the preparation area for cargo operations. This operation is to
transfer ordered items to customers from the logistics center. Its main tasks are to arrange for
a suitable mode of transportation. Within Shanxi province, the company delivers the orders
using its own transportation facilities. Since there are no professional pharmaceutical third
party logistics providers, the company has to use general logistics companies which are not
able to guarantee the quality of the order, such as using special devices and means to control
temperature and humidity to ensure quality, to deliver products out of Shanxi province to
control logistics costs.

Order acceptance: When ordered drugs are received by a hospital, pharmacy or clinic,
professional quality control people will check and accept the order in accordance with the
relevant standards, including checking the drug name, quantity, packaging, and quality.

The existing pharmaceutical distribution channels in China are complex. ZDs customers are
commercial companies or hospitals. The market share of retail stores and chain drug stores is
increasing. The manager commented that 80% of new customers at this half-year are stores.
Therefore, the existing multiple distribution channels can help companies gain a larger
market share and satisfy different kind of customers. However, since customers require small
quantity and multi frequency delivery, ZD faces new problems and difficulties in
pharmaceutical logistics and lacks effective mechanisms for controlling the distribution
channel. For example, logistics costs increase because of low loading rate and trucks
returning empty.

Questions:
1. Conduct a SWOT analysis of the pharmaceutical logistics industry in China.
2 Analyze the current logistics practice in terms of operation flow of the company and
identify the potential problems.
3. Identify the methods which can be used to measure ZDs supply chain performance.
4. Identify the techniques and practices which can be used for ZD to control their distribution
channels.
5. Imagine you are a manager in ZD, please outline a plan for its future development.

THE CLINICAL SUPPLY CHAIN AND ITS STRATEGIC AND OPERATIONAL
SIGNIFICANCE IN PHARMACEUTICAL R & D
Teaching Abstract
9 To provide information about the uniqueness of R & D in the pharmaceutical industry.
9 To study the Clinical Supply Chain and its role in enhancing the productivity of the R & D
function.
this context.
Structure
9 Introduction: The Pharmaceutical Industry.
9 New Product Development in the Pharmaceutical Sector.
9 Clinical Supply Management at a big pharmaceutical company (BP).
9 The Clinical Supply Chain.
9 Description
9 Lead - time in the supply of clinical material
9 Sub -processes
9 Conclusion.
9 Facets of BPs Supply Strategy.

Key Issues
9 The nature of Pharmaceutical R & D and its uniqueness. Developing points of difference or
similarity with other industries.
9 Discussing the concept of the clinical supply chain and its relevance to the R & D function in
a pharmaceutical company
9 Taking a closer look at BPs smart supply strategy and its strategic role in enhancing the
company profitability.
The Clinical Supply Chain and its strategic and operational
significance in Pharmaceutical R & D

Introduction
The Pharmaceutical industry, over the recent times, has been experiencing some turbulence.
The key reasons for this being the fast paced competition in the industry, tighter regulations
governing the proliferation of pharmaceutical products, the global diversity and specific
requirements across nations where drugs are marketed and the ever-increasing research and
development costs. Not to mention the recent economic slowdown is making things difficult
for everybody.
In spite of such conditions however, the Global Pharmaceutical industry in 2010 grew at 4
6% and exceeded a gross total of $ 850 billion (IMS Forecast, 2010). This growth is expected
to sustain through 2013 at a CAGR of 4 7 %. Reasons for this being the advancements in
heath sciences, better public health policy, economic development, untapped developing
markets and the emergence of new health disorders that warrant treatment.
Competition in this growing industry has followed a natural progression and has intensified
over the past decade. Companies now, more than ever, seek to take their products to market
faster than the rest and grab a bigger piece of the pie. The increasing threat of generic
products to the profitability of branded product manufacturers is a key reason for this haste
that is becoming characteristic of pharmaceutical R & D.
One of the most unique things about the Pharmaceutical Sector is the Intellectual Property
Protection Laws or patents. When a company decides to further the research on a particular
molecule (discovered during the very initial stages of drug discovery), they apply for a patent
to prevent the duplication of their research by another firm. These patents provide the sponsor
with 20 + years
96
of protection in which to carry out all the aspects of drug R & D as well as
the commercialization of the product.
Pharmaceutical companies are eager to exploit this window of opportunity to the fullest. by
expediting the drug R & D process. For instance Lipitor, a blockbuster drug originally by
Warner Lambert, had exclusivity for a total of 14+ years (starting 1996 until 2010). During
this period no other manufacturer could bring a similar product to the market. In 2006,
Warner Lambert was acquired by Pfizer and in just four years, Pfizer reported gross sales in
excess of $ 75 Billion for Lipitor, making it the largest selling drug in the history of the
Pharmaceutical Industry.

96
The total duration of patent protection in the US taking into account all possible
extensions is 26 years and 6 months. In the UK this period is 25 years 5 months
Norman, P. (2007). Patent Protection Strategies: Maximizing Product Revenues.
Business Insights Ltd.

Once the patent expires (20 25 year) however, the company no longer has exclusivity for
that particular drug composition. This means that any other company wanting to develop its
own version of the drug can go ahead and do so. Heavily dependent on patent protection, the
profits of the branded drug manufacturers plummet by 75 80 % in the first year due to the
introduction of a cheaper relatively similar generic product. The second year can see up to
90% of profit decay due to the introduction of generics in the market (Bode Greuel and
Nickisch, 2008).
As a result, having a healthy pipeline of products and getting these products to the market as
soon as possible, has become the 1 priority of pharmaceutical companies. It should be clear
by now that in order to enjoy market exclusivity for the longest possible time, it is essential
that drug manufacturers wrap up the nitty-gritty of drug R & D at the earliest - completing all
aspects of drug development, clinical trials and drug registration in markets all over the
world. When talking in terms of blockbuster products, even a few days of added market
exclusivity can be worth millions in added revenues. In this context, effective operations and
supply management play an important role in enhancing the profitability of drug R & D. This
is illustrated later with the example of the clinical supply chain.
Additionally, a drug must be tailored to meet the regulatory requirements of the countries in
which it is marketed. From labeling restrictions and other packaging requirements, to the
nature in which clinical trials are conducted and the results presented, the task of marketing a
drug globally is indeed, daunting. Greater pressures have also emerged as a result of tighter
regulations imposed by government bodies in several nations; especially the developing
countries, which were otherwise safe havens for new pharmaceutical products. Regulating
authorities have also been controlling the price of pharmaceutical products quite stringently
in markets all over the globe. This intensifies the operations management problem (or
opportunity) for multi-national giants.

New Product Development in the Pharma Sector

The pharmaceutical industry is also known for its unique set of challenges in New Product
Development. After a grueling 12 years (or more), one product emerges from the web of
intricate clinical research and stringent regulatory constraints and reaches the market only to
encounter more potential turbulence. Figure 1 indicates the different stages through which a
drug must pass; right from inception, all the way through to market authorization. Even after
securing market authorization, the drug must be tested for efficacy and adverse effects on
larger sample sizes through a post marketing study or Phase 4 clinical trials and ongoing
Pharmacovigilance
97
.
The Green line in Figure 1 indicates the number of molecules screened, which is generally in
the range of 10
5
10
6
. These numbers become fewer and fewer as we progress through the
various stages in New Product Development (NPD) until finally one drug emerges. Further,
the costs involved can be phenomenal; the cost of developing a new chemical or biological

97
Pharmacovigilance looks at the detection, assessment and prevention of adverse drug
events.

entity was estimated to be approximately $ 1,318 million in 2005 (Di Masi, 2007 cited in
EFPIA report 2011).

Figure 1. Phases in Drug Discovery and Development (Source: EFPIA, 2011)

Following the preliminary drug discovery and pre-clinical testing, candidate drugs
98
must be
tested on the sample population through Phase 1 - Phase 4 Clinical Trials. Table 1 provides
the categorization of Clinical Trials and their key characteristics. Clinical trials typically take
5 8 years to complete and this constitutes a considerable portion of the R & D spend for
Pharmaceutical Companies. Figure 2 illustrates this.

98
A candidate drug is a chemical entity, which is in the early stages of development.
There isnt any guarantee of its becoming a successful pharmaceutical product. Its
potential is tested during clinical during early development and subsequently during
clinical trials before it may become a pharmaceutical product.
Figure 2. Percentage of R & D spends by Pharma Companies. (Source: PhRMA, Annual
Membership Survey 2011, cited in EFPIA Industry Report, 2011)

25.2
58.6
4.4 4.4
11.4
8.1
15.4
35.1
0.4
Approval
Pharmacovigilance(Phase4)
Pre-human/Pre-clinical
Phase1
Phase2
Phase3
Uncategorized
ClinicalTrials

Pharmaceutical companies will spend approximately 50 60 % of their R & D costs in
conducting clinical trials in a safe and timely manner. Driving efficiency in the execution of
clinical trials therefore represents a goldmine of opportunity. While the macro-level
challenges mentioned earlier are constraints that are generally beyond the control of a
company, a company can drive efficiency in its internal processes and maintain its
competitiveness. A case of a big pharmaceutical company (BP) reiterates this concept while
illustrating some of the operational challenges in managing a clinical supply network.

Clinical Supply Management at the BP

The Clinical Study Management group at BP is responsible for managing and delivering
clinical trials in a safe, timely and cost effective manner. Amongst Patient Recruitment, Data
Interpretation and Analysis, Operational and R & D procedures, development of Clinical
Product and Regulatory Approvals, the Clinical Supply Chain has a rather vital role to play in
enhancing the value of the R & D function in an organisation. Together, they comprise an
area where great savings can be achieved and a sizeable profit margin conserved (lower
overheads + added market exclusivity = added profitability).

The Clinical Supply Chain
The Clinical Supply Chain is a rather niche area in the Pharmaceutical sector. It has been
receiving greater attention in recent times due to the many pressures that pharmaceutical
companies encounter when developing a drug. One rather significant challenge is effective
management of the clinical supply chain. Figure 3 illustrates the Clinical Supply Chain of the
BP.

Figure 3. The Clinical Supply Chain

AZ
Ancillary
ServicesCRO
APISupplier
Central
Depot1
Central
Depot2
Regional
Depot1
Regional
Depot2
Regional
Depot3
Clinical
Site
Clinical
Site
Clinical
Site
Clinical
Site
Clinical
Site
Clinical
Site
Clinical
Site
RawMaterials
Supplier
Logis cs
Company
Customs
Broker
Local
Distributors
Clinical
Site
Clinical
Site
Clinical
Site
Clinical
Site
Clinical
Site
Clinical
Site
Clinical
Site

RawMaterial
Suppliers
Logis cs
Integrator
CustomsBroker ClinicalSites
Regional
Distributors/
Suppliers
Ancillary
Services
Company(CRO)
Pharmaceu cal
Company

The clinical supply chain is concerned with delivering investigational drugs from the point of
manufacture to the point of use i.e. the investigation sites. It will have a set of intermediaries
namely the sponsor/ manufacturer (point of origin), raw material suppliers, API suppliers,
logistics companies, distributors, customs brokers, ancillary services companies and the
investigation sites where Clinical Trials are conducted (end point). The above schematic in
Figure 4 is merely the representation of the Clinical Supply Chain for one Multi Centric
Clinical Trial. It is a normal practice to have several studies running in parallel; the total
number of study sites running in hundreds. BP currently has over a hundred sites to which
clinical material must be delivered so that their clinical trials may be completed as per
schedule.
To appreciate what this supply network demands from an operations management stand
point, it would be useful to take a closer look at the tasks that constitute this extended supply
chain.
Manufacturing at this stage of the product life cycle is done in-house by the sponsor and in
small batches. The manufacture of a study drug however requires the supply of drug
product and drug substance, which may be procured from partner organizations that
specialize in the area much like the automotive industry. Just like a Toyota car might be
assembled with a Bosch Fuel pump, Gabriel Shock Absorbers, L & T Drive Train and
Bridgestone tires; a pharmaceutical product is also manufactured by assembling a host of
chemical entities, which may or may not be produced in-house. To ensure the reliability of
the chemical substances procured from the market, suppliers must be identified, audited and
developed. BPfor example has a dedicated team of sourcing specialists and QA managers to
ensure that the highest quality is delivered at the best possible costs.
Once the Investigational Drug has been manufactured, it requires a host of ancillary services
to make it ready for use during clinical trials. A medicine must be packaged (primary and
secondary), labeled, receive its protocol number and batch numbers and so on before it can be
dispatched to the clinical sites. The drugs are then moved to a central storage/ supply depot
where they are stored in a controlled ambiance based on their individual temperature
requirements. These drugs are then listed in the inventory and become available for shipping
to clinical sites which might be spread across the globe. A Logistics integrator will ensure the
dispatch of the drugs and monitor their arrival in the target country. The drugs are often
shipped in temperature controlled shippers to ensure that the cold chain is not breached
during any point of the journey.
Upon arrival, the drugs will have to clear the customs and import procedures at the port of
arrival. These are stringent processes and require assistance. Often a Customs broker familiar
with the laws and regulation in the country of arrival will be commissioned to assist with this.
Once the drugs clear the customs and import, they are either moved directly to the clinical
site or to a regional depot and then to the clinical site. Regional depots are generally used
when faster response to demand (which is more unpredictable) is required and there is a need
for carrying out some final alterations to the product before dispatch. Figure 4 shows the flow
of processes in the supply of study drugs. It can take anything between 23 40 days for a
shipment to reach its port of destination since the initiation of the order request.

Figure 4. Stages in the Supply of Clinical Material to the Investigation Sites
Shipmentreceived,checked,datauploadedand
goodsstoredinwarehouseasperprotocol
23days Day10
Shipmentr eceived c hecked d atau ploadeda nd
ReleasefromCustomsandshipmentdeliveredto
FisherBeijing
12days Day8
Releasef romC ustomsa nds hipmentd eliveredt o
CustomsissuingtheVATandDuty+Paymentby
Fisher
2days Day7
Customsi ssuingt heV ATTTTa ndD uty+ P aymentb y
CustomsClearance
23days Day5
C t Cl
AcquireImportPermit
12days Day3
A i I tP it
CheckandConsolidatedocumentsfromShipperand
FisherGlobal
1day Day2
Checka ndC onsolidated ocumentsf romS hippera nd
ReceiveDocumentsfromFisherGlobal
1day Day1
DeliveryConfirma on
Sameday Day23
l f
DispatchtoInves ga onSite
23days Day23
Dispatcht oI nves ga onS ite
OrderProcessing
12days Day21
O d P i
LabelingandSecondaryPackaging(includingbatch
recordgenera on+QA+physicallabeling)
1021 Day20
aryP acka

A keen operations manager would identify areas where the lead-time in the supply of clinical
material can be reduced through process improvements, collaboration, systems
implementation and such. A reduction in the lead time at any stage would often have a direct
impact on the effective launch dates of the product resulting in added exclusivity period for
the drug and therefore greater profitability.
The task of servicing multiple investigation sites and maintaining a continuous supply of
clinical material is indeed complex. Clinical sites can be as many as 20 30 for each clinical
product being tested and spread across the world; the logistics requirements in maintaining
consistent supply can be significant and at the same time, critical to the successful and timely
completion of a clinical trial. While timely supply is important, anticipating the demand at the
point of consumption i.e. investigation sites is also vital. Managing this through accurate
forecasting and supply strategies can lead to substantial savings. Table 1 shows a list of tasks
to be executed to ensure a continuous and cost effective supply of clinical material to clinical
sites. The level of operational complexity and associated risk are also indicated.

Table 1. Sub Processes in the Supply of Clinical Material
Activities SubProcesses
OperationalComplexity RiskComponent
Manufacturing
SourcingDrugProduct High Medium
SourcingDrugSubstance High Medium
QualityAssurance High High
SupplierSelection High High
VendorDevelopment/Management High Medium
Ancillary
Services
Sourcing(Comparators,Kits,
Placeboetc.)
Low-Medium Medium-High
PrimaryPacking High High
SecondaryPacking Low Medium
Labeling High High
ClinicalTrialManagementSystems Medium Medium
Logisticsand
Distribution
Management
SupplyOptimization(IVRS) High High
Warehousing Medium Medium
InventoryManagement High High
Distribution Medium High
ReverseLogisticsandDestruction High High
CustomsandImportAdvice Medium High
Documentation High High

It must be apparent by now that an efficient Clinical Supply Chain demands quality
operations and supply management. However, the extent of the supply chain is too vast for
any Pharmaceutical company to manage alone. It requires partners to assist in achieving
higher operating efficiencies and maintaining its competitiveness in the market. Leading
Contract Research Organizations (CROs) have the capability to provide support services to
make this daunting task easier. With their wide range of specialized services
99
they are

99
Services spectrum of a typical CRO - Drug Discovery and Development, ancillary
service like primary and secondary packing, re-labeling, sourcing, inventory
worthy allies and can aid driving costs down and expediting the time to market of
pharmaceutical products. BP pays great attention to developing competent vendors and
collaborating with leading organizations in drug research and development and its allied
spaces.
Conclusion

While the competitive landscape is rather hostile, the potential for sustained competitive
advantage lies in improving internal processes (Barney, 1991). The case mentioned above
illustrates several challenges that a company faces in the development of pharmaceutical
products. BP however, has met these operational challenges through a sound sourcing and
supply strategy.

Facets of BPs Supply Strategy

BP has systematically invested in streamlining its operations through a robust process
optimization strategy. They have focuses their attention towards social as well as technical
sub systems; making operations management a strategic initiative and a source of their
competitiveness.
x Process Integration Single Global Process for planning and managing the Clinical
Supply Chain.
x Standardization of materials used during clinical trials. This aids in driving down
costs, controlling variability and ensuring a consistent supply of clinical material to
study sites.
x People Integration clear roles and responsibilities. Better organizational structure
and clear lines of reporting.
x Supply Strategies developed centrally, uniform and accessible globally result in
clarity amongst all clinical sites across the globe; strategies can be executed
accurately.
x Documentation central repository for all protocols and documentation regarding
clinical supply results in added transparency and efficiency. Troubleshooting is made
easier.
x Technology - used to a greater extent than before; 80% of the orders are automated
and processed seamlessly. Real demand is sensed; results in reduced wastage. All
sourcing information is visible globally, across all offices. Planning and forecasting
tools aid in matching supply with real demand and reducing the strain on capital.
x Distribution directly to site. One logistics integrator moving material from packing
sites to the clinical sites. Regional depots used only when direct distribution is not
possible.

management and order processing, distribution, returns and destruction, site support,
data analysis and interpretation, designing clinical trials, post marketing study,
documentation and so on.
x Sourcing consolidation of suppliers. There is a focus on developing closer
relationships and greater collaboration. Value co-creation is fostered through these
long term strategic relationships.

With improvements in the clinical supply chain and other study management processes
(mentioned earlier), products reach the market quicker, resulting in added profitability and
improved cash flow. By driving efficiency in internal processes, the company anticipates
savings of up to $ 20 25 Million in distribution costs alone. Additionally with the improved
processes in place, a 1-year cycle time reduction is anticipated and is forecasted to result in a
25.4 % improvement in the number of product launches by 2015. This is expected to result in
a 1 2 % increase in the value of the portfolio by 2015 and 6 7 % by 2020 and added
revenues to the tune of approximately $ 10 Billion by 2020.
An effective Clinical Supply Chain was a key contributor to this improved performance.
Distribution costs were reduced by approximately 25 % by switching to a new direct
distribution model saving approximately of $ 25 million per year. Sensing real demand at
the point of consumption also resulted in reduced wastage and smaller buffer inventories.
Approximately $ 250 million was saved by sensing the real demand and matching it with the
right quantity of supply for just 2 studies. Further, by reducing waste in the system, BP has
come several steps closer to having a lean supply chain. Reduced waste means greater studies
can be carried out with the same $ spend, cycle times can be reduced and the number of
product launches per year can be increased - the effective value of the product portfolio is
enhanced significantly.

Questions

1. Assess the intricacies of pharmaceutical R & D. How similar or different is it from R & D
in other industries.

2. Assess the characteristics of the clinical supply chain and how it is unique? Comment on
the level of operational complexity and risk components of the tasks listed in table 2.

3. Comment on BPs supply chain strategy. Which element do you think is the most vital of
all?

4. In the case described above, what is the role of operations management in building
competitive advantage? Additionally, think of an example from an industry of your
choice for a class discussion.

References
Annual Report (2011). . Access date [03/12/2011].
Anon [1]. (2011). China Could Be the 3rd Largest Pharma Market. IMS Health, 2010.
BodeGreuel, K. and Nicklisch, K. (2008). Value Driven Project and Portfolio Management In The
Pharmaceutical Industry: Drug Discovery Versus Drug Development Commonalities And Differences In
Portfolio Management Practice. Journal Of Commercial Biotechnology, Vol 14, No. 4, pp. 307 325.
EFPIA, The Pharmaceutical Industry In Figures: Key Data, 2011 Accessed At
[Http://Www.Efpia.Org/Content/Default.Asp?Pageid=608] Access Date [11/06/2011].
Norman, P. (2007). Patent Protection Strategies: Maximising product revenues. Business Insights Ltd.
Novartis Annual Report (2011). Accessed at [www.novartis.com]. Access date [03/12/2011]

Pfizer Annual Report (2011). Accessed at [www.pfizer.com]. Access Date [03/12/2011].

STRATEGIC SUPPLIER SELECTION

Teaching Abstract

This case has been developed for students taking the Operations and Supply Management module at
both the undergraduate and post- graduate levels. The case is designed to achieve the following
objectives:

9 To illustrate the impact of strategy on supplier selection
9 To introduce the implementation of lean supply chain strategy
9 To take a closer look at the strategic importance of operations and supply management in this
context

Structure

9 Background

9 Description of the problem

Key Issues

9 To evaluate different sourcing plans and to match supplier selection decisions with the
companys operations priorities.

9 Discussing the concept of total cost in purchasing


Strategic supplier selection

IJK is a large company that makes pharmaceutical products worldwide. The cost of inputting
raw material is one of the key concerns for IJK in the global market. The company has to
move out of its comfort zone and take some risk to reduce the input raw material price.
Product X, which can be sourced from two suppliers, is an important component for a
drug manufactured by IJK. Supplier A has manufactured Product X for 10 years and
therefore has monopoly status. The price is fixed at 1200$/kg and is not ready for negotiation
related to price of the product. The delivery timeline of supplier A is 4 weeks for every
1000kgs. Supplier B is a capable supplier with experience of over 20 years in the field of
chemical manufacturing and is good at developing new products. The quote for the first
1000kg is 1500$/kg and for the remaining requirements is 1100$/kg. Supplier Bs delivery
timeline is 6 weeks for the first 500kgs and 4 weeks for every 1000kg after that.
The first 2000kg of Product X is critical to initiate production for IJK. Product X is
required in another 8 weeks but there is no rush for the remaining raw material quantity.

Questions:
a) Acting as an outside consultant, what would you recommend that IJK do? Perform a total
cost analysis to evaluate the alternatives.
b) If IJKs manufacturing strategy is to reduce cost, which plan should they choose? If IJKs
operation priority is reliability, would your supplier selection change? If IJK want to balance
reliability and cost, whats your suggestion?
c) Please outline a plan for introducing lean supply chain for IJK.

Solution:
a) Sourcing from supplier A for quantity Q:
Cost = 1200 Q; time= Q/1000 * 4
Sourcing from supplier B for quantity Q:
If Q<= 500
Cost= 1500 Q; time = 6
If 500<Q<= 1000
Cost= 1500 Q; time= 6 + 4
If 1000<Q
Cost= 1500*1000 + (Q-1000) *1100; time= 6 + (Q-500)/1000 * 4
Plan A: Only sourcing from supplier A
For the first 2000: Cost= 1200* 2000 = 240000; time= 2000/1000 *4= 8
After that: Cost = 1200 Q; time= Q/1000 * 4
Plan B: sourcing the first 2000 from supplier A and the rest from supplier B
Cost= 2400000+1500 (Q-2000) Time= 6+8=14 (if Q<=2500)
Cost= 2400000+1500 (Q-2000) Time=6+8+ 4= 18 (if 2500<Q<=3000)
Cost= 3900000+ 1100 (Q-3000) Time= 14+ (Q-3000)/4 (if Q>3000)
b) For cost reduction
Sourcing the first 2000 kg from supplier A; then sourcing from supplier B if total quantity
>=6000 kg (Cost= 3900000 +1100 (Q-3000)); otherwise sourcing from supplier A

For reliability
Sourcing from supplier A

For reliability and cost reduction
Source the first 2000kg from Supplier A. In parallel the company will place an order for
1000kg with Supplier B. Inform supplier B they should supply 500kg in 6 weeks & deliver
the remaining 500kg after the feedback on the first lot. Use the supplier B raw material first
lot & check the downstream processing performance. If the raw material performance is fine
then source from Supplier B. Otherwise, request them to make the relevant changes for the
remaining 500kg. If Supplier B cannot solve the problem, then IJK should source from
supplier A.

c) To develop a lean supply chain, IJK should:
x Work with suppliers to include them in its own value creation and control quality at
source
x Lean procurement: automation and e-procurement
x Lean manufacturing: group technology; JIT production and kanban
TRANSFER OF PRODUCTS TO LOW COST LOCATIONS AND THE
IMPLICATIONS FOR QUALITY, SAFETY AND SUPPLY CHAIN RISK
MANAGEMENT
Teaching Abstract

This case has been developed for students taking the operations and supply chain
management module at the graduate or undergraduate levels. The case is designed to achieve
the following objectives:
9 To provide information about the changing business models in Pharma and the role of
outsourcing.
9 To illustrate the importance of quality and safety in the context of outsourcing.
9 To illustrate the factors that contribute to the make or buy decision, and how leading
companies mitigate the added risk of sourcing products from low cost locations.

Structure
9 Introduction
9 Restructuring for survival
9 Flexible Global Supply Chains and Outsourcing the promise of India and China
9 The issue of safety and quality in Pharmaceuticals
9 Outsourcing and Supply Chain Risk
9 Managing Risk
9 Case1
9 Case2
9 Conclusion

Key Issues:
9 Introducing the issue of safety and quality in Pharmaceuticals
9 Developing an understanding of supply chain risks in pharmaceutical industry
9 Discussing how to managing supply chain risks through outsourcing
Transfer of Products to low cost locations and the implications for
quality, safety and supply chain risk management

It's just an immensely challenging time for big pharmaceutical companies. Their whole
business model is under huge strain - the whole research model is under pressure."
- Jonathan de Pass, CEO, Evaluate Pharma, BBC World News, 2
nd
February
2012
"It's a fact that the easy targets, in the body, for the production of drugs have, essentially, all
been used up. "The cost of producing new pharmaceuticals is so astronomical now, that it
only takes one failure of a drug which doesn't perform as well as was expected or has side
effects - one withdrawal from the market can really cripple a company."
- Professor David Phillips, Royal Society of Chemistry, BBC World News, 2
nd

February 2012

We plan to "share cost, risk and reward" with other institutions (in our supply chain).
- BBC World News, 2012
Introduction

The recent news is rife with trouble in the global pharmaceutical industry; the sands are
shifting; the global playing field is fast changing. Competition has intensified over the years
owing to a variety of factors; the increased R & D scrutiny by the FDA, decreasing R & D
productivity, weak (new) drug pipelines, price ceilings, rampant generic competition and the
health reforms in emerging nations are just a few factors spelling chaos for the Pharma
industry. In light of the fast paced competition that is becoming characteristic of the
pharmaceutical sector, the traditional Big Pharma business model is up for an overhaul.
Revitalizing the age - old in-house R & D model is key, especially since the imminent
patent cliff has finally arrived. A majority of the top Blockbuster drugs have already lost their
patents, and the generic players have now got their long awaited chance to converge on the
market. According to analysts, an estimated US $ 250 billion worth of sales are at stake
between 2010 2015, due to the loss of exclusivity of some of the top sellers of the decade
followed by the onset of rampant generic competition (Evaluate Pharma, 2010).

Once an innovative drug loses its patent, popularly known as Loss of Exclusivity, lower
price generics quickly siphon off as much as up to 90% of their sales within the first couple
of years (Mertens, 2005). The simple reason being that generics are far cheaper (see
Appendix A).

As price wars become an eventuality in an ageing market, manufacturers, especially the
brand name manufacturers, must find ways to cut costs and compete effectively for market
share.

Restructuring for survival

Given the current competitive landscape, Pharma companies have been altering their
organizational DNA to become more lean and mean. Lay offs and plant shut downs have
been a common trend in the western countries. On the other hand, companies are heavily
expanding their capabilities in emerging markets like China, India and Brazil.

For instance, a big pharmaceutical company (BP1) has already cut approximately 12000 jobs
in 2010, and has recently announced that it is going to thin the numbers by an additional
7300. The head count in China however, has been rising steadily.

Similarly, in the wake of its recent acquisition of Wyeth, another big pharmaceutical
company (BP2) estimated that it will slash 20,000 jobs, including 3500 R & D jobs in the US
and UK together. Its India operations on the other hand will continue its trend of expansion
and add 200 employees by early 2012 (Hirman Lee, 2010). Likewise, in China, BP2 plans to
increase its workforce by 39% by 2012. A similar pattern has been seen with yet another
multi national Pharma giant, Merck
100
.

To complement their recently acquired lean structures, companies are increasingly
outsourcing components of Pharmaceutical R & D to low cost locations. Mergers and
Acquisitions too are on the rise, and so are collaborative R & D structures, which seek to
integrate a host of suppliers and research organizations into a companys supply chain. While
the prior i.e. moving to emerging (and low cost) markets, is indicative of their revenue
potential, it has much to do with the increasing competition in the industry and the respite
that outsourcing can offer. The relatively nominal costs of carrying out certain R & D
procedures in these countries are too attractive to miss out on, and offer a real chance at
enhancing competitiveness.

100
In early 2011, Merck announced that it too would reduce its numbers by 15%, a total
of 16000 employees will be made redundant. However, reports show, that they are
substantially increasing their workforce in China, India and Brazil (Medical Marketing and
Media, 2011)

Figure 1 shows how some of the leading companies have embraced outsourcing over the
recent years - a new faith (if it were).

Figure 1. A move towards outsourcing

A Common Direction

Double outsourcing of manufacturing activities to 30%.
Stop Production at half of its 27 manufacturing facilities by 2010.
Completely exit API manufacturing over the next 5 10 years.
Outsource 30 - 35% of the manufacturing activities to India and China.
Consolidate 50% of network across LCC and HCC locations.

Outsourcing and flexible global Supply Chains the promise of India and China

Over the past decade, India and China have emerged as Pharma Outsourcing Giants, and are
anticipated to dominate this market for the foreseeable future. Figure 2 shows a comparison
of the leading outsourcing countries based on three key factors i.e. market opportunity, risk
and cost (PWC, 2009).


Figure 2. Outsourcing index based on Market Opportunity, Risk and Cost (PWC ,2008)

China, India, Korea and Taiwan are the pack leaders in Asia; China and India are also
dominating global Pharma Outsourcing today (PWC Report, 2009). The global Pharma
outsourcing market was worth approximately $ 65 - 70 billion in 2010 (55 60 billion in
2009), and China and India account for roughly 7 10 % of this estimate. In 2009, Indias
pharmaceutical outsourcing hit a total of $ 1.7 billion with China not far behind at $ 1.4
billion. Analyst forecasts showed however, that India and China would switch places by late
2010 or 2011. (Taylor, 2009 - Outsourcing Pharma.com)

Additionally, China and India are big players in the API and Formulation space. The Indian
Pharma industry earned $9 billion through exports in 2009 and has been growing at roughly
15 20 %. The contribution of intermediates and active pharmaceutical ingredients (APIs)
was around 35%, while formulations was 65%. While china is trailing in the finished drugs
segment, it is dominating the Active Pharmaceutical Ingredient (API) exports with
approximately 55% of total pharmaceutical exports from China being APIs. Chinas exports
in 2009 were approximately $10 Billion (PWC 2008 and StockMarketReview, 2010). Figure
3 provides more detail about how the outsourcing trends in China and India have been on the
rise.

Figure 3. API and Drug Exports (PWC, 2008)
4.8
5.6
6.5
8.3
10
1.5
1.7
2
3
3.6
0.3
0.7
1.2
1.8
2
4.4
4.8
5.3
6
6.5
0
1
2
3
4
5
6
7
8
9
10
11
2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

(
e
s
t
i
m
a
t
e
)

2
0
1
0

(
e
s
t
i
m
a
t
e
)

Chinese API Exports
Indian API Exports
Chinese Finished Drug
Exports
Indian Finished Drug
Exports
$

B
i
l
l
i
o
n

Companies state the key benefits of offshoring to a China and India as (Murray, 2010);

x Lower cost of goods
x Lower R & D costs
x Shorter overall lead times
x Access to Asian talent pool
x Better Access to the emerging Asian markets
As a result, a growing portfolio of Pharma R & D is being transferred to these locations.
Figure 4 provides details about the kind of tasks being outsourced during a range of R &
D phases.


Figure 4. Pharma R & D Outsourcing, (KPMG 2011)

It is observed that the majority of the development phase is prone to outsourcing, while
opportunity analysis, drug research and registration are activities considered dear to original
brand makers. Such a trend is expected, since originators would be keen to conduct the initial
phases of R & D themselves, in order to minimize transaction costs and the risk of moral
hazard alongside capitalizing on the superior research infrastructure, quality and safety
standards in the developed countries of their origin. It is only once the drug discovery stage is
reached that they are generally comfortable outsourcing 50% of the activities as the benefits
match the risks at this point.

This aggressive growth is fueled by the fact that, India and China when compared with other
leading R & D locations fare quite well, and the added risk of doing business in these
countries is justified by the low cost structures and the huge earning potential they offer.
China and India are the two largest populations in the world, and government spending on
health care in these countries; especially China has been growing steadily. Through 2009
2012, China will spend a total of $ US 20 Billion as part of its latest Health Care Reforms.

Figure 5. Comparison of India and China with other preferred R & D locations (Jain et al.,
2010)
0
0.5
1
1.5
2
2.5
3
Patient Pool &
Recruitment
Comfort of
Sponsor
IP Protection Cost
Attractiveness
India
China
Eastern Europe
US
Low
Med
High

Additionally, India and China are excellent locations from the point of view of speedy and
efficient clinical trials infrastructure. As preclinical and multi center Phase 1 Phase 4
clinical trials make up approximately 60 70% of the total spend on Pharmaceutical R & D,
MNCs they are keen to outsource a large component of this to India and China. Figures 6,
illustrates the cost advantage of carrying out clinical trials in India by phase i.e. 1, 2 and 3.
The figures can be taken as a general benchmark and would apply to outsourcing to China as
well, as India and China are competitively placed in this space. Further, figures 7 and 8
illustrate how China and India have emerged as Global Hubs for clinical trials over the past
decade.

Figure 6. Clinical Research Costs: US Vs. India (Jain et al., 2010)

20
50
100
6
27
57
0
20
40
60
80
100
120
Phase 1 Phase 2 Phase 3
US
India
C
o
s
t

(
$

M
i
l
)

Figure 7. Clinical trials by category: Asia VS Rest of World
19.6
14.9
11.9
10.1
12.7
6.1
3.4
3.7
1
17.5
14.3
13.5
8.4
7.9
7.2
4.9
2.6
1.6
0 5 10 15 20 25
Oncology
Cardiology
Endocrinology
Infectious
Psychiatry
Respiratory
Neurology
Kidney/ Urology
Heamatology
Rest of World
Asia

Figure 8. Clinical Trials in Asia Market Leaders (Mohan, 2009)

36%
41%
19%
4%
India
China
Singapore
Pakistan

While cost is a key consideration, flexibility in the supply chain can often be just as
important. As Figure 9 illustrates, supply chain design must be altered during different stages
of the products life cycle. As such flexibility is difficult to achieve with the in house
model, companies are turning to outsourcing as it offers not only cost benefits but also added
flexibility.


Figure 9. Priorities over the product life cycle

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For instance, a company might find it safer to develop and manufacture the product in its
initial phases in western countries as these countries have better R & D capabilities and
stringent quality and safety standards. However, during the maturity phase, when cost cutting
is critical, low cost countries provide the way forward.

Today, companies are working closely with (low cost) suppliers to form integrated, cost
effective, flexible, efficient and risk averse supply networks (chains). While companies
traditionally have been known for their proclivity to keep operations, especially R & D, in
house, the 21
st
centaury has seen a change from the sluggish model that was Big Pharma.
Today, a typical pharmaceutical supply chain is globally placed and the entire range of R &
D activities are being carried out in different parts of the world - based on the product and its
stage in the lifecycle.

Figure 10. The Global Pharmaceutical Supply Chain

R & D
Raw
Material
Manufacturing Packaging Distribution
Customer Formulation API
India/ China UK, USA, EU,
India, China
China
USA, UK, EU, Japan
and recently, India
and China
India/ US/UK
One or two Integrators ship
products to a majority of
destinations
A MNC typically ships
products to over a 100
countries

Such a global supply chain however, is more complex and while it has several advantages,
there is also the risk of failures occurring at low cost sub contractor sites located in emerging
nations like India and China. As a result, companies take a measured approach to managing
risk in the system, especially at low cost supplier locations. Some of these risk management
strategies are mentioned in the subsequent sections. Additionally, Blum (2008) mentions that
these long supply chains in which R & D, Manufacturing, Packing and Logistics activities
occur in different locations across the globe, are more susceptible to the risk of contamination
and counterfeiting.

Quality and safety in the pharmaceutical industry

The Pharmaceutical industry is one of the most regulated industries in the world when it
comes to quality and safety. Manufacturing facilities must demonstrate the highest level of
quality and safety standards, and comply with GMP
101
and GSP
102
standards developed by
the FDA.
This is necessary because, unlike other product industries, where the finished product can be
tested for deviations and altered based on the quality check, in pharmaceuticals, non -
destructive testing is not an option. This means that quality and safety of a drug that is
actually meant for consumption cannot be tested. So in most cases, the deleterious effects of
quality issues and contamination for instance will only become apparent once the damage is
already done, that being potential loss of lives, adverse drug reactions and so on. To prevent
this, quality control is pre-emptive in nature and in the event of potential quality hazards,
companies must recall huge quantities of drugs from the market. This can be a costly measure
indeed and can dent a companys profits. The recent case of BP2 recalling 1 million birth
control pills is a good example (Bloomberg, 2012).

Marucheck et al. (2011) describe three key issues in Global Pharmaceutical supply chains,
namely, contamination, counterfeiting and the increasing number of tier 2 and tier 3
distributors. These issues are aggravated by the decision to outsource as supply chains get
stretched and become more challenging to monitor. The consequence being, an added risk to
patient safety and cost/ reputation liabilities for the manufacturer.

Given the importance of quality and safety issues in the healthcare industry, MNCs have been
known to go one step further than what government regulations demand of them in this
context. Nevertheless, enforcing these stringent Government and Indigenous Standards is a
challenge, one that requires a lot of attention and investment.

101
"Good manufacturing practice" or "GMP" are guidance that outline the aspects of
production and testing that can impact the quality of a product. Many countries have
legislated that pharmaceutical and medical device companies must follow GMP
procedures, and have created their own GMP.
102
Good Supply Practice, or GSP, standards were established to regulate
pharmaceutical wholesale and retail enterprises to ensure the quality of distribution of
pharmaceutical products in China.
Outsourcing and supply chain risk

Although low cost destinations do help in minimizing the costs involved in pharmaceutical
development, they open doors to issues such as supply chain complexity, extended lead
times, increased supply risk, quality and safety. Companies have serious concerns with the
current quality and safety standards in China and India, and take particular care in ensuring a
safe, continuous and cost effective supply of materials from these locations. The experience
of an MNC working with low cost suppliers in India and China, has been as follows:

Good Research Capabilities,
Responsiveness,
Quality and Safety trends on the rise, However,
- Fraud
- Poor Process Safety
- Miscommunication
- Quality and EHS Safety standards not up to the mark
- Poor attention to detail

In the past, when quality or safety issues have been picked up by the FDA, outsourcing has
been at the root of the problem. Some recent Pharma outsourcing failures in India and China,
are mentioned below.

In March 2009, BP2 and Aurobindo, an Indian manufacturer, entered into a deal where BP2
bought the licenses for 75 generic drugs developed by the Indian company. BP2s intention
was to sell these medicines in the US and EU soon after. This deal was followed with a
partnership with Claris Life Sciences, to market 15 off- patent injectable drugs, in May 2009.
The deals did not play out as BP2 had hoped they would.

In 2010, BP2 recalled drugs made by Claris Life Sciences from the US market after the FDA
found contamination in the intravenous antibiotic and anti nausea drug developed by the
Indian company. Soon after, the Claris Life Sciences facility in Ahmedabad was banned by
the US FDA (Wall Street Journal, 2010).

China too has had its share of mishaps in the past. Melamine, an industrial chemical, was
found in baby formula manufactured in China, and was linked to the death of six babies and
left some 300,000 more suffering from kidney stones. The manufacturer, Sanlu Group,
recalled 700 tons of the baby formula following the incident. This was not to be the end
however, a repeated occurrence was noted in 2011, when thousands of packet of formula
were pulled off store shelves in China, after it was discovered that some of the
melaminetainted products seized in 2008 had been reused instead of being destroyed. The
SPICOT
103
and Heparin
104
cases tell a similar story.

103
A recent EHS failure at India re-enforced the importance of EHS standards at
manufacturing facilities. Residents of at least three villages were affected by fumes,
following an acid leak at a SIPCOT manufacturing facility. Over 70 people, including 11
children suffered health complications. Following the incident, the authorities ordered the
units closure until further investigation.

When such cases crop up, and plants are quarantined, the risk of supply disruption is almost
certain. What this results in is an increase in the total cost from the decision to outsource R &
D or production to a low cost supplier an ironic turn of events which has been observed on
a few occasions over the years. The number of drug recalls from the market is on the rise and
companies are advised to take extra care in ensuring that their low cost sourcing decision is
not a cost/ safety liability.

Managing Risk

Case 1

In 2009, BP1 announced that they would be moving from manufacturing APIs to outsourcing
them low cost locations. While several companies will base the decision of outsourcing on
the product characteristics and the stage of the life cycle in which it is, they also have to be
cautious about risk in the supply networks.

BP1 describes quality and safety as two prime concerns in the emerging low cost destinations
like India and China.
BP1 has noticed that worker safety expectations in these countries is particularly low, with
the exception of construction safety which is sometimes even more alarming. They also
observe that reactive chemical hazards assessments are not a part of the management protocol
and are virtually non existent in many companies.

Health Safety and Environmental Laws in these countries tend to be less acute when
compared to developed countries. However, environmental controls are rapidly improving in
China based on recent trends. Intellectual Property Protection in China is another big issue,
and while the IPP regime in India too is questionable, analysts concur that India is better
placed than China in this regard.

Staff is generally very co operative in these locations, and the western opinions on
safety and quality often go unchallenged said a senior executive at BP1. However,
maintenance regimes can be poor, and the real problem is having sustained improvements, as
(ANON) sourcing managers have noticed in the past.

To ensure that the benefits of outsourcing justify the risks involved, (ANON) carries out
detailed risk assessments based on a variety of risk factors. These assessments are designed to
identify:

1. The type of risk or risk categories i.e. Health, Safety, Environment, Corporate
Image, Financial/ Monetary, Security and Information Protection, Scientific
Capabilities, Quality Systems and Compliance, Natural Disasters and so on.

104
The case of Heparin in 2008, revealed a similar case. The FDA banned Baxters
Heparin as it was contaminated; the root cause of the failure being, yet again, the short
fall of the Chinese suppliers. When the FDA turned to APP Pharmaceuticals, which also
had marketing rights to Heparin, it was found that they too had been sourcing their
product from China.
2. The probability of the risk occurring
3. The implications for the business; mainly financial and time delays
4. Contingency plans to minimize the impact of the risk

Table 1. Risk Management Framework at BP1

Risk Categories (based on likelihood and impact of event) Risks
Score Definition Measure Financial /
Time Delays
Score Reputational Score
VH Very High
An event that you can expect, will happen. < $1 bn
12 months
VH
Product recall or warning
letter from FDA, national
media interest, found to
be guilty with major
penalties loss of license
to operate.
VH
H High
An event that can be anticipated based on
past performance; AZ or a closely allied
company have experienced such an event
in the past.
$300m - $1 bn
4 months
H
LoA item, local media
interest, confidence or
capacity reduced, serious
legal/ regulatory
liabilities.
H
M Medium
A rare event that can be predicted but has
not yet occurred at AZ or a partner
organisation.
$100 m - $300 m
6 weeks
M
Adverse trend in customer
complaints, AZ global
operations feedback,
internal reputation
affected, legal liabilities.
M
L Low
An event which can be envisaged but has
never occurred in the history of the
company or required 2 3 other events to
occur simultaneously in order to be
realized.
$30 m - $100 m
2 weeks
L
Deviation, Several
customer/supplier
complaints, AZ confidence
damaged, minor legal
liabilities.
L
VL Very Low
An event that can be conceived but has a
very low probability of occurring or
requires several events to occur
simultaneously in order to be realized.
< $30 m
1 week
VL
Information only
complaint, internal
improvements, no legal/
regulatory threat.
VL

Case 2

While the BP1 case talk about risk management at a macro level, the case of BP2 shows how
a similar risk management approach might be applied when making a sourcing decision with
regard to a specific risk factor. The risks associated with EHS i.e. Environment, Health and
Safety and how it affects the sourcing decision will be discussed in this case.

BP2 over the years has taken very seriously to rationalizing its plant capacity. Figure 11
illustrates this.

Figure 11. Plant Capacity Reduction by BP 2, 2010
0
20
40
60
80
100
120
2
0
0
2

2
0
1
0

Reserve
Active

A key impact of this move has been an increase in the trend of outsourcing R & D and
manufacturing to low cost locations. To guard itself against the heightened supply chain risk
that outsourcing entails, BP2 implements EHS policies across all of its global locations. This
is done to ensure that the business is responsible and sustainable alongside being financially
viable the idea of the triple bottom line i.e. people, planet and profits.

Like most global pharmaceutical giants, BP 2 holds its suppliers to the same EHS standards
that it would implement in an internal BP2 division. Some of the key concerns often related
to unacceptable EHS performance are

x Business interruption
x BP2 s financial liability
x Reputation impact
x Other implications of non compliance at supplier locations

Based on the type of materials/ products supplied by the supplier, EHS assessment and
control is required at various levels. While BP 2 has several levels of supplier relations,
ranging from Tier 1 Tier 3/ Tier4, the higher the level, the greater the level of involvement
in EHS issues.
Depending on the supplier network and the assessment of risk in the supply chain, the
suppliers may be moved up in the (risk) tiers, in order to help facilitate better control and
monitoring of EHS issues.

BP2 conducts a complete annual supplier EHS review, for all of its Tier 1 suppliers, and these
suppliers are encouraged to carry out similar audits of their tier 1 suppliers and so on. The
EHS results for 2010 are shown in Table 2. Supplier risk is categorized as low, moderate,
high or unacceptable.

Table 2 Annual EHS Assessment, Asia, Americas and Europe, 2010

Supplier Assessment (by region)
Risk Category Asia Americas Europe &
Africa
Low 4 2 4
Moderate 5 7 10
High 23 7 2
Unacceptable 2 0 0
Total 34 16 16

Figure 11. Global EHS Assessment Results, 2007 2010
20
27
32
34
40
43
51
2
3 3
4
5
6
8
0
10
20
30
40
50
60
2
0
0
7

2
0
0
8

2
0
0
9

Q
1

2
0
1
0

Q
2

2
0
1
0

Q
3

2
0
1
0

Q
4

2
0
1
0

High Risk Category
Unacceptable Risk
Category
C
u
r
r
e
n
t

S
u
p
p
l
i
e
r
s

Figure 11 indicates that BP2 is currently using 51 facilities which are high risk (HR) and 8
that are deemed unacceptable risk (UR). Even though procedures state that BP2 not deal with
the UR grade suppliers, there are situations which necessitate doing business with them and
improving their performance over a certain consensual timescale.

While the decision to outsource is complex and relies on the interplay of several factor, BP2
pays careful attention to the following issues;

x Low cost manufacturing capability
x Tax strategy
x EHS and Quality Standards of suppliers
x Local government incentives for development and employment
x Proximity to key markets
x Stage of life cycle of product
x Level of investment required to streamline supplier capabilities
x Supplier reputation
x Fit with sourcing strategy

The sourcing and outsourcing decisions, hinges on a trade off between cost and supply chain
risk. An effective sourcing/ outsourcing strategy would take into account the factors
mentioned above, and optimize the cost Vs supply chain risk relation. The problem facing
most pharmaceutical companies today is to reduce costs while minimizing supply chain risk.

Table 3 shows the kind of analysis goes into making a sourcing decision. The sourcing team,
selected three sites where the product could be developed India, Germany and France. A
range of scenarios were developed for sourcing the products from these locations which are
listed in table 3.

Table 3. Sourcing Cost Vs. Risk Assessment, BP2

Sourcing Decision
No. Scenario Potential
Savings
Risk Rating
1
Indian Co 100% $23.5m 66%
2
French Co 100% $3.5m 31%
3
German Co 100% $2.8m 26%
4
French Co 70%
Indian Co 30%
$17.6m 56%
5
German Co 25%
French Company 75%
$7.6m 44%
6
German Co 20%
French Co 50%
Indian Co 30%
$8.0m 51%

As you can see, some of the more cost saving strategies have a greater risk component.

The more risk averse strategies lead to a total potential savings of only $ 2 3 m, a figure
which doesnt justify the transfer of products to another location. On the other hand, the
decision to transfer the production of the component to India completely leads to a substantial
saving of $ 23.5m. Although in this case the transfer of products is justified, based on the
potential savings, the risk factor of 66% is much too high; a compromise is needed.

BP2 resorts to a staged approach. They found it best to source product based on a
combination of strategies 4 and 5 (from table 3). The strategy was to initially outsource only
to France and Germany. This would lead to an initial saving of $ 7.6m.

In the meantime, BP2 would engage the Indian suppliers to improve their EHS and quality
standards to an acceptable level. Following which, 30% of the production could be
outsourced to the Indian suppliers, as per strategy 4, with the remaining 70% outsourced to
the French suppliers. This step is essentially about switching supply from the German to the
Indian supplier.

In this manner, BP2 could systematically increase the level of outsourcing to a lower cost
location, while reducing the risk component that these locations generally impose on the
supply chain. An obvious long-term strategy would be to increase the quantity sourced from
India up to 50 75% (or even higher), in order to realize the true potential of this low cost
destination. However, ongoing EHS and Quality improvement would be necessary to make
this a viable decision.

Conclusion

While outsourcing to low cost locations can help alleviate the burden of ever increasing R &
D costs, it is not a panacea. Although it does complement the lean working models of Pharma
giants today, it also adds to supply chain complexity and consequently, risk.

Lead times, for instance, are stretched substantially. The movement of goods between borders
can take a considerable amount of time and can sometimes also introduce critical bottlenecks
in the supply network. Customs and Import policies in different parts of the world vary
significantly and are also known to be a particularly high risk proposition in the developing
counties. The risk of contamination, counterfeiting and theft of shipment is also quite high.

India and China to hold tremendous potential, however, the quality and EHS threat in these
country is very real, and something that cannot be ignored. In light of this, when turning to a
low cost supplier, companies must support the supplier to mitigate the looming threat of
quality and safety risks; as in the case of BP1 and BP2. These cases provide a practical
approach to managing risk in extended supply networks. While companies may resort to a
range of supplier development initiatives, deploying quality and EHS teams at the supplier
plants is considered the most effective way to foster lasting performance improvements in
quality and safety standards.

Fostering such performance improvement however, comes at a cost, as a result of which, the
cost benefit in the short run would tend to be rather unimpressive. However, when such
efforts are launched with a long-term perspective in mind, and which they generally are, they
have the potential to drive down costs considerably and enhance competitiveness.

The key lies in balancing the cost risk relation and developing risk mitigation or
contingency plans that will stand the test of outsourcing risk.

Questions

1. R & D is considered the core competence of a brand name manufacturer. How
suitable is it to outsource components of this business function?
2. What are your thoughts on the global Pharma supply chain ? What kind of risks
would it be susceptible to?
3. Comment on the risk management framework at BP1.
4. Comment on the sourcing decision of BP2 presented in the case. What do you learn
from it?

Appendix A - The power of generics

Generics bring substantial savings, as illustrated in the Table below, reductions in retail price
up to 98% when compared with the brand name/ blockbuster versions of the drug. On
average, generics are priced at approximately 30% of the brand name originals (Zhang,
2008).

Table 1. Generics VS Branded Drugs

Brand Name Drug/
Strength
Quantity
(30 day
supply)
Brand Name
Cost
Generic Cost Generic Name Generic
Savings
Amerge/ 2.5 mg 30 $ 1042 $ 505 Naratriptan Hcl $ 536
Armidex/ 1 mg 30 $ 449 $ 24 Anastrozole $ 425
Prozac/ 20 mg 30 $ 136 $ 3 Fluoxetine Hcl $ 133
Valium/ 5 mg 60 $ 157 $ 1.8 Diazepam $ 155

Given their ability to mark down price so drastically, Generic players have strengthened their
grasp on the market. The trend has changed drastically since 2000, and what was once a
rather evenly poised battle between generic and brand name manufacturers, is now becoming
one sided
105
. Today, Generic medicines make up 78% of the market by value, leaving a
meager 22% for the branded, innovative players.

References

Anon. [1],(2011). Merck and GSK expand their sales forces in China. Medical Marketing and
Media, January 13, 2011.
Anon. [2], (2009). India is poised to be in the forefront of outsourcing by Pharma companies
Accessed at [http://www.stockmarketsreview.com/extras/india_is_poised_to_be_in_the_
forefront_of_outsourcing_by_pharma_companies_20100813_31321/]. Access Date
[09/02/2012].
BP1 Annual Report, (2011). . Access date [01/01/2012].
Blum, J., (2008). China and US clash over cause of heparin deaths. Accessed at
[Bloomberg.com]. Access date [01/02/2012].

105
Changes in legislation that allow generics to overcome certain patent barriers, added
incentives for bringing generics to the market and expedited generic drug approval
processes have contributed to this era of generic domination (Manso and Sokol, 2007).
Gray, J., (2011). Quality risk in offshore manufacturing: Evidence from the pharmaceutical
industry. Journal of operations management, Issues 29, pp 737 752.

Giniat et al., (2011). Chinas pharmaceutical industry poised for a giant leap. Accessed at
[www.kpmg.com]. Access date [22/01/2012].
IMAP Pharma & Biotech Industry Global Report 2011, pp 3. Accessed at
[www.google.com]. Access Date [18/01/2012].
Jain et al., (2010). Clinical Research Future Aspects. Scholars research library, Der
Pharmacia Lettre, 2 (1), pp 122 130.
KPMG (2011), Pharma outsourcing trends. Accessed at [www.google.com]. Access date
[06/01/2012].
Lee, H., (2010). BP2 update. Accessed at [http://www.wsws.org/articles/2010/may2010/pfiz-
m19.shtml]. Accessed Date [29/01/2012].
Marucheck et al. (2011). Product safety and security in the global supply chain: Issues,
challenges and research opportunities. Journal of operations management, Issue 29, pp 707
720.
Mertens, G. (2005). Beyond the Blockbuster Drug: Strategies for Nichebuster Drugs,
Targeted Therapies and Personalized Medicine. Business Insights Ltd.
Manso, P.J. and Sokol, A.L. (2007). Life cycle management of ageing pharmaceutical assets.
Pharmaceutical law insight. Vol. 3, No. 7, pp 16 19.
Mohan, H., (2009). India close second to china in clinical trials registered to be conducted in
Asia. Dolcera Study White Paper.
Murray, K., (2010). Transfer of products to low cost destinations. Masters dissertation.
Peterson, M., (2012). BP 2 recalls 1 million birth control packs on wrong dosage, 2012.
Access at [http://www.bloomberg.com/news/2012-01-31/BP2-recalls-1-million-birth-control-
packs-after-mix-up-in-pill-dosages.html]. Access Date [25/01/2012].
BP2Annual Report, (2011).Access date [05/01/2012].
PWC Report, The changing dynamics of pharma outsourcing in Asia, (2008). Accessed at
[www.google.com]. Access date [02/01/2012].
Taylor, N., (2009). India vs China. Outsource what to where. Accessed at
[http://www.outsourcing-pharma.com/Preclinical-Research/India-vs-China-outsource-what-
to-where]. Access Date [03/02/2012].


PART 3 SUPPLY CHAIN IMPROVEMENT
THE SERVQUAL GAPS MODEL USED TO ASSESS AND IMPROVE SUPPLIER
PERFORMANCE: EVIDENCE FROM THE PHARMACEUTICAL INDUSTRY
Teaching Abstract
module at both undergraduate and graduate levels. The case is designed to achieve two
objectives;
9 To inform students about the uniqueness of R & D in the pharmaceutical industry and the
role that operations management plays in this context.
9 To facilitate an appreciation of the concept of Service Quality (SQ) and the SERVQUAL Gaps
model of SQ.
Structure
9 The Concept of Service Quality
9 The case of a big pharmaceutical company (BP) in China
9 Introduction of BP and their business
9 Pharmaceutical R & D
9 The role of partner firms
9 Performance Appraisal partner
9 Applying the SERVQUAL Gaps model to help improve supplier performance
9 Discussion
Key Issues
9 The nature of Pharmaceutical R & D and its uniqueness. Developing points of difference or
similarity with other industries.
9 Discussing the concept of Service Quality and its interpretation from the SERVQUAL
perspective.
9 Applying the SERVQUAL Gaps model by Parasuraman et al (1985) to the case of BP and
partner.

The SERVQUAL Gaps Model used to assess and improve
supplier performance: Evidence from the pharmaceutical
industry

Introduction

Service Quality (SQ) is a concept that has aroused considerable interest and debate in
research literature because of the inherent difficulty in both defining it and measuring it. No
real consensus has emerged on either its definition or measurement (Wisniewski, 2001). A
rather commonly used definition however describes Quality as the degree to which the
product and/or service meets customer needs. This definition is based on the SERVQUAL
method which is founded on the view that the customers assessment of SQ is paramount
(Parasuraman et al, 1985 and Singh and Khanduja, 2010). Service quality can thus be defined
as the difference between customer expectations of service and the perception of the actual
service received. If expectations are greater than performance, then perceived quality is less
than satisfactory and can lead to customer dissatisfaction (Parasuraman et al., 1985;
Parasuraman et al., 1988; Lewis and Mitchell, 1990).
The SERVQUAL approach described in this case is one of the most common methods used
for studying the concept of service quality. As per Brown and Bond (1995), "the gaps model
is one of the best received and most heuristically valuable contributions to the services
literature". That doesnt however mean, that it doesnt have its own set of limitations.
Let us now take a look at a big pharmaceutical company (BP) case and see this construct
(SERVQUAL) working in practice, as a means of driving performance improvements in
service delivery.

The case of BP

The BP is one of the largest Pharmaceutical Companies in the world. Active in over a
hundred countries, the company operates in six core health care areas
106
and employs over
61000 people worldwide. BP was ranked seventh (2010) by annual sales revenues ($ 32.2
billion) which in 2011 rose to over $ 33 billion. BP has an impressive product portfolio with
over a 100 generic products being licensed across 30 emerging markets. With 10 blockbuster
drugs
107
under their belt at the moment, BP has a fine legacy of investing heavily in R & D.

106
BP develop and commercialize prescription medicines for six core health care areas
i.e. Cardiovascular, Gastrointestinal, Infection, Neuroscience, Oncology and Respiratory
+ Inflammation.
107
A Blockbuster drug is a drug which achieves annual sales of > $ 1billion.
In 2011 alone, a whopping 4.2 billion was spent on drug research and development.
Currently, its product pipeline has 92 active projects in clinical development with 9 projects
in phase 3. However, 34 projects were abandoned this year - indicative of the complexity of
drug research and development not all drug discovery projects result in successful products
with only a fraction reaching the potential of a blockbuster product.
Pharmaceutical product development is indeed a complex and high-risk scenario. After a
grueling 12 years (or more), one product emerges from the web of intricate clinical research
and stringent regulatory constraints only to encounter more potential turbulence in the global
pharmaceutical market. Figure 1 indicates the different stages through which a drug must
pass; right from inception, all the way through to market authorization. Studies show that the
cost of developing a new chemical or biological entity can be enormous and was estimated to
be approximately $ 1.3 billion in 2005 (Di Masi, 2007 cited in EFPIA report 2011).
Clinical trials, must be conducted successfully in order to commercialize a pharmaceutical
product by testing its safety and efficacy on a large enough patient pool. Appendix A
illustrates the characteristics of Clinical Trials. Clinical trials represent a significant portion
of the R & D spend and typically take 5 10 years to complete. Pharmaceutical companies
will spend approximately 50 60 % of their R & D budget in conducting clinical trials in a
safe and timely manner. Setting up and managing clinical trials for the entire product pipeline
(92 products for BP) is indeed complex but also represents a goldmine of opportunity.
For a Global Pharmaceutical giant like BP, the operations and supply chain management
problem is too complex to be managed single-handedly. Further, the nature of clinical trials is
such that it forces pharmaceutical companies to indulge in tasks that are far from its core
competence. Logistics, patient recruitment, data collection and interpretation, supply
management, regulatory procedures, reverse logistics, sourcing, other ancillary services like
packaging and labeling, are just a few operations that must be looked at other than the core R
& D activities. In order maintain their competitiveness in the market, pharmaceutical
companies must partner with (supplier) organizations that can provide support services and
that can aid in minimizing costs and driving efficiency in the entire supply chain.


Figure 1. Phases in Drug Discovery and Development (Source: EFPIA, 2011)
M
o
l
e
c
u
l
e
s
s
c
r
e
e
n
e
d
(
1
0
5
1
0
6
)

Leading Contract Research Organizations (CROs) have the capability to provide such support
services and simplify the task of managing an elaborate supply network. With their wide
range of specialized services
108
they are worthy allies and can aid in driving costs down and
expediting the time to market of pharmaceutical products. Cost saving of approximately 25
30% can be achieved by outsourcing just the Logistics operations, which can be to the tune of
$ 20 30 million annually, for just Clinical Trial Logistics (CTL) i.e. excluding the costs of
commercial distribution. BP pays great attention to developing such alliances; seeking out
competent vendors and collaborating with leading organizations in drug development and its
allied spaces. One such alliance is with a global Contract Research Organisation (CRO)
providing support services to the pharmaceutical industry. Figure 2 shows the list of services
provided by CRO to assist BP in their R & D.

108
Services spectrum of a typical CRO - Drug Discovery and Development, ancillary
service like primary and secondary packing, re-labeling, sourcing, inventory
management and order processing, distribution, returns and destruction, site support,
data analysis and interpretation, designing clinical trials, post marketing study,
documentation and so on.
Figure 2. CRO - Services Spectrum
109

ClinicalSupplyChainServices
Manufacturing
Analy cal
Tes ng
Sourcing
StabilityTes ng
Primary
Packaging
Labeling
Secondary
Packaging
Interac ve
Response
Technologies
BioRepository
Distribu on&
Storage
Returnsand
Destruc on
rac
Import&
CustomsAdvice
SupplyChainDesignandConsul ng

Performance Appraisal CRO
BP develops high performance relations with its suppliers, expecting nothing short of the
best, with continuous improvement at every possible step of the way. Earlier this year, the
management at BP noticed some weak links in the China operations of CRO. This was

109
Sourcing: Procurement of ancillary clinical material like comparators and kits from a
global supply network to ensure timely supply of clinical material.
Packing and Labeling: Cold Packaging, blistering, carding, bottling, kit assembly, label
design, translation and printing to support a variety of Chemical and Biological
compound studies across multiple geographies.
Bio Repository: Preserving biological specimens for extended periods of time to support
global studies for the entire length of the study and beyond
Manufacturing: Complete support manufacturing including filing, blinding, API dosing
and sourcing.
Returns and Destruction: Management of expired or unused product at the study sites
which is either quarantined or destroyed by the service provider on request from the
sponsor.
Interactive Response technologies: refer to the automated Information Systems that
are used to optimize order processing, patient recruitment and diaries, data
management and so on at the investigation sites.
Total Transportation Management: Courier selection and management, import /
expert advice and support, customs and regulatory guidance, GMP storage and
distribution facilities, global QA support, inventory management and track and trace
mainly a result of frequent escalations and complaints from the China team regarding the
service delivery of CRO. Soon after, an appraisal of CROs capabilities was conducted and
some key performance gaps were identified. The performance of CRO was benchmarked
against the performance of similar suppliers in the Chinese market - technical, managerial
and overall capabilities were tested. Figure 3 shows the results of the performance appraisal.

Figure 3. Performance Gaps Summary
" #" $" %" &" ' " ( " ) " *" +"
Cost
Loca onsandPartners
Infrastructure
PowerRa ng
StakeholderPercep ons
Compliance
Responsiveness
Flexibility
Capacity
Communica on
Technicalknowhow
Reliability
Troubleshoo ng
ServiceDelivery
Capabili es
RiskRa ng
Influenceonauthori es
CustomerFocus
Scores
(1=Min,5=Max)
FisherBeijing
BestinClassPerformance
PerformanceGap

CRO received particulary high scores for their systems, infrastrucutre and capacity. Their
low scores for service delivery and overall reliability indicate potential improvement areas.
Further, relatively lower scores in competence and know how were due to the perceived in-
expereince of the CRO staff. Their lack of proactiveness and inability to solve problems in
the past resulted in low scores for troubleshooting capability. Stakeholder perceptions were
also relatively platonic as a result and needed to be improved.

Improving performance in the areas which affected the perceived service quality seemed
like a good place to start. The service quality gaps model was used to assess the performance
shortfalls of CRO and as a means of potentially closing these service gaps by exposing some
of the root causes of below par performance.

Applying the Gaps Model

The gaps model of service quality was first developed by authors, Parasuraman, Zeithaml and
Berry at Texas A&M and North Carolina Universities, in 1985. They proposed that the
consumers perception of Quality is contingent on 4 Gaps that exist in the organisation
consumer environments. Figure 4 illustrates the Gaps model (Parasuraman et al, 1985)
adapted to the BP CRO case.
The gaps model identifies four gaps that are often the key contributors to service failures or
poor perception of Service Quality by the customer (the customer gap) and in the case of
CRO, possible causes of the low ratings against service quality measures.
Customer Gap (Gap 5) = f (Gap 1, Gap 2, Gap 3, Gap 4)

Gap 5 is the Customer Gap i.e. and difference between the expected and perceived service
levels. Gaps 1, 2, 3 and 4 are the provider gaps which subsequently lead to the customer gap.

Figure 4 Service Quality Gaps
ProjectRequirements PastPerformance
Performanceofother
ClinicalLogis csCompanies
ExpectedService
Externalcommunica onsto
customers(AZ)
Servicedelivery
PerceivedService
Transla onofpercep ons
intoservicequality
specifica ons
Managementpercep onsof
customersexpecta ons
cifica
Trans
E
M
Gap4
Gap2
Gap3
Gap1
AstraZeneca
FisherClinicalServices
CustomerGap
Problems
Encountered
Gap1

Perceived
Service
Expected
Service
The5determinantsof
ServiceQuality
1. Tangibles
2. Reliability
3. Responsiveness
4. Assurance
5. Empathy

As per the model, perceived service quality can be defined as, the difference between
consumers expectation and actual (experienced) perceptions of service. This eventually
depends on the size and the direction of the four gaps mentioned above. For instance, Gap 3
will be favourable if the delivery of a service exceeds the standards of service required by the
organization, and it will be unfavourable when the specifications of the service delivered are
not met (Nguyen, 2005). The SERVQUAL concept has 5 key dimensions, sometimes also
called the determinants of service quality
110
i.e. Tangibles, Reliability, Responsiveness,
Assurance and Empathy (Parasuraman et al, 1985; Parasuraman et al, 1988; Berry et al,
1988).
Gap 1 is the Knowledge Gap and it results from the service provider not knowing what the
customer wants. It generally reflects inadequate market research and lack of market
orientation. When applied to the BP-CRO Case, the following have been seen as potential
causes of Gap 1.
x Insufficient use of market research (MR) and where used, MR probably lacked
service quality measures.
x CRO had probably not factored in customer requirements in China before
developing their Standard Operating Procedures (SOPs)

x Lack of upward communication i.e. lack of interaction between the management and
customers; insufficient interaction between frontline and managers in the service
organization; too many layers of communication between the concerned people.
x There existed a very distinct disconnect between the team at BP and the team
at CRO. Quarterly reviews are not considered sufficient.
x Insufficient relationship focus i.e. focusing on new customer rather than existing
customers? Focus on transactions rather than a lasting relationship.
x CRO was a fairly new organization and could potentially be spending too
much time trying to acquire and service new clients. This could be seen as a
particular reason for lack of customer relationship focus. The power rating is
particularly important in this case and could potentially be another reason for
lack of customer focus.

x Inadequate service recovery measures i.e. lack of encouragement to listen to customer
complaints; failure to make amends when things go wrong; no mechanisms in place
to ensure service recovery.
x CRO did not have a systematic troubleshooting protocol. Other suppliers made
special arrangements to provide 24x7 service delivery to ensure prompt
service recovery when needed. There was no sign of such efforts at the end of
CRO.

Gap 2 is the Service Design and Standards Gap as is characterized by not having the right
service designs and standards. In case of BP and CRO, the following have been seen to
contribute to Gap 2.

110
Tangibles: Physical facilities, equipment and appearance of personnel. Reliability:
Ability to perform the promised service dependably and accurately. Responsiveness:
Willingness to help customers and provide prompt service. Assurance: (including
competence, courtesy, credibility and security). Knowledge and courtesy of employees
and their ability to inspire trust and confidence. Empathy: (including access,
communication, understanding the customer). Caring and individualized attention that
the firm provides to its customers. (Van Iwaarden et al cited in Singh et al, 2010)
x Absence of customer driven standards i.e. there is no formal process of setting service
quality goals that involve the customers.
x There seemed to be little or no involvement of BP staff in developing the
service quality parameters and hence a disparity existed between the expected
and perceived levels of service.

x Inappropriate evidence of service quality in service design. This can be attributed to
the inability to develop tangibles in line with customer expectations. This could also
result from failure to update the service parameters as per changing customer
requirements.
x Essential parameters like order receipt deadlines, sourcing capabilities,
frequent performance reviews, collaboration, adherence to Global SOPs and
so on were not given the required attention. This indicated that CRO did not
have a clear idea about the tangibles that BP would like to see in service
delivery.

Gap 3 is the Service Performance Gap i.e. not delivering to service standards. This gap occurs
from inefficiencies in putting plans into action. Applying this to the CRO case;
x Deficiencies in the human resource policies. Inappropriate compensation systems
and to some extent, recruitment policies have been seen as potential causes of
problems.
x There seemed to be a definite disconnect between the aspects of service that
are important to BP and the performance appraisal parameters of the project
management staff at CRO. Recruitment policies were seen as a second
potential cause for Gap 3 as CRO staff was relatively inexperienced
compared to the other suppliers. While this is a trend in most emerging
business sections, it reflected a lack of commitment on CROs part to
develop robust and top-notch operations at CRO.

x Managing external service partners and channel conflicts.
x CRO was over - dependent on their partners to render a considerable part of
the services. Courier service was completely outsourced, customs clearance
and import license was acquired through a customs broker, labeling was
done through a 3
rd
party vendor and returns and destruction were also done
with the help of an external partner. CRO needed to be very proactive in
managing these relationships and have stringent performance measures,
which they seemed to have taken lightly. One of the rather serious service
failures can be attributed to ineffective management of external suppliers
111
.

Gap 4 also known as the Communication Gap, results from not matching performance to
promise. With reference to the CRO case, the following observations can be made.

111
Negligence on the part of the DHL staff responsible for delivering couriers to the
investigation site led to a rather serious service failure.
x Ineffective management of customer expectations. Not communicating to
customers some of the challenges in meeting their demands. Lack of collaborative
working style.

x Absence of a strong internal marketing program that empowers employees and
motivates them to deliver the highest levels of service is seen as another possible
contributor to the service quality problem.
x While CRO have the 4 Is internal marketing program which does receive a
lot of attention in their external communication, there was greater need to
reinforce its importance in the China facility. As there was a large cultural
disconnect in China, it might have been useful to have a mandarin
translation for the same.
x Over-promising through external communication.
x For instance, CROs promise of their import capabilities did not match
their service capability. The Faslodex case which delayed clinical supply
for over 60 days was a major service failure.

The gaps discussed here were the key contributors to the subsequent customer gap and
consequently poor perceptions of service quality. The SERVQUAL model used in this
context was used to close the gaps in (refer figure 3) perceived customer focus, service
delivery, reliability, troubleshooting experience, competence and know- how, flexibility,
responsiveness, communication and stakeholder perceptions.

Discussion
Although there is little mention of its intricacies, Operations and Supply Management plays a
critical role in enhancing the value and productivity of drug R & D in the pharmaceutical
industry. Its role is without a doubt, strategic. Supplier alliances of the sort described in the
case play an essential role in driving down costs, adding flexibility, fostering innovation and
efficiency (in outsourced services), achieving lean-ness in the supply chain and most
importantly, reducing the time to market of pharmaceutical products. In such a scenario,
developing and maintaining high performance supplier relations is absolutely essential.

Given the resource constraints under which organizations must operate, it is essential that
customer expectations are properly understood and measured from the customers
perspective. Gaps in service quality must be identified and causes of un-satisfactory service
or service failures should be resolved in a timely manner (service recovery). Under this
pretext, the SERVQUAL Gaps Model can serve as an agent to drive Service Quality and
subsequently a high performance supply chain. Additionally, it can be quite useful in
assisting managers in identifying cost-effective ways of closing service quality gaps and in
prioritizing which gaps should receive immediate attention a critical decision given scarcity
of resources (Singh and Khanduja, 2010).

As per Gaster (1995), "because service provision is complex, it is not simply a matter of
meeting expressed needs, but of finding out unexpressed needs, setting priorities, allocating
resources and justifying or accounting for what has been done". The SERVQUAL model can
help provide a useful guideline in this context.
In the case of BP described above, the SERVQUAL model was used not only to improve
buyer perceptions of service quality but it also helped in fostering greater collaboration. This
is essential in a strategic buyer supplier relationship and is often considered the backbone of
value co- creation. The end result being a more efficient and flexible supply chain and added
competitiveness in the market.

Questions

1. The case describes some aspects of Pharmaceutical R & D. How similar or different is
pharmaceutical R & D to an industry of your choice? What is the role of Operations and
Supply Management here?

2. What is your understanding of the concept of service quality? Is it more difficult to gauge
the quality of a service as opposed to a product? Why?

3. Observe how the SERVQUAL Gaps model has been applied to the case. Could you apply
it to help solve similar issues in other industries?

4. What according to you could be potential limitations of the SERVQUAL model and its
assessment of Quality?

Appendix Clinical Trial Phases


References

Berry L., Parasuraman A. & Zeithaml V. (1988), The Service-Quality Puzzle, Business Horizons, Sep-Oct, pp
35-43.

Buttle, F. (1995). SERVQUAL: Review, Critique, Research agenda. European Journal of Marketing, Vol 30,
No. 1, pp. 8 32.

Parasuraman A., Zeithaml V. & Berry L. (1985), A conceptual model of service quality and its implications for
future research, Journal of Marketing, Vol 49, pp 41-50.

Parasuraman A., Zeithaml V. & Berry L. (1988), SERVQUAL: A Multiple-Item Scale for Measuring Consumer
Perceptions of Service Quality, Journal of Retailing; Vol. 64 Issue 1, pp12-40

Singh et al, (2010). SERVQUAL and model of service quality gaps: A framework for determining and
prioritizing critical factors from faculty perspective in higher education. International Journal of Engineering
Science and Technology, vol. 2 (7), pp 3297 3304.

Zeithaml V., Berry L. & Parasuraman A., (1988), Communication and control processes in the delivery of
service quality, Journal of Marketing, Vol 52, pp 35-48.

NEGOTIATION AND SUPPLIER DEVELOPMENT
Teaching Abstract

9 To illustrate how to develop a negotiation strategy according to the suppliers
characteristics
9 To introduce the implementation of supplier development programs to reduce supply chain
costs and risks
this context
Structure

9 Background

9 Description of the problem

Key Issues

9 To conduct an economic analysis of the sourcing project
9 Discussing the the negotiation strategy and supply chain strategy for the company

Negotiation and supplier development

IJK is a large company that makes pharmaceutical products worldwide. A new drug
demands three components (A, B, and C) which can be sourced from two suppliers (X and
Y). The quotes from supplier X and Y for product A, B, and C are listed in table 1. IJK needs
to negotiate a bundle of projects from suppliers.

Table 1. Quotes for the three products

Product Price ($/kg) Requirement (Kg/annum)
A 120 400
B 80 800
C 85 2000

For Supplier X, product A is a new product that has to be developed for IJK. Product B is
its regular product and product C is a by-product of Supplier Xs regular product. Supplier Y
is the alternative supplier for the three products. Products A & B are supplier Ys regular
products and they need to develop product C just for IJK. The total budget allotted for this
bundle of projects is 250,000$.

Questions:
a) Conduct an economic analysis for this project and discuss the negotiation strategy.
b) Recommend a sourcing plan for IJK for fixing the deal at budget.
c) Outline a supply chain management strategy for IJK.


Solution:
a) For this bundle of projects we have to first arrive at the negotiation strategy prior to
starting the negotiation. We have to prioritize on which product to negotiate in order to fix
the deal at 250,000$.
Spend on Product A: 120 * 400 = 48,000$ (17%)
Spend on Product B: 80 * 800 = 64,000$ (23%)
Spend on Product C: 85 * 2000 = 170,000$ (60%)

We have to negotiate on Product C price as the contribution is very high (60% of spend).
Product C is a by-product for supplier X so we have a higher scope for negotiating a lower
price for Product C with this supplier. Conversely, Supplier Y needs to develop this product
& will not be ready to negotiate for Product C as they do not have any experience in relation
to this product.

b) We suggest the following sourcing plan:

Supplier X Supplier Y
Product A (119 $/kg) 10% 90%
Product B (75.5 $/kg) 50% 50%
Product C (71 $/kg) 100%

In our plan, Product C will be exclusively sourced from Supplier X. Supplier X has more
experience in manufacturing and high batch quantity which also gives IJK more bargaining
power. Product B will be equally shared between Supplier X and Supplier Y as both of them
are good at producing product B and using two suppliers can reduce supply chain risks. The
majority of product A will be sourced from supplier Y as this supplier has more experience.
The rest will be sourced from supplier X to reduce risk. The total cost would be 119*400
(product A) +75.5*800 (product B) + 71*2000 (product c) = 250000

c) Supply chain strategy
x Build a long term relationship with suppliers
x Supplier development: motivate supplier X to develop product A and supplier Y to
develop product C.
x Work with suppliers: participate in suppliers operations (e.g. R&D and
manufacturing) to co-create value with them.
x Source the three products from the two suppliers to reduce supply chain risk.
x Build a sustainable lean supply chain.


STREAMING THE CLINICAL SUPPLY CHAIN
Teaching Abstract

9 To introduce the structure and operations of an outsourced clinical supply chain in China
9 To study the supplier development and collaboration in clinical trial operations
this context.
Structure

9 Introduction
9 R&D in pharmaceutical industry
9 Introduction of Chinese pharmaceutical market
9 Clinical trials outsourcing in China
9 The competitive advantage of China in clinical trials
9 Clinical trial outsourcing
9 Clinical supply chain
9 Clinical supply chain services
9 Improving the clinical supply chain
9 The challenges of current clinical supply chain
9 The direct distribution model
Key Issues

9 The nature of clinical trial outsourcing
9 Discussing the challenges and opportunities faced by pharmaceutical companies in
clinical trials logistics
9 Comparing the traditional clinical trial operations and direct distribution model

Streaming the clinical supply chain

Introduction
The pharmaceutical industry is known for its unique set of challenges in new product
development. After a gruelling 12 years (or more), one product emerges from the web of
intricate clinical research and stringent regulatory constraints and reaches the market
112
.
Clinical trials typically take 58 years to complete and this constitutes a considerable portion
of the research and development (R&D) spends for pharmaceutical companies (figure 1).
Figure 2 shows the typical steps for ongoing clinical trials through phrase 1 to phrase 4.
Figure 1. Percentage of R&D spends by pharma companies
113

112
EFPIA, The Pharmaceutical Industry In Figures: Key Data, 2011 Accessed At
[Http://Www.Efpia.Org/Content/Default.Asp?Pageid=608] Access Date [11/06/2011].
113
PhRMA Annual Membership Survey 2011
Figure 2. Ongoing cyclical process through phase 1- phase 4 clinical trials

China is one of the largest pharmaceutical markets in the world and is expected to get
even bigger in the years to come. With total revenue of 25.7 billion in 2010, China occupied
the number five spot in the global pharmaceuticals market. The market continued to grow at a
consistently high rate during 2010 and was seen to have a 17 % growth
114
. It is anticipated
that the market will be even more attractive and experience an annual growth rate of
approximately 20% from 2010 to 2015, making it the second largest pharmaceutical
market
115
.
The aggressive growth patterns seen in the Chinese market and its sheer volume have
caught the interest of companies worldwide. However, before companies can launch their
products in the Chinese market, they must complete three phases of clinical trials and secure
market authorization. In addition the rapid proliferation of global clinical trials in China has
further added to the number of clinical trials currently being conducted in the Chinese market.

Clinical trials outsourcing in China

In addition to the fast paced growth of China pharmaceuticals market, China has also
emerged as a hub for global clinical trials. This trend has been attributed to the significantly
lower costs of conducting a global clinical trial in China as opposed to developed countries
such as the USA or UK
116
. The key contributors to this are the large pool of patients, faster
recruitment, lower labour and infrastructure costs, numerous sites for clinical trials and a
large talent pool. In 2009, China was the biggest market for global clinical trials in Asia and
accounted for 41% of the market
117
.

114
Datamonitor industry report, (2010) China Pharmaceutical Market: 2015 Forecast
115
KPMG Industry Report (2011). Chinas pharmaceutical industry--- Poised for the giant
leap
116
Huang, G. Xu, G., Zang, L., Halloran, L.A., and Zhong, J.Q. (2009). Conducting Global
Clinical Trials in Asia. Monitor Report 23:42-46.
117
Mohan, H. (2009). India Close Second to China in Clinical Trial Registered To Be
Conducted In Asia. Dolcera Study White---Paper.
The structure of a typical clinical supply chain is shown figure 3. The task of
servicing multiple investigation sites is indeed complex. Clinical sites can be as many as 20
30 for each clinical product being tested and spread across the world and the logistics
requirements in maintaining consistent supply can be significant.
Figure 3. Structure of clinical supply chain

Since pharmaceutical companies lack the specialism in managing a logistics operation
of the nature described above, they tend to outsource their clinical trial logistics to specialists
in the field. In addition, the service providers also provide efficient and cost effective
inventory management, warehousing and order processing solutions and standardised clinical
trial management systems that allow the onsite staff to coordinate the supply of clinical
material.

Clinical supply chain

When an order for a study drug is placed, a clinical trial service provider (CTSP) is informed
of this in parallel with the clinical supply hub. The hub will then make arrangements to
dispatch the shipment. Prior to this, it might get shipping clearance from the pharmaceutical
company. CTSP will check the shipping and import permit documents for consistency and
compliance with the local import regulations in China. If the documents are found to be
complete and correct, CTSP will initiate the shipment via the clinical supply hub. CTSP has a
modular service offering which they customize the needs of their clients and manage the
clinical supply chain from end to end (figure 4).


Figure 4. Clinical supply chain services

Import and Customs Clearance
Before clinical material can enter China, an import permit must be acquired. CTSP will apply
for the import permit while the shipment is on its way to China and ideally secure the import
permit prior to the arrival of the shipment in China.
Once the import permit is acquired and the clinical material is received in China, it
must clear customs before it can be released for dispatch to the CTSP depot. Custom
clearance is perceived as one of the most severe bottlenecks in the systems. The ambiguous
and nonstandard regulatory policies are considered the key contributors to this risk. The
customs inspection of the products is the main obstacle during this phase and special care
should be taken to prevent a holdup. CTSP facilitates this with the help of a third party
imports and customs broker. Once the materials receive clearance, CTSP pays the duty and
VAT (value added tax) on behalf of the pharmaceutical company and the material becomes
available for dispatch to the CTSP depot the next day.
Accurate valuation is another important factor in the customs clearance process.
Under valuing the goods is considered extremely risky as any discrepancies detected in the
near or distant future (following the launch of the drug in the local market) will result in
severe penalties by the customs authority. To prevent this, companies are actually known to
value their products higher during customs clearance and pay higher duty and VAT to
prevent stalling and severe penalties in the long run.

Receiving Shipments
Once the material reaches CTSP, Standard Operating Procedures (SOPs) are used to book the
material into the facility and systems. It must be processed before it becomes available for
dispatch. Clinical material must be checked to ensure consistency and a physical check
followed by a quality assurance (QA) check ensures this. Goods that are found damaged are
quarantined until QA approval is received from the pharmaceutical company. The delays
caused during QA checks have been identified as a potential point of failure in the timely
completion of the operation. Having an internal specialist who can advise on such matters
would help reduce lead times by 25 days.

Packing and Labelling
Depending on the requirements of the study, the materials will need ancillary services like
secondary packing, re-labelling, primary packing, comparator sourcing, packing and labelling,
and so on. These are ideally carried out at the local supply depot. However, in the event that
the supply depot is not equipped with the services needed, the materials are received in a
finished state from the clinical supply hub and stored at the local depot for dispatch directly
to site. This can prove to be more expensive.
The labelling protocol was found to be robust and didnt expose any weak areas.
However, labelling is currently carried out through a third party and this was seen as a
potential risk factor. The labelling process currently adds the most time to the total lead-time.
This is an area where improvements could reduce lead times considerably.

Order Processing and Delivery
Once the clinical material is in a ready to dispatch condition, it is stored in the GMP facility
depending on its specific temperature and humidity requirements. The ready stock is
dispatched on request to site and can be delivered within 13 days from the receipt of the
order. Tight order receipt deadlines were considered a problem by the China team. They
found that a deadline of 4pm is difficult to work with as sometimes clinical research
associates onsite need to place emergency orders and need same day delivery. Further,
monitoring of the deliveries to investigation sites was identified as another area of concern in
the order processing SOP.
The stock that has gone past its expiry date or is not required at the site any more, is
either returned to the pharmaceutical company (to point of origin), or quarantined and/or
destroyed. In addition to returns and quarantine, drug destruction services are also provided
by the CTSP in collaboration with an external vendor certified to carry out this operation.
Figure 5 summarizes the clinical trial logistics process.
Figure 5. Clinical trial logistics process

Improving the clinical supply chain

The managers have realized that the total lead time can effectively be reduced by improving
the imports and customs capabilities, the labelling protocol, the order processing (receipt
deadlines) and dispatch process. 13 days is the best case estimate while 19 is the base case
without packing and labelling being done at CTSP. The estimate is 23 days and 40 days
respectively with labelling.
As patented drugs come closer to losing patent protection, they face the very probable
threat of losing up to 90% of their sales within the first two years. Hence, companies find it
necessary to decrease the time to market of products which are in the pipeline. In the case of
such an event, companies must free up resources (free buffer inventories), increase
productivity, make the supply chain more lean and responsive, increase capacity utilization
and reduce any waste in the system. Direct distribution helps to facilitate this (Figure 6).


Figure 6. Direct distribution

In the existing model, a regional distribution hub is used to ensure timely delivery to
study sites and is responsible for carrying out a number of operations to ensure this. The
traditional model of clinical supply management is capital and human resource intensive and
suffers from demand distortions. If CTSP is unable to acquire the import permit in time to
receive the shipment, the goods will be held up at the authorities until an import permit is
acquired. This can have many undesirable effects, such as the added costs of storing material
at the port authorities, damage to goods due to the non-GMP storage facilities at the port and
potential risks of supply failure to investigational sites. Moreover, clinical material sourcing
is another particularly weak area for CTSP as they do not have a China GSP license and
hence cannot procure prescription comparators from the China market.
When using direct distribution, material is delivered directly to the investigation sites,
with all operations including manufacturing, sourcing, primary and secondary packing and
labelling consolidated at one location, globally. A CTSP generally provides support services
from one of their locations in the vicinity of the manufacturing plant. This saves the cost of
maintaining regional supply depots and also reduces the amount of waste in the system.
Hence, the direct distribution model will lead to a lean and responsive clinical supply chain
with shorter lead-time and reduced waste.
The direct distribution network needs to be supported by appropriate technology
solutions like a global supply chain management system to sense the demand in the various
points in the supply chain. Manufacturing schedules and buffer inventories (which are
considerably lesser by comparison to the legacy model as the numbers of points at which
buffer inventories are held are reduced to a handful) can be planned accordingly. The CTSP
needs to change its role to an integrator or a 4PL company to render clinical supply services,
including managing couriers and depots (fewer in number), designing the distribution
network, and raising the efficiency and performance of the clinical supply chain. Currently,
the CTSPs project management capabilities and lack of customer focus have also been raised
as a concern and a more proactive and collaborative method of working has been suggested
to move forward.

Questions:
1. Analyze and identify the characteristics of clinical supply chain.
2. Analyze the challenges and opportunities faced by pharmaceutical companies in clinical
trials logistics and what implications there are likely to be in the future.
3. What approaches do you suggest to improve the lead-time for clinical trials?
4. Analyze the current service gaps and suggest methods to improve CTSP capabilities.
5. Compare the traditional clinical trial and direct distribution models and what implications
they have from an operations management point of view?
TRENDS IN SUPPLIER DEVELOPMENT: A CASE STUDY IN CHINA
Teaching Abstract

This case has been developed for students taking the Operations and Supply Chain Management
module at the graduate level. The case is designed to achieve the following objectives:

9 To provide information about the pharmaceutical sector and the current outsourcing trends.
9 To introduce the concept of Supplier Development (SD) and illustrate some recent developments
in this area of management.
9 To provide the reader(s) with a practical assignment on Supplier Development which would
enable a thorough understanding of this concept.

Structure

9 Introduction
9 Outsourcing in the Pharmaceutical Sector: The role of suppliers

9 Supplier Development
9 Definition
9 Milestones
9 Direct and Indirect Supplier Development
9 Supplier Development: Industry trends

9 The Problem: A case in China

Key Issues

9 Introduction to the Pharmaceutical sector and the role of suppliers in developing
competitiveness.
9 To develop an understanding of the various approaches and trends in Supplier Development.
9 To discuss the applicability of these Supplier Development approaches in different contexts
and industries and to aid managers in coping with its challenges.

Trends in Supplier Development: A case study in China

Introduction

Heightened competition, rapid technological change and shortened product life cycles are a
mere handful of the many challenges that firms face in todays competitive markets. So that
they may focus on their core competencies, firms have responded to such market forces by
developing alliances with competent partner organizations or suppliers. Their ability to bring
competitive products or services to the market, largely depends on the capabilities and
efficiencies embedded within their supply chains. The capabilities of suppliers are
particularly important in this context and a supplier with superior technological and/or
managerial capabilities can add significantly to the competitiveness of the buyer firm. As a
result, the concept of Supplier Development has received greater attention over the past few
years and is also the focus of this article. An actual case of a big pharmaceutical company in
China (BP) has been chosen to serve as a scenario and aid in the appreciation of the concept
of supplier development and stimulate a discussion on the possible supplier development
techniques that manager could use in practice.

Outsourcing in the Pharmaceutical Sector: The role of suppliers

Across industries, firms have been seen to assign greater responsibility to suppliers in order
to produce innovative, high-quality products at a competitive cost and in a timely fashion.
The Pharmaceutical sector serves as a prime example of this fact.

While traditionally the Pharmaceutical giants were accustomed to carrying out most of the
tasks involved in the development and distribution of their products themselves, this is no
longer a viable option given the heightened competition in the sector. The Pharmaceutical
industry, over the recent times especially, has been experiencing some turbulence. Key
reasons for this being tighter government regulations controlling the proliferation of
pharmaceutical products, the ever-increasing research and development costs, the emergence
of new markets (China and India) and therapeutic areas, the inherent patent and intellectual
property protection protocols, large talent pools in developing nations that offer a significant
advantage and the specific and diverse requirements across nations where pharmaceutical
products are marketed. The current recession has further intensified this trend and is pushing
companies to drive efficiency and innovation in their manufacturing, management and
distribution processes i.e. their supply chain processes.

Although the pharmaceutical industry is a nascent adopter of outsourcing as compared to
some other industries, multiple factors - some of which have been mentioned above, are
driving its adoption. Outsourcing in the pharmaceutical industry grew at a faster pace than
any other in 2010, surging to a 10-year high that represented 81 percent growth over 2009 as
compared to the overall industry average of 13 percent (Everest Group, Outsourcing and
Offshoring Trends in Pharmaceuticals, 2011). Currently at about 3-5 percent of the industrys
total annual spend of $490-670 billion, outsourcing by Pharmaceutical companies has the
potential to rise to 10-15 percent, representing a total of $ 33-65 billion in additional spends
(Everest Group, 2011).

The tasks outsourced by Pharmaceutical companies typically include, but are not limited to,
Research and Development, Contract Manufacturing, Clinical Study Management and Data
Analysis, Logistics and Supply, Commercial Distribution, Support Services, Reverse
Logistics and more. Moving forward, industry analysts expect to see an increase in the
outsourcing of drug development and research (which has traditionally been a function that
Pharma companies insisted on keeping in-house), supply chain activities, data management
and analytics (Everest Group, 2011). The article provides more detail regarding this trend in
the forth coming sections.

Supplier Development

Although developing such alliances with supplier organizations is advantageous in many
ways - reduced costs, improved efficiency, flexibility and access to innovation being the most
compelling, it also leads to dependency and in other words risks. A suppliers inefficiency
can mar the competitiveness of the buyer firm in the market.

Since companies today, rely on their suppliers to deliver technologically advanced, defect-
free and ethically sourced products or services in a timely and cost effective manner (Krause
and Ellram, 1997; Dyer, 1996; Wagner, 2006), it is essential to ensure that they are well-
equipped to meet the varying supply needs of the buyer firm.
The concept of Supplier Development is considered an effective approach to enhance the
capabilities of deficient suppliers and institute ongoing continuous improvement.

Definition

Krause and Ellram (1997) describe supplier development as any effort of a buying firm
with its suppliers to increase the performance and/or capabilities of the supplier to meet the
buying firms needs.

Alternatively, Watts and Hahn (1993) view supplier development as a long term
cooperative effort between a buying firm and its suppliers to upgrade the suppliers technical,
quality, delivery and cost capabilities and to foster on-going improvements.

Since the alternatives to supplier development i.e. supplier switching and vertical integration,
involve greater risks and greater investment respectively; supplier development is considered
a good approach to raise the quality and service levels of supplier organizations.

Milestones

Supplier development can be traced back to 1943 when Toyota joined a supplier association
named Kyoho Kai to assist a number of suppliers in improving their productivity (Hines,
1994). Since then, the interaction between the supplier organizations within the Kyoho Kai
and Toyota increased consistently. Toyota was successful in conquering the three dilemmas
commonly associated with a knowledge sharing network i.e. motivating members to
participate and openly share valuable knowledge, preventing free riders and reducing the
costs associated with finding and accessing different types of valuable knowledge. This
fostered greater levels of performance and also led to the development of better supplier
capabilities. While this practice was more common in the Asian subcontinent (mainly Japan
and Korea) through industrial and trade groups called keiretsu, the supplier development
trend was not widespread in the Western economy until the 1990s (Hines, 1994). Since then,
supplier development has gained momentum and as a result, has also received greater
attention in academic literature.

Supplier development literature is now rife with success stories; companies like Toyota,
Honda of America
118
, Hyundai, Johnson Controls, Rolls Royce, Raytheon, John Deere,
Chrysler, GE are and several others have set great examples that can help inform supplier
development in a variety of contexts.

The John Deere (JD) and (Supplier) Barton case, (Golden, 1999), makes another excellent
anecdote. JD extended Quick Response Manufacturing (QRM) to suppliers, which helped
achieve faster order fulfillment rates, better quality and consistent reductions in the cost of
procured parts. They did so through an extremely collaborative process where suppliers
would have to expose their manufacturing methods to intense buyer (JD) scrutiny and ensure
complete transparency. John Deere could only achieve this unconditional trust from
(Supplier) Barton (FB) through their commitment to treat that particular department of FB as
an internal John Deere function and reconceive their manufacturing capabilities from the
ground up. It is worth mentioning here, that, goals for the supplier development program
were clear and well defined and understood right from the outset (Wagner and Krause, 2007).
The John Deere program was characterized by extensive exchange of personnel (facilitating
the sharing of technological, managerial as well as tacit know-how) and a rather strong
relationship with a long-term commitment in mind.

Further, several Aerospace and Defense companies including Boeing, Lockheed, Northrop
Grumman, Rockwell Collins, Parker Aerospace and United Technologies joined forces to
develop the Service Excellence Alliance with the goal to develop a common base of suppliers
(Avery 2008, cited in Wagner, 2011). They have cited quality improvements, on time
delivery, cycle time reductions and reduced inventories as the key benefits from the program.
Development of such alliances has proved to be a rather efficient way to organize supplier
development efforts, especially if companies share a common set of suppliers. There has also
been an attempt to explore the possibility of applying this concept to the modern
Pharmaceutical supply chain.

A similar approach was taken by John Deere, Wisconsin Manufacturing Extended
Partnership (MEP), Harley Davidson Motor Company and the Oshkosh Truck Corporation in
2006
119
.

118
Honda of America, with its well-crafted supplier development program, worked with
12 stamping suppliers to reduce costs by approximately $ 4 million (Hartley and Jones,
1997). They adopted the BP i.e. best practice, best process and best performance
approach to help suppliers implement Kaizen and to facilitate continuous improvement
and organization change.
119
30+ OEM suppliers were included in the supplier development program and lean-
ness was the main focus area. The consortium members developed a 3-phase supplier
development template (phase 1 gap identification; phase 2 gap reduction; phase 3
lean culture) and collaborated extensively. For instance, Harley Davidson and Oshkosh
Truck Company together, engaged in a benchmarking exercise to aid in the
implementation of lean methods and establish competitive internal and external
benchmarks.

Following this trend of greater involvement of Western companies with their suppliers,
Krasue (1999) developed a model indicating the antecedents of supplier development
activity. Figure 1 illustrates the model.

Figure 1. The antecedents to supplier development

Rateof
Technological
ChangeinBuying
FirmsIndustry
BuyingFirms
Top
Management
Support
BuyingFirm
Market
Compe on
Importanceof
PurchasedInputs
toBuyingFirm
BuyingFirms
Perspec ve
Towards
Suppliers
Buyers
Percep onof
Suppliers
Commitment
Supplier
Development
Ac vi es
BuyingFirms
expecta onof
Rela onship
Con nuity
Interfirm
Communica on
Effort
B
H1
H2
H3
H4
H5 H6
H7
H8
+
+
+
+ +
+
+
+

Krause identified a positive correlation between each of these hypotheses and the initiation of
supplier development activities. He identified factors labeled H1 H4 as Environmental or
Influence factors that suggest the initial need for supplier development. Factors labeled H6
H8 are termed as Barrier factors i.e. these have to be met / overcome if supplier development
efforts are to be successful. Lastly, the Attitudinal Factor i.e. H5 comprises the buying firms
attitude towards the supplier and whether there is a good fit (Hartley and Jones, 1997)
between the two at different organizational levels; this can sometimes be a rather crucial
factor.

The model provides as a good context in which to place ongoing supplier development efforts
such as the ones described in the earlier passages. Other factors that could serve as potential
antecedents to supplier development are, service/product failures (Krause 1997, Monczka et
al., 1993), suppliers involvement in new product development (Handfield and Lawson,
2007), anticipation of greater dependence on suppliers capabilities and so on.

Direct and Indirect Supplier Development

Extant literature identifies two broad ways of carrying out supplier development, namely,
direct and in-direct development (Monczka et al., 1993; Krause, 1997; Krause and Ellram,
1997; Wagner, 2010).

In the case of direct supplier development, the buying firm commits relationship specific
resources such as capital, human capital, know-how, technologies, managerial capabilities
and so on (Hahn et al., 1990; Monczka et al., 1993; Krause 1997). These relationship specific
investments are generally through the agency of on site consultation, training programs,
temporary personnel transfer, supplier development consortiums (Avery, 2008) and so on.
Krause points to Transaction cost theory to justify the investment in direct supplier
development and states that the costs incurred by the buying organization tend to reduce over
the course of the relationship (Krause 1997). He suggests that for a buying firm to make
relationship specific investments, it is important that the investments add value or reduce
costs above what could have been achieved by the other two alternative actions i.e. supplier
switching or vertical integration.

Further, studies on supplier development have shown that Direct Supplier Development plays
a significant role in the achieving performance and capability improvements (Krause, 1997;
Krause and Ellram 1997, Wagner, Monczka et al., 1993, Hahn, 1990). However, assessing
the supplier base and selecting a suitable candidate organization before undertaking direct
supplier development is critical. Some commonly used direct supplier development activities
are formal supplier audits, personnel transfer, setting up consortiums for supplier
development, performance incentives, training programs, knowledge transfer sessions, capital
investments, credit facilities and so on.

Indirect Supplier Development on the other hand, is characterized by the buying firm
committing limited resources to the supplier organization. Human capital could be invested
occasionally by carrying out supplier audits. However, the indirect approach generally makes
use of communication tools and market forces to improve supplier performance (Wagner,
2010). Some common techniques used in in-direct supplier development include informal
supplier assessment, communicating feedback, communicating performance goals and
instilling competition by the use of multiple sources. In-direct supplier development is
generally used to improve the products of the supplier firms and is considered less effective
in developing capabilities.

Supplier Development: Industry Trends

To illustrate the different techniques that firms might use to improve supplier performance
and/or capabilities, a study by Daniel Krause in 1997 has been described below. Krause
carried out a survey of both, manufacturing and service firms and their use of direct and
indirect supplier development methods. Table 1 illustrates the findings. Direct and Indirect
supplier development activities have been organized over a continuum ranging from direct
firm involvement or high commitment to no commitment or low involvement. The
anticipated nature of the relationship is also indicated.

Table 1. Supplier Development Activities on a continuum of direct to indirect
120
(Source:
Krause, 1997)

Note: * 1 = always; 2 = often; 3 = sometimes; 4 = seldom; 5 = never

The manufacturing and service firms included in this survey tended to use direct measures
more than indirect measures. A later study by Krause and Scannell (2002) also pointed out a
similar trend; however, it showed that service firms tended to use a greater degree of indirect
supplier development and communication mechanisms to drive superior supplier
performance.
Noticing the predominance of direct supplier development activities in product firms, Wagner
(2006) conducted a study of firms from German speaking countries to illustrate how direct
supplier development activities differ from one industry to another. Figure 2 illustrates the
findings.

120
In table 1, a higher rank indicates an activity which is used more often as compared
to activities with lower ranks. While direct supplier development activities seemed to be
more common, indirect supplier development activities like the use of a multi vendor
environment came in at rank 7 with slightly indirect, but pre - dominantly direct methods
of supplier development coming in at ranks 5 and 9 respectively. Supplier feedback
following an informal evaluation and buyer site visits were the most used supplier
development methods amongst the firms surveyed.


Figure 2. Direct SD Activities: Capital and Human support
121
(Source: Wagner, 2006)

This study pointed out, that the nature of the industry influences the supplier development
activities that firms might use to develop supplier capabilities. For instance, suppliers in the
construction industry often suffer from cash-flow problems and hence it is natural to see that
supplier development in the construction industry uses greater capital support alongside
human support (Wagner, 2006). Industries such as the wood products and furniture,
electronics, optics and precision mechanics, chemicals and pharmaceuticals often use greater
capital support as compared to human support as they tend to work with smaller suppliers
who might need capital assistance to stay in the business (Wagner, 2006). Primary industries
like minerals, glass, oil refining, rubber, plastics and so on are seen to have arms length
relationships with suppliers and are characterized by below average human and capital
support. Supplier management (rather than development) in these industries relies on
inducing competition, contractual agreements and so on.
So far, we have looked at the concept of supplier development and the conditions under
which firms might partake in said supplier development activities. We have also seen the
prevalence of different supplier development activities and how these might differ from one
industry to another. We now look at the case of BP, which should provide the reader with an
opportunity to apply some of the concepts described in this article. The intent being the
provision of a practical solution which could enable BP to improve its suppliers
performance. Questions at the end of the case should provide a working guideline to help
with this task.

121
Two dimensions that are characteristic of direct supplier development i.e. use of
capital and use of human capital, have been used to illustrate the difference in the
approach to direct supplier development activities used by firms from different
industries.
The BP Case

The BP is one of the largest Pharmaceutical Companies in the world. Active in over a
hundred countries, the company operates in six core health care areas
122
and employs over
61000 people worldwide. Ranked seventh (201x) by annual sales revenues ($ 32 billion), BP
has an impressive product portfolio with several innovative products (Blockbusters) and over
a 100 generic products being licensed across 30 emerging markets.

The BP has a fine legacy of investing heavily in R & D. In 2011 alone, a whopping 4.2
billion was spent on drug research and development. Currently, its product pipeline has 92
active projects in clinical development with 9 projects in phase 3. However, 34 projects were
abandoned this year - indicative of the complexity of drug research and development not all
drug discovery projects result in successful products with only a fraction reaching the
potential of a blockbuster product.

In accordance with their current Supply Chain Strategy, BP has rationalized its supplier base.
They intend to develop strong relations with a few business partners who have the
capabilities to assist them with the intricacies of product development and the marketing of
pharmaceutical products globally. Clinical Services (CS) is one such supplier. Figure 3
illustrates the services provided by CS to assist BP with their product development.

122
(ANON) develop and commercialize prescription medicines for six core health care
areas i.e. Cardiovascular, Gastrointestinal, Infection, Neuroscience, Oncology and
Respiratory + Inflammation.

Figure 3. Services Spectrum
123

123
Manufacturing: Complete support manufacturing including filing, blinding, API
dosing and sourcing.
Sourcing: Procurement of ancillary clinical material like comparators and kits from a
global supply network to ensure timely supply of clinical material.
Packing and Labeling: Cold Packaging, blistering, carding, bottling, kit assembly, label
design, translation and printing to support a variety of Chemical and Biological
compound studies across multiple geographies.
Bio Repository: Preserving biological specimens for extended periods of time to support
global studies for the entire length of the study and beyond
Returns and Destruction: Management of expired or unused product at the study site
which is either quarantined or destroyed by the service provider on request from the
sponsor.
Interactive Response Technologies: refer to the automated Information Systems
that are used to optimize order processing, patient recruitment and diaries, data
management and so on at the investigation sites.
Total Transportation Management: Courier selection and management, import /
expert advice and support, customs and regulatory guidance, GMP storage and
distribution facilities, global QA support, inventory management and track and trace
Given the strategic and long term nature of this alliance, BP wants to ensure that CS comply
with their supply needs and deliver nothing short of best in class performance.

Earlier this year, the management at BP noticed some weak links in the China operations of
CS. This was mainly a result of frequent escalations and complaints from the China team
regarding the service delivery of CS. CS is a relatively young organisation and was only
established in 2008. Systems and processes are developing and the current capabilities are not
tailored to serve the China market.

An appraisal of CSs technical, managerial and overall capabilities revealed some key
performance gaps. The performance of CS was benchmarked against the performance of
similar suppliers in the Chinese market. Figure 4 shows the results of this performance
review, with the performance of CS compared against the best in class performance for any
category.

Figure 4. Performance Gaps Summary


Based on this initial review, BP would have to develop a comprehensive Supplier
Development plan to help close the performance gaps identified. This is seen as an essential
step forward to reinforce their supply operations in China. With the market showing
aggressive growth trends, they capabilities of CS will have a very direct impact on the
competitiveness of CS in China in the years to come.

You have been appointed as an Operations and Supply Management consultant to help
resolve the issue. With the aid of the guideline below and the Supplier Development
techniques mentioned in the article, develop a solution, which BP can use to improve supplier
performance.

Guideline for Solution:

1. Understand what is Supplier Development? Why is it important?
2. Analyze the various supplier development activities and their anticipated effect i.e.
improvements in output (products or services) or improvements in overall capabilities.
3. Identify the Nature of the Buyer Supplier Relationship.
4. Identify the areas, which need greater attention (from figure 3).
5. Based on your initial analysis, which supplier development activities would you use to
bring about the necessary performance improvements? Why?
6. Draw parallels between the trends in supplier development mentioned in this case study
and your experience from the industry. These could help provide some creative solutions.

References
Annual Report 2011. Accessed at [Anon] Access Date [03/01/2012].
Avery, S. (2008). Suppliers Follow A Road Map To LEAN. Purchasing, 137 (4), pp. 5355.
Dyer, J.H. (1996). Specialized Supplier Networks As A Source Of Competitive Advantage:
Evidence From The Auto Industry, Strategic Management Journal, Vol. 17 No. 4, pp. 271-92.
Firms are more dependent than ever on their suppliers capabilities to accomplish
strategic goals and create competitive advantage (Wagner, 2010). Greater efficiency and
flexibility in the supply networks (chain) can help firms to cope with todays dynamic
market environments and varying customer needs. In order to identify and realize
significant cost savings or added customer value, buyer firms must work with their
suppliers and can no longer limit productivity enhancement efforts to their own
backyards. The concept of Supplier Development provides a way forward.
Golden, P. (1999). Deere On The Run: Quick Response Manufacturing Drives Supplier
Development At John Deere, IIE Solutions, Vol. 31 No. 7, pp. 24-31.
Hahn, C.K., Watts, C.A. and Kim, K.Y. (1990). Supplier Development Program: A Conceptual
Model. Journal of Purchasing And Materials Management, Vol. 26, No.2, pp. 2 7.
Handfield, R. and Lawson, B. (2007). Integrating Suppliers Into New Product Development. Research
Technology Management. September Issue, pp. 44 51.
Hartley, J.L. and Jones, G.E. (1997). Process Oriented Supplier Development: Building The
Capability For Change, International Journal Of Purchasing And Materials Management, Vol. 33
No. 3, pp. 24-9.
Hines, P. (1994). Creating World Class Suppliers: Unlocking Mutual Competitive Advantage, Pitman
Publishing, London.
Krause, D.R. (1999). The Antecedents Of Buying Firms Efforts To Improve Suppliers, Journal Of
Operations Management, Vol. 17 No. 2, pp. 205-24.
Krause, D.R., Scannell, T.V. (2002). Supplier Development Practices: Product And Service Based
Industry Comparison. The Journal Of Supply Chain Management, Spring Issue, pp. 12 21.
Krause, D.R. and Ellram, L.M. (1997a). Critical Elements In Supplier Development, European
Journal Of Purchasing & Supply Management, Vol. 3 No. 1, pp. 21-31.
Krause, D.R. and Ellram, L.M. (1997b). Success Factors In Supplier Development, International
Journal Of Physical Distribution & Logistics Management, Vol. 27 No. 1, pp. 39-51.
Krause, D.R., Handfield, R.B. and Scannell, T.V. (1998). An Empirical Investigation Of Supplier
Development: Reactive And Strategic Processes, Journal Of Operations Management, Vol. 17 No. 1,
pp. 39-58.
Krause et al. (2000). Avoid the pitfalls in Supplier Development. Sloan Management Review, Vol 41,
No. 2, pp. 37 49.
Monczka, R.M., Trent, R. and Callahan, T. (1993). Supply Base Strategies To Maximize Supplier
Performance, International Journal Of Physical Distribution & Logistics Management, Vol. 23 No. 4,
pp. 42-54.
Novartis Annual Report 2011. Accessed at [www.novartis.com]. Access date [01/01/2012].
Pfizer Annual Report 2011. Accessed at [www.Pfizer.com]. Access date [02/01/2012].
Everest Group. (2011). Outsourcing and Offshoring Trends in Pharmaceuticals. Accessed at
[https://research.everestgrp.com/Product/11577]. Access Date [01/01/2012].
Wagner, S.M. (2006). Supplier Development Practices: An Exploratory Study. European Journal of
Marketing, Vol. 40, No. 5, pp. 554 571.
Wagner, S. M. (2010). Indirect and Direct Supplier Development: Performance Implications Of
Individuals And Combined Effects. IEEE Transactions On Engineering Management, Vol 57, No 4,
P 536 545.
Wagner, S. M. (2011). Supplier Development And The Relationship Life Cycle. International
Journal Production Economics, Vol 129, P 277 283.
Watts, C.A. and Hahn, C.K. (1993). Supplier Development Programs: An Empirical Analysis,
International Journal Of Purchasing And Materials Management, Vol. 29 No. 2, pp. 11-17.
COPING WITH PATENT EXPIRY AND LOSS OF EXCLUSIVITY: CONTEMPORARY
STRATEGIES FOR LIFE CYCLE MANAGEMENT
Teaching Abstract

This case has been developed for students and/or practitioners with an active interest in either
IP Protection or the pharmaceutical sector and its unique challenges in this space. The case is
designed to achieve the following objectives:

9 To provide information about the nature of Intellectual Property Protection (patents) and
life cycle management in the pharmaceutical industry.

9 To illustrate the potential impact of patent expiry and Loss of Exclusivity (LOE) for a
pharmaceutical company.

9 To present strategies for, maximizing the lifecycle of a pharmaceutical product and
retaining competitive advantage.

Structure

9 Introduction
9 Patents and IP Protection in the Pharmaceutical sector
9 Understanding Patents
9 The Patent Cliff of 2011 and 2012
9 Lifecycle Management
9 Strategies for Maximizing Drug Exclusivity
9 Offensive Strategies
9 Defensive Strategies
9 Releasing Own Generic
9 Marketing Tactics
9 Case of a big pharmaceutical company blockbuster.
9 Conclusion
Key Issues

9 Understanding the need for and the terms of patent protection in US and Europe.
9 Generic competition and its impact on the braded pharmaceuticals market the case
of Pfizers mega blockbuster Lipitor.
9 To familiarize students with some of the strategies in pharmaceutical life cycle
management as companies prepare themselves for severe losses due to patent
expiration in 2011 and 2012.
Coping with Patent Expiry and Loss of Exclusivity:
Contemporary strategies for life cycle management
Introduction

Over the past decade, competition in the pharmaceutical sector has been on an upward trend.
This case is a result of the on going contention between branded and generic drug makers.

A generic drug is one which has the same pharmaceutical form and composition of active
chemical substances as the drug of reference, and whose bioequivalence to the mentioned
reference drug has been suitably demonstrated through bioavailability studies (Guzmn,
2011). Since the clinical efficacy of the innovative drug (also known as reference or branded
drug), has already been proven, through extensive R & D, the generic need only demonstrate
bio-equivalence to gain approval (SandozFAQ, 2011).

Generics are sold on a commodity-like basis in most of the world's biggest pharmaceutical
markets; since they incur no R&D costs, generics can be priced significantly lower than the
originator brands (Kanavos et al., 2008). These low prices ensure rapid penetration once
relevant patents and exclusivity periods have expired, causing the originators revenues to
halve within two years. Authors predict, that the golden age for pharmaceutical innovation
will be followed by a golden age for generics (Wesley, 2010) as Generics already make up 78
% of the market by value (PhRMA Report, 2011).

While competition between innovators and generic companies for market share has always
been heated, intensification of this conflict in recent years can be attributed to the changes in
legislation that allow generics to overcome certain patent barriers, provide added incentives,
and expedite generic approval processes (Manso and Sokol, 2007). Additional factors that
have reduced profit margins and aggravated competition in general include tighter health
regulations and policy, declining R & D productivity, increasing R & D costs, and the
complexity of marketing and monitoring a drug globally. In spite of these hurdles however,
the global pharmaceutical markets expanded to approximately $900 billion in 2011. This
represented a growth of approximately 7.5% over 2010. Biotechnology and generic industry
kept up with their respective forecasts and reached a global market share of $150 billion and
$ 130 billion respectively (IMAP Global Report, 2011).
In the foreseeable future, the global pharmaceutical market is expected to grow at a 5-8
percent CAGR through 2014 and reach a gross total of $1.1 trillion (IMAP and IMS Health
Global Reports, 2011). Increasing spend on health care by emerging nations and
interventions in underserved segments will constitute a significant portion of this forecasted
growth (IMS Health, 2011).

Amidst this trend of sizeable growth, the war between the Braded and Generic players rages
on, and the issue of life cycle management of a pharmaceuticals comes to the fore - and
rightfully so. Prolonging the exclusivity of their branded product is critical to the success of
the company.

This article shall explore the concepts of patent protection and life cycle management in the
pharmaceutical industry and competitive strategies that a company may employ in order to
protect their (branded) product from the generic onslaught.

Patents and Intellectual Property Protection in the Pharmaceutical Sector

Traditionally, companies have relied on developing blockbuster drugs to fuel their long-
term profitability. A blockbuster drug is a drug that generates more than $ 1 billion in sales,
annually.

Such a drug can have a huge impact on the companys profitability. For instance, the biggest
selling drug yet, Pfizers cholesterol lowering drug, Lipitor (Atorvastatin) secured global
sales in excess of $ 13.5 billion in 2007 - more than a quarter of the companys total income
and nearly twice the revenue of the next best seller, Mercks Zoncor. During its total
exclusivity of approximately 14 years, which was made possible with the aid of IP protection
rights/patents, Lipitor made sales in excess of $ 133 billion. Given the earning potential of
blockbuster products, pharmaceutical companies attempt to prolong the life cycle of their
cash cows to its fullest.

However, developing such a blockbuster product is a daunting task and requires significant
time and investment. It can take anywhere between 10 12 years with spends generally in the
range of US $ 800 1600 million (EFPIA, 2009). Owing to this fact, in the year 2010,
companies in Europe alone, invested approximately US $ 27 billion in drug R & D an
investment much higher than the comparable figures for R & D in any other industry.

Figure 1. Ranking of Industrial Sectors based on annual R & D spends.
15.9
9.9
8.7
6.5
6.2
4.7
4.4
3.9
3.4
3.1
1.8
1.7
1.2
0.4
0 2 4 6 8 10 12 14 16
Pharmaceuticals and Biotecnology
Software and IT Services
Technology Hardware & Equipment
Leisure Goods
Health Care Equipment & Services
Automotive Sector
Electronics and Electrical Equipment
Aerospace and Defence
Chemicals
Industrial Engineering
Household Goods
Telecommunications
Food and Beverages
Oil and Gas Producers

(Source: The 2010, EU Industrial R & D Investment scorecard, European Commission, JRC/
DG Research cited in EFPIA 2011 report.)

Figure 1 shows that pharmaceutical companies will reinvest approximately 16% of annual
sales in R & D. Given the mammoth R & D expenses and substantial risk (Table 1) that
pharmaceutical companies must bear (in order to develop and register a product successfully
in markets across the globe), they seek protection for their products through patents.

Patents grant the applicant with a period of exclusivity in which to market its patented
product a commensurate return for the risks involved in pharmaceutical R & D. During the
validity of the patent no other drug maker is allowed to produce the drug, and this gives the
innovator a lasting edge over its competitors.

It should be noted that, at any time, a pharmaceutical company will have several products in
development, of which, only a few actually emerge as marketable products. This makes
patents a rather effective way to regulate the health care industry; fostering on-going R & D,
not only in the attractive but also the niche and complex therapeutic areas while also
compensating companies for the risks involved in drug R & D. Table 1 represents the success
rates of pharmaceutical R & D according to the various therapeutic areas.

Table 1. Drug Development Success Rates

Drug Development Success Rates (%)
Disease Group Phase 1 Phase 2 Phase 3 NDA Cummulative
Arthritis/Pain 76.9 38.1 78.1 89.1 20.4
CNS 66.2 46.5 61.8 77.9 14.5
Cardiovascular 62.7 43.3 76.3 84.4 17.5
Gastrointentinal 66.8 49.1 71.0 85.9 20.0
Infections 70.8 51.2 79.9 96.9 28.1
Metabolism 47.8 52.0 78.9 92.8 18.2
Oncology 64.4 41.8 65.4 89.7 15.8
Womens Health 39.0 42.0 48.0 59.0 4.6
Source: Valuation in Life Sciences by Boris Bodgan and Ralph Villiger. Courtesy of Avance, Basel/ Switzerland

All those drugs that dont emerge as marketable products simply drain the resources of a
pharmaceutical company as they dont have any revenue generating potential. In 2010, Astra
Zeneca Plc, had 92 active products in development, of which 9 were in phase 3 and
undergoing scrutiny by the FDA. A total of 34 products were withdrawn during the year,
which represents significant sunk costs for the company (Astra Zeneca Annual Report, 2011).

Understanding Patents

A patent is a set of exclusive rights (i.e. a monopoly) granted by a state to a patentee (the
inventor(s) or assignee) for a fixed period of time in exchange for the public disclosure of
certain details of an invention (Norman, 2007). Pharmaceutical patents may be sought for
product, formulation, process, or/and use. Over the years, there has been some harmonization
of a patents term - it is now 20 years from the date of filing in major markets, including the
US, Europe (Norman, 2007) and many emerging markets (Doxey, 2010).

Pharmaceutical patents protect manufacturers of prescription drugs, prohibiting others from
producing a drug during the length of its patent protection. This is mainly done to foster on
going innovation and R & D in this research-intensive industry. The length of these patents
varies in different countries, though they are usually for a term of 20 years.

Drug companies usually apply for patent protection before they actually begin producing the
drug, opting instead to secure their rights to a particular compound at the beginning of the
testing process. By the time a drug comes to market, there may only be 8-10 years of patent
protection remaining, which is significantly less than the 20 offered by the patent. This
period can however, be extended through the use of lifecycle management techniques that are
becoming a necessity rather than an option today, as innovators find themselves on the patent
cliff.

The patent cliff of 2011 and 2012

The year 2011 has marked the end of the exclusivity rights of some of the largest selling
branded drugs, including Pfizers mega blockbuster, Lipitor. This patent expiry trend, along
with government authorities driving down price in both developed and developing nations, is
arguably the most pressing issue that multi national companies are facing. In 2011 and
2012, together, a majority of the top 10 selling drugs will lose their exclusivity and face
generic competition. Table 2 lists the top 5 US patent expiries in 2011.

Table 2. Top 5 Patent Expiries in 2011

Manufacturer Drug Disorder
US Sales ($),
2009
Pfizer Lipitor High Cholesterol 7.1 billion
BMS / Sanofi Aventis Plavix Blood Clots 5.7 billion
GSK Advair Diskus Asthma / COPD 4.6 billion
Eli Lilly Zyprexa Anti-psychotic 2.7 billion
Johnson & Johnson Leyaquin Infections 1.5 billion

Source: Pfizer Internal Reports, 2010

To re-emphasize the impact of this sequence of patent expiries, Figure 2 shows the revenue at
a risk from generic competition, following patent expiries.


Figure 2. Revenue at risk from Generic Competition (IMS Health, 2010)

15
25 25
10
19
0
5
10
15
20
25
30
2010 2011 2012 2013 2014
Revenue at Risk (USA)
Value of products at risk to Generic competition, 2010 2014, (IMS Health, 2010)
U
S

$

b
i
l
l
i
o
n
s

YEAR

In 2008, it was estimated that patent expiries in the US alone, would effect over US $ 15
billion in global branded drug sales. This amount is forecasted to hit US $ 25 billion in 2011
and 2012, as the top selling drugs go off patent. Branded drugs risk losing up to 80% of their
annual sales in just the first year of generics entry into the market. Year two and three can
see up to 95% of revenue drain; this presents a serious problem for the branded players.

Furthermore, there has been a decline in the productivity of pharmaceutical R & D per $
spend when compared to earlier trends. Figure 3 illustrates this point.

Figure 3. Decline in R & D Productivity in Pharma (Bemstein Research, 2010)
N
M
E
s

p
e
r

U
S

$

b
i
l
l
i
o
n

R

&

D

S
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e
n
d

(
i
n
f
l
a
t
i
o
n

a
d
j
u
s
t
e
d
)

FDA tightens regulation post
thalidomide
FDA clears backlog following PDUFA
regulations and (perhaps) relaxes on
HIV drugs

key reason for this reduced R & D productivity has been the FDAs policy on drug approval,
which has become more stringent in the recent past. Drug makers must expend more time and
capital in R & D (to conform to the FDAs requirements) and innovation becoming more
challenging as a consequence.

Product Lifecycle Management - Strategies for innovative drug makers to retain
competitive advantage

The lifecycle of a pharmaceutical product is the course from conception to the point where it
is no longer commercially viable, usually as a consequence of generic competition or
obsolescence. Lifecycle management is the process by which a company manages the IP
protection available to a new medicinal product in order to optimize its economic potential,
both in terms of the duration and the profitability of its lifecycle (Nodder and Manley, 2009).

The flattened bell-curve in Figure 4 is apt for describing the revenue lifecycle of a drug.
Revenue grows rapidly during the initial phase of marketing, only to reach a plateau when the
drug becomes an established treatment. It then declines as superior drugs - or, more often
than not, cheaper generic substitutes - become available (Norman, 2007). Such generic
competition during the last phase is particularly damaging to the blockbuster model (Mertens,
2005).

Figure 4. Drug Revenue Lifecycle (Norman, 2007)
Product
Launch
Patent
Expires
Growth
Phase
Plateau Phase Generic
Competition
TIME
R
E
V
E
N
U
E

Lifecycle management is aimed at maximizing the exclusivity/ revenue period of
a drug, from product launch to patent expiry and beyond.
t
h

Given the current state of the pharmaceutical industry stringent approval requirements,
price regulation by governments, fast paced competition and the recent trend of patent
expiries, maximizing the market exclusivity of a branded product seems critical. Developing
a good grasp of the current market authorization policies and patent provisions is the first step
forward. Table 3 illustrates the various extensions that are applicable to the initial patent term
of 20 years in two major world markets US and Europe.

Table 3. Patent terms and extension categories (Source: FDA and EMA websites, 2011)

To illustrate how these patent terms might be used to extend the exclusivity period of a
branded product, imagine a drug that has taken 12 years to develop from the date of filing the
patent. The company now has 8 years until the initial patent on their innovation expires. This
term may be extended to a maximum of 14 (US) / 15 years (EU) with the aid of the various
term extensions mentioned above (Wesley, 2010). For instance, a company may apply for an
orphan drug status, which if successful will grant the company an additional 7 10 years of
market exclusivity. Several permutations could be used based on the product, the companys
strategy, resistance from competitors and so on. However, under no circumstances will a drug
be allowed market exclusivity for greater than 14 or 15 years.

Strategies for maximizing drug exclusivity

Over the years, various tried and tested mechanisms have emerged for realizing the full
potential of an innovative product. These can be categorized as offensive and defensive.
Figure 5 illustrates how an MNC can leverage these offensive and defensive strategies during
the revenue life cycle of a drug (Norman, 2007).


Figure 5. Strategies for maximizing market exclusivity of a branded product (Norman, 2007)

TIME
S
A
L
E
S

Patent
Granted
Product
Launch
Patent
Expires
Enhanced
Market
Exclusivity
Offensive Strategies
Defensive Strategies

Offensive Strategies

Indication Expansions

Broad claims on existing patents might be pursued through an indication expansion: the
expansion of a drugs usage beyond its original intended application. These claims include
related conditions and other diseases, which not only add to the data exclusivity period and
thereby delay generic competition, but also serve to enlarge the originators target market
(Sahoo, 2006).

A caveat: In both, the US and Europe, generic manufacturers can still introduce the drug by
excluding the new indication from their label (Pharmaceutical Field, 2006).

Pediatric Exclusivity (6 months)

Pediatric exclusivity provisions encourage availability of drugs for use in children, and as
such, can be claimed for products with much broader market potential than orphan drugs
(Wesley, 2010). In the EU, where this was introduced only recently (January 2007),
originators can apply for an extension to the products Supplementary Protection Certificate
(SPC) in return for conducting pediatric studies (Hathaway et al., 2009).

Orphan Drug Status (7 10 years)

In a bid to avail all possible term extensions, one might consider claiming the orphan drug
status: a designation to state that the drug treats rare, or very rare diseases. Incidentally, this
claim is applicable to both patented and out-of-patent drugs (Norman, 2007).

Figure 6. Strategies for innovators to sustain drug revenues

STRATEGIES FOR
INNOVATORS
TO SUSTAIN DRUG
REVENUES
Maximizing
Innovator Drug
Lifecycle

OFFENSIVE
STRATEGIES
DEFENSIVE
STRATEGIES
Indication Expansions
Pediatric Exclusivity
Orphan Drug Status
Reformulations
Second Generation Launch
Litigation
Rx to OTC Switch
Manipulating Orange Book
Listings
RELEASING OWN
GENERIC VERSION

MARKETING TACTICS

Note: Releasing own generic version and marketing tactics mentioned above do not fit neatly
into either offensive or defensive strategies, and will be dealt with separately.
Reformulations

By exploiting the originators right to improved formulation, drug combinations and new
delivery mechanisms, formulation patents act as lifelines to a branded drugs sustenance
(Sahoo, 2006; Norman, 2007). Reformulations are most appropriate when an un-met need is
tapped by products with significant market potential. Line extensions would thus be
considered a type of reformulation (Sahoo, 2006).

Indeed, a sly move to prevent ready substitution by generics would be to change the
formulation, dosage, or labelling on the eve of generic launch by competitors. Such a strategy
in the run-up to the patent expiry has been dubbed product hopping, and is now common
practice as originators are proficient at encouraging major shifts in demand to the new
formulation (Wesley, 2010).

Second Generation Launch

A second generation launch is pursued for an extended release (XR) version that is superior
to the original drug in some respect. If the launch is successful enough, patients will forgo
generic substitutes to the original product in favour of this new drug. The goal would be to
switch patients from a first generation product to the successor prior to patent expiration
(Treece, 2011).

Although gains from second generation launches are significant, this strategy is also a
considerable drain on resources, and is thus best suited to larger players with more capital and
expertise at hand (Sahoo, 2006).

Defensive strategies

Litigation

Litigation is a prime defense mechanism; particularly in the US, where it provides defined
restrictions on generic market entry by allowing the originator to file a patent infringement
suit that would automatically delay approval of a Paragraph IV ANDA
124
for 30 months
(Norman, 2007). In practice, disputes may drag on far longer (Wesley, 2010).

Manipulating Orange Book Listings

In the US, the FDA mandates certain patents for approved innovative drugs to be listed in the
Orange Book. These are the patents for which claims of patent infringement can reasonably
be asserted should a third-party attempt to make the drug. An originator can severely hamper
the granting of ANDAs by de-listing an unexpired patent. Alternately, it might add additional
patents to the listing just before a generic is expected to be approved. Since there is no way
for an ANDA filer to challenge an improper listing of a patent in the Orange Book,
originators find appeal in this strategy (Norman, 2007).

Rx to OTC Switch

Over-the-Counter (OTC) products are now perceived as one of the key market segments
driving growth (Anon[1], 2010). Originators consider switching a drug deemed safe enough
to be sold without prescription to OTC category, either to exploit the OTC market, to
preserve their revenues in face of generic competition, or to broaden the availability of their
product. However, this requires considerable time and resource investment (Sahoo, 2006).

Releasing own generic version

The generics market today makes up for approximately 78% of the market by value
(PhRMA, 2011). This represents a major chunk of the global pharmaceutical market and as a
result, has been receiving greater attention from branded manufacturers as well.

124
An ANDA is an Abbreviated New Drug Application that a generic player must make if it
wishes to produce a soon-to-be off patented drug. Under the Para IV filing, besides
providing proof that their product is bioequivalent to the original brand, the potential
generic makers must also certify the patent status of the original brand, confirming that,
either:
No patent exists; the patent has expired; the patent will expire on the date upon
which the generic will be marketed; no patent listed in the Orange Book will be
infringed or the patent is invalid.
This filing effectively amounts to a patent challenge, which will be resolved either in
courts or in an out-of-court settlement (Wesley, 2010).

The generics route is one that innovators frequently tread - especially as a defensive move
should a generic company announce its intentions to launch the drug (Mertens, 2005). The
innovator can exploit its First-Mover Advantage in resources, learning expertise and buyers
brand affinity, and reach the market first to fix the generic drugs price whilst also claiming a
portion of generic revenues. According to Jon Hess (2005), senior analyst for Cutting Edge
Information, If a pharmaceutical company's generic subsidiary can be first-to-market, the
company essentially retains devalued market share for its off-patent drug. Timing is the key
strategic tool here: an earlier launch would be counter-productive, as it would cannibalize
sales of the higher-priced branded product.

Organic means to bringing a generic to the market would be to develop what is known as a
branded generic, i.e. a generic version of the drug manufactured by the same company that
owns the original branded product patent. Another route that companies often take is
Strategic Alliances or Acquisitions. An acquisition (of a generic player) or strategic in-
licensing with a generics player allows an innovative drug company to acquire appropriate
expertise and infrastructure to position its branded generic competitively in the market; the
price of a branded generic is generally 60 80% of the branded drug during the 180 day
exclusivity that it is granted and 15 30% thereafter.

Since Pfizer set up an 'Established Products' business unit in 2008, the company has
completed a series of in-licensing deals which, in total, have added more than 200 products
to the BU's portfolio. Consisting largely of branded generics, these serve to tap into
markets across the US, Europe and emerging countries (Wesley, 2010).

Lastly, companies will actively seek out agreements with first-to-file generics players, which
plays out well for both the branded as well as the generic player. The net effect is that the
companies choose to co-operate during the crucial 180-day patent period that the generic
version is granted as opposed to competing during this time.

Marketing tactics

Mertens (2005) has noted that in the future, the salvation of large companies (at least of a few
of them) will be their effective marketing creativity and clout. This could be especially true in
the US, where direct-to-consumer (DTC) advertising is legal.

Companies can employ a host of marketing tactics to secure market share post Loss of
Exclusivity. Branded drug manufacturers have the ability to capitalize on the brand loyalty
sentiment that persists among clinicians, pharmacists and patients based on the safety,
efficacy and reliability of the branded drug. In doing so they can successfully pit the branded
drug against its competition while justifying the higher costs when compared to a generic
version. Additionally, some of the tactics mentioned below can be rather effective.
9 Influence initial buy-in by keeping key accounts updated on the status of the branded
generics launch.
9 Stock-pile the new drug and flood the distribution channels close to the launch date.
9 Offer promotional schemes to piggy-back the new drug on a current popular sale.
9 Intangible repositioning - a marketing strategy that has to do with repositioning the
product to a different target market segment (Jobber & Fahy, 2009).

Pfizers mega blockbuster Lipitor

Pfizer is known as the worlds largest pharmaceutical company with annual revenues in
excess of US $ 68 billion. The company acquired Warner Lambert in 2000, thus adding
Lipitor, the cholesterol-fighting blockbuster to its arsenal. Lipitor has been a key contributor
to Pfizers revenue stream ever since, generating a total of over 81 billion in sales for the
company. Table 4 provides some additional detail.

Table 4. Lipitors Statistics (Pfizer Company Reports)

LIPITORS PROFILE
U.S. SALES, 2010 $5.3 billion
NUMBER OF U.S. PRESCRIPTIONS 45 million
NON-U.S. SALES, 2010 $5.4 billion
NUMBER OF COUNTRIES IN WHICH IT IS SOLD 119
PEAK SALES (2006) $13 billion

However this would not have been the case had Pfizer not resorted to a host of lifecycle
management strategies to prolong the exclusivity of Lipitor in the market, beyond the initial
patent expiration term. Figure 7 shows the added revenues that resulted from this extended
period of exclusivity, effective until November 2011; Figure 8 shows the various extensions
that Pfizer secured in order to achieve this.

Figure 7. Revenue Life Cycle for Lipitor

0
1000
2000
3000
4000
5000
6000
7000
8000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Beyond Basic Patent Term
During Basic Patent Term
S
A
L
E
S

(
U
S

$

m
i
l
l
i
o
n
s
)

YEAR

Figure 8. Patent Extensions availed by Pfizer to extend exclusivity till November, 2011

Tuesday, 30 May
2006
Thursday, 24
September 2009 Tuesday, 23 M
arch
2010
Thursday, 30 June
2011
W
ednesday, 30
November 2011
Saturday, 30 June
2012
Original US Patent
Expiry
1,213 days
Extension on
account of Clinical
Trials and
Regulatory Delays
Pediatric Exclusivity
Granted
Key 'Enantiomer'
Patent Expiry
Ranbaxy Entry
Under Terms of
Deal
Open Playing Field
for Generic
Competition

During its life span, Lipitor (Atorvastatin) faced two major challenges. The risk of losing
market share however, in both cases, was mitigated through the use of some of the tactics that
have been discussed earlier.

The first was when the cholesterol-fighting blockbuster was at the peak of its life: Zocor, the
lower grade statin (simvastatin) by Merck, had come off patent. There was a danger of
prescribing patterns leaning towards the cheaper, albeit lower dose, simvastatins. Pfizer,
Lipitors manufacturer, tackled the onslaught of generic simvastatins by intangibly
repositioning Lipitor (generic name: atorvastatin) from a cholesterol reducer to an inhibitor of
repeat stroke episodes. The aggressive sales and physician focused push thereafter, resulted in
Lipitors US revenues actually increasing by 12% in Q3 2006 (Wesley, 2010).

The second challenge is more recent (and more severe), with Lipitor having exhausted its
initial patent term (20 years) along with all possible lifecycle extension strategies: the
looming generic competition has finally arrived. By November 2011, most countries
125
,
including the US, had entered the post-patent era for Lipitor.

Ranbaxy was at the forefront of the generic aggression the Indian generic specialist
challenged one or more of Lipitors patents in nearly all developed countries (Norman, 2007),
and won the first-to-file status in the US.

In order to ward off generic competition (post loss of exclusivity), Pfizer resorted to the
following strategies:

1. Striking a deal with Ranbaxy: Under a 2008 deal wherein no money changed hands,
Ranbaxy agreed to delay marketing its generic in the US until late 2011, while Pfizer
agreed to drop its efforts in trying to stop Ranbaxy from selling generic atorvastatin in
a number of Asian and Latin American markets, besides acknowledging Ranbaxys
early entry into several key European markets (Wesley, 2010).

125
In the UK, courtesy of the pediatric investigation plan set up by EMA, Pfizer managed
a late pediatric exclusivity for Lipitor, extending the drugs lifecycle to May 2012.

2. Developing its own (branded) generic version of Lipitor, with Watson
Pharmaceuticals as the distributor (Eban, 2011).

3. Pursuing a major generic acquisition before Lipitor went off patent. This strategy
didnt work out too well though, with Pfizer losing out to Teva in the bid for
Ratiopharm an acquisition that would have handed Pfizer a major interest in many
of Europe's biggest generic markets (Krauskopf, 2010).

4. Releasing a complementary drug (Torcetrapib) for statins as a combination pill with
Lipitor, instead of releasing it as a standalone drug. The project was aborted during
phase 3 clinical trials (Dunne, 2010). Had the drug been approved, this would have
awarded Pfizer with an additional exclusivity period for the patent on Torcetrapib,
which would effectively protect the Lipitor franchise due to the added efficacy of the
combination pill.

5. Resolving to strategies to retain its market share by
a. Launching a price war against generic manufacturers so that it may hang on to
its market share: Lipitor is now available for 80% off its original price
(Sanburn, 2011).
b. Offering Lipitor at generic prices directly to patients (Rockoff, 2011).

6. Adopting marketing tactics, like issuing insured patients with discount cards, using
traditional yet effective media like TV adverts, using slogans like "If Lipitor has been
working for you, stay with it" to evoke brand loyal sentiments (Rockoff, 2011).

7. Striking deals with health care/insurance companies to ensure that Lipitor is still the
statin of choice (Sanburn, 2011).

It is apparent that despite Lipitor losing its patent cover, Pfizer is not ready to retreat from
the battlefield; instead, it is considering a shift to new playing fields. In emerging markets
like China, Pfizer believes that the growing number of people diagnosed with high
cholesterol issues will be willing to pay more for a branded generic rather than the cheaper
alternatives available (Rockoff, 2011).

The way forward

The significance of patents in the pharmaceutical sector cannot be stressed enough. They are
the fuel that drive the entire branded drug market. As more and more blockbusters face the
patent cliff, however, lifecycle management strategies have gained steam and are increasingly
viewed as indispensable means of preserving an innovators market share; in fact, offensive
strategies are explored soon after a patented drug first goes to market, in an attempt to
maximize the authorized market exclusivity period.

As the pharmaceutical industry converges to a more generic-friendly era, branded drug
makers are venturing into this territory through acquisitions and a concentration on new
emerging markets a topic that merits its own dedicated space to explore.

Questions

1. What role do patents play in the Pharmaceutical Industry?
2. What is the role of life cycle management in the pharmaceutical sector? How is it
different from life cycle management in other industries?
3. Can you suggest some additional strategies that might prove beneficial in this
context?

References

Anon[1]. (2010). The OTC Pharmaceutical Market in Emerging Countries. Management
Report by in-house analysts. Business Insights Ltd.
Anon [2]. (2011). China Could Be the 3rd Largest Pharma Market. IMS Health, 2010.
Accessed at [www.google.com]. Access date [12/01/2012].
Bemstein Research Report, (2010). The Long View R & D Productivity.
Doxey, M. (2010). OTC Opportunities in Europe, the US and Japan: Key Trends, Leading
Players and Future Rx-OTC Switching. Business Insights Ltd.
Dunne, A. (2010). Pharmaceutical Patent Expiration: Lipitor, Loss of Exclusivity.
Management Project.
Eban, K. (2011). The War Over Lipitor. Business Source Premier. Vol. 163, Issue 7.
EFPIA, The Pharmaceutical Industry In Figures: Key Data, 2011. Accessed At
[Http://Www.Efpia.Org/Content/Default.Asp?Pageid=608]. Access Date [11/06/2011].
Guzmn, J, L. (2011). Generic drugs: Areas of Uncertainty and Reasonable Discrepancies.
Pharmaceuticals Policy and Law. Vol. 13. pp. 57-60. DOI 10.3233/PPL-2011-0314.
Hathaway, C., Manthei, J. and Scherer, C. (2009). Exclusivity Strategies in the United States
and European Union. FDLI. Issue 3.
Hess, J. (2005). Combating Generics: Pharmaceutical Brand Defense. Cutting Edge
Information. Durham, NC.
IMAP Pharma & Biotech Industry Global Report 2011, pp 3. Accessed at
[www.google.com]. Access Date [18/01/2012]
Jobber, D. and Fahy, J. (2009). Market Segmentation, Targeting and Positioning.
Foundations of Marketing, Third Edition, McGraw Hill. pp. 123-125.
Krauskopf, L. (2010). Generic deals may still hold appeal for Pfizer. Reuters. [Online].
Available at: http://www.reuters.com/article/2010/03/18/pfizer-ratiopharm-idUSN
1823639220100318. [Accessed on 30 January 2012].
Mertens, G. (2005). Beyond the Blockbuster Drug: Strategies for Nichebuster Drugs,
Targeted Therapies and Personalized Medicine. Business Insights Ltd.
Manso, P.J. and Sokol, A.L. (2007). Life cycle management of ageing pharmaceutical assets.
Pharmaceutical law insight. Vol. 3, No. 7, pp 16 19.
Nodder, E., Manley, M.I. (2009). Why Life Cycle Management is a necessity. Managing
Intellectual Property Oct 2009 IP Focus Life Sciences, pp 36 39.
Norman, P. (2007). Patent Protection Strategies: Maximising Product Revenues. Business
Insights Ltd.
PharmaceuticalField (2006). No Room for Expansion? Will Legislation Squeeze the Life Out
of Indication Expansion? [Online].
Available at: http://www.pharmafield.co.uk/features/2006/02/No-room-for-expans ion.
[Accessed on 30 January 2012].

Rockoff, J. D. (2011). Helping Lipitor Live Longer. [Online]. Available at:
http://online.wsj.com/article/SB10001424052970203710704577052350701638614.html.
[Accessed on 30 January 2012].
Sahoo, A. (2006). Lifecycle Management Strategies. Datamonitor. Reference Code:
BI00027-048.
Sanburn, J. (2011). Lipitor Already Cheaper After Patent Expiration. [Online]. Available at:
http://moneyland.time.com/2011/12/01/lipitor-patent-expiration-wont-mean-cheaper-
generics-yet/ . [Accessed on 30 January 2012].
SandozFAQ. (2011). How are Generic Medicines Evaluated and Compared to the Reference
Medicine? FAQ Generics Comparability and Safety. [Online]. Available at:
http://www.sandoz.com/our_products/faq_2_1.shtml. [Accessed on 31 January 2012].
Treece,J. W. (2011). The Treatment of Pharmaceutical Life Cycle Management Strategies in
the European Commissions Pharmaceutical Sector Inquiry Final Report: An American
Perspective. Bloomberg Law Reports. Available at:
[http://www.sidley.com/files/Publication/21f53ccb-4eed-4ecb-84d8-0ce745a
e9eab/Presentation/PublicationAttachment/f1c90dd7-d91a-4f03-8cb6-0d567dc7204d/the%
20treatment%20of%20pharmaceutical%20l.pdf]. [Accessed on 30 January 2012].
Wesley, T. (2010). The Future of the Generics Industry: Opportunities, Threats and Key
Trends. Business Insights Ltd.

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