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? 49% of off- contract claims for less than £50 19% of off- contract claims for less than £10 Average cost to a supplier of managing the payment of a claim is £43 Wave VIIIB tender showed only one or fewer bids for hundreds of lines Anecdotally, we hear of increasing concern about inability to supply Evidence of lack of communication & understanding between supplier and hospital

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 consolidated demand reduced its stock holding levels  Suppliers have [typically] merged rationalised product ranges rationalised organisation of manufacturing capacity optimised utilisation of manufacturing capacity and supply chain performance When supply failure occurs impact is potentially greater 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 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 PriceList 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 Companies build in a contingency Raw material availability Manufacturing time Packing time Components Test and Release Availability of labour Decrease  Reduction in Recovery of Overhead  Cost of Raw materials increase  Batch sizes may not be achieved Leads to cost increase 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  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 Within Global Supply Chain, their demand massively affects EU supply One company’s current back-order position is €160M  France – ‘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, private health care insurance funds take most of volume Significant penalty clauses Range is important ‘Bundling’ is common  NO/DK 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 – tender is for one year for XX packs More than 150 tenders per year. Growing generic market  Ireland 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 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 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 90 hospitals 5 purchase groups (20% of market) Negotiations start June to November for Jan 1 st start Annual arrangements Hospitals – 90% verbal propositions with gentleman's agreements  Sweden 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

Reasons for failure to supply: mid contract

Reasons for failure to supply: start of contract

Differences start v mid contract Higher demand Manufacturing Regulatory Uneconomic 34% 22% 12% 0%

Products that companies did not tender for (again)  20 products that companies had tendered for in the past but decided not to again  Reasons for this included: 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  A ‘one size fits all’ tendering system is not adequate For some categories of products, a tender system is proving counter- productive and may require a different form of procurement  The criteria for award of contracts should take into account ability to supply (Swedish model noted) 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 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

Critical Speciality Commodity Commitment to purchase? Tender by quarters? Open market? Possible future thinking Risk assessment criteria  Patient safety critical  Degree of use in primary care too  Number of suppliers  Volumes  Difficulty of manufacture  Shelf life  API supply capacity  Availability of alternatives Categorised products 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