Achieving pharmaceutical cold chain synergy in the face of M&A

Pharmaceuticals   30 Apr 2018

In the mid-2000’s, mergers and acquisitions (M&A) accelerated as a viable measure for pharmaceutical enterprises to bolster pipelines, expand into emerging markets, reinvigorate a dwindling drug pipeline, increase market growth, leverage operations to achieve greater economies of scale, and address the challenges inherent in approaching patent expirations.  

The pharmaceutical industry sees some of the most M&A activity more than any other industry, both in terms of the quantity of deals and the amount of money spent on them. Large, industry-changing transactions profoundly change the competitive landscape, while smaller transactions are an integral part of their strategic positioning.

As the global economic outlook improves, worldwide M&A activity is predicted to continue, although the rate of deal-making remains uncertain. While 2015 was a record breaking year for pharmaceutical M&A activity, 2016 saw deal-making fall 65 percent behind the previous year’s rates, and 2017 was even more subdued, leaving many organizations at a loss as to how to maintain their forward momentum. 

The pharmaceutical chain is one of the most complex supply chains globally, given the nature of the industry, the scope and size of the companies that dominate it, and their extended networks of logistics partners. But it has historically been unwieldy and resistant to transformation. 

Over the last two years, there were significant changes in the way both consumers and regulators have approached the pharmaceutical industry, which have pushed pharma enterprises towards a critical inflection point. Growing consumer expectations, an increase in various multi-channel regulatory issues and scrutiny from regulators, and a fluctuation in M&A has meant that there’s more pressure than ever before on the supply chain to be redesigned. These pressures grow even more complex and intense across globally distributed organizations.

With recent fluctuations in M&A activity, the remit for pharmaceutical supply chains of 2018 and beyond will be to actively drive revenue instead of passively supporting revenue-generating business operations. The pharmaceutical industry has begun working in earnest to digitize the supply chain as a means to address these changes and retain their business margins while maintaining pace in a competitive market.

Achieving true digital transformation will remain a key strategy for achieving supply chain synergy in the face of M&A activity and beyond.

What’s driving supply chain transformations

A number of factors have been pushing pharmaceutical companies to drive transformation across their global supply chain, including through M&A. 

An increasing cost of drug development

One of the most important drivers for changes in the pharmaceutical industry is the ever-increasing cost of drug development. The R&D costs associated with finding innovative compounds are becoming increasingly prohibitive.

Based on their figures from their 2017 annual reports, the top 10 R&D budgets (using GAAP figures), spent over 17 percent of their top line on research. It’s estimated that a pharmaceutical company needs to invest between $1.3-4 billion per year in R&D to maintain a competitive portfolio of drug development programs. Thus, companies with revenue of $10 billion or higher can afford to maintain a substantial drug development program.

One reason behind the growing costs relates to the advancement of medicine. To create value, new drugs either need to solve a new problem which has not previously existed, or be substantially better than what already exists on the market. Another primary driver for the development costs is the ever-increasing regulatory requirements.

An increasing volume of prescriptions

Over recent years, there has been an overall rise in the volume of prescription drugs, which has presented its own set of complications. Although the volume of prescription drugs declined from 2000 through 2013, those numbers have picked up again, and the trend is expected to continue. 

Although the overall cause is not attributed to any single factor, recent studies have pointed to the effects of an aging population, the entry of new drugs in the market, and consumer empowerment as possible primary factors. Regardless, as the demand for prescriptions continues to grow, more accurate forecasting, supply chain visibility, and agility has become increasingly important. 

A rise in generics

Over the last five years, the percentage of generic drugs in the market has been steadily growing, and generics are expected to account for around 92 percent of all prescriptions by 2020. As consumers are becoming more and more comfortable with using generic medications, and with fewer blockbuster drugs being launched into the market, the onus is on pharmaceutical manufacturers to compensate for lost revenue. Pharma enterprises whose revenue has traditionally come from patents are being forced to reconsider their supply chain strategies as a means to counter this rising market segment, which has in turn lowered the cost of drugs by up to 85 percent

The growth of cold chain logistics

The market for products that require storage at colder-than-average temperatures for the duration of their long-distance journey to market is rapidly growing. What was once considered a niche domain for biologic companies is quickly becoming an expectation for all pharma enterprises. The pharmaceutical cold chain is expected to grow to at a CAGR of nearly 10 percent per year through 2022, reaching $2.57 billion, and will require additional resources to monitor and protect it.

Challenges to mergers & acquisitions

Despite the recent numbers, failure rates for M&A initiatives remain considerably high; depending on which report you refer to, efforts have a failure rate of between 50 percent and 90 percent. A failure to consider the synergies and redundancies of the end-to-end supply chain is arguably a primary contributor to the shortfall.

Inadequate planning can have the greatest negative impact in merger transactions. These failures result in lower synergies than planned, a delay in capturing value, supply chain disruptions that end up hurting revenue, an inventory build-up that increases the cost of goods sold, a general increase in supply chain operating costs and efficiencies, less than optimal effects on customers that are unable to get products, a decrease in product quality, and a significant increase in out-of-stock products.

Why is preparing for an M&A event necessary? Mergers and acquisitions generally happen for one basic reason: to increase earnings of the net new entity. Earnings generally can be increased either by growing revenue or by cutting expenses. An increase in revenue growth may not be realistic in the short-term, however.

If Entity A acquires Entity B, the short-term revenue of the new entity, C, is A plus B, minus overlap. Therefore, to increase earnings in the short-term, expenses are often cut. Human capital consolidation is the area traditionally focused on when thinking about cuts, but the supply chain’s impact to expense reduction can be game changing, including the cold chain. 

A well-prepared supply chain with functionality that is turnkey and scalable can deliver savings and drive the increased profitability needed in a post-M&A environment when consolidation is needed.

Strategic transformation archetypes are emerging

Despite the challenges associated with transformation, key archetypes are forming.

A shift towards global supply chain visibility

With the proliferation of global markets being serviced, enterprises are pushing forward global programs and systems to help ensure that each region is adequately serviced with as little overhead as possible. End-to-end visibility has become a popular theme at most pharmaceutical supply chain and cold chain conferences, and businesses have been investing in earnest in consolidating their ERP systems and harmonizing what’s left.

However, most current monitoring solutions do not in actuality provide truly real-time visibility and control. Those that do will enable businesses to shift from a supply chain that’s a cost center to one that is a core competitive differentiator.

The unlocking of AI, Big Data, and Cloud technologies

In order to roll out dramatically improved practices, pharmaceutical enterprises are utilizing a number of newly available solutions to “turn on” their supply chains — making them business-aware and able to predict outcomes and prescribe actions autonomously.

Just as Amazon Prime Now and other service models in other industries that rely heavily on cloud, Big Data, and machine learning, there is significant promise for ROI in cold chain automation tools — something that pharmaceutical companies are beginning to experiment with in earnest. These advancements will continue to make the entire supply chain autonomous and agile for an M&A environment.

Considering what’s next with Big Data opportunities

To sufficiently leverage the opportunity, given the volume of data being generated with digitalization efforts, digital transformation is imperative. This means filling in the organizational role needed to manage and utilize the real-time data and to initiate proactive efforts to prevent shipment excursions. In a recent LogiPharma Benchmark Report, 97% of respondents surveyed view digitization as a priority, yet only 41% believed their current visibility to be excellent or good.

As companies continue to adopt monitoring solutions that streamline and automate their supply chain, they’ll need to consider what to do with the data generated from these solutions. A service model that enables pharmaceutical businesses to outsource their reverse logistics and 24/7 control tower monitoring for all shipments is a natural progression that will empower enterprises to gain further agility and resilience.

What’s next

M&A is a necessary tool for strategy implementation in the pharmaceutical industry. Deal-making is often needed to implement game-changing strategic moves to build businesses that are fit to master future challenges. M&A is also a standard element of the business model for pharmaceutical enterprises not only to gain access to innovation, but also to streamline operations in manufacturing or to prune business portfolios. 

Supply chain agility is necessary in a pre or post-M&A environment where rapid consolidation is needed. Digital transformation is a necessary component to reaching agility and supply chain optimization, but to fully leverage the data opportunities that come with real-time visibility and to maintain their competitive advantage, businesses will need to consider what to do with that data.

Controlant’s CHaaS solutions facilitate agility and digital transformation, and position pharmaceutical businesses for the future.

Resources 

Daniel Associates, Global Cold Chain Monitoring Market - Trend and Forecast to 2022

Differentiated by Supply Chain, A LogiPharma Report - 2018

Kaiser Family Foundation analysis of National Health Expenditure (NHE) Historical (1960-2016) and Projected (2016-2025) data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group

McKinsey, Perspectives on Mergers and Acquisitions, 2010

U.S. Food and Drug Administration, Generic Drug Facts, 2017

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