The impact of Off Patents on the Supply Chain

1. The impact of Off Patents on the Supply Chain Mark James UKMANAGING DIRECTOR

2. Introduction CELESIO GROUP (UK) Four customer focused channels operating across the Pharmaceutical supply chain Retail Pharmacy Wholesaling & Distribution Solutions Public Sector & Healthcare Services Pharmaco We directly employ over 20,000 employees We have revenues over £4billion pa We dispense over 150 million items a year We focus on all dispensing points including hospitals, community pharmacies, dispensing practices, prisons, and Mental Health Trusts We operate 19 distribution warehouses We deliver over 600 million packs of medicine in a safe, efficient & cost effective manner

3. The basic facts about the Off-Patent Cliff! £1,353m £383m £272m £136m £611m ARICEPT AMIAS ZYPREXA SERETIDE LIPITOR CLEXANE SYMBICORT COZAAR VIAGRA £2.7BN lost sales to branded manufacturers & a huge windfall for Healthcare budgets Between 2009 and 2014 The UK market will lose ~46% of current protected brand value

4. The Polarisation of Pricing 2003 x50 2010 x500 Price Range of Rx Products 10% 10% Low Price High Price Leading to a polarisation of product types: Mass Market Specialist

5. Branded Manufacturers – An evolving business model Previous Blockbusters losing Patent Protection and Sales Value Research Pipelines not producing replacement blockbusters Off-patents can see sales value drop by up to 90% within days of launch New Product types Many manufacturers have reorganised around mature product ranges to maximise residual value New modes of Healthcare delivery Commercial success can depend on therapeutic equivalence Increasing emphasis on proving beneficial outcomes Focus on cost reduction per product Focus on reducing supply chain leakage

6. Generics – A business model under threat! UK market damaged by global supply planning Oversupply & deregulation lead to prices below cost Different reimbursement models developing at country & regional level Focus on price not total supply chain cost Product range can be split into “exclusives” & “me toos” Exclusives provide profit and me toos provide market share Cross subsidies across a range to make the basket worthwhile Fluctuating demand leads to poor service levels

7. Current Distribution Models Primary Care Distribution Secondary Care Distribution • Primary care has utilised shared user distribution (wholesale) to improve efficiency of delivery and administration • +600 manufacturers on one delivery • Multiple deliveries at very low cost • Profit per delivery more important than profit • per product • Reduced stock holding & stable demand • planning • Secondary care has experienced a mixed model • Direct relationships with multiple suppliers • Multiple delivery mechanisms • Appears to lack joined-up approach to Pharmaceutical distribution • Internal logistics costs • Administration costs • Working Capital Costs • Price • VAT Reduced wholesale & DTP provides cost and supply chain control but also fragmentation

8. Result of off-patents, current systems, and incentives Low cost medicines but potentially higher cost healthcare Fragmentation of supply and increased economic costs Lack of a co-ordinated supply chain Out of Stocks on basic lines

9. The true focus for the supply chain A move from Product to Patient Key areas of focus: Patient Data Economic Value

10. Focus on Patient • Standardise treatment for patients with same illness to provide clear understanding of outcomes • Defined care pathways should not be subject to national or regional differences • Design broader methods of delivery to the patient • Understand the broader “final mile” options • Integration of appropriate product and support service

11. Focus on Data • Primary aim to manage healthcare costs must be reduced hospital admissions and disease prevention • Joined up data between primary & secondary care • Outcomes measurement • Patient management • True transparency of total patient cost would highlight the right pharmaceutical intervention and point resources into consistency & quality

12. Focus on Economic Value • What provides the greatest economic value from a pharmaceutical intervention • Mass market requires shared user distribution & maybe shared manufacturing • Minimised transaction costs across the supply chain • Eg: Nestle & Mars • Specialist requires most clinically effective distribution method • Distribution to Pharmacy • Direct to patient

13. Key Messages Off patents have continued the process of pricing polarisation across the supply chain Branded & Generic manufacturers both face significant challenges to their business models Distribution models have traditionally provided one size fits all solutions based on bundled product portfolios New commercial pressures on costs & supply chain control are fragmenting distribution, increasing economic costs, & introducing fragility Fragmentation forces a focus onto product profitability and leads to unsustainable supply If supply chain focus moved from product to patient then more sustainable solutions could reduce healthcare costs

14. Summary Polarisation leads to two core product distribution demands: Mass market = Minimise total transaction costs Specialist = Focus on Patient Outcome and the right final mile solution Data Economic Cost Patient Serving Patients Best Integrate Primary & Secondary Care Move from Product to Patient 14 14 14