What European pharmaceutical supply chains really look like?

Arete-Zoe – April 24 2016 

Globalization of the pharmaceutical industry profoundly affects supply chain complexity and functioning.

Geographical distribution of pharmaceutical manufacturing and main markets, and major shipping routes.

The map above shows major traffic routes, straits and chokepoints relevant to pharmaceutical industry shipping routes.  Any traffic from India to Western Europe has to pass through several straits and chokepoints: Bab el-Mandeb that connects Gulf of Aden and Red Sea, Suez Canal, and Gibraltar.

The most important passages and chokepoints in Pacific Asia are Strait of Malacca and Singapore Strait. Any cargo shipped from India to Western United States, from China to Europe, and between India and China has to pass these straits.

Consolidation and outsourcing are among the most important trends within the pharmaceutical industry that drive globalization of operations. The shipping industry follows the same trends: container ships have been increasing in size, whilst crews have been getting smaller. Operations increasingly rely on remote control and automation.

The distance between manufacturing sites and markets, as well as complexity of the entire operation, creates numerous vulnerabilities with potentially high impact for organizations and their customers.

Location of manufacturing centers and major markets determines which shipping routes are used, and which piracy hotspots are likely to become an issue. Supply chain disruptions caused by piracy on the high seas affect pharmaceuticals the same way as any other industry dependent on long-distance trade routes. The main losses result from the cost of security measures and escorts, increased cost of insurance, and circumventing piracy areas.

Pharmaceutical manufacturing is concentrated in four major regions: the U.S., Western Europe, India and China. The share of Asian economies is steadily increasing both in generics and in high value products. Due to increasing cost pressure and increased local demand, production is being relocated to emerging markets.

Comparing revenue is a common way of measuring geographical distribution of pharmaceutical manufacturing. The graph depicts revenue derived from the sale of all pharmaceutical active ingredients. This includes generics and original products, old conventional technologies as well as highly specialized production.

It is estimated that in 2011 the value of active pharmaceutical ingredients sold on global markets totaled around $107 Billion.

Two thirds of this volume was shared equally by North America and Europe. The remaining 26% came from Asia, specifically India and China, and 11% from all other countries.

The expectations are that by 2016 the share of Asian production will increase from the current one quarter to about a third, mainly at the expense of the U.S. and Western European share. Global annual spending on pharmaceuticals is set to reach almost $1.2 trillion in 2016.

Regions with very limited own production of pharmaceuticals include the entire African continent, South America with the exception of Brazil, and Russia.

Pharmaceutical quality and safety standards such as the FDA’s Process Analytical Technology (PAT) guidance, as well as Good Manufacturing Practice (GMP) set the framework for pharmaceutical manufacturing processes. Quality controls are getting more and more sophisticated.

Since 2005, the total volume of high-potency active pharmaceutical ingredients tripled. By 2016, all major producers are expected to increase their production of high-potency active pharmaceutical ingredients by more than 50% compared to 2009.

The graph shows that India and China together hold over 50% of U.S. drug master files. Israeli production can be attributed to its largest producer – TEVA. The remaining produce mostly comes from Europe.

With the implementation of the Generic Drug User Fee Act (GDUFA) in the U.S. and the Falsified Medicines Directive in Europe, the role of foreign produce in regulated markets has been better quantified due to compulsory registration.

In Europe, the requirement to register domestic and foreign manufacturing facilities was introduced by the Falsified Medicines Directive of 2011. As of 2013, the European Commission reported that 438 Chinese manufacturing sites and 496 Indian sites were supplying active pharmaceutical ingredients in the EU.

According to EMA, 80% of all active pharmaceutical ingredients used in Europe come from other countries. However, manufacturing and clinical trial (GMP and GCP) inspection capacity is limited.

15 years ago, India and China were emerging pharmaceutical markets supplying mostly low-cost active pharmaceutical ingredients to local customers. Today, these nations dominate the global bulk drug landscape, supplying wide range of products to regulated markets worldwide. Both countries are also a major source of counterfeit and substandard drugs.

Countries associated in the Organization for Islamic Cooperation have insufficient or no manufacturing capacities in the pharmaceutical industry. Local industry covers a tiny fraction of domestic pharmaceutical demand and the countries rely heavily on imports and medicinal aid.

Islamic countries face many challenges including the establishment of an efficient and effective health care system, shortage of medical staff and medicines. In the Middle East and North Africa, local production accounts for 45 % of consumption. Sub-Saharan Africa accounts for 25% of global burden of disease but only slightly over 1% of global health expenditures.

The region is a major market for counterfeit and substandard drugs produced in India and China.

Compliance with national regulations cannot replace holistic vulnerability assessment and risk management. No national regulator can ensure oversight of all corporate operations conducted around the globe. Compliance with national and international regulations is not enough in current globalized economy to ensure safe and secure function of pharmaceutical supply chain.

With increasing complexity of pharmaceutical supply chains, and limited enforcement capacity of national regulators, holistic management of vulnerabilities and risks is ever more important.