A May 17 article in the Economist Quagmire to goldmine? describes the impending entry of global pharmaceutical companies into developing world markets. Traditionally the big companies like Pfizer and GSK have avoided the third world, preferring to sell blockbuster drugs at high prices in the US, Western Europe, and Japan. Sales in poor countries have typically been low or negative margin, typified by HIV drug giveaways in Africa.

That’s changing now:
• TPG, a big US private equity group, has backed Moksha8, which licenses branded drugs from big pharma to sell to rich customers in poor countries
• GSK is reorganizing to sell into poorer countries directly
• Novartis and Merck are doing research in places like China and India, which represent a new pool of talent but also opportunities to combat diseases that are rare in the rich world

As high-end pharmaceutical products reach the market in significant numbers, supply chain security becomes a major challenge — or opportunity, depending on where you sit:
• Counterfeiting is a problem and will become a bigger one. Moksha8 customers, for example will want guarantees that they are getting the real deal
• Business models that contemplate vastly different prices among countries and even within countries will be irresistible targets for arbitragers

Companies are using different colored pills, different packaging and audits in order to keep things straight. That’s not such a robust solution. It does little to address counterfeiting and diversion is likely to occur anyway. More promising will be technologies such as package-level and even dosage-level identification and tracking, in some cases through covert means. It will be interesting to see whether these technologies catch on first in the developing world and then spread to wealthier countries.

In the good old days big pharma earned attractive returns by bringing differentiated, patent protected products to market, supporting them with robust sales and marketing programs, and making intelligent use of a variety of communications channels to physicians, and –for the last decade– consumers.

As pipelines dried up and the generic industry became more sophisticated and aggressive, big pharma adjusted its tactics. In product development it’s turned to in-licensing, creating new formulations (especially extended release products), and combination products. Big pharma has combated generics in the courtroom, introduced “authorized generics” that cut into the profits of the initial generic supplier, and attempted to bundle multiple products into its contracts with payers.

It’s been a losing battle, though and new tools are needed. The current wave of cost cuts and acquisitions of smaller firms won’t be decisive.

It’s unlikely that big pharma will succeed in reviving its pipelines anytime soon, but there are things the industry could try.  For example, if branded pharmaceutical companies can demonstrate better clinical results through medication adherence programs, they may be able to make the argument that they are selling a “solution” rather than a product. Instead of losing roughly 90 percent of their sales when generic competition begins, maybe they can cut it to 50 or 60 percent. That will make a huge difference –if pharma can pull it off. I haven’t seen much indication yet that this strategy will be pursued in a serious way or that big pharma can execute.

The recent Heparin scandal makes me think that there is another opportunity. That is, rather than shifting production to low-cost locations such as China, as big pharma seems to be doing, why not deploy a manufacturing network strategy that is deliberately more expensive but more assured? Only make products in Europe, North America, Japan, Singapore and their ilk, and don’t accept any inputs from questionable sources.

Then make the pedigree of the finished products and their components a significant part of the marketing/educational campaign to payers, pharmacists, and patients. Since the cost of goods sold for branded products is so low (typically 5-15 %), it won’t matter so much if those costs rise. On the other hand, generic companies are really pressed to offer the lowest possible price and they need to shave costs wherever they can.

Of course it would be unseemly to cast aspersions on competing products based on their manufacturing quality, but because of the publicity surrounding the Heparin recall and problems with Chinese products in general awareness is already high and the customer will make the connection.

A Pharmaceutical Executive article about the Heparin recall sums up the current view on China:

“Greed is universal. But in China, it is especially dangerous because of the lack of regulations and enforcement,” says Wang Fei-ling, an expert in Chinese policy at Georgia Institute of Technology. “That combination creates rampant corruption, which is the most serious problem China faces.”

Pharma companies that can afford not to manufacture in China might be wise to keep that observation in mind. I believe there is a profitable niche available for products going off patent that want to compete on manufacturing quality and pedigree.

The Associated Press reports that most US states have implemented “drug recycling” programs or are considering doing so. The basic idea is to accept donations of unused drugs and re-dispense them to people in need. It sounds like a good idea on the surface. After all, why should the drugs go to waste when there are people who can’t afford their prescriptions?

I’m sure that some people are helped by such programs and that the people running them have the best of intentions. Still, I have some concerns:

• Donations aren’t likely to be particularly steady, so I don’t see how chronically ill patients will be able to count on gaining access to a specific drug and dose over a long period of time
• Although there are some restrictions on who can donate and what can be donated, there will definitely be concerns over the integrity of the supply chain. I’m worried more about drugs being stored in poor conditions (e.g., heat, humidity) than tampering
• Inventory management will be hard. The donation centers want products six months or more before expiration, but will be a challenge to manage stock. It’s expensive to do it well
• The administrative costs of these programs will be large relative to the volume of drugs. Even the larger programs seem to be dispensing only hundreds of thousands of dollars per year worth of products (though of course that could increase)
• Widespread drug recycling would undermine the software licensing model I’d like to see implemented for chronic medications. Rather than charging per vial or per pill or per prescription, drugs could be licensed to patients per year or per episode of treatment. This would work because drugs are basically an expression of intellectual property. The production cost is negligible compared with the development cost and price. Making it work, though, will require robust tracking through the supply chain to prevent diversion of products. (Think of it as DRM for drugs.)

There are better, more cost-effective ways to get products into the hands of patients who can’t afford them:

• Patient Assistance Programs run by drug manufacturers. States and/or private agencies could put their resources into publicizing the existence of these programs rather than scrounging for donations of unwanted products
• Increased generic utilization. Generic drugs are generally cheap. (Take $4 Wal-Mart generics for example.) I’m sure the drug recycling programs spend more than $4 per prescription even though they get the drugs for free