Driving Traceability Requirements to True Business Value

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Serialization is no longer on the horizon, it has arrived; the first few legislative requirements for the US Drug Supply Chain Security Act have already landed, and it is now a steady march until full enactment in 2023. Similar regulations in Europe, China, Brazil and elsewhere are in place or taking shape. The pharma companies preparing for serialization compliance generally are taking two approaches: doing what is necessary for compliance with each of the deadline dates written into DSCSA, and rolling out implementations for a few packaging lines (and for a few countries) in a piecemeal fashion; while others are taking an aggressive, enterprise-level approach, and aiming for full compliance with the 2023 requirements as soon as possible.

Both approaches have merits; for example, the piecemeal approach allows for avoiding premature investments in technologies or equipment that will be rendered obsolete by later developments. However, our contention is very simple and direct: an aggressive, enterprise-level approach, for full DSCSA compliance as soon as possible, is the best approach, with quantifiable benefits:

• Save nearly $800 million in operating expenses in the first year the system is fully implemented (equal to 2.5X the capital expenditure) for an “average” Big Pharma company.
• Accrue savings of approximately $3.7 billion by 2023 (the first year of full DSCSA compliance requirements).
• Lay the groundwork for next-generation pharma business, based on close coordination of patient activity and market visibility—years sooner than the companies opting for “just in time” regulatory compliance.

FIG. 1. PUTTER’S LOOP AND DRIVER’S LINE

The leaders in the industry have recognized the opportunities presented by serialization, and have developed implementation plans that will carry them through to the final requirements of 2023: interoperable electronic systems with aggregation and inference to the item level. The laggards in the industry have opted for a more piecemeal approach: serializing just enough to comply with the letter of the law for a given market, with a lick and a promise to come back at a later date for full compliance only when they are legally bound. These divergent approaches lead to what we have taken to calling the “Drivers” and “Putters” (see Fig. 1).

The Putting option seems a prudent course—you might end far over par, but you know you won’t fall into the pitfalls and sand traps along the way. With each new legislative requirement, companies deploy just enough strategy and just enough capital to come into compliance. Softer costs, such as the inevitable hit to process quality and the training required to smooth the transition to the new process, are absorbed, ignored, but quietly accumulate in the background to the tune of tens of millions of dollars for a global company. Meanwhile, as soon as one legislative requirement has been tackled, the next has already begun to rear its head, pulling the company right back into the same cycle.

By breaking the cycle, aiming for the green at the far end of the fairway, industry leaders save themselves these soft costs hitting them time and time again—but the benefits go so far beyond a few soft costs. There is a tangible ROI in the form of production efficiencies and cost reductions that begin as soon as the project wraps up.

Value of visibility

The most notable of these cost reductions is in the form of inventory savings. According to McKinsey’s 2012 report “Strength in Unity: The promise of global standards in healthcare,” an average pharmaceutical company can expect to save up to 15% on their inventory costs through increased supply chain visibility. By knowing what products are being sold where, and when, companies can create better forecasts, smooth out production schedules, and prevent critical shortages, all while freeing up the capital that is currently being tied up in inventory.

FIG. 2. QUANTIFIABLE COST REDUCTIONS

This single reduction has auxiliary benefits as well. By reducing inventory, there is also a reduction in the financing costs and management costs associated with holding inventory. Additionally, by running a leaner inventory, and the transparency to know where inventory is, obsolescence costs are decreased by selling these products well before they can hit their expiration. Similarly, in the case of a typical recall, McKinsey suggests that administrative costs associated with managing a recall would fall 50%, as recall efforts would be more focused to only customers who had actually purchased products from the recalled lot. Neither obsolete drugs nor recalled drugs would be able to be distributed to patients.

The original intent of the DSCSA, and other global serialization legislation like it, is to prevent counterfeit drugs from entering into the legitimate supply chain. According to the World Economic Forum Report, counterfeit pharmaceuticals are a $200-billion problem. Estimates vary on exactly how much serialization will counteract this problem, but between 35-50% is the commonly cited range. Different companies will have different exposure levels to counterfeiting, based on not only the type of product they sell but also the markets they sell into, with developed markets having a relatively low incidence rate, to some emerging markets that could be as high as 30% or more. And reducing counterfeit rates has a greater impact beyond the bottom line. Counterfeit drugs at their best don’t work as advertised. As we move toward an outcomes-based payment model, pharmaceutical companies that are frequently counterfeited will have a lower perceived efficacy rate, hurting their brand and their sales as payers move to companies that can ensure the proper outcome. (See Fig. 2 for a full list of quantifiable cost reductions.)

FIG. 3. INTANGIBLE GAINS

Beyond these quantifiable cost reductions, more intangible gains will result from a robust serialization program (See Fig. 3). Serialization can help hospitals tackle errors and adverse drug events by facilitating the use of more robust technology for drug monitoring, resulting in improved patient outcomes. Similarly, as “outcomes become incomes,” developing a closer relationship with the patient will be key. Through having a serialized data matrix, a customer can scan their medication generating many opportunities for manufacturers to create a closer relationship with their end consumer. Ultimately, the creation of support group communities will progress toward the goal of personalized medicine. For companies that are looking to expand to new markets, serialization will make this process easier, particularly as larger economies work out the kinks, emerging markets will be able to quickly implement what is already working in other markets. Having serialization in place will dramatically reduce the cost of doing business, allowing more countries to pass the minimum threshold to become attractive markets.

Within the four walls of the manufacturer, there will be benefits to the production process as well as to the generally accepted financing models. By being able to track product to the unit level through the production process, huge amounts of new data will be available. Harnessing that data could result in creating new efficiencies, catching small problems at the source before they become large problems, and scheduling maintenance to prevent unexpected down time. On the financing side, the highly manual chargeback process can be streamlined by leveraging existing EDI structures to create rebates between payer groups and manufacturers, allowing wholesalers and manufacturers to reduce staffing levels. The rebate model allows manufacturers to continue to negotiate pricing with large payer groups, but charge a flat rate to all customers. The rebate is issued upon usage, providing the manufacturer with robust data about usage trends, and preventing parallel trade by companies not issuing rebates to serial numbers outside their intended market.

FIG. 4. COST REDUCTIONS BREAKDOWN

FIG. 5. ROI TIMELINE

FIG. 6. NPV OF COST SAVINGS

Bottom line realities

In order to take our analysis from the abstract to the tangible, we looked at real companies, and created a “typical” global pharmaceutical company, whom we will call BigPharma. BigPharma has revenues of $58 billion, and 325 packaging lines globally. By taking BigPharma’s revenues and inventories, we were able to extrapolate the kind of cost savings they could be looking at—and, to be ultra conservative, we cut all of our expected savings in half. Fig. 4 shows the breakdown of the cost reduction BigPharma could reasonably expect.

The benefits and cost reductions we have previously outlined will materialize for BigPharma whenever they choose to build the appropriate infrastructure, giving a boost to the profit margin. In Fig. 5, we illustrate the difference in benefit between a company that acts immediately compared to one that waits. For the company that moves right away, the cost savings are able to accrue over a longer time period. This consistent return means that by the time the putters finally reach the green for the 2023 deadline, industry drivers will have already received an NPV of several times their putter counterparts. Fig. 6 shows that if BigPharma takes a driving approach, they can expect an NPV of $4 billion, as opposed to $330 million for a comparative putter.

In addition to the straight financial benefit, companies that move quickly on these regulations have the benefit of being done with them quickly. This frees up time and resources to be more forward thinking toward their next challenge. They will be easier to do business with for wholesalers, and could easily become preferred vendors for key accounts, growing market share while further reducing their cost structure as new efficiencies are found.

How can we be so confident that these benefits will materialize? Because this is nothing new; it has all been done before. The consumer packaged-goods (CPG) industry in the 1990s went through the growing pains associated with sharing their data among channel partners, and the end result was a symbiotic relationship. Producers were better able to forecast demand, smoothing out the production cycle, all while reducing inventories by up to 50%, while retailers were better able to ensure consistent product on the shelf, without holding an excess of back of house inventory. A skeptic might say we are comparing apples to oranges, but if the orange producer notices the apple producer just slashed their cost structure, it might behoove the orange producer to ask how.

Article contributions made by Excellis Health Solutions in conjunction with Global Track and Trace. www.globaltrackandtrace.org