New Rules -The game has changed for the global pharmaceutical industry. Numerous forces are shaping this new pharmaceutical era: The rise of emerging markets, increasing price pressure and expiring patents are just some of the factors forcing pharmaceutical companies to change the way they operate and how they manage their value chain.

"Drug Supply 2.0: How to manage a disaggregated pharmaceutical supply chain" is a study by Camelot Management Consultants and the ESB Business School Reutlingen that examines how companies are responding to the changed environment and looks at the growing role of third-party suppliers in the pharmaceutical business.

The interviewed companies are no newcomers to the field: 88% of the companies look back on more than 10 years of experience in sourcing supply chain services and already manage on average a portfolio of 214 suppliers. They count among the sector's forerunners.

Geographic Shift and Supply Chains

Although traditional markets account for the bulk of sales, "pharmerging" markets will outpace traditional markets in terms of growth by 2013. Given the environmental forces at play, pharmaceutical companies have no alternative but to make striking changes to their supply chains. A closer cooperation with contract manufacturers or R&D providers is the chosen option. This is not only the easiest way to partner in new and uncertain markets, it also enables them to manage increasing price pressures arising from health care reforms, patent expiry and the success of Generics.

Each of the four new strategic business models adopted by pharmaceutical business units - Harvesters, Rx Innovators, Gx Innovators and Branded Generics (fig. 1) - requires stronger partnerships with third-party suppliers to be formed to guarantee success. According to the experts interviewed, the potential for doing so is huge: Up to 75% of production volume could be reallocated to third-party manufacturing. Yet there are hurdles that need to be overcome. Managing a disaggregated value chain involving a growing number of third-party providers is a different game than managing own sites. More extensive and new forms of information exchange beyond the own company´s boundaries will be necessary to ensure productive planning.

This is increasing the pressure on supply chain management to create processes to steer this new virtual network, reducing the threats seen in know-how transfer, internal change process and increasing administrational costs. On a positive note: while the majority of companies still primarily let the manufacturing organization make supply chain disaggregation decisions, already one-third of companies have turned this into a boardroom decision.

Reshaping the Supply Chain

Abandoning the single minded blockbuster mindset, pharmaceutical companies have been forced to review their business plans and reconsider new business models as well as how they allocate their capital. Contract manufacturing organizations (CMOs) play a large role in the business models that are evolving. CMOs are increasingly being considered strategic partners, responsible for greater amounts of the portfolio volume, and less as step-in organizations to smooth out manufacturing peaks. This view is supported by this study's participating companies, which believe that this trend will gain even more traction over the next five years.

Most pharmaceutical companies already outsource activities such as clinical trials, API production or logistics to third-party suppliers. Over the next five years, pharmaceutical companies are likely to become more emboldened and will start examining all their technologies and business processes for outsourcing opportunities, according to the companies interviewed. When this happens, contract service providers will have made the jump from service to strategic partner.

Based on the experience and roadmap of other industries like automotive and electronics, pharmaceutical companies are likely to make this change in three phases:

Phase 1: Early wins
In this phase companies focus on low-risk support functions such as finance and accounting, IT and HR as well as low-risk R&D functions such as clinical development and data management.

Phase 2: Phase 2: Minimal risk move
In the second phase, companies are prepared to move out of their comfort zone and start outsourcing contract service functions such as bulk drug manufacturing and packaging, API production and 3PL. They are also likely to consider the outsourcing of R&D activities including bio-informatics, analytic services and Phase III clinical trials. Other functions like the sales force are also outsourced during this phase. Companies are encouraged by the significant bottom-line impact and variabilisation of their cost base resulting from this outsourcing and spurred by the emerging vendor base already built-up by some big pharmaceutical companies.