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Sustained worries over quality of generics can pose a challenge to pharma procurement

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by Sakthi Prasad
2 April 2014

Pharmaceutical companies that make cheaper generic drugs have never had it so good in all these years. Debt ridden Western governments are looking for ways to slash their burgeoning healthcare expenditure at a time when many costlier branded drugs are going over the so called "patent cliff".
Nevertheless, generic firms face one challenge: The quality of drugs manufactured at third party facilities.

India is a key manufacturing destination and has the highest number of FDA registered Formulation units outside of the U.S.  Aided by lower costs, the country has emerged as one of favoured drug sourcing destinations in the world.

And according to Reuters, Indian firms supply about 40 percent of generic and over-the-counter drugs used in the U.S.

However, the country is unable to fully capitalize on this advantage because of recurring quality issues. Reuters recently reported that some U.S. doctors are becoming concerned about the quality of generic drugs made by Indian firms. (http://beroeinc.co/1dPEs3n)

U.S. Food and Drug Administration (FDA) has previously issued import bans on products manufactured by certain Indian pharma firms. These critical regulatory decisions have a wide impact across the drug supply chain.

The news relating to quality of drugs made in India has an immediate impact on generic manufacturers. The drug innovators aren't impacted much for now.

To understand this situation it is useful to determine the position occupied by Indian Contract Manufacturing Organizations (CMOs) in the global value chain.
Pharma value chain can be broadly divided into two categories: Active Pharmaceutical Ingredients (API) and Finished Formulation.

APIs typically denote the dosage in a drug, or in other words the key chemicals that make the drug work, while finished Formulation is the process in which different chemicals, including the active ingredient, are mixed in specified ratios to produce a specific drug.

Presently, drug innovators source APIs from emerging markets such as India and China, but do not outsource the actual drug Formulation to these countries, according to Beroe's B. Hariharan.

If something goes wrong with the API then it would amount to only a business-to-business product recall. The business impact would be minimal as end consumers are not affected.

Whereas the business impact would be much larger if things go wrong with Formulation, which essentially produces the final product displayed on store shelves. Any recall owing to missteps in Formulation would largely impact the end users.

And this is why big pharma firms are not yet ready to outsource Formulation to Indian CMOs, Hariharan says.

Although drug innovators shy away from India when it comes to Formulation, generic drug makers such as Mylan and Teva have outsourced some of their drug Formulation business to their Indian CMO partners.

The reason why generic companies outsource Formulation to India is because they have a much larger cost pressure as compared to drug innovators, according to Hariharan.

Raw material costs for innovators would be 30 percent of a drug price; whereas for generic drug makers it could be as much as 60 percent, as per Hariharan's calculation.

Since generic firms make use of Indian CMOs for some of their Formulation process, any sustained worries about drug quality could potentially impact the business.

While Indian CMOs have responded to the FDA bans by introducing better quality control, generic firms would still need to address this growing concern from a procurement perspective.

After all, choosing a contract manufacturer is one of the most important functions of pharma procurement.

To weed out quality worries, category managers in charge of emerging market procurement will have to constantly keep a tab on quality of the drugs produced at CMOs and also look to strengthen existing controls.

If a CMO doesn't pass the quality test then the company should look for alternate suppliers. Supplier selection isn't a simple process: without continuous market intelligence, category managers would be caught off guard if something goes wrong all of a sudden.

However, changing the supplier involves switching as well as regulatory costs. On an average, companies would end up spending anywhere between $10,000 and $100,000 in switching costs. And it may take up to 12 months before a new supplier could come on board, according to Hariharan.

A generic company can also look to buy Indian CMOs, which would give them complete power over drug quality. Of course, buying up companies or manufacturing facilities is a board level decision and would not fall under the ambit of category managers.

For example, in 2013, Mylan acquired multiple companies in India in order to expand into emerging markets. These acquisitions have also helped Mylan make India its preferred API sourcing destination. Mylan has 7 API and intermediate facilities in India.

As "patent cliff" gains traction, Indian CMOs will continue to tighten up their quality standards: their growing business pipelines bear testament to this fact.  Nonetheless, category managers of generic pharma firms will have to proactively keep a watch on CMO landscape.

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