Pharmaceutical companies have historically been top-line focused. Due to a combination of patent law and block-buster drugs, they’ve been in a very strong position from a revenue standpoint (think Claratin, the little purple pill and the little blue pill). The model worked well for quite some time due to high volume, exclusivity and high prices - largely paid by insurance companies - so they haven’t felt the need to drive down costs like a typical manufacturing company.

But those glory days are over.

A recent Category Chatter podcast featured SpendMatters‘ Jason Busch interviewing Ariba Health Care sector expert Chris Merchant on how pharmaceutical companies are looking to low-cost country sourcing of Active Pharmaceutical Ingredients (API) from China as a cost cutting measure. Chris described pharmaceutical companies’ current dilemma - a situation with lots of generics coming online between 2006 and 2010 that could see as much a $50 billion in lost “Big Pharma” revenue - and how they’re cutting costs to cope.

Unfortunately, as the heparin disaster illustrated, looking abroad to source such important ingredients poses some serious risks to consumer safety, a company’s reputation and revenue.

So, in Chris’ experience, what have successful pharmaceutical companies done when sourcing API from China?

• Make a commitment - Investing substantial time, money and resources to put significant parts of the portfolio in a low-cost country ensures the support for necessary safety measures will be in place from the highest levels of the company.
• Put feet on the ground - It is critical to have local representation that understand business culture, context and how to get things done in China. Without it, you’ll be operating with a dangerous lack of visibility.
• Trust…but test - The goal is to build long term relationships with API suppliers. But although you want the relationship to evolve into one of mutual trust, you simply must make sure you know where all materials are coming from. So, as Chris said, you “still need to test backwards and forwards.”

Because pharmaceutical companies can’t simply rely on the FDA to do the work for them, they must take steps to ensure their API is safe. Their reputation, customers and revenues depend on it.

*** Stream the podcast here. Or right click the link and “Save Link As…” an mp3 to download the podcast to your computer.***

Justin Fogarty is Managing Editor of Supply Excellence. For any questions or feedback on the blog or its contributors, Justin can be reached at jfogarty[at]ariba.com.