In Part Five of this series, we estimated the potential value from optimizing inventory, reducing expired drugs, and implementing anti-counterfeiting from using a supply chain network. Here in Part Six, we explore the potential value from reducing cold chain excursions and grey market diversion.
Cold chain temperature excursions
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Biopharmaceuticals currently account for about a quarter of the global pharmaceutical market but are growing at about twice the rate of the market as a whole. Biopharmaceuticals are temperature sensitive. Their growth is leading to a corresponding growth in the need for cold chain services. The unprecedented scale of the COVID-19 vaccination effort has only accelerated this trend.
The pharmaceutical supply chain already employs a wide array of methods and services for cold chain logistics, including extensive services from major 3PLs, carriers, and distributors, myriad varieties of dedicated temperature monitoring devices and services, and a wide range of cold-chain packaging and conveyance systems. Nevertheless, cold chain logistics are complicated, with many players handling a product on its end-to-end journey from manufacturer to patient. As a result, temperature excursions occur too often. Estimates of the rate of excursions vary widely (from 1 percent to 25 percent).[1] One study (Barrowclough 2020) estimated the cost of temperature-related issues for pharmaceuticals at around $35 billion annually, from a combination of lost product, clinical trial loss and replacement costs, wasted logistics costs, and the costs of root-cause analysis. Of this, about $15 billion per year (a little over 1 percent of revenue) is the cost of lost product from cold chain failures (Cece 2020).
We envision PharmaNet integrating with end-to-end condition-monitoring devices and services, where each unit has temperature tracking from the point of manufacturing to the point of consumption.[2] With the data from that end-to-end tracking, there are three main ways that the proposed PharmaNet can help reduce excursion:
- Chain-wide accountability and systemic improvements—End-to-end monitoring provides more precise and irrefutable evidence about who is responsible when excursions occur. The unambiguous assignment of liability and associated fines provide strong motivators for all parties to improve their performance. On a more collaborative front, this type of rigorous monitoring allows systemic problems to be identified and jointly worked on. This may involve specific process improvements, targeted training to particular personnel, improvements to equipment maintenance programs, upgrading of cooling systems, and so forth. The data may also be used during negotiations with logistics and distribution service providers to push for performance improvements as a condition of awarding more business.
- Real-time alerts and actions—Alerts generated in real-time can be used to drive near-term corrective actions. For example, warehouse workers could be alerted when a shipment has been sitting too long in an uncooled location (e.g., a loading dock) and instructed to move it into cold storage. If the cooling unit on a truck or container starts failing, someone could be notified to take corrective action, such as exchanging vehicles or containers or having the cooling unit fixed (if immediate repair is feasible). Such actions could prevent more severe excursions and the loss of those drugs.
- Intelligent distribution and dispensing (stability-budget-based)—PharmaNet records cumulative temperature excursions for each end-consumable unit, recording the total time out of storage (TOS). This can be used to calculate the impact on each unit’s stability budget,[3] thereby determining the remaining shelf-life and any degradation to efficacy and safety. Based on this, more intelligent distribution and dispensing decisions can be made. A distribution center can send units that have less remaining stability budget to nearer locations, have better temperature controls, or have higher velocity consumption. Units with a larger remaining stability budget can be sent to locations that need a bigger buffer due to lower consumption velocity or more challenging handling conditions. In this way, the total number of units discarded due to excursions is reduced. Similarly, doctors and pharmacists can be provided with precise remaining efficacy estimations to make more informed decisions for drugs that have been exposed to temperature excursions.
We estimate that taken together, these measures could enable PharmaNet to reduce excursions by 10 percent to 50 percent and reduce product and process costs by a similar amount. The size of the improvement opportunity will be at the higher end of this range for companies that have below-average cold chain performance today and at the lower end of this range for those that already have above-average cold chain performance.
Grey market diversion
Estimates of the volume of grey market[4] sales of drugs vary but are generally around €5B in the EU plus UK and $5B in the US.[5] Grey market sales harm profits for pharmaceutical manufacturers and revenues for authorized dealers who are playing by the rules. The beneficiaries are the unauthorized distributors, who often pocket most of the price arbitrage difference, and patients who pay potentially somewhat lower prices. Research differs in what portion of the benefit goes to unauthorized distributors vs. patients, but regardless, the consensus seems to be that the average amount of price arbitrage is around 20 percent to 40 percent. Assuming global grey market sales are in the neighborhood of $10B (i.e., about 1 percent of total global sales), that means that 20 percent to 40 percent price arbitrage equates to an annual loss of $2B to $4B in profit for pharmaceutical manufacturers, or about 0.2 percent to 0.4 percent of revenue.
Trying to reduce grey market sales is a complex issue that technology alone cannot solve. It is very important to have strong contracts that obligate legitimate distributors not to source from or sell to unauthorized dealers, regular education and communications with distributors reminding them of these obligations (including requiring written confirmation that they have read, understood, and agree to those conditions), and, in particular, rigorous monitoring and enforcement. Monitoring of grey market sales has become considerably more difficult in the internet age of online e-commerce.
The proposed PharmaNet platform can help in several ways, first by facilitating regular communications and confirmation of agreements between pharma manufacturers and their authorized distributors. More importantly, the PharmaNet platform provides robust monitoring via end-to-end tracking of every chain-of-custody handoff. It becomes immediately apparent when a shipment of drugs is recorded as received by a distributor who in turn fails to record the sale of those drugs. With consistent recording of shipments received by pharmacies and healthcare providers, any shipments that did not flow through authorized channels can be spotted. Combined with consistent communications and enforcement, we estimate that these capabilities could reduce grey market sales by 25 percent to 75 percent, thus returning $1B to $3B of profit back to pharmaceutical manufacturers and $2.5B to $7.5B of revenue back to legitimate authorized distributors.
In Part Seven of this series, we finish our examination of compliance and control by looking at the value potential of better regulatory compliance. We also estimate the relative value for other participants in the pharmaceutical supply chain (beyond the manufacturer/brand owner). Finally, we calculate the total value that could be realized across the entire industry if it adopted the solutions and methods discussed in this series.
[1] One study (Arcebido 2020) found that excursions happen for 1 percent to 5 percent of shipments. Another source (Barrowclough 2020) cited a study concluding that 25 percent of vaccines have reduced efficacy due to cold-chain failures and that 20 percent of all temperature-sensitive pharmaceuticals have significant temperature excursions during transport. That same source estimated around 15 percent of temperature-sensitive pharmaceuticals were wasted. — Return to article text above
[2] Ideally, each unit of end consumption has its own temperature-tracking device that goes from the manufacturer to the dispenser. However, for smaller unit sizes, this can be quite costly. An alternative is to have a series of temperature trackers at the case, pallet, or conveyance level, with PharmaNet providing an association between each of those and the individual units they contain. This way an end-to-end temperature history can be recorded by ‘stitching together’ the data from each segment of the journey for each end-consumption unit. This approach risks some blind spots during handoffs (such as sitting on a loading dock or tarmac) but is still much better than a fragmented view. — Return to article text above
[3] Regulations require companies that bring a drug to market to maintain data on how long the drug lasts under different temperature conditions. This is known as the ”stability budget,” which determines how long a drug can stay at different temperatures and still be safely and efficaciously used. For more on this, see Stability Budget – The Key to Patient Safety in Cold Chain or Establishing Drug Stability Budget During Storage and Transit. — Return to article text above
[4] Grey market refers to the sale of goods through unauthorized channels or distributors. Though there are various reasons for grey market sales, it is often done to take advantage of price arbitrage opportunities. An unauthorized or unscrupulous dealer buys drugs in a market with lower authorized pricing limits and sells them at a profit into a market with higher pricing limits. — Return to article text above
[5] Estimates of €5B in the EU plus UK by (Chaudhry 2014) and $5B in the US by (Bandyopadhyay 2010). — Return to article text above