procurement and distribution interest group (pdig) autumn symposium, 5th june 2008, coventry review...

Procurement and Distribution Interest Group (PDIG)Autumn Symposium, 5th June 2008, Coventry

Review of theSupply Chain Model

Michael W Thomas

2PDIG, Coventry 2008

Pharmaceuticals – A £11bn + Market

Branded Retail(40%)

DispensingGPs

Parallel Trade(~10%)

ZeroDiscount

Retail Generics18%

Hospital 17%

Homecare

Source: IMS; A. T. Kearney and Industry analysis

Fragmented and subject to different pressures

UK Market Structure By Value (2007, %)


Discussion Points

Where Is Healthcare Headed?

What Is Happening To The Supply Chain?

What Will It Look Like In The Future?

Who Are The Winners & Losers?


NH

S T

ota

l S

pen

d (

£bn

)

60

70

80

90

100

110

2004

120

20052006

20072008

20092010

20112012

20132014

2015

3.5% p/a growth

4.9% p/a growth

Developed Economies Face Funding CrisisAccelerating Expenditure Growth

Source: OECD Data

400

2000

50

100

150

200

250

300

350

1600

USD Bn

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

USA

Japan

Germany

France

UK

Italy

Analysis of UK Funding Gap

Source: NERA

1.4% p/a spending

gap

The critical issue is affordability


Worker : Dependent Ratios Out Of Line

Source: United Nations

1950

2000

2050

2020

USA UK France Germany

Most health systems were designed for this …

… but will have to deal with this reality

= Retiree = Worker


There May Be Differences Of Philosophy …

Government

Payers

Citizens Providers

Suppliers

Access, Choice, Safety, Equality,

Sustainability

Government

Payers

Citizens Providers

Suppliers


Sustainability

• Cash Limits• Rationalization• Rationing• Regulate Drug costs• Shift to community care• User fees and

co-payment

• Cash Limits• Rationalization• Rationing• Regulate Drug costs• Shift to community care• User fees and

co-payment

Cost ContainmentMechanisms

• Decentralizationand autonomy

• Funding Incentives • Competition• Patient choice• Commissioning• Savings Accounts

• Decentralizationand autonomy

• Funding Incentives • Competition• Patient choice• Commissioning• Savings Accounts

MarketStyle

Mechanisms

Government

Payers

Citizens Providers

Suppliers


Sustainability


Increasingbudgetsallocatedto health

Developing Markets

Affordability gap

DevelopedMarkets

Core Service Provision Will Be Redefined

Services considered to be essential for basic health

needs

Services considered to be essential for basic health

needs

Care of the ElderlyAccident & Emergency care

Control of infectious diseasesSanitation, nutrition

Services which reduce overall burden on the health

system and country

Services which reduce overall burden on the health

system and country

Mental health, rehabilitationLong term conditions

Prevention, screening, education Generics

Services whichare not cost effective

Services which are cost effective to improve quality

or length of life

Services whichare not cost effective

Services which are cost effective to improve quality

or length of life Priority conditions

Local epidemiology


Hard Choices For Net Incremental Spends

Source: Various; A. T. Kearney Analysis

Creating Life

Preventing ill health

Treating ill health

Prolonging life

Preventing Death

£ £

Reduced infant mortality with rotavirus vaccinationCOST SAVING

Reduced infant mortality with rotavirus vaccinationCOST SAVING

• PET for Alzheimer’s disease

£250,000/QALY

• PET for Alzheimer’s disease

£250,000/QALYBevacizumab for metastatic colorectal cancer

£46-88,000

Bevacizumab for metastatic colorectal cancer

£46-88,000

Effective use of statins~£2,300/QALY

Effective use of statins~£2,300/QALY

Suicide preventionCOST SAVING

Suicide preventionCOST SAVING

GM-CSF in elderly with Leukemia£118,000/QALY

GM-CSF in elderly with Leukemia£118,000/QALY

Breast cancer screening£2,050/QALY

Breast cancer screening£2,050/QALY

Smoking cessation advice in pregnant mothers£424/QALY

Smoking cessation advice in pregnant mothers£424/QALY

Intensive Glucose control of type 1 DiabeticsCOST SAVING

Intensive Glucose control of type 1 DiabeticsCOST SAVING


Push Towards Greater Use Of GenericsCost Of Prescribed Medicines Prescription Volumes

… with increasing mass adoption post expiry

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Innovative

Generics

Indexed Total Net Ingredient Costs (1996 = 100) Indexed Volume Growth (1996 = 100)

0.0

50.0

100.0

150.0

200.0

250.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Innovative

Generics

Source: PPASource: PPA


Case Study: Statins

Simvastatin

Zocor

50

100

150

200

250

300

CalQ

tr/3/2002

CalQ

tr/6/2002

CalQ

tr/9/2002

CalQ

tr/12/2002

CalQ

tr/3/2003

CalQ

tr/6/2003

CalQ

tr/9/2003

CalQ

tr/12/2003

CalQ

tr/3/2004

CalQ

tr/6/2004

CalQ

tr/9/2004

CalQ

tr/12/2004

CalQ

tr/3/2005

CalQ

tr/6/2005

CalQ

tr/9/2005

CalQ

tr/12/2005

CalQ

tr/3/2006

CalQ

tr/6/2006

CalQ

tr/9/2006

CalQ

tr/12/2006

Co

un

tin

g U

nit

s P

er Q

uar

ter

(Mill

ion

s)

Source: IMS


Discussion Points





12PDIG, Coventry 2008Source: Lehman Brothers Pharmapipelines, 2005 & 2007

Worldwide Therapeutic Area Growth

- 5%

0%

5%

10%

15%

20%

25%

30%

35%

- 5% 0% 5% 10% 15% 20%

CAGR %2008-2011

CAGR %2004-2007

Secondary Care Drives Portfolio Growth

Hormone Control

Metabolism/Endocrinology

AntiInfectives

Respiratory

CNS

Cardiovascular

More specialistMore biological

More primaryMore chemical

Vaccines

Sexual Dysfunction

Diabetes

Inflammation

Cancer

DermatologyHaematology

Ophthalmic drugs

ImmuneSystem

• Slow growth• Intense generic competition• Primary• Chemical

• High growth• Low volume• High cost• Secondary• Biological


There Is A Significant Shift To Cold-Chain

2004 2005 2006 2007

Cold chain

Portfolio Composition By Value(Top 5 Pharma Example)

31% 38% 44% 55%

Ambient 56% 45%69% 62%


What Is On The Industry Agenda?

Supply chain integrity / transparency

Customer intimacy

• Services• Commercial terms

Lower total operational costs

• Differential deals to reflect real costs

Wholesale and retail consolidation

Shift in portfolio to higher cost / specialist products

Parallel trade and counterfeit risk

Supply chain excellence focus

Pressure For Change Industry Objectives


1987 1993 1998 2003 2008 e

Source: A.T. Kearney Studies 1987 - 2004

12.1%

8.6%

6.4% 6.1% 5.9%

1.3%

2.5%

2.5%

2.5%

1.2%

1.7%

1.8%

3.9%

1.0%

1.0%

1.6%

2.8%

0.8%

0.8%

1.5%

3.1%

0.9%

0.8%

1.1%

3.2%

Administration

Inventory

Warehousing

Transport

Productivity Focus In Other Industries

50% Reduction

Supply Chain Costs As A Percentage Of Sales


Increasing Use Of Tiered Distribution TermsD

istr

ibu

tio

n c

ost

(U

SD

/un

it)

Unit ex-Factory Price (USD)

Wholesaler unit cost based on 10%

Fee-for-service based on 5% of ex-factory price

Direct distribution price per pack(10 USD)

10

15

20

25

0

5

50 100 150 200 250 300

W/Sroute for low

price products

Direct distribution for

expensive products

Fee-for-service for mid-price

products


Alternative Models Being Explored

Manufacturer sells to wholesaler

Manufacturer sells to pharmacies

All Fully Line Wholesalers GSK

Semi-Exclusive/ Exclusive

Napp

sanofi-aventisPfizer, AZ

TraditionalModel Company /

customer specific

trade terms

Home Delivery Models

OFT: Impact on Competition, NHS, Patients?


Headlines From The OFT Report

Cost increases to the NHS

• Safeguard pharmacy discount

Reduced service levels

• Clarify service level being “paid for”

Recognition of potential efficiency benefits of DTP

Manufacturers should be free to choose

No evidence of reduced competition in the sector

To be addressed as part of PPRS discussions


Care Will ‘Shift’ Into The Community

From

‘One size fits all’

Reactive care

Hospital setting

To

Community based

Responsive, adaptable,flexible service


Specific Shift Ideas Being Tested

Initial Appointment Diagnosis Treatment Follow

-Up

GP/Other Outpatients Simple Tests

Complex Tests

Non-surgical Outpatients Day Case Inpatient Step-down

CareOutpatient Follow-up

Source: “Our health, our care, our say”, DH 2005

Large Some Limited

Key – Potential to provide additional activity in the community setting:

Acute to Community• Primary care follow-up after discharge• Relocating specialist services to other

venues • Direct GP access to hospital based tests

or specialist treatment

Acute to Community• Primary care follow-up after discharge• Relocating specialist services to other

venues • Direct GP access to hospital based tests

or specialist treatment

Community to Self-care• Home visits or hospital-at-home• Automated telemonitoring• Self-management education and

monitoring• Telemedicine consultations

Community to Self-care• Home visits or hospital-at-home• Automated telemonitoring• Self-management education and

monitoring• Telemedicine consultations


Initiatives like C-Port illustrate new supply chain management partnering opportunities

Innovative partnership working

Capacity modeling

Optimising network performance

Business case support


CostEfficiency

CommunicationChannel

ServiceDelivery

Transparency& Integrity

Extended Supply Chain Vision

2010

Today

Manufacturing Centre

Consumer / Patient

Local Warehouse

Regional Warehouse

Central Warehouse

Wholesalers 3rd Party Logistics

Retail Pharmacy

Home Point of Care

Hospital

Ward

Source: Adapted from “Pharma 2010: The value-creating supply chain”, IBM


Discussion Points






Different Growth Rates In Each Channel

Channel Trend

Branded Retail = / -

Retail Generics + +

Branded Hospital + + +

Home / Community Shift + + +

Parallel Trade ~ / -

… as supply chain adjusts to new realities


Wholesale Economic Model Under Threat

Un

it V

alu

e

Rate of Sale

+ +

+ +

CrossSubsidy

Tomorrow’sPortfolio

Yesterday’sPortfolio

• Unprecedented generic expiries

• High volume growth• Payor price pressure

• High value, limited patient numbers• Mostly hospital• Increasingly ‘direct’• Manufacturer value chain control


Blended Prices Have Dropped

Retail sales in 2003

£7.4£5.5

Pressure in use of Gx

Pressure in use of Gx

DTP

Source: IMS, A. t. Kearney Analysis

Retail sales in 2007, excl. PFZ and AZN

The future?

The future?

0%

10%

20%

30%

40%

50%

60%

70%

0 10 20 30 40 50

% p

acks

of t

hat

pric

e

Product price

£10 £20 £30 £40Product price

% p

acks

(u

nit

s)

NHS retail volumes by product price

£7.4

£6.2

£5.5

£5.0

£5.5

£6.0

£6.5

£7.0

£7.5

£8.0

Average price

Cross-subsidy model no longer sustainable


• Decreasing economic attractiveness

• Scale and operational efficiencies

• New market expansion

Supplier Focused

Payor Focused

Specialist Service Provider

Aggregator / Integrator

Choices Will Need To Be Made

Traditional Wholesaling

Pre- Wholesale

PharmacyRetailing


Multiple Retailers Dominate

Source: Taylor & Nelson, A.T. Kearney Analysis

Breakdown of number of Retail Dispensing Points in the UK (~14,000)

- 7% growth p/a

Singlepharmacies

31%

Multipleownership

16%

Supermarkets

5%

DispensingDoctors

16%+ 9% growth p/a

Largechains

32%

Boots 30%

Lloyds 25%

Others

Boots

Lloyds

Increasing use of differential commercial terms, reflecting buyer leverage and scale economies

53%

Potentialcross subsidy

effect


Shape Of The Future?

71% of respondents would pay for a home delivery service. 30% would pay between €1-3

5% would pay €3-5

Source: European Study, 795 Respondents


Supplier Focused

Payor Focused



Homecare

Choices Will Need To Be Made


Pre- Wholesale

Payor Supply

Manager

PharmacyRetailing

Supplier Portals


Future Will Drive Increasing Specialisation

… being a ‘generalist’ will be unviable

Supplier Focused

Payor Focused

Supplier Focused

Payor Focused





Homecare


Pre-Wholesale

Pre-Wholesale

Payor Supply

Manager

Payor Supply

Manager

PharmacyRetailingPharmacyRetailing

Supplier Portals

Supplier Portals

CrossBorder

Arbitrage

Michael W. [email protected]

Principal A.T. Kearney Limited

Lansdowne House

+44 20 7468 8090 Direct Berkeley Square

+44 796 716 8090 Mobile London W1J 6ER

procurement and distribution interest group (pdig) autumn symposium, 5th june 2008, coventry review...

Documents

industriessupply chain

kearney studies

discussion pointswhere

winners losers

retail consolidationshift

industry agenda

service b

greater use of genericscost