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Fairness in the pharma supply chain key to success in today’s business climate

By Andrew Badrot, CEO of C2 PHARMA - 9th January 2020

Andrew Badrot, CEO of C2 PHARMA, explains that times are changing for pharma, and considers some of the factors impacting the future of the industry as we enter 2020.
 
Times are changing
The pharmaceutical industry is experiencing a period of significant change. Interest in biologic drugs is growing, and the focus has shifted from blockbuster therapies to personalized medicine. Patients, payers and governments expect drug prices to reflect the value they offer.
 
For novel drugs, FDA approval rates, which had declined in the mid-2000s, reached an all-time high in 20181 and remained strong in 20192. Even so, pharmaceutical companies must develop novel drugs with improved efficacy over existing products and do so in shorter timelines and at lower cost while ensuring the highest level of safety and quality.
 
Business models are changing as a result. Most Big Pharma firms rely heavily on outsourcing today in a variety of forms. Process and formulation development, clinical trial management, manufacturing and analytical testing are often now performed by third-party service providers. While some drug discovery work is still conducted in-house, collaborations with universities, other institutions and emerging/speciality pharma companies has become an essential means for accessing interesting candidates. 
 
In the generic sector, downward pricing pressure is tremendous. Many generic drug makers have turned to third-party suppliers in emerging markets that offer lower costs. Quality and safety issues that have occurred in recent years have, however, led regulatory authorities, including the FDA and EMA, to increase their scrutiny of manufacturers located around the world, particularly in China and India. Inspections have resulted in the issuance of a record amount of warning letters – 98 in 2019 vs. 19 in 2015 - and in some cases import bans, sometimes leading to shortages of medicines.
 
Drug makers are caught between contradictory forces – pressure to lower prices at a time when the imposition of higher more globally harmonized quality standards is leading to greater costs.
 
Supply chain considerations
The trade war between the US and China has also raised concerns about the strategic aspect of the pharmaceutical supply chain in the minds of many politicians in the US and to some extent in Europe. Access to medicines is becoming a key strategic component of the healthcare system and directly impacts the health of a nation’s population.
 
For many generic drugs – antibiotics are a good example – all starting materials are manufactured in China. If China were to withhold shipments of these raw materials from US and European manufacturers, the stock of antibiotics would dwindle. It is unlikely to occur, but awful to imagine a world in which no antibiotics were available in the US or Europe.
 
Dependence of the US and European pharmaceutical supply chains on China will likely be of interest to our governments in the coming years. This issue and the increasing regulatory and quality standards are creating supply constraints for drug makers that outsource the production of raw materials, intermediates and APIs.

Supplier selection
Selection of suppliers must therefore be done very carefully, with pharmaceutical supply chains designed to avoid the potential complications posed by these two trends. The best solution is to think about the cost-to-quality ratio.
 
It is necessary to find suppliers that offer high-quality products at fair prices using a risk-based approach. There will always be some level of risk, even with the highest-rated suppliers. There is therefore a trade-off between cost and risk, and it is important to find good quality materials – not just acceptable – but at a price point that is manageable and allows manufacturers to be competitive in the marketplace.
 
This type of risk assessment takes into consideration the total cost of ownership of APIs. That requires consideration of not only the initial cost of the material, but any added costs that could accrue due to problems associated with that supplier, such as delivery delays and quality problems, which also increase the risk of doing business.  A reliable supplier may have a higher upfront purchase price, but the total cost of ownership (from purchase to the management of the overall supply chain) is lower when the cost of quality is considered.
 
It is also important to understand customer expectations. Many customers do not perform a quality-to-cost ratio calculation, they rather simply look at the upfront purchase price. Many purchasing organizations decided that the potential to save upfront is of utmost importance and any problems that arise after purchase can be dealt with at that time by the quality team. Other customers have a more strategic outlook and seek to partner with reliable, high-quality suppliers rather than seek the cheapest options.
 
Supply chain relationships
C2 PHARMA was established in 2014 with the acquisition of a portfolio of products from a large pharmaceutical company. The portfolio includes several phytochemicals, or chemicals extracted from plants, and several synthetic chemical products focused partially on ophthalmic indications. Our sales footprint reaches the Americas, Europe, Africa, the Middle East, Oceana and Asia-Pacific/Japan with either direct sales relationships, or through local partners/agents that have been carefully selected and must meet stringent standards to remain in our network.
 
The same goes for selecting suppliers. We use a fair and balanced approach with great importance placed on being transparent and treating suppliers as part of our team. Working with suppliers we genuinely like and appreciate is imperative because we must rely on them to provide the materials we need. That is the case with all our suppliers, Laurus Labs in India, Nobilus in Poland and Anidro in Brazil.
 
If the suppliers are not successful, neither are we. Stressing them with unrealistic pricing demands does not lead to financially solid partners, and we understand that unhealthy suppliers are not good for us. By building a positive relationship, we create an environment in which our suppliers want to work for us and want to provide good service. We are then able to transfer these benefits to our own customers.
 
Collaborations with customers generally fall into two categories: those that are transactional and those that are strategic. Transactional customers make individual purchases based on expectations for regulatory compliance, quality, pricing, speed and reliability of supply.
 
All those criteria are considered in strategic collaborations as well, but in this case the relationship goes much deeper. With some of our strategic customers, we have long-term supply agreements. With others we manufacture multiple products or have developed highly specialized solutions for APIs for which they have previously had supply issues. Most of these supply agreements are exclusive or partially exclusive. The key to successful strategic relationships is transparent communication and provision of good customer service at a fair price.
 
Building the right portfolio
To attract the right customers, it is necessary to build the right portfolio of products. C2 PHARMA considers five criteria when evaluating any potential portfolio candidate: the indication, the volume, the technology, the distribution channel and competitive landscape.
 
The choice of indication will determine two things: the type of customer and the nature of the market. For some indications, customers will be more risk-averse than for others. Some will have a cost-to-quality mindset regarding their suppliers, while others will tend to be focused solely on cost. It is necessary to understand the nature of the market in order to determine if it is driven purely by cost or one that will look for a balance between cost and quality.
 
Volume will dictate whether you are producing a commodity or a specialty material. The supply chain, logistics, cost structure and many other aspects of the business will be different for products with different production volumes. Similarly, it is necessary to consider the technology required to manufacture the product. Do you want to be involved in a complex or simpler process, and do you have the capability to pursue complex options?
 
The geographical focus is also important. Do you want to tackle the global market, or focus on just the US and/or Europe? What are the regulatory considerations in the different regions? Are there any differences in sales channels for certain types of APIs – can you market directly, or will you need to go through a distributor or local agent?
 
Finally, the competitive landscape is a key factor, particularly for generics. It is important to identify the number of existing players in the market and determine how many of them are credible companies (i.e., no warning letters, quality issues, etc.).
 
The challenge is to find the right balance between these five criteria. There is never a simple answer, never a great indication for which a high-volume, high-priced product can be simply manufactured and sold directly to all regions of the world without competition. There will always be tradeoffs. Having knowledge of the marketplace is generally not enough; it is often necessary to know your customers well and to some extent follow your instincts and the science as well.
 
Global footprint
Taking into to consideration the ever-changing landscape of this industry, our business model focuses on quality, fair pricing, and strong competency. Over time, we have invested in state-of-the-art manufacturing facilities both internally, and at partner sites, and continue to invest in supporting supply chain security (the Digoxin portfolio is a good example of this approach in action).
 
As we work to build onto the predominantly synthetic ophthalmic API portfolio, our goal is to use our unique approach to sourcing and  validation to be the leader in this space. There are currently three products on the market; five additional ophthalmic APIs are anticipated to launch in 2020 with three more in 2021; and by 2025 we expect to have a total of 15 APIs for ophthalmic indications.
 
Each quarter we take the time to review our full portfolio with the customer in mind and focus on how best to ethically and sustainably supply quality products to the market. We have seen the cost of short-sightedness in this industry and feel that by investing time and money into our processes, we can deliver long-term solutions that customers, and ultimately patients, can rely on.
 
References
 
Author
Andrew Badrot, Founder and CEO of C2 PHARMA, 270, Rue de Neudorf, L-2222, Luxembourg, Grand Duchy of Luxembourg
T: +352 28 26 11 00