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The impact of Off Patents on the Supply Chain

Mark JamesMark JamesUKMANAGING DIRECTORUKMANAGING DIRECTOR

Introduction

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CELESIO GROUP (UK)CELESIO GROUP (UK)

Four customer focused channels operating across the Pharmaceutical supply chain

Retail Pharmacy Wholesaling & Distribution Solutions

Public Sector & Healthcare Services Pharmaco

We directly employ over 20,000 employees

We directly employ over 20,000 employees

We have revenues over £4billion pa

We have revenues over £4billion pa

We dispense over 150 million items a year

We dispense over 150 million items a year

We operate 19 distribution warehouses

We operate 19 distribution warehouses

We deliver over 600 million packs of medicine in a safe, efficient & cost effective manner

We deliver over 600 million packs of medicine in a safe, efficient & cost effective manner

We focus on all dispensing points including hospitals, community pharmacies, dispensing practices, prisons, and Mental Health Trusts

We focus on all dispensing points including hospitals, community pharmacies, dispensing practices, prisons, and Mental Health Trusts

The basic facts about the Off-Patent Cliff!

Between 2009 and 2014 The UK market will lose ~46% of current protected brand value

0

200

400

600

800

1000

1200

1400

1600

2010 2011 2012 2013 2014

COZAAR

CLEXANE

SYMBICORT

ARICEPT

AMIAS

ZYPREXA

SERETIDE

LIPITOR

VIAGRA

£272m

£611m

£1,353m

£383m

£136m

£2.7BN lost sales to branded manufacturers & a huge windfall for Healthcare budgets

2003 x50

2010 x500

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The Polarisation of PricingThe Polarisation of Pricing

Price Range of Rx Products10% 10%

Leading to a polarisation of product types:

Mass Market Specialist

LowPrice

HighPrice

Branded Manufacturers – An evolving business model

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Previous Blockbusters losing Patent Protection and Sales ValuePrevious Blockbusters losing Patent Protection and Sales Value

Off-patents can see sales value drop by up to 90% within days of launch

Many manufacturers have reorganised around mature product ranges to maximise residual value

Commercial success can depend on therapeutic equivalence

Research Pipelines not producing replacement blockbustersResearch Pipelines not producing replacement blockbusters

New Product types

New modes of Healthcare delivery

Increasing emphasis on proving beneficial outcomes

Focus on reducing supply chain leakageFocus on cost reduction per product

Generics – A business model under threat!

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UK market damaged by global supply planning

Oversupply & deregulation lead to prices below cost

Different reimbursement models developing at country & regional level

Focus on price not total supply chain cost

Product range can be split into “exclusives” &“me toos”

Exclusives provide profit and me toos provide market share

Cross subsidies across a range to make the basket worthwhile

Fluctuating demand leads to poor service levels

Current Distribution Models

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Primary Care DistributionPrimary Care Distribution

Primary care has utilised shared user distribution (wholesale) to improve efficiency of delivery and administration• +600 manufacturers on one delivery• Multiple deliveries at very low cost • Profit per delivery more important than profit per product• Reduced stock holding & stable demand planning

Secondary Care DistributionSecondary Care Distribution

Secondary care has experienced a mixed model• Direct relationships with multiple suppliers• Multiple delivery mechanisms

Reduced wholesale & DTP provides cost and supply chain control but also fragmentation

Appears to lack joined-up approach to Pharmaceutical distribution• Internal logistics costs• Administration costs• Working Capital Costs• Price • VAT

Result of off-patents, current systems, and incentives

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Fragmentation of supply and increased economic costs

Lack of a co-ordinated supply chain

Out of Stocks on basic lines

Low cost medicines but potentially higher cost healthcare

The true focus for the supply chain

A move from Product to Patient

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Key areas of focus:

Patient Data Economic Value

Focus on Patient• Standardise treatment for patients with

same illness to provide clear understanding of outcomes

– Defined care pathways should not be subject to nationalor regional differences

– Design broader methodsof delivery to the patient

• Understand the broader“final mile” options

• Integration of appropriateproduct and support service

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Focus on Data• Primary aim to manage healthcare costs

must be reduced hospital admissions and disease prevention

– Joined up data between primary & secondary care

– Outcomes measurement

– Patient management

• True transparency of total patient cost would highlight the right pharmaceutical intervention and point resources into consistency & quality

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Focus on Economic Value• What provides the greatest economic

value from a pharmaceutical intervention • Mass market requires shared user

distribution & maybe shared manufacturing– Minimised transaction costs

across the supply chain– Eg: Nestle & Mars

• Specialist requires mostclinically effective distributionmethod– Distribution to Pharmacy– Direct to patient

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Key Messages

Off patents have continued the process of pricing polarisation across the supply chain

Distribution models have traditionally provided one size fits all solutions based on bundled product portfolios

New commercial pressures on costs & supply chain control are fragmenting distribution, increasing economic costs, & introducing fragility

Fragmentation forces a focus onto product profitability and leads to unsustainable supply

If supply chain focus moved from product to patient then more sustainable solutions could reduce healthcare costs

Branded & Generic manufacturers both face significant challenges to their business models

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Summary

Polarisation leads to two core product distribution demands:

Mass market = Minimise total transaction costs

Specialist = Focus on Patient Outcome and the right final mile solution

Serving Patients

Best

Integrate Primary & Secondary Care Move from Product to Patient