FIND IT, FILE IT, FLOG IT: PHARMA’S CRIPPLING ADDICTION AND HOW TO CURE IT
Chapter 7: Harsh Realities For Big Pharma And The Industry Unearthed, Part 2
Chapter 7: Harsh Realities For Big Pharma And The Industry Unearthed, Part 2
Strangers are sailing the ship
To do justice to this next reality, I start with an expert witness, Professor Andrew Cox.
The professor is world renowned in strategic procurement and outsourcing practices and in my estimation is the only academic who truly understands the nature of the business of procuring goods and services from third parties. Professor Cox is in great demand across all industrial sectors and has kindly offered his views here on practices in the Pharma industry.
AN EXPERT WITNESS STATEMENT: Professor Andrew Cox
Q. Is Big Pharma alone in adopting less-than-optimal practices in outsourcing?
A. Many industries have extensive experience of less-than-optimal make versus buy decision-making and outsourcing, and the major pharmaceutical companies are no different in this respect. Most poor practice arises from low levels of professional competence and a lack of rigorous and robust make versus buy and outsourcing management methodologies.
Q. What is your perspective on Pharma specifically?
A. In the last few decades, the major pharmaceutical companies appear to have been influenced by a number of factors when outsourcing many of their former key internal resources and capabilities (critical assets) to the suppliers in its supply chains. The key factors appear to have been:
a desire for more flexible use of assets
lower perceived costs of external (developing country) supply
short-term headcount cost reduction targets to meet quarterly financial targets
copying the latest fad.
Q. I can see your first bullet could be for strategic reasons, but the other three appear to be based on ill-informed decision making. Is that right?
A. I’m glad you raised the point and of course you are right. The remaining three bullets reflect incompetence in the make-versus-buy decision, and knock-on management issues that can occur once the contract is signed, normally caused by three major factors:
Unforeseen loss of critical assets. By this, I mean inadvertent outsourcing of assets that provide the basis for differentiating your product from the competition.
Unforeseen postcontractual moral hazard. This may sound a difficult concept, but in fact it is easily explained. It means that once the contract is signed, there is a shift in the power and leverage position of the buyer and supplier over time. I sometimes lightheartedly use the analogy of my marriage contract with Mrs. Cox and how our power and leverage positions have changed over time.
Inability to drive improvement in the supply and value chain.
This last point relates to the relative weakening of a buyer’s position so that it cannot drive through the necessary improvement work that is going to make them more competitive in the market. More powerful suppliers will not be obliged to offer up improved quality, reduced costs or end-user value enhancements in the end-to-end value stream unless there is a consequent return for them.
If the contract assures their return anyway, then more often than not it does not make business sense for suppliers to offer things up.
Q. What evidence have you to offer up from your professional expertise in this area?
A. Unfortunately for the major pharmaceutical companies that used to be the “channel captains” who controlled the industry and all of its major supply chains through a judicious control internally of critical assets, there has been considerable evidence of very poor practice in outsourcing in recent years. This has led to the loss of critical assets, postcontractual moral hazard and poor postcontractual management of suppliers. Evidence of this poor practice is listed below:
Unforeseen loss of critical assets:
There has been a loss of internal intellectual property (IP) and technical design, manufacturing and quality-control competencies, with growing dependency on suppliers for these key competencies.
Unforeseen postcontractual moral hazards:
There has been an increase in regulatory and supply-chain complexity, with increased threats to corporate reputation and litigation.
There has been an increasing and unanticipated dependency on supply-chain partnerships with distributors and manufacturers.
There has been a failure to predict the size of switching costs and high exit barriers for Big Pharma companies with their key suppliers.
Inability to drive value for money improvement in the supply and value chain:
There has been increasing evidence of poor quality control and adulteration of raw materials, products, and services across the industry.
There is widespread evidence of poor schedule compliance and on-time delivery.
The major Pharmaceutical companies have been experiencing rising rather than falling prices and total costs of ownership.
There is considerable evidence that the major pharmaceutical companies still lack cross-functional supply-chain value and process optimization competence.
Q. How would you sum up all of this?
A. All of these recent developments lead to a serious questioning of the strategic outsourcing undertaken by the major pharmaceutical companies in the recent past.
Not only has there been an inadvertent loss of critical assets, but also an increase in competition and a loss of control of key suppliers and supply chains. Unfortunately, this has occurred at a time when competition from generic companies has increased and when profits from patented products have been in decline. The result has been an industry experiencing widespread decline in profitability, now responding with short-term knee-jerk merger and acquisition strategies.
This is a telling indictment of the failure of strategic outsourcing in the pharmaceutical industry. [Note from Hedley: that failure became the SARS-CoV-2 fraud to make $$$ by colluding with its supply base]
These are powerful words from the Professor and should send a chill through the hearts of industry executives:
“This is a telling indictment of the failure of strategic outsourcing in the Pharmaceutical industry,” the professor concludes.
There is so much for readers to pick up on in the above, and I hope the issues shine through. The key harsh reality I want to follow up is Professor Cox’s comment:
“Major pharmaceutical companies that used to be the ‘channel captains.’”
This is why this section is titled Strangers are Sailing the Ship. We can confidently say that no other industry has outsourced its critical assets to the extent Big Pharma has. It has now lost the ability to design and develop its products because suppliers and contractors hold the key, and it has become a golden key for them.
Boeing dabbled with increased levels of outsourced development for the Dreamliner and suffered a reported eighteen-month delay, as well as much pain and suffering, for its troubles. This is what Peter S. Cohan reported in his book You Can’t Order Change: Lessons from Jim McNerney’s Turnaround at Boeing:
“But by outsourcing both the design and the manufacturing, Boeing lost control of the development process.”
The point McNerney makes is that outsourcing manufacture can work so long as the development process and control are in the hands of the developer and it allows detailed instructions and specifications to be handed down to contractors and suppliers. This has not been the case for a long time in Pharma. The knowledge, experience, and capabilities all lie within the supply base.
Observations, Views, and Experiences of the Author
If I were to appear on British television’s Mastermind quiz show, this would be my specialty subject. I’ve been involved in procuring almost every good and service Pharma could ever want, from molecular modeling software to third-party finished goods channel distribution services across global markets, and everything in between.
Through the years, I have seen the Pharma purchasers get ever more locked into their contractor supply bases, and this is why. When the industry decided to mass outsource, it did not take account of the regulatory environment in which it operated. This environment prevents any company from using a contractor unless that contractor has been registered as part of the regulatory filing. The result is that any company in the filing, especially if it is the only one, is in a powerful position because the switching costs and regulatory turmoil would be enormous. Now in the power position, contractors often are able to name their prices and charge for every little piece of work.
I was at a large contract manufacturer where one of the senior executives recounted how a client complained about having to pay for the number of investigations and corrective actions. The client was charged for putting things right when they went wrong at the contractor’s premises!
Even if Big Pharma remained the channel captain, there would be a further intractable obstacle in the way of taking hold of the effort to develop medicine for patients—the massive gulf between Big Pharma and the end users of its products, health-care professionals.
This harsh reality is about the distance between companies developing drugs and the end users. The most contact drug developers have with health-care providers is between the developing company’s clinical group (often a contract research organization) and the clinical trial study investigators who operate within a network of hospitals and clinics signed up for the trials.
The communication is pretty much one way; the investigator role is to collect data from recruits on the clinical trial. The developer has to give a brochure telling the investigator everything about the product undergoing the testing. The objective is to collect the clinical data until the end of the study, normally blind to both the investigator and patient for phase II studies and beyond.
On completion of the study, the statistical end point gets either a pass or fail. Each phase of development has a new end point:
preclinical proof of safety
clinical proof of safety (phase I)
further clinical proof of safety and efficacy (phases II and III).
Drugs reaching their end points are met with fanfares and the waving of flags. Press announcements follow, and plans are put into place for the journey to the next end point. Similar celebrations take place if that also succeeds, until that one in 250 reaches the approval of a drug for patients.
During this time, the drug developer fixes its eyes firmly on the regulator, with the case report form representing the patient. The case report form records everything that has happened to the patient during the trial for inclusion in the regulatory filing dossier. It can be electronic or paper. The net result is that patients and the many health-care professionals are not on the radar screen during the development stage as the Pharma companies and regulatory authorities do their dance.
During this time, the drug developer fixes its eyes firmly on the regulator, with the case report form representing the patient. The case report form records everything that has happened to the patient during the trial for inclusion in the regulatory filing dossier. It can be electronic or paper. The net result is that patients and the many health-care professionals are not on the radar screen during the development stage as the Pharma companies and regulatory authorities do their dance. If the regulators say, “Jump,” the industry says, “How High?“ This is commonly accepted throughout the industry. The regulators are omnipotent. What they say goes. The industry has stopped thinking for itself as it hangs on to regulators’ apron strings.
To confirm this is Peter Savin, former VP, Global Quality Assurance at GlaxoSmithKline, now editor of the journal GMP Review, and an industry consultant like myself.
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