Procurement has a key role to play in solving the costs up: revenue down equation in pharma

A new event - ProcureCon Pharma - which took place in Zurich last week - has been added to the ProcureCon series of global procurement conferences. The event is timely, as not only does purchasing in pharma have its own unique challenges but, more importantly, procurement enterprises are in a unique position to drive innovation and value in the industry through dynamic procurement.

Cost up
For those of us that have been in and around the pharmaceutical industry for a while it doesn’t seem that long since the quoted costs for developing a new drug were a few hundred million dollars. In the mid-noughties they cut through the billion mark. But now, according to some research, the cost to bring a new drug to market can exceed a truly staggering $10bn.

Productivity down
This figure takes into account another indicator that weighs heavily on pharma – not only are costs going up but pre-market failure rates are increasing too. For example, a 2011 study showed phase II success rates declined from 28% in 2006/7 to just 18% in 2008/9. Considering that the chance of a drug subsequently progressing through phase III is 50%, the attrition rate is unsustainably high.

Market fragmentation
It’s been well documented that the biopharmaceutical industry is undergoing unprecedented change. The blockbuster era – where a single drug addressed a large market over a sustained period of time is ending. New medicines are more complex, address smaller markets and treatments increasingly personalised.

Price sensitivity
With costs escalating, the operators of healthcare systems globally are also looking to reduce spending. The same buyers of pharmaceuticals are also asking more questions about the value of the products they buy. Unfortunately, the sellers aren’t always coming up with convincing answers. So whilst the industry is still making the decisions on which drugs come to market and their pricing, price sensitivity will be an increasing factor.

Grappling with increasing failure rates and increasing costs has meant that productivity has become a major focus in the pharma sector. In R&D a significant trend over the last 2 decades has been to blend in-house developed candidates with a pipeline from biotech firms. Companies in the biotech space have a lower legacy cost base and a vaunted innovative culture that sparks new ideas for therapies.

Balanced supply chains
However, pharma companies are also looking to reduce costs by simplifying supply chains. In some cases this is leading them to bring work back in house to drive out cost and increase control.

The pharmaceutical supply chain of the future will therefore comprise a balance of insourced and outsourced capabilities. Those activities requiring local control, that are key drivers of competitive advantage or where offshore costs no longer drive a numerical benefit will be conducted in-house. On the other hand, those activities that require specialist resources or are non-differentiating will continue to be outsourced.

Dynamic procurement
All of this points to an increasing requirement for dynamic procurement where the procurement department plays three essential roles – as innovator, collaborator and strategist. Some examples of how procurement will create value in each of these areas include:

- Innovator – driving more productive outsource/insource structures to deliver more effective supply chains.

- Collaborator – effectively leveraging supplier relationships to capture increased value and drive greater innovation.

- Strategist - SRM has always been a core component of the procurement enterprise; recognising and leveraging sources of competitive advantage in these relationships will be a key source of competitive advantage in future.

With its unique position at the nexus of finance, operations and suppliers, procurement is in a key position to recognise and exploit key sources of competitive advantage in pharma.

Jonathan Betts is Sales & Marketing Director at procurement technology provider Science Warehouse.