Pharmacy 483 Institutional Pharmacy Practice

1. Pharmacy 483 Institutional Pharmacy Practice Purchasing, Product, and Inventory Management Donald L. Bomgaars, M.S., M.B.A. bomgaars@u.washington.edu February 26, 2004

2. Pharmacy Practice Overview • Product Supply Chain Management • Patient Care Issues & Management • Institutional Level Therapy Management • Population Level Management

3. Lecture Overview • PRODUCT & VENDOR SELECTION PROCESS • GROUP PURCHASING • PURCHASING & DISTRIBUTION CHANNELS • INVENTORY CONTROL SYSTEMS • PRICING & REGULATORY ISSUES • RELATIONSHIPS WITH THE PHARMACEUTICAL INDUSTRY

4. SELECTION PROCESS • ASSESSMENT OF NEEDS • P&T decisions • Patient populations • Staff preferences • Managed care environment

5. SELECTION PROCESS • SUPPLIER APPROVAL • Quality assurance

6. SUPPLIER CERTIFICATION REVIEW BIG PHARMA, INC. • Product Line – Oral solids, controlled substances, SVP, LVP, topicals, peptides, and chemicals • Supplier Type - ( )Primary/( )Secondary/( )Marketer • Back Order History – What & when? • QA/QC Director & Production Director – Appropriate educational backgrounds and experience? • Recall History – Is there a pattern?

7. SUPPLIER CERTIFICATION REVIEW BIG PHARMA, INC. (cont.) • FDA Documents & Company Responses – What was noted or observed? How did the company respond? Was there a Warning Letter issued by the FDA? Is there a pattern of observations from visit to visit? • Overall Comments – Company SOPs review, financial news reports, company web site info, recent FDA approvals? • Recommendation - Approve, qualified approval, disapprove?

8. SELECTION PROCESS • SUPPLIER APPROVAL • Quality assurance • Supplier performance history • Terms and conditions

9. SELECTION PROCESS • PRODUCT SPECIFICATIONS • Bioequivalence issues http://www.fda.gov/cder • Packaging issues • CONTRACT BID & AWARDS • Conventional RFQ process • Online reverse auction

10. SELECTION PROCESS • PRODUCT SPECIFICATIONS • CONTRACT BID AND AWARDS • POST-AWARD MONITORING

11. GROUP PURCHASING ORGANIZATIONS • ADVANTAGES • Pooled volumes • Shared resources • Peer networking • DISADVANTAGES • Loss of control • Variety of constituencies • Member compliance issues

12. PURCHASING & DISTRIBUTION CHANNELS • Supply Chain Management • coordination of processes from the supplier of raw materials to the end user.

13. PURCHASING & DISTRIBUTION CHANNELS • Wholesaler versus Direct Purchases • Selection of a Distribution Vendor • Big Three vs. regional players • Specialty distributors and “grey-market” sources

14. PURCHASING & DISTRIBUTION CHANNELS • Prime Vendor Wholesaler Features We Value • Access to online inventory status and QOH • Accurate representation of TOS and MOS • Bar code receiving • Electronic access to invoices and statements • Clean and standardized product detail info • Data warehouse of purchase history info • Markers in wholesaler database to direct purchases to desired products • Pick & ship accuracy • Customer service follow-up

15. PURCHASING & DISTRIBUTION CHANNELS • Value Management Other directions for improvement: • reverse distribution process • indigent care program management • information companies (HBOC, MediQual, CIC) • pharmacy distribution systems (Pyxis, API, Owens) and pharmacy department management (Swedish) • manufacturing component (Cardinal Assist, National PharmPak, RP Scherer)

16. PURCHASING & DISTRIBUTION CHANNELS • E-Commerce Expanding efficiencies to other members of supply chain • Decreased transaction expenses, increased info flow Impact on wholesalers Pharma to patients direct • Dispensing with the intermediaries?

17. INVENTORY CONTROL SYSTEMS • Balancing the costs • Ordering costs • Product cost • Inventory carrying costs • Outage costs

18. INVENTORY CONTROL SYSTEMS • Alphabet soup of acronyms • JIT, POS, MRP, ERP • ABC, EOQ, ROP • Consignment stocking programs • POU replenishment • Demand forecasting

19. EOQ EXAMPLES • Cost = • Demand= • Reorder cost= • Inventory carrying cost= • EOQ= • Filgrastim: $1,627/pkg 700 annually $2.00 $163 4 • Multivitamin: $6/pkg 700 annually $2.00 $0.6 68

20. INVENTORY CONTROL SYSTEMS • DEMAND FORECASTING • Moves further out the supply chain • Uses software algorithms to predict usage based on seasonal and customer specific anticipated fill dates. • Longs’ Drug California DC reduced inventory by 58%, cut replenishment costs by 65%, maintained 99.5% controllable service levels, released enough cash flow ($60M) to purchase 20 stores.

21. INVENTORY CONTROL SYSTEMS • Decision Support & Monitoring • Linear programming • Allows optimization under constrained resources • Decision trees • Simplifies complex decisions using outcomes and probability distributions

22. Decision Trees STATUS $328,000 (p= 1.0) QUO $328,000 SUCCESSFUL $235,000 (p= 0.2) MAKE $319,000 SWITCH $340,000 (p= 0.8) FAILURE

23. INVENTORY CONTROL SYSTEMS • Decision Support & Monitoring • Multi-Attribute Utility Theory (MAUT) • Method of quantifying assessments of worth of diverse attributes • Financial concepts • Time value of money (NPV, IRR) • Risk value of money • Standard cost monitoring

24. PRICING & REGULATORY ISSUES • For Profit vs. Not For Profit Status • Class of trade and own use provisions • Governmental/Regulatory impacts • Cost based vs. DRG based reimbursement • Budget Deficit factor - OBRA 90 • Veterans Health Care Act of 1992 • Medicare APC program • Medicare Prescription Drug, Improvement, and Modernization Act of 2003

25. PHARMACEUTICAL INDUSTRY RELATIONSHIPS • The Global Market and Price Controls • Impact on the US market • Cross border internet sales

26. PHARMACEUTICAL INDUSTRY RELATIONSHIPS • The Changing Face of Industry • Rapid consolidation continues • Driven by failure of the R&D organizations to meet the earning per share expectations • Increased R&D expenditures may not solve the problems

27. PHARMACEUTICAL INDUSTRY RELATIONSHIPS • The Changing Face of R&D • The Human Genome project could provide up to 25,000 new molecular targets

28. PHARMACEUTICAL COMPANY RELATIONS HUMAN GENOME PROJECT TO SPARK EXPONENTIAL GROWTH IN NUMBER OF TARGETS FOR DRUG INNOVATION Source: Drews, Jurgen, M.D., "Genomic Sciences and the Medicine of Tomorrow: Commentary on Drug Development," Nature Biotechnology, Vol. 14, November 1996

29. PHARMACEUTICAL INDUSTRY RELATIONSHIPS • The Changing Face of R&D • The Human Genome project could provide up to 25,000 new molecular targets • Combinatorial chemistry will allow increases of the number of compounds synthesized and screened by a million-fold

30. PHARMACEUTICAL INDUSTRY RELATIONSHIPS • The Changing Face of R&D • The Human Genome project could provide up to 25,000 new molecular targets • Combinatorial chemistry will allow increases of the number of compounds synthesized and screened by a million-fold • Increased ways of attacking medical problems could fragment market and allow easier competition

32. PHARMACEUTICAL COMPANY RELATIONS SHRINKING PERIOD OF MARKET EXCLUSIVITY BETWEEN INTRODUCTION OF BREAKTHROUGH MEDICINE AND COMPETING INNOVATORS Sources: PhRMA, 1997; The Wilkerson Group, 1995.

33. PHARMACEUTICAL INDUSTRY RELATIONSHIPS • Marketing • Partners versus antagonists • Managed care organizations • Government funding for prescription coverage • DTC and Internet marketing

34. SUGGESTED READINGS • TEXT: www.ashp.com/bestpractices • ASHP Technical Assistance Bulletin on Assessing Cost-Containment Strategies for Pharmacies in Organized Health-Care Settings • ASHP Technical Assistance Bulletin on Hospital Drug Distribution and Control • ASHP Guidelines for Selecting Pharmaceutical Manufacturers and Suppliers • ASHP Guidelines on Managing Drug Product Shortages • Additional reference regarding business methodologies as they are used in the clinical arena: • Magid, David et al., Doxycycline Compared with Azithromycin for Treating Women with Genital Chlamydia trachomatis Infections: An incremental Cost-Effectiveness Analysis, Ann Intern Med. 1996;124:389-399. • Pharmacogenomics reference: • Evans WE, McLeod HL. Pharmacogenomics-drug disposition, drug targets, and side effects. NEJM 2003; 348:538-49.