Transcript Generic Contracting – How can it be improved?

Effective procurement of
generic medicines
PDIG Summer Symposium 2014
Warwick Smith
Director 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?
Wave VIIIB
tender showed
only one or fewer
bids for hundreds
of lines
49% of offcontract claims
for less than £50
Anecdotally, we
hear of increasing
concern about
inability to supply
Evidence of lack
of communication
& understanding
between supplier
and hospital
19% of offcontract claims
for less than £10
Average cost to a
supplier of
managing the
payment of a
claim is £43
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
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consolidated demand
reduced its stock holding levels
When supply failure
occurs impact
is potentially greater
 Suppliers have [typically]
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merged
rationalised product ranges
rationalised organisation of
manufacturing capacity
optimised utilisation of
manufacturing capacity and supply
chain performance
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
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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
Increase
 Estimated quantities in the
UK are poor
 Unplanned increase in
demand impacts
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Companies build in a
contingency
Raw material availability
Manufacturing time
Packing time
Components
Test and Release
Availability of labour
Leads to cost increase
Decrease
 Reduction in Recovery of
Overhead
 Cost of Raw materials
increase
 Batch sizes may not be
achieved
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 sustainability
Leads to fewer suppliers
Weakens 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
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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
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Within Global Supply Chain, their demand massively affects
EU supply
One company’s current back-order position is €160M
 France –
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‘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,
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private health care insurance funds take most of volume
Significant penalty clauses
Range is important
‘Bundling’ is common
 NO/DK
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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 –
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tender is for one year for XX packs
More than 150 tenders per year.
Growing generic market
 Ireland
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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
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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
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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
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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
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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
2%
Regulatory problem
9%
18%
API manufacturing problem
21%
16%
Finished form manufacturing
problem
Demand higher than contracted
Global demand
34%
Product became uneconomic to
supply
Reasons for failure to supply:
mid contract
9%
3%
Regulatory problem
15%
API manufacturing problem
12%
Finished form manufacturing
problem
21%
Demand higher than contracted
Global demand
40%
Product became uneconomic to
supply
Reasons for failure to supply:
start of contract
9%
27%
Regulatory problem
Finished form manufacturing
problem
Demand higher than contracted
46%
18%
Product became uneconomic to
supply
Differences start v mid contract
34%
Uneconomic
22%
Manufacturing
Regulatory
0%
Higher demand
12%
Products that companies did
not tender for (again)
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20 products that companies had tendered for in the past but
decided not to again
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Reasons for this included:
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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
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A ‘one size fits all’ tendering system is not adequate
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The criteria for award of contracts should take into account
ability to supply (Swedish model noted)
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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
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For some categories of products, a tender system is proving counterproductive and may require a different form of procurement
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
Possible future thinking
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
Risk assessment criteria
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Patient safety critical
Degree of use in primary care
too
Number of suppliers
Volumes
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Difficulty of manufacture
Shelf life
API supply capacity
Availability of alternatives
Categorised products
Critical
Speciality
Commodity
Commitment to
purchase?
Tender by
quarters?
Open
market?