A recent analysis by the life-science practice of Capgemini provides insight in how current economic conditions are reshaping the model for supply-chain practices, outsourcing, and other areas of the value chain.
As contract manufacturers and suppliers gather for CPhI Worldwide in Madrid this month, a key question is the overall performance and outlook for the pharmaceutical and biotechnology industries. A recent report by the life-science practice of Capgemini, “Life Sciences: Performing in the Downturn and Beyond,” surveyed eight of the top ten pharmaceutical companies and other leading life-science industry executives in Europe and North America to provide insight into how current economic conditions are reshaping the model for supply-chain practices, outsourcing, and other areas of the value chain.
Overall economic conditions
Executives interviewed as part of the Capgemini study expressed mixed opinions as to the effect of the economic recession on the life-science sector. On one level, the industry has fared better compared with other industries. In the five years to September 2008, the Dow Jones Pharmaceuticals index was “significantly underperforming,” the Dow Jones Global Index, according to the Capgemini analysis. Since September 2008, however, the gap has narrowed and the pharmaceutical index is now tracking the global index. This shift may be attributable to a shift by investors that see the life-science sector as a relatively safe place to invest during a downturn.
The report, however, points out a concern among life-science executives over the effect the economic downturn has had and may have in reducing the ability of both public and private concerns in paying for the products of life-science companies as well as the resultant push toward generic drugs. “With diminished cash streams, both public and private payers will be forced to tighten their budgets, and there are already signs that governments are doing so,” says Jean-Marc Neimetz, Capgemini Consulting's life-sciences leader for North America. “Several of our interviewees from pharmaceutical companies, especially those with significant business in developing countries, have been seeing slower cash collections. Lack of cash, combined with growth in demand, means that the switch to generics is likely to accelerate wherever there is an alternative to the branded product.”
Small pharmaceutical companies, particularly emerging and biotechnology companies, face more immediate concerns over liquidity and sustaining operations. The report points out as of November 2008, out of the 370 publicly traded biotech companies in the United States, 140 companies had less than one year’s cash. Since that time, there have been some positive signs in US biotechnology financing. Financing and partnering deals were collectively more than $13 billion for US biotechnology companies in the third quarter of 2009, with more than $4 billion raised through financing and $9 billion in partnering capital, according to a recent analysis by Burrill & Company, a San Francisco-based private merchant bank. “This 147% increase in funds raised compared to the third quarter 2008 total clearly shows that conditions have improved considerably since the initial capital markets meltdown,” said G. Steven Burrill, CEO of Burrill and Company in an Oct. 1, 2009 press release.
Financing from partnering for the third quarter 2009 was $9.39 billion, compared with $2.96 billion in third quarter of 2008. Through the first nine months of 2009, financing from partnering more than doubled compared with the same period last year: $22.17 billion in the first three quarters of 2009 compared with $10.19 billion in the same period in 2008. Public financing (i.e., initial public offerings, follow-on offerings, private investment in public equity, and debt) in the US biotechnology companies totaled $4.98 billion in first nine months of 2008 and increased to $10.23 billion for the first nine months of 2009.
Private capital, however, did not see similar rebounds. Venture-capital funding for the third-quarter 2009 was $759 million, down from the $1.09 billion raised in the third-quarter 2008. However, year-to-date venture capital increased. The aggregate financing raised by venture capital through the third quarter of 2008 was $2.93 billion; this level increased to $3.09 billion for the first nine months of 2009.
Response to economic situation
Only a small majority, 57% of respondents, in the Capgemini survey indicated that the recession is not causing their company to do anything differently. Such respondents tended to be from large or mid-sized pharmaceutical companies, who also indicated that their companies had already initiated cost-cutting initiatives. While the recession did not change those plans, it contributed to the scope or speed of implementation of the initiative. The other 43% of respondents that said the recession is having an effect are taking more transactional (such as cost reductions through personnel cuts, hiring freezes, and administrative-cost reductions) as opposed to strategic changes.
Given the prevalence of cost-reduction measures, among large, mid-sized, and small pharmaceutical companies, the Capgemini study examined areas of current cost reduction and strategies for effective cost reduction. Supply-chain cost reduction was cited by respondents in the survey as the leading area with the greatest cost-reduction opportunity, with 52% of respondents citing this area. More than one-third of respondents cited cost-reduction opportunities in research and development (39% cited as such), local marketing (39%), and information technology (35%).
The study points out opportunities for cost-reduction and supply-chain optimization. “It is only recently that pharmaceutical companies have made supply-chain optimization the focus of the cost of goods sold (COGS) improvement activity, and they are still in the process of dealing with complexity built up over many years,” says Neimetz. “At the same time, in the case of biological products, they are having to adopt supply chains that are intrinsically more complex, characterized by processes and analytical methods that cost more and are harder to master, products with shorter shelf lives and cold-distribution chains.”
The Capgemini report outlines several areas for supply-chain optimization and simplification such as tax optimization of a company’s manufacturing network and a specialization of manufacturing sites by product type. The report also points to the value in reducing the number of stock-keeping units (SKU) for products, which have increased as a result of life-cycle management decisions and country-specific requirements, and the opportunity for increased outsourcing.
In offering a framework for supply-chain optimization, Capgemini segments supply-chain activities into four main areas: plan, buy, make, and move. In the planning phase, “the emphasis has shifted away from product availability to reduction of excess inventory at all stages of the supply chain,” concludes the report. The report points to the value in conducting more thorough demand and supply planning, which includes sales and operations planning activities.
In the buy phase, companies should focus on supplier-relationship management, which encompasses procurement, strategic sourcing, and supplier risk management. Under the make phrase, in addition to closing redundant facilities and increasing outsourcing, the report points to the value in adopting process excellence or lean-manufacturing programs.
In the move phase, the report points to opportunities in consolidating the supply chain and rationalizing stock holdings. The report points out that certain companies are evaluating the cost-effectiveness of the historical logistical channel involving wholesalers and distributors. Some options include the use of third-party logistic providers, direct sales to pharmaceutical, and direct-to-patient distribution.