Digitalizing Drug Development
Pfizer is using digitalization to increase visibility and efficiency across its supply chain. But can the pharmaceutical giant capitalize on these benefits quickly enough?
As debates about health insurance reform rumble and patient care models shift from fee-for-service to fee-for-value, another revolution is sweeping the healthcare industry: pharmaceutical supply chain digitalization. For executives at Pfizer, the world’s 3rd largest pharmaceutical company, this megatrend cannot be ignored.
A third of the pharmaceutical industry’s profit and loss is attributable to the supply chain.[1] Pfizer’s supply chain is particularly complex, spanning 66 manufacturing sites, 200+ supply partners, and 134 logistics centers across 175+ markets.[2] This network has only grown more complex with Pfizer’s recent acquisition of Hospira, adding 13 new manufacturing sites.[3] Increasing visibility and efficiency across Pfizer’s supply chain has never been more urgent.
Enter Digitalization
Whether digitalization concerns or excites Pfizer’s management will depend on whether they can capture its many benefits before their competitors do. Digitalization can increase Pfizer’s inventory turnover. Currently, Pfizer’s days-sales-in-inventory soars above 200, while peer companies Johnson & Johnson, Novartis, and Merck maintain ratios in the 130s.[4] Embedding track-and-trace technology can improve Pfizer’s forecasting and capture some of the $25 billion tied up in wasted inventory across the pharmaceutical industry.[5] Digitalization can also reduce plant downtime. While downtime is notoriously high across the pharmaceutical industry, machine-to-machine communication and machine learning can reduce it by 30-40%.[6] Embedding sensors throughout the supply chain can provide Pfizer’s managers with real-time insights to adjust batch sizes, mitigate product obsolescence, avoid stockouts, and improve customer retention.[7] Sensors can also improve quality by allowing Pfizer to monitor equipment as chemicals are mixed and pills are pressed.[8] Lastly, digitalization will be necessary for regulatory compliance, since the Drug Supply Chain Security Act (2013) will soon require Pfizer to implement product serialization across its supply chain.[9]
The race towards pharmaceutical supply chain digitalization has already begun. Merck is implementing sensors and intelligent software to better understand how products are performing in the market and to help accelerate their planning processes.[10] Cipla improved their production forecasting by implementing new supply chain planning software—an investment that paid for itself in six months.[11] Cipla is also planning to use artificial intelligence to create a “driverless” supply chain.[12] Other companies are using infrared technology to detect counterfeit medicines more efficiently.[13]
Early Progress
Pfizer’s management is taking several steps to respond to this megatrend. In the short-term, Pfizer has installed temperature monitoring and cooling technologies to accommodate its growing portfolio of temperature-dependent drugs.[14] Pfizer has also been implementing a cloud-based supplier system with track-and-trace capabilities across 500 different partners.[15] This will bring all partners onto the same interoperable platform so that Pfizer can gather information and map products as they move through their network.
Over the longer-term, Pfizer envisions full end-to-end visibility that extends all the way to the patient. To that end, Pfizer has launched a partnership with IBM aimed at using wearable technology to monitor and analyze data from patients with Parkinson’s disease. By understanding the frequency and severity of various symptoms as they arise, Pfizer hopes to expedite clinical trials and uncover new effective drugs.[16] This early foray into the Internet-of-Things (IOT) is likely only the beginning.
Next Steps
Beyond these actions, Pfizer can take several additional steps to ride the digitalization wave. In the short-term, mindset shifts are critical to embracing digitalization. According to pharma experts, a major impediment to supply chain digitalization is employees’ reluctance to “change how they’ve always done things.”[17] This underscores the need for Pfizer’s management to communicate a compelling digitalization vision. Meanwhile, Pfizer’s leaders should pick 1-2 new digitalization projects that the company can get started on immediately,[18] with the goal of achieving quick wins and diffusing skepticism.
Over the longer-term, Pfizer should expand its IOT investments into other therapeutic areas where real-time patient data could speed up the drug development and delivery process. Through cost-benefit analysis, they should determine whether to replace or retrofit plant machinery with new IOT-equipped technologies. Pfizer already expects to invest $1.9 billion in PPE in 2017 alone, on top of $2.6 billion spent over the previous two years.[19] Relative to these large investments and to Pfizer’s $13 billion in total PPE, plant retrofits are unlikely to stretch capital budgets—particularly with the decreasing cost of IOT sensors.[20] Lastly, Pfizer’s physical capital investments should be matched with human capital investments. Merck, by comparison, is recruiting younger employees and training older ones in order to build the skillsets needed to implement new technological solutions.[21] Pfizer should likewise diversify its talent so that its workforce is ready for digitalization.
Conclusion
Opportunities for supply chain digitalization at Pfizer abound. Nonetheless, questions remain. Digitalization is increasingly used to forecast demand—but how far downstream to the point-of-sale should Pfizer’s digital network extend before it compromises patient confidentiality? And digitalization requires the cooperation of hundreds of players across the supply chain—but will partners have an incentive to share increasing amounts of data?
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[1] Edwin Lopez, “Why Merck & Co. turned to supply chain integration to save costs,” Supply Chain Dive, March 3, 2017, https://www.supplychaindive.com/news/merck-co-supply-demand-planning-manufacturing-integration/436496/, accessed November 2017.
[2] Pfizer, “2015 Annual Review: Manufacturing and Supply Chain,” 2015, https://www.pfizer.com/files/investors/financial_reports/annual_reports/2015/manufacturing-and-supply-chain.htm, accessed November 2017.
[3] Pfizer, “2015 Annual Review: Manufacturing and Supply Chain,” 2015, https://www.pfizer.com/files/investors/financial_reports/annual_reports/2015/manufacturing-and-supply-chain.htm, accessed November 2017.
[4] Stock Analysis on Net, “Pfizer: Short-Term (Operating) Activity Analysis,” December, 31, 2016, https://www.stock-analysis-on.net/NYSE/Company/Pfizer-Inc/Ratios/Short-term-Operating-Activity, accessed November 2017.
[5] David Keeling, Martin Losch, Ulf Schrader, “Outlook on pharma operations,” McKinsey & Company, 2010, https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/operations/pdfs/outlook_on_pharma_operations.ashx, accessed November 2017.
[6] Dr. Marcus Ehrhardt, Peter Behner, “Digitization in pharma: Gaining an edge in operations,” Strategy&, October 19, 2016, https://www.strategyand.pwc.com/reports/digitization-in-pharma, accessed November 2017.
[7] Joseph Ludorf, “Improve your supply chain forecasting,” IndustryWeek, October 26, 2012, http://www.industryweek.com/planning-amp-forecasting/improve-your-supply-chain-forecasting, accessed November 2017.
[8] Brian Hartmann, William P. King, Subu Narayanan, “Digital manufacturing: The revolution will be virtualized,” McKinsey & Company, August 2015, https://www.mckinsey.com/business-functions/operations/our-insights/digital-manufacturing-the-revolution-will-be-virtualized, accessed November 2017.
[9] Food and Drug Administration, “Drug Supply Chain Security Act: Overview of Product Tracing Requirements,” September 2015, https://www.fda.gov/downloads/Drugs/DrugSafety/DrugIntegrityandSupplyChainSecurity/DrugSupplyChainSecurityAct/UCM464907.pdf, accessed November 2017.
[10] Hans Thalbauer, Michael S. Goldberg, “Amp The Supply Chain,” Digitalist Magazine, May 10, 2017, http://www.digitalistmag.com/digital-supply-networks/2017/05/10/amp-the-supply-chain-05034986, accessed November 2017.
[11] Joseph Ludorf, “Improve your supply chain forecasting,” IndustryWeek, October 26, 2012, http://www.industryweek.com/planning-amp-forecasting/improve-your-supply-chain-forecasting, accessed November 2017.
[12] Gary Forger, “NextGen Supply Chain: The new look of supply chain automation,” Supply Chain Management Review, September 26, 2017, http://www.scmr.com/article/nextgen_supply_chain_the_new_look_of_supply_chain_automation, accessed November 2017.
[13] Brian Hartmann, William P. King, Subu Narayanan, “Digital manufacturing: The revolution will be virtualized,” McKinsey & Company, August 2015, https://www.mckinsey.com/business-functions/operations/our-insights/digital-manufacturing-the-revolution-will-be-virtualized, accessed November 2017.
[14] “Digitizing the supply chain: Why Pfizer is investing in IoT, drones and personalized medicine,” Internet of Business, January 31, 2017, https://internetofbusiness.com/digitizing-supply-chain-pfizer-iot/, accessed November 2017.
[15] “Pfizer moves supply chain to cloud,” Financial Times, 2012, https://www.ft.com/content/1608e5d6-fc59-11e1-ac0f-00144feabdc0, accessed November 2017.
[16] Jessica Davis, “IBM, Pfizer partner on experimental Internet of Things study for Parkinson’s Disease care,” Healthcare IT News, April 8, 2016, http://www.healthcareitnews.com/news/ibm-pfizer-partner-experimental-internet-things-study-parkinsons-disease-care, accessed November 2017.
[17] Julian Upton, “Setting Sights on the Smart Supply Chain,” Pharmaceutical Executive, Volume 37, Issue 3, March 14, 2017, http://www.pharmexec.com/setting-sights-smart-supply-chain, accessed November 2017.
[18] World Economic Forum, “Industrial Internet of Things: Unleashing the Potential of Connected Products and Services,” http://reports.weforum.org/industrial-internet-of-things/5-recommended-actions-for-stakeholders/, accessed November 2017.
[19] Pfizer, “2015 Annual Review: Manufacturing and Supply Chain,” 2015, https://www.pfizer.com/files/investors/financial_reports/annual_reports/2015/manufacturing-and-supply-chain.htm, accessed November 2017.
[20] Mario Honrubia, “Industrial IoT is booming thanks to a drop in Sensor Prices,” Ennomotive, August 17, 2017, https://www.ennomotive.com/industrial-iot-sensor-prices/, accessed November 2017.
[21] Julian Upton, “Setting Sights on the Smart Supply Chain,” Pharmaceutical Executive, Volume 37, Issue 3, March 14, 2017, http://www.pharmexec.com/setting-sights-smart-supply-chain, accessed November 2017.
I like your point about how crucial mindset shifts are in making this transition. As you mentioned, and I can attest to this, conservatism and complacency are rampant in the industry. While I completely agree with your recommendations, I feel the need to try to defend my former colleagues a bit.
Between the two ends of the pharmaceutical pipeline (drug discovery at the beginning and commercialization at the end), conservatism is (albeit with a few exceptions) pretty much the ruling paradigm. Change, in a world where your innovative new idea can kill someone or FDA can knock on your door tomorrow and shut you down, can be tough to stomach. Furthermore, while the people running a lot of the manufacturing and operations processes are often extremely technically proficient, that usually doesn’t apply to the kinds of technologies the industry needs to advance. So in some ways, job security (along with patient safety and regulatory compliance) is another source of inertia.
On the complacency side, I think a big part of this comes from the fact that pharmaceutical gross margins can be extremely high compared to other industries (https://www.statista.com/statistics/473429/top-global-pharmaceutical-companies-gross-margin-values/). With so much wiggle room, pharma companies might feel little pressure to invest heavily in operational improvements that could have only a small impact on their profitability. Also, short term competitive pressure around margins is, from my limited experience, pretty rare. These companies’ bread and butter comes from non-fungible products with atypical competitive dynamics that reduce the need for operational efficiencies relative to manufacturers in other industries.
In conclusion, I’m on board with your point, but I couldn’t resist giving a little justification.
Exciting read! It will be interesting to find out how pharma companies use IoT technologies to optimize supply chain. I wonder how would a giant like Pfizer go about training thousands of employees on these cutting-edge technologies.
I agree that patient confidentiality will be a big issue, especially with subscription-based models and connected drug delivery. Also, I will be curious to follow up on how they leverage this data beyond supply chain – be it partnering with IoT majors like Google, or data-based healthcare companies like Epic – to ultimately provide better care.