Almost three years after the COVID pandemic put the world into lock down, we are still not yet free of COVID-19. In fact, we now have steadily increasing cases of monkeypox, which was previously confined to endemic regions.
Are we better prepared for the next health threat? Have we plugged the gaps to respond faster? Let’s not forget the many obstacles in this path.
For one, analysts point out that India Pharma Inc is still heavily dependent on imports for key raw materials. More than 70 per cent of its raw material requirements and in the case of certain drugs, more than 90 per cent are imported. Nearly 70 per cent of APIs are imported from China, and the cost has reportedly jumped by orders of magnitude, thanks to geo-political concerns. This has impacted the margins of pharma drugs.
While higher raw material, freight costs as well as pricing pressures in the US business due to high channel inventory will continue to drag overall performance for the pharma sector, how will the first two challenges hamper the development of medicines and diagnostics for future health threats?
Corporate boardrooms have been in re-set mode to prepare themselves for this scenario, incorporating the hard lessons of the COVID pandemic into business-as-usual practices. This exercise has been enriched with direct feedback from cross-functional heads who were never part of boardroom discussions in the pre-pandemic era.
This is vital because some vital benchmarks have not yet – and probably will not – revert back to pre-pandemic times.
Express Pharma, as part of SAP India’s Industry Knowledge Exchange (IKEX) Series, in partnership with the Indian Pharmaceutical Alliance (IPA), has culled some of these insights over a series of interactions. In May, we met up with CFOs, IT heads and CRAMS leaders for an overview of how collaborations and technology are driving business innovation in the lifesciences sector. (https://www.expresspharma.in/collaboration-tech-driving-business-innovation-in-life-sciencessector/).
And, in July, we got pharma procurement leaders, along with IT and operational leaders, to decipher their game plans on the procurement and SCM side. While the SAP team gave an overview of how pharma companies can transform their organisations into intelligent enterprise by achieving value with intelligent ERP systems, pharma leaders spoke of transformations within their organisations to cope with disruptions in the pharma supply chain.
Harking back to the total disruption of pharma procurement during the early stages of the pandemic, Sapna Sharma, Director, Procurement, Category Head for API, Excipients and Respiratory, Cipla, said creating alternatives for suppliers topped the list of her company’s learnings. “We have to be proactive, not reactive about creating alternatives for suppliers, especially those where we could predict we might have a problem. Cipla had started on this process a couple of years back. So, during the pandemic, we were able to move to alternative suppliers very fast as we already had them in place.”
This process actually started way back in 2008, when China shut down many chemical and API manufacturing units before the Beijing Olympics. That was the pharma, and other sectors, first
warning of supply chain shocks due to heavy dependence on imports.
But, even though this might seem like a logical thing to do, there was a lot of push back within companies, because as Sharma pointed out, it is a laborious process. For instance, one API might go into multiple SKUs. Sharma says it took some time to create a mindset that alternative suppliers were
necessary. Cipla also created a plan to shift not just to alternative vendors, but alternate sites of existing vendors. As part of this initiative, Cipla also started educating their vendors, so that they were in line with the company’s overall strategy.
Sharma also spoke about putting better inventory management systems into place at both Cipla and their vendors, by implementing supplier scorecards to identify their strategic partners. Cipla stopped spot buying, and put in place strategic partners for key inputs that led to better forecasting, negotiating better rates considering the volume consolidation.
Logistics lock down
While procurement heads were setting right their house, their peers in logistics, the next step in the supply chain, found that there was no going back to pre-pandemic times. As Pratyush Kumar, General Manager, Demand Planning and Logistics Excellence, Glenmark Pharma, detailed, each shipping container, which used to cost $2500 pre-pandemic, today quotes at a whopping $12000. There is no way pharma companies can add this cost increase to the price of the output goods (medicines), as the markets are extremely competitive and price-sensitive.
Glenmark used this opportunity to make transportation more cost effective through various measures. Giving a small example, he described how they reduced the huge difference between the gross weight and the volume weight in air freight as pallets were not being utilised optimally. When prices increased, Kumar recounted how even this small opportunity was used to put more packs per pallet.
A second major realisation was that while inventory used to be considered a cost, the pandemic proved that freight is the real higher cost. Glenmark decided to increase inventory levels in order to reduce air freight costs and ship more products by sea rather than air. But shipping by sea came with its own drawbacks. The US-India shipments, which used to take 22-25 days, were now taking up to 45 days. To cope with the decreasing reliability and visibility of sea freight, Glenmark installed IOT enabled data loggers in all consignments to get real-time visibility. This enabled the company to make decisions in real-time to reroute to the final destination to make up for some of the delays. Pratyush Kumar also explained how forecasting technology had helped them prepare better and save costs.
The new definition of BC-AD
In spite of these strategies, it’s a different reality today. As Vickram Srivastava, Head of Planning, Global Supply Chain, Sun Pharma, points out, “Disruption is part of the new normal and the new business paradigm. This is part of the new Gregorian calendar, Before Corona (BC) and AD (After Disease). And it’s not yet clear that we are in the AD phase as yet.”
Srivastava points out that our dependence on imports from China has increased multi-folds over the last two decades and cannot be replaced easily. To his mind, the difference has come from a sustained effort by China’s policies to encourage the chemical/pharma sector.
Also, he mentions that the focus has to be to invest in new complex products and getting it right the first time in addition to de-risking the current supply chain for business continuity. Using digital technology to understand market trends and demand from the sales and marketing field force directly to the upstream vendor supply chain would be the real game changer.
Shortages of certain vital materials like filters persist even post the pandemic. So, it’s no longer about Business Process Re-engineering (BPR) but Business Continuity Plans (BCP), which is not just about
putting in place alternate vendors, but about end-to-end mapping of value chain to ensure undisrupted supply of critical life-saving drugs. Especially as most pharma companies in India are now dealing with complex and niche generics, where not many alternative vendors may be available, which is why Srivastava feels that pharma companies need to see their vendors as long-term collaborators, going beyond cooperation.
The search for alternate vendors needed procurement and technical teams to work together as alternate vendors needed to be validated before being onboarded. And, in some cases, the lack of time forced companies to repurpose the existing stocks.
For instance, Dr Aravind Badiger, Technical Director, BDR Pharma, recalled how the increase in cases of the rare fungal infection, termed ‘black fungus’ called for huge quantities of liposomal Amphotericin B. However, shortages of filters and lipids was one of the reasons why initially production could not ramp up in time.
BDR Pharma probably had the largest batch size of 30,000 vials, but no filters. The company finally used filters that their QA team was using after due sterilisation and tests. They had to educate the procurement team to consider other alternative sources after scientific due process was followed, and then convinced them to use other products.
However, taking Srivastava’s point that procurement challenges extend beyond the pandemic, Dr Badiger points out that the US FDA approves about 52 products a year, approximately one product a week. He observes that demand always overshoots supply after generic approvals and that causes volatility in prices, which is why procurement is the nerve centre that should be connected to all key departments. Sharing of information among all departments can make procurement practices smoother and avoid panic and chaos, pandemic or not, avers Dr Badiger.
China Plus One strategy
It is supply chain shocks like these that made API manufacturers like Hikal take proactive measures to build a China Plus One strategy. For Mahendra Maske, AGM, Demand and Supply Planning, Hikal, this meant buying more and building up the inventory. “Safety stock norms, which were reviewed every quarter, were now reviewed more frequently, based on market needs and demands. We reduced our dependence on China and developed multiple alternate vendors from other countries and within India as well. We also diversified our product portfolio, so that we were not dependent on any one product.”
As Shrikant Gade, VP, Sourcing and Procurement, FDC, puts it, “It’s not that we weren’t thinking about procurement developing alternate vendors, moving from manual to hybrid to digital systems, etc before the pandemic. The pandemic changed our approach and forced us to think differently and out-of-the-box. It forced us to intensify our efforts to forecast better. Though the government introduced the PLI scheme, implementation will take time. Everyone is in the same boat: we are dependent on China for 70-80 per cent of input materials, which is using high freight and material costs to arm twist us.” He too agreed that these rates will remain 30-40 per cent higher than pre-pandemic times.
Sachin Ghosalkar, Sr Vice President, Operations, Indoco Remedies, re-emphasised the strategic collaborations that were forged during the pandemic with suppliers like Hikal. “Everyone now realises that their suppliers have to be in their backyard. Or they have pushed their suppliers to move closer to them.” Escalations in freight rates is a post-pandemic phenomenon, according to him, with profit margins of logistics companies going from four-five per cent pre-pandemic to up to 20 per cent post-pandemic.
The case for digitisation?
Swapnil Rajepawar, IT & Digital Project, Procurement Head, ACG Worldwide, narrated how the pandemic was the biggest opportunity for the IT departments of companies to emphasise the benefits of digitalisation. He observes that companies are now more willing to spend on digital technologies.
While many pharma companies have gradually moved certain systems like artworks, invoicing etc to the digital medium even before the pandemic as part of the digitisation process, there are many speed-breakers to digital transformation.
For instance, Venkat Srinivas, CIO, RA, Chem Pharma, underlined the concern about making a business case to sell digitisation within his organisation. In a similar vein, Himal Desai, VP, Supply Chain, Virchow Biotech, expressed concerns on the varying quality of digitisation implementation partners. Secondly, there should be digital solutions for smaller companies as well. While he taught himself coding and developed solutions for his company’s needs, all MSME companies might not have access to coding skills.
New faces in the pharma boardroom…
Once the hallowed space reserved for promoters and finance heads, pharma’s top table expanded considerably during the pandemic. Dr Rami Reddy, VP, Purchase, Hetero Labs, recounts how purchase heads became part of boardroom discussions during the pandemic as the thought process of most top management of pharma companies changed during the last two-and-a-half years.
As he had straddled both IT and supply chain in his previous roles and in his current role in IT&IS, M Prabhakar Rao, AVP, IT&IS, Natco, pointed out that every node in the supply chain is very important and the pandemic bought supply chain and IT heads into the boardroom. Cost consciousness has crept into all functions. The result is that it’s not just smart buyers, but all smart suppliers, where everyone does their homework and preparation before they come to the negotiation table during the procurement process, avers M Prabhakar Rao.
…bode well for pharma bottom line
The new faces in the pharma boardroom have already added value. PV Raju, Sr Vice President, SCM, Biological E, quotes from a BCG report, according to which, companies which involve their Chief Procurement Officers in the strategic decision making process, have 130 per cent more growth. He also stresses that decisions regarding purchase, sales, should be taken in consultation with procurement heads which will lead to huge savings.
Jagannatha Reddy, Sr VP, Head, SCM, Viyash Life Sciences, too agreed that today, procurement leaders are no longer clerks. They are expected to know the chemistry, route of synthesis, etc as different categories have different challenges. They are more visible and are invited to boardroom meets as they are expected to add value to the discussions. They are given the prerequisite inputs and are free to come up with their own strategies, recounts Reddy.
Raju narrated how technology platforms are helping suppliers/vendors negotiate among themselves and come to clients with a final price, rather than pharma procurement teams negotiating with each vendor. Such sourcing strategies impact not just the price, but the total cost of ownership, according to Raju.
Bringing in new perspectives
Many industry experts point out that there is no going back to pre-COVID times. Avinash Kumar Talwar, VP, MRO and Packaging, Material Sourcing (Strategic and Plant), Global Supply Chain Management, Dr Reddy’s, recounts how lead times have expanded from one-to-three months to nine-12 months. For example, filter manufacturers still have a lead time of one year for filters. Similarly, imported aluminium used in packaging material, has a lead time of eight-to-nine months minimum. It’s the same story with rubber stoppers.
Talwar believes that these challenges can be solved by thinking differently. Firstly, indigenisation will help reduce costs. For instance, having India-based makers of rubber stoppers and filters reduces costs by 30 to 40 per cent. Towards this end, he reveals that Dr Reddy’s has started hand-holding Indian partners, like investing in some API companies and backing packaging material makers.
Speaking about Dr Reddy’s initiatives to improve ease of doing business, Talwar also narrated how Dr Reddy’s had built a digitally-enabled common platform for their partners called Vikreta Connect (i.e. Digital P2P – Procurement to Pay process). According to him, Dr Reddy’s became the pioneer pharma company to switch to paperless transactions through introduction of digital invoice processing. The introduction of “Digitally Signed Invoice Upload” helps the company to honour timely payments and the introduction of “mobile app” will help business partners to view/receive/acknowledge PO’s, check ASN status, payment status of all invoices on a real-time basis.
Agreeing with Talwar’s suggestion for indigenisation, Atul Shastri, President, Operations, Eugia Pharma, points out that if India could master the art of making quality generic medicines, why can’t we master the art of making quality filters? Especially as rubber stoppers and filters are still in short supply.
Long-term contracts are also a good practice, says Talwar and suggests that the pharma sector should have an Amazon-like marketplace, where members get better prices and delivery on products ranging from APIs, packaging materials etc. Common vendor audits are also a good way to share resources.
Adding his perspective from the operations side, Shastri narrated how resources like nitrogen cylinders, etc which were always taken for granted, suddenly reduced drastically during the pandemic as all gas storage cylinders were diverted to supply oxygen to hospitals. The result was a shortage of nitrogen cylinders, which are central for the production processes of many pharma products from filling injectables, etc. Similarly, isopropyl alcohol is generally abundantly available, but during the pandemic, all of it was diverted for making hand-sanitising solutions and it was in short supply for other uses. Shastri concludes, “Leveraging technology to anticipate unpredictable shortages, so that a plan B or C can be developed and deployed before a crisis, is the need of the industry.”
Learning from other sectors
Drawing on his experience in the aviation defence and auto sectors, Reddy of Viyash Life Sciences spoke about the need for similar vendor development programmes in the pharma sector. 2022 has been a year of great disruption for pharma supply chains, with end-to-end visibility, which, according to him, has improved the credibility of supply chain professionals as well.
But Reddy cautioned that there are still challenges and gaps in the pharma supply chain, which benefit pharma giants. Therefore, he posits that making a supply chain as fool-proof as possible, with all the uncertainties, calls for creativity from supply chain leaders.
“Building a proactive supply chain is today’s need and challenge. Today, the challenge of SCM leaders is to balance their time and technology, to form a good strategy to bring success and value to the company. Past supply chain systems were more stable, but today’s supply chains are more dynamic for a variety of reasons. Today’s supply chain should be owned by stakeholders across the organisation, not just the supply chain leaders, so that it is not a blame game,” says Reddy.
Vishnu Rayapeddi, Head, Supply Chain Management, Indian Immunologicals, spoke of how the pandemic proved that change is the only constant. Just as we got used to using masks, procurement teams now have weekly reviews. He also spoke of the hard learnings of the pandemic. Indian Immunologicals supplied the raw products for the Covaxin vaccine to Bharat Biotech in large quantities in a very short period of time. But, now, the company is left with huge stocks of consumables and some raw materials as demand dried up in March this year. “We were left with excess stocks of filters, but we could not pass them on to other companies who needed them. The lessons from the pandemic, like the formation of e-commerce platforms for finished goods, need to be taken forward.”
In retrospective, Chandan Shirbhayye, AVP and Head, Supply Chain, Aragen Life Sciences, believes that the silver lining in the COVID cloud was that the SCM community came closer. “Competitors shared the best practices and even collaborated on various instances to mitigate the impacts of the pandemic. We are still dependent in a big way on imports, and the need is to bring down dependency, and improve capability in India.”
While he highlighted that the SCM function is the data custodian of the organisation, he pointed out that there is an urgent need to create a solution for uniform material master data management which is the foundation to have effective technology implementation and data analytics. For instance, there are multiple technology solutions available, and there is a need for a solution to integrate and avoid creation of duplicate data. Avoiding duplicate Master Data creation is one basic requirement which needs immediate solution.
Shirbhayye also highlighted that India has huge potential in the pharma space, and the industry will have to take the lead and partner with the Government in ensuring that we convert this opportunity into economic growth. According to him, we need to continue to drive improvements in two areas which will help India to gain the logistics/supply chain leadership, globally.
Firstly, upgradation of infrastructure (power, logistics, connectivity, etc), including digital infrastructure across India to have uniform growth opportunities. Encouraging faster logistics both inland and outbound is the need of the hour to make Indian industry competitive with global players. And, secondly, Shirbhayye opines that we need simplification, rationalisation and integration of compliances among various statutory and regulatory bodies of states and ministries using the digital platform for seamless and transparent execution. His rationale is that many procedures can be simplified by better coordination among various statutory bodies.
Sudarshan Jain, Secretary General, Indian Pharmaceutical Alliance (IPA), highlighted that adversity brings the best in any situation. The pandemic brought uncertainty on both the demand and supply sides, which had never happened before in the world. Pre-pandemic, pharma companies set their manufacturing schedules based on quarterly demand forecasts from the sales and marketing teams, based on market trends. But the pandemic changed all that as one never knew which way the virus was going.
He summarised five key learnings from the pandemic (see box) and also quoted from IIM Ahmedabad Professor Tambe’s book, Age of the Pandemic, which makes the point that while the world learns from war history, we don’t learn from pandemics of the past. He highlighted that learnings from pandemics should be recorded and leveraged to strengthen pandemic prevention, preparedness and response for the future. His strong advice is that we have to learn from the pandemic and change our strategies as far as organisation dynamics and economics are concerned.
Tech as a lever
Technology solutions do exist and many companies like SAP are collaborating with pharma companies to scale up faster by expanding their solution platforms and business network for collaboration between various stakeholders. The SAP team gave examples of how the SAP Business Network platform is helping buyers connect, collaborate and transact with suppliers in a transparent and efficient manner. The SAP Business Network has already clocked $189 billion worth of annual transactions for life sciences industry by connecting 169 customers in the industry with more than that 300000 life sciences suppliers. These members are exchanging 9.5Mn+ documents (PO and Invoices) on the Network.
They also pointed out that the push for digitisation has to come from the top management. Secondly, adaptability and simplification of the tools should be from bottom up. They believe that this will help the sector prepare for upcoming unexpected pandemics. SAP Business Network, formerly known to millions of companies around the world as Ariba Network, makes it easy for buyers and suppliers to collaborate on transactions, strengthen their relationships, and discover new business opportunities. Buyers can automate the entire procurement process from source to settle, while controlling spending, finding new sources of savings, and building a healthy, ethical supply chain. In turn, suppliers can help buyers achieve their procurement transformation goals, collaborating in the cloud to boost customer satisfaction, simplify the sales cycle, and improve cash flow.
Policy push as a pivot
But even though many companies are already investing in such technologies, it will be a long an uphill task without the right policy push and a conducive ecosystem.
Industry leaders have concerns that with the slower than desired implementation of PLI schemes and other policy measures, pharma manufacturing in India might never be sustainable from a business ROI perspective. For instance, many companies investing in API manufacturing or fermentation plant infrastructure today under the PLI scheme might still find themselves undercut by and lagging Chinese products by the time their plants get into production mode.
The growing consensus is that policy makers should realise that the Indian pharma sector is one of the most competitive in the world. We have passed the age of price control and now the focus should be on quality, research. And companies investing in manufacturing infrastructure should get assurances of guaranteed local demand, like the Chinese government promoted manufacturers with a guarantee of local demand. The expanding list of medicines under the NLEM is sure to cause more heart burn, but this too can be balanced better.
The code word is collaboration between competitors, in a model called co-opetition, which evolved during the pandemic. A classic example is the fact that a consortia of big Indian pharma companies have collaborated to invest in DigiHealth Technologies, with the common goal of creating an IT backbone for a digital pharma supply chain and distribution network.
IPA’s Jain clarified that derisking pharma procurement practices did not mean making everything in India, following the Atmanirbhartha policy. This might not be economically feasible. It was about having the most cost-effective alternate suppliers for key products. So, a supplier in Europe could be an alternative to China. Similarly, on the fermentation front, China is the unsurpassed leader but that’s fine, because Indian pharma players will still find an alternative, till we have our own fermentation plants.
While these interactions show that most big pharma companies have taken the COVID lessons to heart and are proactively planning for disruptions like scarcity of key ingredients, consumables, etc, this transition remains a work in progress. In the coming months, Express Pharma, in partnership with IPA and SAP, will continue to meet more leaders to reflect how companies are transforming into more resilient corporations and to ensure this transition percolates into all segments of the sector.