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The Big Crunch: Price Pressures and Big Changes in Healthcare and Life Science Supply Chains - Part One

Life Science's transformation is being driven by price pressures, healthcare reform, emerging markets, and other factors, disrupting the traditional value chain relationships and business models. We discuss some key trends and how companies are coping.

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Healthcare spending as a percent of GDP has risen dramatically over the last several decades (see Figure 1, below). While this is true across countries, the US has expanded spending even faster, and by now has costs much higher than any other nation. This trajectory is not sustainable – we will run out of GDP! There are signs that we are now at the point where it will be difficult for healthcare costs to rise much further at a rate faster than the rest of economy. This is leading to much more determined efforts, on many fronts, to contain costs.


                                                                                                                                       Source: OECD

Figure 1: National Healthcare Spending as a % of GDP

Changes to Payor Strategies—Outcome-driven, Tiered Payments

Both public and private payors are increasingly basing their payment policies on the use of evidence-based medicine to shape demand and align payments with cost-effective, proven outcomes for various treatments. Most insurers use evidence-based approaches in their coverage policies and formularies and have tiered co-pay structures which encourage patients to use more cost-effective drugs, such as generics, through a lower co-pay.

Germany, Sweden, France, Spain and Italy have value-based pricing to align the price they pay for drugs with the measured clinical benefits. The UK’s National Health Service (NHS) said it will move to a value-based pricing policy by the end of 2013. It is estimated that pricing for nearly a quarter of the world’s pharmaceutical sales reference prices set by the NHS, so this will have a broad influence. Some countries are experimenting with risk-sharing arrangements, including conditional coverage and outcome guarantees, where the provider is paid less or is liable to rebate charges if the treatment is not as effective as it should be.

Shift of Focus from Marketing to Outcomes

Since the passage of the Prescription Drug Marketing Act (PDMA) in 1987, marketing has become increasingly important to branded pharmaceutical companies. Pharmaceutical companies have been very successful at generating and sustaining demand for their products through marketing campaigns. As payors’ policies shift more and more to evidence-based practice, the demand for drugs is being shifted to those therapies that are most cost-effective, as measured by outcome research. Outcome data and measurements are therefore more and more critical, becoming key drivers of actual demand and consumption in the market. Pharmaceutical markets are being determined and demand shaped by this data. This is driving some fundamental changes in focus for pharmaceutical companies, beyond just marketing, to try and maximize the clinically measured outcome of the treatments they sell.

Measuring Each Supply Chain Activity’s Impact on Outcomes

Of course pharmaceutical companies have always had an interest in having the best possible proven clinical outcomes. But now that interest has increased exponentially and is no longer just about discovering and manufacturing a drug that is effective and safe. There are many activities along the entire supply chain that can impact the ultimate outcome for the patient, as shown in Figure 2, below. Drug manufacturers will increasingly pay attention to the downstream activities that affect outcomes, such as how the drug is handled in the distribution chain, doctor and patient education programs, and partnering with service providers that can help improve compliance and lifestyle choices.

Figure 2: Optimizing Patient Outcomes Via Activities Across the End-to-End Supply Chain

We speculate that some drug manufacturers will start trying to measure the impact on patient outcomes of these various end-to-end supply chain activities. For example, do the drugs delivered by one 3PL consistently perform better or worse than those handled by another (after compensating for other factors)? If so, then why—what are they doing wrong or right? The same type of analysis could be done to measure the effectiveness and impact of manufacturing processes, doctor and patient education programs, counseling services, and so forth. Some of these efforts could be integrated into initiatives to serialize and track drugs at the end-salable unit level, from the manufacturing plant through to sale to the patient, and perhaps taking those one step further to the actual consumption of the drug by the patient (privacy concerns need to be addressed here, of course). This will require increased capabilities for conducting complex, fine-grained adaptive trials and multiple stages of in-life testing, as well as the competencies for gathering and analyzing the data.

Other ways that Pharma manufacturers can try to optimize actual outcomes include:

  • Service Level Agreements (SLA) with the various service providers across the supply chain, aligned to maximize patient outcomes
  • Partnering with patient service providers to improve outcomes—e.g. counseling programs, compliance improvement mechanisms, etc.
  • Individualized or cohort-specific therapy variations (including non-drug elements, such as demographic-specific or lifestyle-specific compliance programs)

Incremental Approval Process

Both the EMA1 (via EC 507/2006) and the FDA (via PDUFA—Prescription Drug User Fee Act) have introduced conditional approval processes. These allow for the conditional authorization to sell a drug earlier in the approval process, in order to meet unmet critical medical needs of patients, in particular those with seriously debilitating or life-threatening diseases. These are granted subject to specific obligations such as enhanced pharmacovigilance or in-life testing. The FDA refers to this as the ‘Fast Track’ process, which makes a drug eligible for Accelerated Approval (i.e. approval on an effect on a surrogate, or substitute endpoint reasonably likely to predict clinical benefit) as well as a Rolling Review (submitting sections of a New Drug Application (NDA) for review by FDA as they are completed, rather than waiting until the entire application has been completed).

We expect that both authorities will evolve to a more incremental approval process for a broader set of drugs, in which drug companies are granted limited approvals, which are incrementally expanded to broader populations as safety and efficacy is proven out in stages. This is being driven not just by the pharmaceutical company’s desire for earlier revenue, but also by patients demanding earlier access to promising drugs to treat critical conditions. As part of the deal, drug makers will be expected to increase their post-marketing surveillance.

Flexible Manufacturing Ramp-up

This change to the approval process has a profound effect on manufacturing ramp-up rates and volumes, as shown in Figure 3, below. Rather than a single massive launch, volumes will ramp up in stages. This has implications for manufacturing build-out strategies. A company can choose to build a large capacity plant that will be manufacturing at low utilization during the early stages. Or it can create a more modular and expandable manufacturing platform.


Figure 3: Manufacturing Volume Ramp-up Curves for Traditional vs. Incremental Approval Processes

The ability to efficiently produce in small batches and shift production from one type of drug to another in the same facility will become much more valuable than it has been in the past. This can be accomplished through equipment and process changes, monitoring the right metrics (like change-over times), and employee training.

Companies may also decide to develop the capabilities to create and manage partnerships with contract manufacturers with flexible capacity. The ability for pharmaceutical manufacturers to analyze the tradeoffs between the various manufacturing approaches will become increasingly important.

In Part Two of this article, we will look at the huge impact that emerging markets are having on the life sciences industry.


1European Medicines Agency -- Return to article text above

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