Pharmaceutical and healthcare

Vertical industry brief

Production and design: Global Sales and Marketing department

IBS, ASW and IBS VIRTUAL ENTERPRISE are registered trademarks of IBS AB, in the European Union and in other countries. IBM, AS/400, iSeries, Lotus Notes, andWebSphere are registered trademarks of International Business Machines Corporation. All other trademarks or registered trademarks mentioned herein are the propertyof their respective holders. The information contained in this document is summary in nature, subject to change and intended for general information only. The details

pertaining to functionality and routines are based on IBS software, post release 5.50. For updates of this information, please contact your local IBS representative. © Copyright IBS 2003.

ContentIntroduction

Market situation and trends 4Pressures on total distribution margins

Mass market channels for OTC and wellness products

Growth of pharmacy chains

Pharmacists have more bargaining power

Consolidation vertically and horizontally

Profits from generics

Managing the supply chain

Implications on pharmaceutical distribution

IBS software - a competitive advantage 9

Tailored for the pharmaceutical industry 10

IntroductionThe global pharmaceutical distribution industry generated sales in excess

of USD 400b in 2002. Wholesale distributors occupy an essential niche

in the pharmaceutical supply chain. Some 2,000 companies develop,

market and distribute tens of thousands of different pharmaceutical

products to hospitals, pharmacies, and other healthcare institutions.

Pharmaceutical wholesalers are the lifeline within the pharmaceutical

industry, providing the continuity of supply and facilities for storage.

They also offer a range of supporting services, such as information

technology systems and product withdrawal notifications, which form

an essential part of the total healthcare package. These companies and

institutions all operate in an environment where speed and efficiency

may mean the difference between life and death.

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Market situation and trendsThe pharmaceutical industry is highly competitive, regulated and in apermanent state of change. Customers demand instant attention, whilesuppliers require comprehensive leading-edge services with regard totheir products. Regulatory authorities such as the U.S. Food and DrugAdministration require that the industry keep up-to-date with regulations,following them to the letter. Competitors are always inventing new waysto gain market share, while e-business presents new opportunities andchallenges. All the while the pressure to reduce prices and to shortenorder cycles is high. The pharmaceutical industry has both the financialstrength and the willingness to make the investment necessary to remainon the leading edge. However, the industry has a number of specificrequirements that are critical for achieving success in the distribution sector.

Pressures on total distribution marginsCustomers require outstanding service regardless of time and place.Information on products, prices and special offers is required to be availablethrough first-class information services. Constant availability of products,low prices, additional services and frequent deliveries is taken for granted.Pharmaceutical distributors need to achieve extraordinarily high customerservice levels in order to succeed

Suppliers also demand excellent services for their products. These servicesrange from taking over production tasks, marketing and national productcertifications to handling direct supplier orders, labelling and storingproducts and delivery to end users. Information is essential and suppliersexpect to receive daily product sales and stock balances online.

Healthcare providers are under constant pressure to keep within governmentcost guidelines. They turn to the pharmaceutical distributors to helpminimise their total procurement costs and to maintain contingency stocksof medical supplies and vaccines to help overcome medical emergencies.At the same time, distributors are expected to follow stringent and ever-changing regulations for product storage and supply chain lot control,and to adapt to new market regulations such as those controllingInternet pharmacies.

Companies constantly create new ideas to leverage their business overtheir competitors in the same marketplace. They will do everything possibleto attract new customers and to retain exclusive distribution or pricingagreements with suppliers. Services can be extended to include newproduct lines while implementing new pricing schemes or even offeringbetter financial incentives, such as extended credit, to customers.

Pharmaceutical distributors must remain vigilant to prevent margin erosionand losing market share.

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Pressure to:

• Maintain high customer service levels

• Provide product and price information

• Maintain low prices and constantavailability

• Handle production tasks

• Manage supplier inventory

• Ensure fast distribution times

• Provide constant information onsales

• Maintain costs of medicine withinguidelines

• Manage emergency stocks

• Adapt to new market regulations

• Stay ahead of the competition.

Mass market channels for OTC and wellness productsTraditional healthcare relies on the physician as the primary driving forcefor pharma-ceuticals. With the explosive growth of alternative medicines,such as natural products, health foods and vitamin supplements combinedwith Internet pharmacies, direct to consumer advertising, and the avail-ability of over-the-counter (OTC) drugs, consumers are now playing agreater role in decisions regarding their health. The result is a morevibrant healthcare environment where the consumer takes centre stage.

This trend has led to some retailers establishing wellness centres focusedon helping the consumer maintain good levels of health. As a result,pharmaceutical wholesalers and distributors are expected to carry aneven broader range of products including vitamins and natural products.Inventory levels increase and the already slim profit margins are threatened.Powerful logistics software is needed to manage the growing inventoriesin order to stay profitable.

Growth of pharmacy chains A current trend in a number of markets has been the establishment oflarge pharmacy chains. Most retail chains carry their own pharmacy-branded products. These products must be delivered in pre-determinedpackaging complete with labels. As these chains are large and operateacross large geographic areas, they can demand strict operating practicesand lower prices. Wholesalers and distributors see their value-addedrequirements increase as narrow margins reduce even further.

To combat margin erosion, wholesalers have begun acquiring pharmacychains. This creates the need for a back office system that is able tomaintain contact with each of the pharmacies that comprise the chain.

Pharmacists have more bargaining powerDistribution customers in the pharmaceutical industry range from individualdoctors running their own practices to large city hospitals and long-term care facilities. Operating budgets are tight, making the healthcareinstitutions very cost-conscious. At the same time, governments areunder pressure to improve healthcare services without tax increases. All parties expect pharmaceutical distributors to help reduce the totalprocurement costs of medical supplies despite their already pressed margins.

The price of drugs and medical supplies in the pharmaceutical industry isdirectly related to volume. Larger purchase volumes lead to lower prices.This phenomenon has led to small independent pharmacies bandingtogether and to hospitals combining their purchasing power through grouppurchasing organisations (GPOs) to take advantage of volume discounts.

The rise in GPOs has made it increasingly complex to manage contracts,rebates and charge-backs. Visibility and pricing traceability throughoutthe supply chain are prerequisites. This creates some very specific ITneeds for distributors who require thorough credit checks on individualclients and must handle charge-backs between manufacturers and buyersin order to maintain narrow margins.

Handling various pricing models such as contract pricing, multiple pricelists, sales promotions, annual rebates and discounts is crucial.

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Functionality to:

• Manage a growing product range

• Provide increasingly complex packaging

• Combat lower profit margins forthe distributors

• Allow back-office systems to commu-nicate with multiple companies

• Handle credit checks

• Enable charge-backs

• Handle various pricing models.

Profits from genericsA generic drug is a chemically equivalent, lower-cost version of a brand-name drug. The generic version becomes available when the brand-namedrug's patent protection expires. Generics contain the same activesubstance, comply with the same stringent rules of production andpharmacovigilance and show the same quality, safety and efficacy as theoriginal branded products.

As it is less expensive to make and sell generic drugs, these savings arereflected in lower prices. Unlike the manufacturers of brand-namedrugs, the makers of generics do not have to spend as much money onresearch and development, marketing and advertising. In most countries,generics are sold at 30-80 percent of the price of the original drug. Thishas led to exponential growth in the market for generics and created abattle for market share, leading to price erosion of the original brands.

Significant patent expirations in the pipeline over the next few yearsmeans that more and more companies will try to benefit from this trend.This is good news for wholesalers and distributors. They can earn largerprofits on generics than on brand-name medicines and still offer pricesthat are typically well below those of brand-name drugs.

Consolidation vertically and horizontallyReducing time-to-market for new products and services is critical withinthe pharmaceutical industry. Companies are forming global allianceswith research and development firms and growing through mergers andacquisitions to ensure faster product development cycles. In the 1990s,the world's top ten pharmaceutical players accounted for 28 percent ofthe global market. Just ten years later, we see an industry that is heavilyconsolidated both horizontally and vertically, with the top ten estimatedto own 55-60 percent of the market.

These conditions create challenges for companies to find more rapidand less expensive ways of global knowledge transfer, while at the sametime ensuring compliance with ever-changing government regulations.The immense costs involved in the research and development of newdrugs and medical treatments generate numerous complicated businesspartnerships and virtual partnerships. Other critical factors are errorminimisation (defects), strict warehousing conditions and the addedchallenges of incredibly large transaction volumes that are severelypressured by time constraints.

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Opportunities:

• Patent expirations over the horizon

• Larger profit margins on generics.

Critical factors include:

• Compliance with government regulations

• Error minimisation

• Strict warehousing conditions

• Large transaction volumes

• Time constraints.

Managing the supply chainThe continuity of supply and guaranteed availability of medicines arecrucial to the unique dynamics of the pharmaceutical market. Classicrules of supply and demand only apply in a limited sense to pharmaceu-ticals, as it is doctors and physicians, through prescribing choices, whoare the key influencers of demand. Moreover, the classic model of thesupply chain does not apply to the pharmaceutical industry. Physicianscan procure their supplies from pharmacies, wholesalers, or suppliers,leading to a complex supply chain model.

While firmly established in other industries, the use of third-party logistics(3PL) services for distribution and product tracking is a relatively newtrend in the pharmaceutical industry. It offers companies an attractiveway of reducing their supply chain costs while focusing on their corebusiness. These logistics providers help wholesalers reduce capital spendingby eliminating such assets as warehouses and delivery vehicles, reducingworking capital tied to inventory, saving on personnel costs and complyingwith government regulations. Logistics specialists also typically takeownership of the inventory to further finance their customers' activities.

The significance of speedy availability of drugs and medical supplies hasa heightened importance in today's world, where events such as naturaldisasters, bio-terrorism attacks or sudden viral disease outbreaks requirea rapid response. Pharmaceutical companies must maintain stocks tokeep their order and delivery cycle times as low as possible. Furthermore,efficient cycle times can help boost sales, as producers are able torespond to market trends more quickly, reducing stock-out costs. Suchservices demand the use of sophisticated information systems to optimiseplanning and the flow of information through the supply chain.

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Distributors must:

• Keep order and delivery cycle timesshort

• Comply with government regulations

• Respond rapidly to emergency situations.

With IBS' high-performingsoftware and industry-specificcompetence we see an oppor-tunity to take the advantageover our competitors.

Roger Cavillier, General Manager, Alloga

Implications on pharmaceutical distributionThe pharmaceutical market is in a constant state of change and thedemand to continuously adapt expansive supporting systems is extreme.As companies grow through mergers, acquisitions and alliances, itbecomes increasingly important to have a system that is easy to main-tain and integrate - across multiple facilities, locations, platforms,regions and languages.

Pharmaceutical distribution places a heavy burden on the operationaland logistics resources of any company. Industry-specific regulations andinstitutional requirements - together with forecasting, procurement, cus-tomer service, picking, dispatch and physical inventory - all require spe-cial treatment. Exceptionally powerful software is required to handle theextremely large transaction volumes created in day-to-day business.These are all important factors for any pharmaceutical company to con-sider when looking for a software solution which will provide a competi-tive advantage. This solution must provide the ability to meet individualcustomer's expectations and service levels while protecting and optimis-ing profits.

Many wholesale distribution companies are experiencing difficult timeswhen confronted with low profit margins, increased government regula-tion, pressure from pricing controls and fierce competition. The increas-ing use of the Internet to access new and existing channel partners andchanges in pharmaceutical product procurement has left the industry ina state of flux. A change is required in the approach taken for pharma-ceutical product distribution.

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IBS software - a competitive advantageThe pharmaceutical industry is one of IBS' priority target markets. Thecompany works with major pharmaceutical companies to distributesome of the most carefully controlled substances in the world.

Based on ASW - IBS' integrated business software solution - IBS PHARMA isdesigned to address the critical requirements of pharmaceutical distribution.The software solution supports the tracking and distribution of drugs(narcotics), biotechnology products, medical supplies and extremelyhazardous materials. Uncompromising lot control and quality assurancemake the pharmaceutical industry process model one of the mostdemanding challenges within distribution and supply chain management.

ASW is a world-leading business software suite for distribution and supplychain management. It is designed to fulfil the requirements of world-wide business-to-business trading. According to studies conducted byAMR Research and Frost & Sullivan in 2001, IBS is the market leader forsupply chain execution software. IBS is also ranked among the top threeglobally active SCM suppliers.

The industry focus puts IBS at the forefront of fully integrated productsthat are tailored to fit the needs of the industry - pharmaceutical appli-cations designed to address critical issues in order to achieve excellentbusiness performance. IBS PHARMA will enable distributors to:

• Handle high order volumes during peak hours

• Achieve improved control of inventory

• Abide by the rules and regulations connected with pharmaceutical distribution

• Achieve required service levels

• Achieve required quality levels

• Increase profit margins.

IBS provides the pharmaceutical distribution sector with a completesolution spanning hardware, software and service. The company cantake full responsibility for the entire customer installation as a one-stop-shop supplier. The systems and services have a high level of security andare extremely reliable.

ASW is designed to increase return on investment, efficiency, profitability,productivity and to keep expenses down. At the same time, it enhancescustomer service and growth. IBS industry experts and the GlobalCompetence Centre in Germany provide an unmatched level of expertisefor the pharmaceutical distribution industry. Our experts work closelywith customers to fully understand the business processes, anticipatefuture requirements and to configure the best solutions.

IBS' service portfolio offers a broad range of professional services,including the mapping of business processes, technical know-howand implementation, training, project management and pure businessconsulting. The services are characterised by quality and competence.IBS' consultants have profound knowledge about the customers' businessoperations and provide continuous service after the implementation.This long-term partnership generates major benefits for our customersin terms of time and money and is one of the reasons why IBS repeatedlyranks very high in customer satisfaction ratings.

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IBS solution for pharmaceuticaldistribution

Solution:Software: ASW 5.00+

Modules:

• ASW BUSINESS PARTNER REQUEST

• ASW DISTRIBUTION

• ASW INVENTORY CONTROL

• ASW MULTI DISTRIBUTION CENTRE

• ASW NETSTORE

• ASW WAREHOUSE MANAGEMENT

• IBS PHARMA

Hardware: IBM iSeries eServers

Our goal is to base ourdistribution, between manu-facturing and retail sales, onthe most reliable foundationpossible.

Prof. Michel Troyon, CIO and Board Member, Galenica AG

Tailored for thepharmaceutical industryIBS PHARMA - IBS' integrated IT solution - is tailored for the pharmaceuticaldistribution industry and addresses the needs of wholesalers, pre-whole-salers, manufacturers and logistics and warehousing companies.

IBS PHARMA has a +90 percent functional product fit for the pharmaceuticaldistribution industry. The solution focuses on all key areas of pharma-ceutical distribution: sales order management, e-business, inventorycontrol, procurement, warehousing, logistics, financials and businessintelligence and control. Integrated tools for business analysis can enableyou to maximise profits and control critical success factors such as:

• Periodical improvements in Key Performance Indicators (KPI) and subsequent ROI

• Fill rates and on-time deliveries

• Business partner performance overviews based on item and customer profitability

• Operational costs

• Procurement

• Optimised supply chains and collaboration

• Automated business processes

• Automated decision support.

The IT solution combines the use of secure, reliable servers, operationalmodels and pharmaceutical application software. IBS PHARMA providesup-to-the minute status of all processes in the supply chain processing inexcess of 2.0 million order lines per hour with enquiry response time of0.04 seconds.

With advanced customer-oriented functionality that focuses on perform-ance and service, IBS PHARMA is built to address your needs. The softwaresolution has been designed to address a number of issues arising fromthe highly specific needs of the pharmaceutical distribution industry andfully supports:

Enhanced sales features

• Call and contact planning - Call plans define daily work schedulesfor your sales operatives and provide such information as time to call,customer information, contact names and telephone numbers. Salesorders can be placed directly from the contact plan. You can gain aunique advantage over your competitors.

• Electronic order entry - For your company to process a large volumeof daily orders, it may be necessary to receive orders electronically. IBSPHARMA allows orders to be received via EDI, XML, web services, directcommunication lines, PC or PDA devices. A stock availability request isperformed automatically, and an immediate availability response isreturned together with shipping details and timing. Electronic com-munication can shorten lead-times and result in increased customersatisfaction, as errors are minimised.

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We found in IBS the bestpartnership to support and

develop our business withsecurity, commitment, function-ality and lower costs.

Celso Pereira, Financial Manager, Audifar

• Sales restrictions - In accordance with varying legal requirements,you may not be allowed to sell all items to all customers. You must beable to limit certain items, such as narcotics, to specific customergroups. Furthermore, functionality for dangerous goods handling andexception item storage is imperative. This ensures security and accuracythroughout the supply chain. Functionality also includes dangerousgoods handling and exception item storage.

• Order line pricing - Pricing in the pharmaceutical distribution industryneeds to be flexible, allowing for various pricing models. Your soft-ware solution must be able to handle contract pricing, multiple pricelists, sales promotions, rebates and discounting. Automatic order linepricing results in faster invoicing, improved accuracy and reduced daysoutstanding.

• Phonetic searching - A source of costly errors is the mispronunciationand consequent misspelling of pharmacological terms, productsnames and medical expressions. Phonetic correction allows you to easilylook up the correct product name. For example, if you enter the letter'F', the system will automatically include 'PH' in the search functionand correct the product name and description spelling in the orderline. This 'fuzzy matching' reduces human error and saves valuabletime.

• Returns handling - Returns must be handled quickly and efficiently.A range of return codes can be configured to reflect any scenario -from wrong delivery to damaged goods. IBS PHARMA allows you towork with mandatory return reason codes at the order line level toenhance the quality control process and avoid re-occurring defects.

• Wake-up call - Sometimes it is necessary to remind your customersthat it is time to place a sales order to ensure an afternoon delivery.IBS PHARMA can inititiate an automatic wake-up call to remind customersto place sales orders before the route plan is started. This can result inincreased customer satisfaction and shorter lead-times.

• Alert capability - IBS PHARMA allows you to configure any number ofevents, based on an infinite combination of parameters, to automaticallymonitor your entire system and create alerts that notify you of adverseoccurrences. Business partner requests can be monitored by the system'salert management tools, resulting in immediate messaging of exceptionbased events to your staff. If a change in an order is observed by thesystem, immediate notification is possible by email, system message,mobile phone text message, or other means. This is helpful for lateorders, quantity differences, price differences, re-planning notification,or anything affecting the customer's order. You can rest assured thatyour processes are always running at optimum performance, and thataction can be taken to avoid costly delays and errors.

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Enhanced procurement features

• Purchase order creation - Due to the sheer number of products thatare held at multiple distribution centres, and the need to achieve ahigh customer service level, automating procurement is crucial. TheIBS solution provides several options to simplify the order creationprocedure. These options can enable you to reduce errors associatedwith data entry and speed up delivery times. These alternativesinclude:

- Manual purchase order entry

- Copy an existing purchase order

- Create a purchase order from a requisition

- Create a purchase order from a supplier quotation

- Create a purchase order from purchase suggestion

- Automatic creation of purchase order from sales orders (back to back orders).

• Emergency procurement - When the system detects a suddenchange in customer buying patterns, an emergency procurement sug-gestion is triggered outside of the usual purchase plans. This reducesthe risk of unexpected stock-out scenarios for you.

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Enhanced logistics and distribution features

• Consolidated pick and ship - Picking in a warehouse must be quickand efficient, and it is vital to consolidate morning orders. In practice,this means that a collection of individual picking lists is groupedtogether under one consolidation number. Multiple orders from eachof your customers also require consolidation so that all products arepicked at the same time. In order to facilitate the loading of vans, IBSPHARMA includes information about total weight and volume, routeand preferred vehicle on the pick lists.

• Interface with warehouse automation systems - Warehouses aretypically large and may contain in excess of 100,000 different prod-ucts. Most large distribution centres will have automated picking sys-tems, such as Peem or Knapp, to cope with the large order volumesand the extensive range of products. The system interfaces with thesewarehouse automation systems and supports such functions as 'con-tainer routing', 'send pick instructions' and 'receive pick confirmation'.Interfacing results in shorter lead-times, reduced delivery errors and,ultimately, increased customer satisfaction.

• Narcotics control - Most countries have legal restrictions on the han-dling of narcotics. You are expected to report storage, stock move-ments, transportation, procurement and sales to the appropriate legalauthority. IBS PHARMA reports all of this information for you, in the for-mat required by the local authority in question. You can spend moretime concentrating on your core business.

• Route planning - A route is defined to cover a sequence of cus-tomers in a specific region where products are to be delivered. Routeplanning enhances the delivery process and lessens the delivery timeto the customer, resulting in increased customer satisfaction.

Furthermore, all applications are multi-language, multi-currency andmulti-company and, where appropriate, equipped to handle all majorinternational and national regulations for VAT, taxes and reporting.These are essential functionalities for any company operating in thepharmaceutical distribution industry.

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We expect that the IBSsystem will generate verysubstantial annual savings.It's a win-win situation.'

Phillippe Milliet, Board Member, Galenica AG

Modular software solutionYou can select the software components you need from a broad rangeof fully integrated options. IBS software is designed to incorporate newrelease upgrades and functional enhancements with the least possibleimpact on operation time and costs. You can step up to new e-businessand supply chain opportunities at a pace that suits your company.

The flexible nature of IBS PHARMA, and its ease of configuration, enablesit to encompass new business models as they arise. This ease of configu-ration allows for a fast and successful implementation. Your operationswill function at an optimum level very quickly.

IBS has a unique position with its software solution for the pharmaceuti-cal distribution market and will continue the research and developmentto keep ahead of the competition. With a global network of subsidiariesand business partners - software and services available in local lan-guages - IBS offers you fast, easy-to-use and highly cost-efficient sys-tems that help to achieve success in the rapidly changing pharmaceuticalmarket.

IBS has the right software for you, and the experience of world-wide installations. Are you interested in finding out more?

Contact IBS today - pharma@ibs.net or visit www.ibs.net

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IBS corporate headquarters: +46-8-627 2300 • pharma@ibs.net • www.ibs.net

IBS is a world leading provider of supply chain management solutions for distribution, demand-driven manufacturing,financials and business intelligence. IBS delivers measurable value through software solutions, services, hardware,outsourcing and financing. IBS offers industry solutions for pharmaceuticals, healthcare products and medicalequipment with Alloga, Amerisource Bergen, Clarins, Galexis and Oriola among its 5,000 customers in 40 countries.