I participated recently on a Future Pharmaceuticals podcast titled “Responding to Change and Cycle Time Reduction” with Walter Kittl (Siegfried-USA), Philippe Cini (IBM Global Services), and Zach Pitluk (Proveris Scientific) which was hosted by Reid Graves (Merck). One of the questions was: What should senior mgt within the pharmaceutical/biotech industry do differently to realize rapid improvements in managing their supply chains? Is there enough collaboration, sharing of best practices, awareness, and education? The key point I stressed in my answer was to bring in fresh ideas from other industries.
Drug companies, specifically the pharmaceutical companies, have enjoyed very high gross margins – often as high as 85% – for many years based upon patent protection and good portfolios of new drugs coming to market. This has led to the slow adoption of Lean principles and little focus on supply chain innovations and efficiency when compared to other industries, particularly high-tech/electronics or consumer packaged goods. These industries experience much lower gross margin, sometimes as low is 10%, meaning that their supply chain operations have to be much more efficient. Some key metrics, averaged over the last 4 quarters, that illustrate the differences are below. Notice the considerably longer cash-to-cash cycle, largely due to much higher inventory levels.
|Company Name||Cash-to-Cash (Days)||Days of Inventory||Rev/Emp ($1,000)||Gross Margin|
|Research In Motion||78||28||1,123||42.60%|
|Eli Lilly & Co||314||273||522||82.40%|
|Merck & Co||189||140||424||76.40%|
Telling an industry that they need new ideas is not always the sure way to a long term future in that industry. Thankfully, I came across an article in the Wall Street Journal about the new CEO at Novartis, one of the largest drug companies. (A subscription may be required to read the full article.) As per the WSJ, Joe Jimenez “has led Novartis's largest division—its prescription-drug business—for the past two years, overseeing strong growth. He joined Novartis in 2007, having spent most of his career at HJ Heinz Co., Clorox Co. and ConAgra Foods Inc.” These are all consumer packaged goods companies.
To quote the WSJ, Mr. Jimenez called the food business a "leaner industry" that was better at responding to changes in the marketplace, including changing consumer preferences. "Margins are lower and the time with which you have to move is quicker," Mr. Jimenez said of the food business. "The pharmaceutical industry in the past has not been focused on taking out non-value-added cost because the growth has been very good," he said. So there might be a future for me in the pharmaceutical industry after all.
More seriously, the business drivers for the increased focus on supply chain efficiency are directly related to the product portfolio performance. Many of the larger companies are reaching the end of the patent period on their stronger performing drugs and do not have drugs coming though the development stage that will replace the older drugs.
Another contributing factor to an increased awareness of the importance of greater supply chain efficiency is the debate over healthcare reform in the US. In addition, there has an increase in the competition from drug companies in the so-called BRIC countries (Brazil, Russia, India, and China) especially in generics. Although these countries are less of a factor in the prescription drug business at the moment, they are likely to be a much bigger factor in this part of the business over the next 5-10 years.
What do you think? Will the pharmaceutical industry transform itself internally, or will “fresh blood” be needed?