1 The impact of Off Patents on the Supply Chain Mark James UKMANAGING DIRECTOR

Introduction 2 CELESIO GROUP (UK) Four customer focused channels operating across the Pharmaceutical supply chain Retail Pharmacy Wholesaling & Distribution Solutions Public Sector & Healthcare Services Pharmaco We directly employ over 20,000 employees We have revenues over £4billion pa We dispense over 150 million items a year We operate 19 distribution warehouses We deliver over 600 million packs of medicine in a safe, efficient & cost effective manner We focus on all dispensing points including hospitals, community pharmacies, dispensing practices, prisons, and Mental Health Trusts

The basic facts about the Off-Patent Cliff! Between 2009 and 2014 The UK market will lose ~46% of current protected brand value COZAAR CLEXANE SYMBICORT ARICEPT AMIAS ZYPREXA SERETIDE LIPITOR VIAGRA £272m£611m£1,353m£383m£136m £2.7BN lost sales to branded manufacturers & a huge windfall for Healthcare budgets

2003 x x500 4 The Polarisation of Pricing Price Range of Rx Products10% Leading to a polarisation of product types: Mass MarketSpecialist Low Price High Price

Branded Manufacturers – An evolving business model 5 Previous Blockbusters losing Patent Protection and Sales Value Off-patents can see sales value drop by up to 90% within days of launch Many manufacturers have reorganised around mature product ranges to maximise residual value Commercial success can depend on therapeutic equivalence Research Pipelines not producing replacement blockbusters New Product types New modes of Healthcare delivery Increasing emphasis on proving beneficial outcomes Focus on reducing supply chain leakage Focus on cost reduction per product

Generics – A business model under threat! 6 UK market damaged by global supply planning Oversupply & deregulation lead to prices below cost Different reimbursement models developing at country & regional level Focus on price not total supply chain cost Product range can be split into “exclusives” & “me toos” Exclusives provide profit and me toos provide market share Cross subsidies across a range to make the basket worthwhile Fluctuating demand leads to poor service levels

Current Distribution Models 7 Primary Care Distribution Primary care has utilised shared user distribution (wholesale) to improve efficiency of delivery and administration +600 manufacturers on one delivery Multiple deliveries at very low cost Profit per delivery more important than profit per product Reduced stock holding & stable demand planning Secondary Care Distribution Secondary care has experienced a mixed model Direct relationships with multiple suppliers Multiple delivery mechanisms Reduced wholesale & DTP provides cost and supply chain control but also fragmentation Appears to lack joined-up approach to Pharmaceutical distribution Internal logistics costs Administration costs Working Capital Costs Price VAT

Result of off-patents, current systems, and incentives 8 Fragmentation of supply and increased economic costs Lack of a co- ordinated supply chain Out of Stocks on basic lines Low cost medicines but potentially higher cost healthcare

The true focus for the supply chain A move from Product to Patient 9 Key areas of focus: PatientDataEconomic Value

Focus on Patient Standardise treatment for patients with same illness to provide clear understanding of outcomes – Defined care pathways should not be subject to national or regional differences – Design broader methods of delivery to the patient Understand the broader “final mile” options Integration of appropriate product and support service 10

Focus on Data Primary aim to manage healthcare costs must be reduced hospital admissions and disease prevention – Joined up data between primary & secondary care – Outcomes measurement – Patient management True transparency of total patient cost would highlight the right pharmaceutical intervention and point resources into consistency & quality 11

Focus on Economic Value What provides the greatest economic value from a pharmaceutical intervention Mass market requires shared user distribution & maybe shared manufacturing – Minimised transaction costs across the supply chain – Eg: Nestle & Mars Specialist requires most clinically effective distribution method – Distribution to Pharmacy – Direct to patient 12

Key Messages Off patents have continued the process of pricing polarisation across the supply chain Distribution models have traditionally provided one size fits all solutions based on bundled product portfolios New commercial pressures on costs & supply chain control are fragmenting distribution, increasing economic costs, & introducing fragility Fragmentation forces a focus onto product profitability and leads to unsustainable supply If supply chain focus moved from product to patient then more sustainable solutions could reduce healthcare costs Branded & Generic manufacturers both face significant challenges to their business models

14 Summary Polarisation leads to two core product distribution demands: Mass market = Minimise total transaction costs Specialist = Focus on Patient Outcome and the right final mile solution Serving Patients Best Integrate Primary & Secondary Care Move from Product to Patient