Joel Farrance, Medical Biochemistry student at Manchester University, teams up with Annona Search to review how the Pharmaceutical industry is coping with major change and the role Procurement can play in this over the next decade.

Undoubtedly the landscape of the Pharmaceutical industry is a changing one, with companies facing a myriad of challenges. In the case of research-based Pharmaceutical the patent cliff continues to be a great one, standing as a significant hit to sales. Whilst for companies with new business divisions, such as generics and consumer health, the major benefits of diversification are still unclear, given much smaller margins associated with these areas. In all parts of the industry, competition is set to grow making it necessary for companies to find ways of adding value to their products and themselves. In light of this, Procurement will have an opportunity to play a greater role in Pharmaceutical companies as it works more closely with suppliers and stakeholders to create value through operational improvements. To assess the current outlook of the industry it is useful to look at two companies taking different approaches to such issues: Novartis, a diversified, multi-channel healthcare business, and AstraZeneca, an essentially research-based Pharmaceutical company.

Certain challenges are common throughout the industry yet are affecting companies to different extents. The patent cliff is a significant one, which is set to lead to $120 billion in lost sales for branded drugs from 2011 to 2015 (IMS Health). Both Novartis and AstraZeneca have suffered from this, with patent expiration on the drugs Diovan and Seroquel respectively. While Novartis’ Pharmaceutical division experienced 1% drop in overall sales over 2012, AstraZeneca saw sales fall by 15%.  Such a large difference is greatly down to a contrast in strength of each one’s pipeline – Novartis is considered to have one of the strongest pipelines in the industry.  Such a difference is characteristic of the issue in the industry as a whole: whilst some companies have managed to just outpace patent expirations, others have fallen behind. In any case, there has been huge pressure exerted on Research and Development (R&D) to keep-up.

Arguably, AstraZeneca’s lesser pipeline reflects the overall decline in the industry’s R&D productivity over the last decade. Since the initial boom in the number of new molecular entities (NMEs) discovered in the late 90’s, the number has generally fallen over the proceeding period and has only rebounded in the last two years (IMS Health). The recent revitalisation in R&D productivity has been possible in large part due to the transition from targeting broad therapy areas, with well characterised pathways (e.g. hypertension), to unexplored pathways involved in specialist diseases. Although such pathways are more complex, the industry has been able to use advances in science technology, such as quicker and cheaper genomic profiling, to begin to bring the number of discoveries of NMEs back up again.

Novartis is well placed to exploit this change, having altered its approach to R&D. Drugs’ mechanisms are now developed based on rare disease pathways and subsequently expanded to target related diseases which affect a larger number of patients. The first part of this process has been successful: many new drugs to treat rare specialist diseases have been found and are being marketed. However, the expansion of the drug to essentially create a new blockbuster has been much more difficult, mainly in the face of increased payers (consumers) frugality. The drug Ilaris has yet to be approved by health agencies for use in treating the common disease, acute gout, despite approval for use against certain rare autoinflammatory syndromes; therefore, revenue from the drug is currently much less than hoped.

In addition to potentially yielding smaller margins, the move to specialist diseases will lead to greater competition as the number of target areas decreases. In view of this, there will be an unprecedented level of drug-to-drug competition in the branded market. This will force companies to find ways of accelerating products to market, as well as taking an objective and critical look at their pipelines and filtering out less promising products early in clinical development.  The adoption of such approaches relates not just to R&D but can feed into Procurement. According to Procurement Leaders, one priority for Chief Procurement Officers of many blue chip companies in 2013 is “value chain engineering” which will include the speed to market of new products. If, in the future, Procurement can offer innovative ways of streamlining the process, it will provide companies with a significant competitive advantage in the Pharmaceutical Industry.

The problem of shrinking margins and growing competition is not restricted to research-based Pharmaceuticals. Companies which have diversified are facing such problems perhaps to even greater extents, particularly in the field of generics. Unlike patented products, which offer novel treatments, generics offer only cut prices to payers. In this way, it is extremely difficult to find an edge over competitors in this market and returns on products are a fraction of those in the branded market. Despite this, diversification is likely to be a rewarding strategy for all of Pharmaceutical companies in the future as there will be substantial growth of the industry in emerging markets. China, for example, is set to double its Pharmaceutical spending by 2015, with 80% of this in generics and OTC therapies (IMS Health).

With increased competition against similar products, Pharmaceutical companies need to add value to both their products and services, and better convey this to stakeholders (i.e. from patients to payers). One possible means of accomplishing this is by developing Supplier Relationship Management (SRM), a point now being recognised by Procurement in many industries. Despite this, Pharmaceutical companies are largely well behind in developing this process, even though it keenly suits the current trends and opportunities in the industry. Many companies only see SRM as a strategy to track the performance of their suppliers. Yet it is now evident that SRM programs can be extended in order to more effectively leverage suppliers’ competencies, primarily by cultivating closer and lengthier relationships. Through the forming of a collaborative mentality, sourcing companies can pinpoint their suppliers’ key services and capabilities with a view to better meeting their own needs and potentially improving such services – benefitting both parties.

The advantages from applying this are countless both for research-based Pharmaceutical and those which have generics and consumer health functions. For the former, it will better ensure that key requirements of supply chain are met, for instance the product is of the highest quality and there is constant access to it in hospitals. For the latter, with much smaller margins, it will guarantee that the supply chain is cost-focused, with as little wastage as possible. For the most nimble, initiatives on both fronts could be possible.

The theme of increasing value also applies to the company as a whole and can be achieved through better application of Key Account Management (KAM). This is a process which deals with the company’s most valuable customers, such as payers and hospitals in the case of Pharmaceutical industry. As with SRM, this area will undoubtedly benefit from finding ways to bring the company and customer closer together. In doing so, a mutually beneficial relationship can be formed, ultimately allowing the free exchange of solutions to fulfil the unmet needs of both parties. One instance of this is in Novartis’ pursuit of telehealth solutions. Through this, a system has been developed to allow severe chronic obstructive pulmonary disease (COPD) patients to monitor their own health at home on their personal computer. Accordingly, the patient can avoid deterioration in health, requiring hospitalisation, and the hospital can avoid extra pressure and cost in treating the patient. Looking forward, those tasked with developing KAM and SRM should also look to collaborate, seeing as the processes share key aspects.

Although there are significant challenges facing the Pharmaceutical industry, companies that are willing to adapt can still thrive.  This has already been proven in R&D as innovative methods have started to restore productivity and ensure growth despite significant patent losses. If Procurement can also be flexible through adapting traditional processes, it is likely to play a much more elevated role in the industry.


ASTRAZENECA PLC. (2013). Annual Report 2012 [online]. Now moved:

THE BOSTON CONSULTING GROUP (BCG PERPECTIVES). (2013). Rethinking the Pharmaceutical Supply Chain: New Models for a New Era [online]. Available from:

IMS HEALTH. (2011). The Global Use of Medicines: Outlook Through 2015 [online]. Available from:

IMS HEALTH. (2012). The Global Use of Medicines: Outlook Through 2016 [online]. Available from:

IMS HEALTH. (2012). Restoring Innovation as Global Pharmaceutical’s Center of [online]. Available from:

MCKINSEY & COMPANY, INC. (2012). Escaping the Sword of Damocles: Toward a New Future in Pharmaceuticalceutical R&D [online]. Available from:

NOVARTIS INTERNTIONAL AG. (2013). Annual Report 2012 [online]. Available from:

NOVARTIS INTERNTIONAL AG. (2012). Annual Report 2011 [online]. Available from:

RASHED, S. (2012). Beyond Procurement 12: SRM for Value Creation [online]. Available from:–sammy-rashed/beyond-procurement-12-srm-for-value-creation-

RASHED, S. (2012). Beyond SRM – Co-Creating Value through Strategic Alignment [online]. Available from:

RASHED, S. (2012). Engaging Health Care System through Key Account Management [online]. Now Moved:

RASHED, S. (2012). SRM; Co-Creating Value through Strategic Alignment [online]. Available from: