Pharmaceutical Supply Chain Risks

PHARMACEUTICAL SUPPLY CHAIN RISKS
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Abstract
Currently, the pharmaceutical industry is one of the most evolving industries in this century. Unfortunately, the industry has fallen victim to globalization in the supply chain where external service providers are determining the level of operation of the industrial activities. The tremendous changes taking place in this field emerge from changing tastes and preferences of consumers who are the major determinants of how far an industry can go in meeting the needs and demands in the market. Some of the notable changes are inevitable because the modes of operations have now shifted. The responsibility of the business has shifted from that of merely providing goods and services to that of providing quality goods and services to the patient. This has burdened the industry and compelled it to resolve to use outsourcing instead of insourcing. The industry is increasingly outsourcing research activities Contract Research Organizations (CROs) and Contract Development Manufacturing Organizations (CDMOs) to its academic and private contract research organizations (CROs) as a strategy to stay competitive and efficient. The competitive increase in demand for quality services coupled with patient autonomy has left the industry with no choice but to resolve to follow what the market dictates. The present study explores how these changes in the pharma industry affect service delivery and the risk of outsourcing to the future of the industry.
Introduction
The present overall outlook of outsourcing in the pharmaceutical industry is brighter and promising than ever (Treva, M. 2017, p. 7). Globalization of supply chain ranging from labor to IT services has taken the core of operational activities in the pharmaceutical industry. Pharmaceutical and biotechnology companies have heavily widened their reliance on external service providers for research and development (R&D) and manufacturing services for operations. The major disadvantage for pharma companies is that they do not source drugs substance and R&D from a single vendor. This has had an adverse impact on service delivery and operations because vendors take advantage of the industry and the cost is transferred to the patient. Additionally, Edmunds et al. (R. 2017, p. 3) note that New Health Economy has posed a serious challenge to the pharma industry as patients are now playing a direct role in services they receive. Patients are no longer waiting to receive services at the table, but have gone ahead to demand an understanding of the treatment and medications they receive. The emergence of online service deliveries and consultations has even made it complicated for pharma and biotech companies to blindly serve clients. Patient autonomy has made it compulsory for the industry to do a self-reflection and evaluation before providing drugs to the market. From the CDMO and CRO perspective, quality drug delivery is only possible if there is division in distribution and delivery of services. Pharma companies lag behind in the integration of these services into one system and they do not have time to overtake the changes that have already taken place. This explains continuous outsourcing of CDMO and CRO services and it will only continue being a lucrative business for the external service providers. On the other hand, pharma companies will continue spending billions of money on outsourcing at the expense of affordable insourcing which holds potential, yet underutilized benefits to the industry.
The primary objective of this research study is to develop a risk-based approach to the supply chain in the pharmaceutical industry with the intention of exposing the trends, risks, and challenges of outsourcing to the industry. In the process of responding to the main objective above, the study will seek to answer the following research questions.
* What are the visible trends noted in the biopharmaceutical industry in terms of outsourcing in the recent past?
* How has the pharmaceutical industry changed in terms of acquisition and retention of external service providers? What do external service providers do that make it mandatory for the industry to rely on them instead of insourcing?
* What is the role of the regulator in the small molecule?
* What are the risks associated with outsourcing?
The long tenure of outsourcing in small molecule
Outsourcing of small molecule high-quality active pharmaceutical ingredients (API) has been around for a while (Contract Pharma, 2017). In pharmaceuticals and biotech, a small molecule is a drug of low molecular weight (< 900 daltons) that may regulate biological processes. Most drugs outsourced from CROs and CMDs are small molecules. According to Langer (E. 2017) small molecules have considerable advantages over large molecules. Small molecules can be engineered to deliver a strong therapeutic effect with a small dose as compared to large molecules. Smaller amounts of API in small molecules combined with the maturity of chemical manufacturing technology in the recent past explains an added advantage of these drugs to the biopharma industry. Additionally, the overreliance on small molecule drugs has been facilitated by the advancement in analytical technology for small molecules. This has translated to quality, efficacy, and reproducibility at a standard cost.
The advantage of small molecules is that it encompasses the flexibility of their administration and injection. Physicians prefer small molecules because they can be formulated into orally delivered dose forms and offer better compliance at a lower cost of administration as compared to injectables which are the main mode of administration for large molecules (Patel, S. & Weng, N. 2018). Additionally, clinical trials involving small-molecule therapeutics are often simpler and less expensive. In spite of this simplicity, pharma and biotech companies are yet to take advantage of these simplicities and reduce the cost of insourcing. Instead, the simplicity and accessibility are left to external vendors and service providers. Langer (E. 2017) adds that even though the process of development and manufacturing of clinical trial materials for small molecules are typically much less expensive, clinical supplies for small molecules must be handled carefully. A slight error in the process increases the likelihood of adverse effects and the costs cannot be underestimated. The reason is that biopharmaceutical companies often deal directly with the client and the effects are immediately the substance hits the shelves.
Statistical Evidence on Biopharmaceutical Outsourcing
The increase in the willingness of biopharmaceutical companies to outsource API is a tacit signal that the industry has developed more trust in outsourcing as a way to meet business and demand goals in the market. However, even though the reliance on external vendors plays a crucial role in meeting the pharmaceutical demands. The goals of supply and distribution lines do not match those of the biopharmaceutical industry. While the business industry seeks to maximize profit by selling as many units as possible, the biopharmaceutical industry seeks to provide quality services while at the same time operating within the limits and dictations of clients.
The growth of external R&D activity in CRO and CMD
Before diving into the understanding of basic factors that have contributed to the changes evident in this industry, it is important that one first understands the statistical context of how the industry has evolved to rely on external service providers. Researchers have been keen on the trend of outsourcing and have provided statistical evidence on the topic with the intention of explaining and predicting the trend for years to come. The profiled data indicate a predictable trend for coming years. Companies are going to outsource more and this implies potential profits for external service providers.
Biopharmaceutical products are produced as a result of activities carried out by a complex array of public institutions and private organizations working together in the development and manufacture of drugs. The process takes place through a team of scientists, researchers, and research institutions working for profit with the hope that the discovery will generate billions of money in the industry. Since the steps of discovery to the point of manufacturing of drugs involves different players, it would be impossible to underestimate the role of external service providers for the success of this process. As a fact, the whole process is to make sure that the firm taps into the knowledge existing in public for its good and that of the company as well. Additionally, the screening process from drug discovery to the time the drug is released to the market requires a team of committed people working together. Since pharma companies are now working as for-profit firms, there is no doubt that nothing would serve them better than outsourcing knowledge for the benefit of the firm. Additionally, if outsourcing is cheaper as compared to undertaking the task in-house, then a firm would opt for an alternative that does little harm to its business.
Figure SEQ Figure \* ARABIC 1. Outsourcing Trend: 2006-2017
From the figure above on outsourcing, it is evident that outsourcing is increasing after every year due to changes taking place in the delivery and services. Traditionally, biopharmaceutical companies used to outsource IT services for data analysis. The tremendous shift evident in the above chart shows that the industry is no longer capable of meeting its goals in the absence of external support from the CMO and CRO. The reason why the industry outsourced in the past is also slightly different from what is experienced today. Traditionally, outsourcing was fueled by reasons such as repetitive services or simply cheap services that were costly if the industry decided to take the task. Today, the higher demand for quality services coupled with the knowledge among clients is the reason why the industry outsources most services, even those that are within its capabilities.
The graph above also sheds some light on the future of outsourcing and it is evident that the trend is likely to go higher as time progresses. Generally, the industry has been open to the outsourcing of basic necessities and services that could otherwise be cheaper if biopharmaceutical industry decided to shoulder the responsibility of production without involving the third parties.
Figure SEQ Figure \* ARABIC 2. Pharmaceutical Spending on Outsourcing
Source: Edmunds et al. (2017)
The surprising evidence from the above data is that the amount of money that the pharmaceutical industry pumps into outsourcing is directly proportional to the labor outsourced. Scholars appear contented that there is an economic tradeoff between the burden of outsourcing and the value generated from acquiring external services. Generally, it is clear that the industry could not be opting for this option if it was making losses. Even though the goal remains to meet consumer goals and satisfaction, the benefits generated by external vendors outweigh the risks associated with carrying out the activities in-house.
It would be ill-advised to critique increasing outsourcing without considering the reasons as to why the industry has adopted this means of operation. One key factor stands out that globalization has increased the global demand for pharmaceutical products. Unfortunately, the pharma industry deals directly with clients who are sensitive to quality and service delivery. According to Trova (M., 2017), life sciences deal directly with clients whether at the local or international level. In this new era, pharma companies have been forced to become more proactive with large communities of patients. Service delivery is no longer lip service in meeting the needs of a wide range consumers, but also emphasis on delivering positive results in terms of health, wellbeing, and optimal management of illness for the global population. Mentesana et al. (2017) add that the New Health Economy is creating a wave of competing challenges for the pharmaceutical industry where there is a need to provide quality services while at the same time remaining competitive and effective in profit maximization. Pharma companies operate as businesses with shareholders. A slight mistake in standards of operation or delivery of quality products will mean that the industry is adversely affected and this will be a threat to millions of shareholders in the company. Additionally, in this era of globalization, the business has to strive to operate within the limits and specifications of the society as a slight error is picked up by mainstream media and within a short period, the reputation of the business will have been ruined.
The growth of outsourcing in the supply chain of the pharma industry is based on a number of factors, some emanating from the industry while others being beyond the control of the industry. Internal factors for outsourcing include insufficient labor supply for analysis and documentation of data. However, a big chunk of work arises when the industry wants to remain competitive and efficient in service delivery. Generally, there is limited time for the industry to concentrate on training and equipping current manpower with technical skills in data management and analysis. As a matter of fact, outsourcing enables the industry to concentrate on delivering its co competencies and this allows it to remain effective and sufficient in operating and managing the available resources. Just as Mentesana et al. (2016) puts it, Pharmaceutical companies have had their interaction limited to consumers. Pharma products have been marketed directly to the consumers including involving patients in clinical trials. The industry has, therefore, lagged behind in business models that have recently encompassed the pharma industry due to globalization. To overcome and offset these challenges, the industry has no alternative but to employ those that are competent in the sector. This is when CMOs and CROs are readily available to keep operations running. The industry’s traditional means of engagement is no longer sufficient in dealing with the increasing population that is mounting pressure on its operation.
Regulator Activities in Small Molecule and the Risks Associated with Outsourcing
Pharmaceuticals are not produced overnight. In fact, it takes between ten to fifteen years from the time small molecule drugs are discovered to the time they hit shelves (European Union Commission, 2013). This is due to the complex process involved in the preparation, testing, and taking drugs through clinical and preclinical trials before releasing them to the consumer. Pharma companies and life sciences deal with human life and nobody would wish to take chances with human life. To understand the role of the regulator in the pharma industry and what the regulator says on outsourcing, this section will review the EU Commission’s stipulations on drug manufacturing and outsourcing. The EU Commission has published guidelines on GoodDistribution Practice (GDP) of drugs which has to be adhered to with all external vendors in the region.
One of the reasons why the EU Commission seeks to regulate distribution and supply of drugs is to ensure control of the distribution supply chain while at the same time maintaining the quality and the integrity of pharmaceuticals. The players involved in the supply chain of drugs are manufacturers or their depositories, importers, other wholesale distributors or pharmacists and other persons authorized to supply pharmaceuticals. Failure to monitor and regulate the movement of drugs in the member states creates room for other unauthorized entities to take advantage of the consumer who is not aware of risks associated with consumption of bad drugs until it is too late to notice. According to the EU Commission, wholesale drug distributors must meet quality requirements stipulated in the GDP, their personnel meets GDP standards, and the equipment and premises be up to the required standards defined in the GDP. Some of the quality management requirements include quality risk management, review and monitoring of processes, management and review of outsourced activities including contract performers. The goal is to make sure that all the risks within the operations of the firm are carefully assessed and reviewed to maintain the system and legal requirements for the benefit of the company and the public at large. Outsourced activities should be reviewed and assessed on their suitability and competence to carry out the activity, defining the responsibilities and communication processes, and monitoring and reviewing the contract acceptor on a regular basis.
Another area of concern is the Quality risk management. This is a systematic process for the assessment, control, communication, and review of risks to the quality of pharmaceuticals. Quality risk management ensures evaluation of the risk to quality is based on scientific knowledge, experience with the process, and ultimately, the protection of the patient. Outsourced chemical compounds must undergo laboratory screening before being approved for use. The facilities and premises handling drugs and must also meet hygienic standards stipulated in the GDP. From this point of analysis, it is evident that most of these activities cannot be managed in-house. Furthermore, the fact that most of these processes do not take place within a single premise indicates that the challenges cannot be faced by a single entity in the pharmaceutical industry. It requires a collective action from all the stakeholders, some operating at the international level. The collaboration of efforts from different players calls upon the firm handling the processes to outsource if it indeed wants to remain competitive and effective in time management while at the same time delivering the best service to the patient.
In the EU, it is evident that firms operate with personnel from different countries. Even if a firm wanted to restrict its activities in-house, the open borders allowing companies to trade beyond geographical boundaries creates a challenge for those that want to isolate themselves from outsourcing. A firm has to choose between operating within the stipulated standards to be faced off by the competitors who are targeting the best brains in the universe. If a firm has limited access to competent employees trained to work in a particular field, there is no option but to opt for what the market demands (Adams, J. 2017). Pharmaceuticals would want to employ responsible people that will not only add value to the firm, but will also help the firm ascend to the new level. This explains why pharma companies are drawing employees even from third world countries because competition has defined the theme of operation in the era of globalized business operation.
Apart from the EU Commission, individual governments have also realized the need of regulating small molecule drugs, concerns related to the efficacy and safety of drugs have made most governments to develop regulatory agencies for overseeing development and marketing of pharmaceuticals. The reason for creating these agencies is to protect domestic industries from external manipulation while at the same time securing employment opportunities for populations that depend on this industry. All drugs carry some risk of adverse events. Generally, most drugs have the benefit derived from using the drug outweigh the risk incurred from its use. However, there have been circumstances where counterfeit drugs have caused adverse effects to the public. Presence of such cases in the past made created a need for effective drug regulation to ensure the safety and efficacy of manufactured drugs for the general public.
Even though regulatory activities seem to serve the best of the industry, they also mount pressure on the industry. One of the biggest challenges for pharmaceutical companies is to shift the focus towards high value but lower volume products in the market. Technological advent has made it possible for the industry to focus on the small, yet efficient drugs that meet the needs and demands of the consumer. Additionally the increasing price pressure caused by the tightening market price regulations and competition among external service providers and vendors are also forcing pharma companies to challenge their current product and market strategies to remain competitive. Global regulation is also increasing and bringing more complexity in compliance with supply chain infrastructures and operations. The EU Commission on regulation and emphasis on quality drug manufacturing with extensive regulatory oversight creates new kinds of requirements for firms operating on traditional supply chains. This forces these firms to either opt for outsourcing or endure stiff competition in the market which eventually threatens their existence.
How to address the challenging risks to small molecule
Before delving into how to mitigate risks affecting supply chain in pharmaceuticals, it is important that one first understands the types of risks that are likely to impact pharma companies. As mentioned earlier, pharma companies do not operate as single entities. Most of them work as contract givers and they source their products from third parties. Even though a firm may have its manufacturing, storage, and distribution channels, there are always risks associated with the consumption of drugs associated with life sciences. Some of these risks include regulatory shifts, supply chain risks, healthcare spending, and pricing. Pharma companies are forced to strike a balance between the manners in which they operate and the market demand. Pharma companies often operate within the restrictions of drug availability and patient safety. The two restrictions are set by regulatory bodies which are either governmental agencies or private institutions that are concerned about safety and welfare of the public. A slight mistake is costly to the market and most firms hardly recover after suff...