How to Select the Right Pharmaceutical Sourcing Model

How to Select the Right Pharmaceutical Sourcing Model

Farewell to the Blockbuster?

The blockbuster drug era is widely reported to be coming to an end. Last year GEN reported (as did many others):

“The blockbuster drug model once reigned supreme. Now it is being succeeded by the precision medicine model. During this transition, the pharmaceutical industry may worry about losing the blockbuster model’s strengths—broad, simple indications and large, steady revenues.”

Blockbusters have been making room for their more targeted, lower-volume siblings. This shift is neither unexpected nor particularly unwelcome – having opened the doors for a massive upsurge in pharma innovation and upstart drug makers. Human health has been a major beneficiary, as well – with a proliferation of therapeutics targeted at long-ignored small-population and orphan indications.

A Changing Drug Industry Landscape

The impacts from this shifting drug landscape have rippled outward, forcing changes across virtually every aspect of the industry. Pharmaceutical sourcing is an excellent example, having experienced significant evolution to date. Traditional purchasing models – while certainly still in use – have been augmented by partnering or other strategic arrangements.

Today, there is no one-size-fits-all solution in pharmaceutical sourcing and manufacturing. In some cases, drug makers are leveraging different sourcing models for different portfolio products.

With Industry Advances Come New Supply Chain Pressures

Consider what we’ve witnessed in the drug industry over the last two decades:

  • Omics revolution
  • Rise of precision medicine
  • Globalization of drug research, development, manufacturing and marketing
  • Data collection, storage, management and use, and related security & compliance issues
  • Exponential improvements in analytical, computing and manufacturing technology, and so much more.

Today, all of these dynamics are converging in a post-blockbuster world – with smaller margins, more competition, less revenue stability and increased regulatory burdens.

One of the outcomes has been increased pressure on pharma supply chains, changing the way the industry views – and structures – supply relationships.

The Cost of Sourcing

It’s no secret that drug development is a costly affair. Unforeseen quality issues, supply challenges, delays in market entry…any of these can exact a heavy price, highlighting the importance of vendor selection. And since pharmaceutical sourcing can represent up to 50-60% of a drug’s cost, it has become a focal point for creating cost efficiencies while simultaneously managing risk.

Drug companies have more sourcing options today – but they also find themselves forced to navigate complex processes just to determine which sourcing model is most appropriate. From contractpharma:

“Current trends have forced life science industry companies to more rigorously optimize sourcing activities for raw materials, intermediates, active pharmaceutical ingredients (APIs) and other material components for both clinical supplies and commercial manufacturing. If managed improperly, sourcing can result in supply chain interruptions, significant unexpected expenses and quality control issues.”

Since there is no ‘right’ or ‘wrong’ model, companies must have a solid grasp of numerous factors which can impact their strategic objectives. Some will be cost-driven, others speed-, process-, risk-, or quality-driven. Other factors, specific not only to each company but to each individual formulation, will also come into play.

2020 Pharmaceutical Sourcing Models

So what are the common models used to source active drug substances and services? Here’s a quick rundown of the top pharmaceutical sourcing models in use today.

Traditional Purchasing

The traditional purchasing model is to simply buy products or services from an external vendor. Typically, it is based on a set price for products and services which are commonly available in the market.

While wholly transactional in nature, traditional purchasing models provide a way for companies to extend their suppliers list, which (at least in part) can help manage and mitigate risk. This model is more frequently employed with low-cost, non-differentiated products, offered by a wide selection of suppliers.

Subcategories of the traditional purchasing model include the approved-provider approach in which suppliers are qualified to predefined standards.

Project-Based Sourcing

With project-based sourcing, a specific set of deliverable items is provided at an agreed-upon price and defined schedule. As mentioned by the Clinical Research Society, this approach – in which a single provider is contracted to deliver a single service in support of all activities in a specific segment or project – is commonly seen with CDMOs. The project-based sourcing approach is a common practice among pharmaceutical companies who outsource projects (or parts of projects) in order to devote more attention to their core focus and reduce their time-to-market.

‘Quick and Dirty’ or ‘Fast’ Sourcing

Fast sourcing refers to obtaining deliverables rapidly and at the lowest price. With fast sourcing, quality may not be a key focus – at least in the short term. One key benefit, of course, is time: the job – and deliverables – proceed quickly.

An article on procurement strategies by management consulting firm Tefen references the time-consuming nature of some procurement processes and mentions how a ‘quick and dirty’ sourcing approach can help:

“Larger or more complex categories often require a formalized tendering process with 2-3 rounds of negotiations, while small spending buckets could be tackled with a “quick and dirty”, less formal tender or simple organizational adjustment (e.g. aggregate orders and appoint a central reference for small categories; eliminate unnecessary spending and corresponding roles, etc.).”

This route can be a good fit for certain business segments, but not all.

Strategic Sourcing

Strategic sourcing is the process of developing channels of supply at the lowest total cost…not just the lowest purchase price. It expands upon traditional purchasing activities to embrace all activities within the procurement cycle – from specification to receipt and payment of goods and services.

This sourcing model is a collaborative process that allows an organization to align purchasing power with its overall value proposition. One key advantage is it creates a long-term partnership and relationship with mutual commitment between companies. The relationship between the company and the vendor also becomes stronger over time, and both will seek out opportunities – and new projects – to mutually grow. Strategic sourcing improves efficiency and quality through building a robust, diverse supply base with longer-term stability.

As a part of the sourcing and procurement organization & supply chain, there should be a demand management review function. This assesses all demands at a higher level, ensuring they match the technical specs and required quantities in terms of SKUs (Stock Keeping Units) and SLAs (Service Level Agreements).

Strategic sourcing focuses on the core capabilities of the supplier. It is critical to select the right supplier for the right sourcing objective – especially since strategic sourcing can be a long & complex process demanding significant resources (if performed in-house). Because of this, it may not be suitable for every segment.

Assembling Your Sourcing Team

With so many variables and sourcing paths available to drug companies, determining which one is the best fit for a specific project can be daunting. It can be resource-intensive, demanding equal parts risk management know-how, a firm grasp of finance, product management expertise, regulatory & quality skillsets, and much more.

A sourcing partner can eliminate time- and resource-intensive sourcing burdens, allowing your company to focus on what it does best. But since no two solutions are the same, sourcing firms such as LGM must develop a deep understanding of your company’s needs in order to create an appropriate tailored solution.

You’ll want to choose a sourcing provider with a strong track record and relevant technical knowledge. Make certain they can provide comprehensive quality & regulatory support, as well as project management capabilities and logistics capabilities. You also want to make sure they will have full control over the entire supply chain process and can bring the required API all the way to your door.

Don’t neglect any other services a sourcing partner may provide to help secure your supply chain. For example, at LGM we offer business intelligence. Our extended expertise in the API global environment is a huge advantage for both our clients and our partners/manufacturers – allowing us to clearly understand the landscape of the players/prices in the market. Be sure to ask what else the sourcing partner under consideration can offer your company.

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