The evolution of the European Union has transformed logistics and supply chain strategies for most industries on the Continent. However, many of the benefits of borderless trade have eluded a few industries, especially pharmaceuticals.
A few requirements such as different labeling regulations are merely an inconvenience. The widely differing national health programs throughout Europe are far more challenging. France, for example, is very generous when it comes to paying for even the most expensive pharmaceuticals. Germany and England are less so. In some of the newer member countries, government subsidies are quite low. The level of subsidies in these countries directly affects demand, as well as the pricing. And when pricing differs from country to country where borders are no barrier, gray markets abound, thereby threatening the integrity of the supply chain as well as the products themselves. On the other hand, with more than 350 million very health-conscious residents, Europe is a market no pharmaceutical company can afford to ignore.
One such company that has met the challenge is Amgen, the Thousand Oaks, Calif.-based biotechnology company that manufactures human therapeutics based on naturally occurring protein molecules. In the U.S., it sells cutting-edge products for serious diseases and ailments ranging from rheumatoid arthritis to cancer.
But Amgen's growth has also been built on its ability to become a truly global company, and it has been increasing its sales worldwide for nearly 20 years. Global sales have reached $12.4bn. Today, around 20 percent of its sales are outside the U.S., and it projects that these international sales will continue to increase significantly.
Amgen began its international operations program in 1989. The company set up its commercial and financial headquarters in Switzerland to oversee regional sales and research operations. Initially, Amgen partnered with the Swiss pharmaceutical company Hoffmann La Roche to handle its distribution. But in 1998, as new products were developed and sales increased, Amgen launched its own European logistics center in Breda, in the southern end of the Netherlands. Distribution volume at the Breda ELC has grown annually by 30 percent to 50 percent ever since.
Worldwide, Amgen has doubled revenue in three years and tripled in the last four. In Europe, it has doubled revenue in the last two years, and quadrupled it in four years. No company in the S&P 500 has matched Amgen's revenue or EPS growth.
By any measure, Amgen's financial performance is near the top of its peer group of pharmaceutical companies.
Amgen sells four medicines in Europe: Neupogen (helps fight neutropenia in patients undergoing chemotherapy), Aranesp (helps to fight anemia in dialysis and oncology patients), Mimpara (bone disorder for patients with kidney disease) and Kineret (which treats rheumatoid arthritis).
While there are just four products, the different dosages, packaging and labeling stretch the SKUs to 670. A single dosage of some products can be well over $1,000 in cost.
Amgen's European distribution operations are very different from those in the U.S. where it ships in volume, mainly to wholesalers. In Europe, Amgen ships directly to customers, which may be hospitals, clinics, pharmacies or individual medical professionals and, in some cases, to wholesalers. Shipment sizes tend to be small, often just one unit of a medicine. Last year the Breda ELC shipped 20 million units in 120,000 shipments to 50,000 customers in the EU and EMEA.
All the products are highly sensitive to temperature, so Amgen has developed its own insulated temperature-controlled shipping boxes with ice packs that keep the product at the correct temperature for up to 110 hours, although most shipments arrive in less than 24 hours.
"We want to maintain complete control over our supply chain," says Pim van der Aar, Amgen Europe's director of business development, adding that its 24-hour-or-less service time is at least as good as the performance any 3PL could offer.
According to van der Aar, transportation connections are the primary reasons for locating the ELC in Breda. The 15,000-square-meter facility is within 20 miles of both the Port of Rotterdam and the Port of Antwerp, and within 60 miles of both Amsterdam Schiphol airport and Brussels airport. Until recently, inbound and outbound shipping have been entirely by airfreight and air express, but increased volumes and the reliability of refrigerated ocean transportation is allowing increased use of ocean container shipping.
DHL and UPS handle 90 percent of the outbound shipments with the remaining 10 percent going by special couriers or refrigerated transport companies. DHL has its European hub at the Brussels airport and the UPS European hub is located at the Cologne airport about 80 miles to the East.
"DHL is our primary carrier because its hub is so close and because it offers late cutoffs," says van der Aar. "For the large majority of the shipments we are assured of next-day delivery of every shipment we can process each day."
Europe's Multiple Markets
While the EU is becoming a more homogenized market for many consumer goods, that is not entirely the case with high-value pharmaceuticals. Each country in Europe has its own policies on what treatments are paid for or subsidized by national health services. France, for example, is a front runner when it comes to using advanced medicinal products so it has become Amgen's largest single European market. It receives 24 percent of all Amgen shipments from Breda.
The next four largest markets are in Germany (17 percent), the U.K. (10 percent), Spain (10 percent) and Italy (7 percent). The remaining shipments go to nearly 40 countries throughout Europe, the Middle East and Africa.
Because of the different national healthcare policies, pricing for products such as Amgen's therapeutics is country-specific and varies considerably all over the EU. Customers in countries where prices are low, such as Greece, buy the product and resell in countries where prices are higher, such as Germany. Once the product is in the parallel market channels it is out the hands of Amgen, and can easily be mishandled. This obviously is especially delicate for "cold chain" products.
"All pharmaceutical companies are trying to deal with this issue," says van der Aar. "It is not just about pricing, but making sure the customer receives the safest, highest quality product."
Production Growth Plans
Currently, most production is done in Puerto Rico. Volume quantities are shipped by KLM and Martinair Cargo through Schiphol Airport to Breda for value-added handling (labeling, packaging, device assembly, quality control/ release and distribution). While Amgen is investing in a new manufacturing plant in Puerto Rico, it is also building a $1bn production facility in Cork, Ireland, to supplement the Caribbean plant.
The Cork facility will provide new process development, bulk manufacturing and fill-and-finish facilities that will give the company capacity closer to the patients it serves in Europe. By 2010, Amgen expects to employ more than 1,100 people at its new Irish facility, which will produce products for the growing number of patients in Europe and other parts of the world who benefit from Amgen's vital medicines.
"Amgen is pleased to establish a site in Ireland as part of our ongoing global development and manufacturing expansion," said Fabrizio Bonanni, senior vice president of manufacturing. "As demand for our products grows in Europe, Amgen requires capacity closer to this important market."
The company considered several attractive sites in other countries, but chose Ireland due to its thriving biotechnology community, infrastructure to support biologics manufacturing and attractive business climate, according to Bonanni.
"Our new facilities in Cork will enhance our ability to deliver on Amgen's robust pipeline," says Bonnani, adding that Amgen expects to begin operating in Cork in 2009.
From a supply chain standpoint, the Irish plant is much closer to Holland and could replenish the Breda ELC with ocean container shipments by short sea.
"Having all production in Puerto Rico presents risks because of the potential for hurricanes and bad weather that can shut down production and air transportation," says van der Aar.
Even though the value-added at the ELC is limited to packaging, labeling and device assembly, Amgen needs a manufacturing license for the facility. The ELC is so critical to Amgen's operation that it has redundant capabilities there for fire protection, production, cold storage, air handling, electronics and IT.
A major part of the storage area in the ELC is refrigerated. About one quarter of the actual material handling is based on an automated storage and retrieval system that is linked to its warehouse management system. Actual order fulfillment and shipping room operations are manual.
The ELC operating strategy is very simple. It receives and maintains standard, unlabeled inventory and provides whatever labeling and packaging is needed to satisfy customer demand. These finishing requirements vary widely by country and customer, so the value-added at the ELC can be substantial. By postponing the finishing process as close as possible to the actual order, Amgen can maintain lower inventory levels of each product, react quickly to orders of any size and avoid stockouts.
The steps in the value-added operation at the Breda facility take product that has a generic label, then add a country cluster pack. Finally, a "blue box" label that includes warnings, pricing and barcodes is applied.
All processes at the ELC are attempting to move the fixation point for a particular unit of product closer to the end customer to keep inventory in a generic state for as long as possible. Because Amgen's value-added logistics strategy is based on postponement, it needs to have as much as possible standardized products and packaging that is accepted in the countries where the product is sold. Amgen has achieved this centralized registration for its products and packaging in the EU.
More Global Activity
For all pharmaceutical companies, the key to long-term success is research and development. Amgen is expanding its existing research and development operations worldwide. While most growth will take place in the organization's existing regional R&D sites-including San Francisco, Seattle and Cambridge, Mass., in the U.S., and Cambridge in the U.K.-Amgen also will add a development site in Uxbridge, U.K. Future expansion is planned in Japan, Australia, Canada and other locations.
"This significant, long-term investment in our global R&D infrastructure underscores the commitment of Amgen to be the world's best human therapeutics company," says Roger M. Perlmutter, executive vice president for research and development. "In particular, our growth in clinical development at Amgen San Francisco and Uxbridge, U.K., will provide the capability to deliver on the promise of our extraordinary pipeline."
Global growth is so important to Amgen that it has recently moved its European headquarters from Lucerne to Zug, Switzerland, and formed a new entity, Amgen International. The new international headquarters in Zug is the home of Amgen's international commercial operations outside of the United States, Canada and Japan. It will support Amgen's entrance to emerging markets in Central and Southeast Asia, Africa and Latin America.
The newly formed Amgen International oversees operations in Europe, Australia and the Middle East. Amgen expects that it soon will start up activities in Russia, Mexico and Brazil. By the end of the decade, Amgen anticipates expansion of its commercial activities into countries not yet covered in Eastern Europe, Central and Southeast Asia, Africa and Latin America. Rolf Hoffmann serves as senior vice president of Amgen's international operations and is now based in Zug.
"Amgen's choice of Zug as the headquarters for international commercial operations reflects the outstanding business environment Switzerland offers to biotechnology companies," says Hoffmann. "Switzerland is an ideal location from which to further expand Amgen's commercial operations into new markets. This will accelerate greater patient access to Amgen's innovative therapies."
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