Sunday, May 31, 2009

Sourcing APIs in Emerging Nations

Guidelines for new supply chains

Two years after filing a drug application, the FDA gives you the green light for your new medicine and you formally launch the product. But your work is far from done. In a few years, you can look forward to expiring patents, and if you don’t have a new blockbuster drug to maximize its sales exclusivity rights in the pipeline, you'll have a revenue gap of several billion dollars to fill. So what can you do about it? Develop a plan to reduce costs now so that you can maintain your competitive advantage in the future.

Where do you start on such a daunting task? Many pharma companies have begun by abandoning once-sacrosanct active pharmaceutical ingredients (APIs) and evaluating sources for newer ones that promise lower costs.

There are hundreds of sources sprouting up in the low-cost nations such as India and China, for thousands of different APIs. They offer great potential to deliver savings. Other industries have been leveraging these regions and generating tremendous value for more than a decade, so pharma companies offshoring in them is a no-brainer, right?

Well, not exactly. True, there are great gains to be had by pharma companies that integrate API sources from all over the world into their supply chains. However, there are also substantial risks which, if navigated unsuccessfully, can have catastrophic consequences. As we have seen in the food and manufacturing industries, tainted products traced back to suppliers in low-cost countries have led to large-scale product recalls and critical health issues.

The recall of lead paint-coated toys, for instance, cost manufacturers millions last year, while melamine-tainted wheat gluten found its way into several brands of pet food, killing hundreds of animals. In both cases, the outbreaks were traced back to rogue suppliers in China, which has traditionally imposed much looser environmental and quality standards than the U.S. and has been very lax in its enforcement of the standards it does have.

Pharma companies sourcing APIs must be aware of these issues, as the consequences of contaminated products will be far worse for them than any food or toy recall. Although the lead and melamine incidents spawned hundreds of articles and new proposed measures from various governmental agencies, the cacophony generated over the first significant API failure will make them sound like a symphony. If the public cannot trust its medicine, the government and general public could potentially reach new levels of consumer panic.

In addition to the intense PR and financial hits of having to execute a recall, pharma companies face another major risk. With a 17-year window of exclusivity on its drugs (give or take), pharma companies face a tight timeline for maximizing patents’ profits. Even if a company catches harmful chemicals in the testing phase before a product goes to market, the testing phase could be delayed as long as two to three years. And this reduces the amount of time left to capitalize on the de facto monopoly they have on the drug in development.

Pharma companies can certainly obtain all of the economic benefits of outsourcing APIs to low-cost countries while avoiding these pitfalls, but they have to consider several important points.

Do Not Let the Government Do the Work for You

In one sense, the FDA’s presence helps to provide a clearer picture of what is expected of the U.S. government. The agency puts healthcare through a much more intricate quality control process than governmental bodies overseeing other industries. However, pharma companies must go above and beyond the government’s standards and make sure they police API sources on their own. For one thing, as stringent as the agency’s directives are, FDA approvals are oftentimes attributed to political factors. If a substandard operation lands in one of these “blind spots” within the FDA’s approval cycles, it could bite pharma companies down the road in a way that would be far worse than an initial rejection by the agency. Pharma companies should always hold their API sources to higher standards than those set by the FDA.

Long-Term Commitment Requires Short-Term Investment

Pharma companies setting up in low-cost regions need to understand that it will take several years to get their API sources operating smoothly and complying with the aforementioned high standards on their own. Consequently, a large investment needs to be made upfront, including a strong presence on the ground to hold new suppliers’ hands from the setup of these procedures through their continuous execution. Pharma companies not only need to walk suppliers through these processes a few times, but monitor them thoroughly and regularly to ensure that they don’t cut corners or misinterpret expectations.

Pharma companies observing successful manufacturers who already have their offshore suppliers seamlessly integrated into their supply chains have to realize that this does not happen overnight, or even within a few years. Pharma is today at the point where manufacturing was 10 to 15 years ago. It took manufacturers more than a decade to establish smoothly running global supply chains and it will be at least that long before the training wheels come off and API sources are riding on their own.

Limit the Number of Offshore Partnerships

Every year, new API sources sprout up in low-cost countries, covering a wide variety of specialty chemicals. This might lead to the temptation of partnering with dozens of low-cost API providers in order to diversify the supply chain and maximize cost savings opportunities. However, given the tremendous time and financial commitment that goes into developing an API source in these regions, it is best buyers focus on quality, not quantity. Rather than attempting to cultivate high standards in many suppliers, concentrate on one or two so that you can ensure tremendous quality over the long haul.

High Standards Begin with Due Diligence and Continue with Ongoing Supplier Performance Management

The best way to create and enforce high standards is to conduct a rigorous and thorough process to identify the right supplier(s) to partner with, and to make quality and safety critical focus points to analyze, confirm and monitor on a regular basis. One way to do this is to make safety a criterion in the RFP process for initial selection. It is the nature of business for suppliers to be most attentive to your needs when they are fighting for new revenue. Therefore, pharma companies can set the tone and have potential partners demonstrate that they have high-quality safety standards in their proposals. This not only makes suppliers aware of safety from the get-go, it sets up a baseline that can be used to measure performance on an ongoing basis.

Another critical factor is to establish and maintain an on-the-ground presence to ensure that suppliers are held accountable for the standards you set. Pharma companies need to perform random batch testing, actively monitor day-to-day operations and have suppliers undergo frequent audits. If they rely on periodic site visits to do this, they have already failed. Any potential problems need to be identified well before they can impact products headed for pharmacy shelves.

Industry pundits agree that successful offshoring will be for a key driver of success for drug companies in the long term. So the question is not whether to utilize offshore API sources, but how to manage them to reduce costs without sacrificing quality. Pharma companies that invest in solutions and processes now that enable them to evaluate and manage new markets and sources of supply will ultimately realize the greatest benefits that low-cost regions can generate down the road.

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