Effective procurement of generic medicines

PDIG Summer Symposium 2014

Warwick SmithDirector General, BGMA

5 June 2014

Why we’re here

Success is achieving a secure, sustainable supply of medicines for patients

Anything else is failure

So, do we succeed?

49% of off-contract claims for less than £50

19% of off-contract claims for less than £10

Average cost to a supplier of managing the payment of a claim is £43

Wave VIIIB tender showed only one or fewer bids for hundreds of lines

Anecdotally, we hear of increasing concern about inability to supply

Evidence of lack of communication & understanding between supplier and hospital

Administrative improvement

Agreed by PMSG and BGMA

Increased dialogue to solve long-term issues

Small claims aggregated over three months

Template form to standardise

Trialled by Leicester & Portsmouth NHS Trusts, now being rolled out for 1 July start

BGMA, CMU, PMSG seminar

In October 2013, BGMA convened a meeting of members, the NHS and CMU to discuss security of supply in the hospital sector

CMU perspective The NHS has

consolidated demand reduced its stock holding levels

Suppliers have [typically] merged rationalised product ranges rationalised organisation of

manufacturing capacity optimised utilisation of

manufacturing capacity and supply chain performance

When supply failure occurs impact is potentially greater

When supply problems occur flexibility within the supply chain to respond is reduced

CMU perspective

Companies more risk averse Risk of penalties too great for companies to enter into

contracts/framework agreements England – obligation to supply, no obligation to purchase Penalties are significant and are often more in value per month

than the value of the business per annum Zero profit per line following penalty payments Similar position across many EU states

Example product – Central and South West, 2,800 packs per month

Contract Price List Price (brand)

Annual Revenue

Penalty for 1 month out of stock*

£20.00 £162.76 £672,000 £400,000

Uncertainty of demand IncreaseEstimated quantities in the UK are poor Unplanned increase in demand impacts

Companies build in a contingency

Raw material availability Manufacturing time Packing time Components Test and Release Availability of labour

DecreaseReduction in Recovery of OverheadCost of Raw materials increaseBatch sizes may not be achieved

Leads to cost increase Potential for product discontinuation

Decrease in API availability Reduced number of API suppliers globally As companies discontinue products, locally or globally,

this API is not often reassigned Reduction in API availability creates scarcity which

increase API costs Very difficult to achieve price increases in many

countries

Reduces economic sustainabilityLeads to fewer suppliersWeakens supply chain resilience

Decrease in Manufacturing Capacity Companies continue to merge/acquire to improve on

economies of scale High barriers to entry on production of certain product

types Reduction in number of manufacturing plants for many

product types especially Oncology. Companies reassign production scheduling to most

valuable products 3rd party manufacturing arrangements Many products that are unprofitable have been

discontinued – a number of companies have achieved this on a few products ‘in isolation but together’

FDA/MHRA warning letters

Decrease in Manufacturing Capacity Companies discontinuing several major products at a

global level has seriously distorted the manufacturing base

Not enough other manufacturers have products registered to back-fill on these discontinuations

Timeline required to get a new licence does not solve the problem

Biggest potential for long term shortages is on-going global discontinuation of key molecules

Change in distribution practices at a country level DTP schemes did not exist a few years ago Wholesaling distribution is more common and therefore

stock is more dispersed in the supply chain Early warning systems of other companies being out of

stock are reduced. Many other countries operate their own national or local

distribution networks within their healthcare systems Use of commercial compounders in the UK/DE/Nordics

“The quickest way to create an out of stock position on a product is to inform hospitals that there is the potential for an out of stock”

Quote from a national wholesaler

Declining profitability of products Annual ‘pruning’ process Many products make marginal profitability due to very low

prices UK has often been used a ‘sink’ to improve on total companies

COGS (Cost Of Goods Sold) to benefit smaller markets. Incorrect volumes on tenders can force incorrect product

launch decisions Volumes decline over term of contract making product

unsustainable to keep in the market. Changes in prescribing patterns as other products lose their

patents Reduction in profit means less to invest in bringing new

products to market

Other countries’ approach

Other countries Impact of the US market

Within Global Supply Chain, their demand massively affects EU supply

One company’s current back-order position is €160M

France – ‘ring-fenced’ stock is rewarded in contract award More than 150 tenders per year Many types of Ts and Cs French owned companies are ‘preferred’ Short term contracts Public and private healthcare

Other countries DE – Krankenkasse,

private health care insurance funds take most of volume Significant penalty clauses Range is important ‘Bundling’ is common

NO/DK Must demonstrate ability to supply at start of contract Contracts run by calendar year Off patents in middle of year must wait until next calendar

year ‘Purchase orders’ provided up front

Other countries Poland –

tender is for one year for XX packs More than 150 tenders per year. Growing generic market

Ireland Hospital specific contracts Spot purchase is common Prices are above EU average Few out of stocks Joint packs are becoming more common

Other countries Italy

18 regions (540 hospitals) Public tenders for one year or XX packs Private negotiation Often clinician based decisions on off-patent products (co

presentations) Growing generic market

Spain 800 hospitals 60% tenders (€18K = tender), 40% direct negotiation

(<€18K= direct negotiation) Annual awards for one or two years Award criteria – 60% price, 25% quality/technical, 15%

supply chain

Other countries Belgium/Luxemburg

90 hospitals 5 purchase groups (20% of market) Negotiations start June to November for Jan 1st start Annual arrangements Hospitals – 90% verbal propositions with gentleman's

agreements Sweden

Unique tendering system in Stockholm Recognised as one of the best systems (by companies) Very few out of stocks Prices remain ‘reasonable’ 100% transparent

Survey of out of stocks

Reasons for failure to supply: overall

18%

16%

34%

21%

2%9%

Regulatory problem

API manufacturing problem

Finished form manufacturingproblem

Demand higher than contracted

Global demand

Product became uneconomic tosupply

Reasons for failure to supply: mid contract

15%

21%

40%

12%

3%9% Regulatory problem

API manufacturing problem

Finished form manufacturingproblem

Demand higher than contracted

Global demand

Product became uneconomic tosupply

Reasons for failure to supply: start of contract

27%

18%

46%

9%

Regulatory problem

Finished form manufacturingproblem

Demand higher than contracted

Product became uneconomic tosupply

Differences start v mid contract

Hig

her d

em

and

Manufa

cturin

g

Regula

tory

Uneco

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34%

22%

12%

0%

Products that companies did not tender for (again) 20 products that companies had tendered for in the past but

decided not to again

Reasons for this included: Decrease in market price rendering bidding uneconomic (7) Insufficient time between tender award notification and supply to build stock

imposing too large a risk for companies (3) Low level of tender award prices (2) Penalties at innovator list price present too large a risk (2) Insufficient market size against batch size (2) Lack of cost effectiveness due to increase in API costs and reduced uptake

resulting in significant write-off costs (1)

Overall: Supplying became uneconomic, either due to risk of non-supply penalties or because of the lack of profitability in the price

What next

Seminar conclusions A ‘one size fits all’ tendering system is not adequate

For some categories of products, a tender system is proving counter-productive and may require a different form of procurement

The criteria for award of contracts should take into account ability to supply (Swedish model noted) There may now be more confidence to do this with the EU Public

Procurement Directive as public bodies are able to take into account previous suppliers’ supply histories

Contract lead times should reflect increasing global production and supply chains Estimates for the product quantity they need should be more accurate

Heavy penalties for failure to supply, even when beyond a supplier’s control, can lead to an inequitable balancing of risks and rewards

Critical Speciality CommodityCommitment to

purchase?Tender by quarters?

Openmarket?

Possible future thinking

Risk assessment criteriaPatient safety criticalDegree of use in primary care tooNumber of suppliersVolumes

Difficulty of manufacture Shelf life API supply capacity Availability of alternatives

Categorised products

Objective: To create an environment to deliver a secure and sustainable supply of secondary care medicines to ensure so far as possible that patients receive their critical medicines