Supplier Diversity in Pharmaceutical R&D

Abstract / Business Case Procurement decisions are no longer limited to cost savings, quality and time; sustainability is the new addition to procurement decision making. Risks arising from environmental and social factors, compliance, value creation and external demand are driving sustainable procurement. Supplier Diversity, an aspect that impacts the sustainability of procurement, has gained much importance today. This whitepaper attempts a roadmap to integrate supplier diversity into Pharma R&D supply chains. Introduction Pharmaceutical industry is reeling under pressure from dying pipelines and revenue loss from patent cliffs. There has been an increase in mergers and acquisitions, joint ventures and in-licensing. Outsourcing and externalization of services is also increasing. Cost effectiveness is of utmost importance. In this scenario, cost efficiencies are of paramount importance. Procurement is in forefront, driving cost effectiveness in external collaborations. Diversity groups include minority groups, women, LGBT, physically challenged, veteran, war-disabled veteran, small business entities, etc. In the USA, minority groups include African Americans, Hispanics, Asian, Native American, etc. In Australia, aboriginals are also considered minorities. Hence, minority status is determined by the historical participation of a particular community in business. Advantages of Sourcing from Diverse Suppliers The advantages of diverse supplier engagements are many; they range from corporate social responsibility, tax benefits, sourcing innovation, agile supply chain, and so on. Corporate Social Responsibility: Reasons for Supplier Diversity Program It is the right thing to do Federal Reporting Regulations Customers are Diverse 61.1% 59.8% 76.9% The R&D supplier landscape is very dynamic with considerable consolidation; the landscape is replete with integrated service providers that provide end-to-end services as well as specialized service providers catering to niche services. Off late, there is an increase in collaboration with niche or specialized service providers. This whitepaper focusses on one such class of niche service providers Diverse Suppliers. Diverse Suppliers To drive more suppler competition Diverse Suppliers live where we operate and are our potential customers To get access to innovation To reduce supply risk Law requires us to do it Others 41.9% 41.5% 35.5% 32.5% 24.4% 8.1% Diverse suppliers are those business entities that are certified by a third party at least 51% owned, controlled and operated by diversity groups. Source: ISM Supplier Diversity Survey - 2011 2 Copyright Beroe Inc, 2015. All Rights Reserved

Procurement team which manages supplier diversity programs in most organizations is also aimed at meeting goals within the organization for corporate social responsibility. This is prevalent in countries that do not have any legislature that mandates engagement with diverse groups. Pharmaceutical industry on an average spends ~10-20% of its externalized spend with diverse suppliers. Tax Credits: Tax reductions or credits that can be achieved through diverse supplier engagements can range from 10% to 40%. Further, there are special tax credits for R&D and innovative small business entities, in many countries. For example, in France this tax credit is ~30% with additional 5% for special cases. Agile Supply Chain: Engagement with diverse suppliers can bring in greater flexibility and agility in supply chains. Most diverse suppliers are small business entities that can respond to a request faster. Further, the decision making in these organizations is quicker and problem solving. Challenges in Diverse Supplier Engagements Diverse service provider engagements have its own set of challenges such as type of diverse supplier chosen, scale or scope of services, quality and cost of services. Which type of diverse supplier to choose? Diverse suppliers include minority groups, women, veteran, physically challenged, etc. The challenge is in identifying which type of diverse supplier to source. Mitigation can be achieved through proactively updating diverse service provider database alongside the registered diverse suppliers. Scope or Scale of Service Offering One of the biggest challenge that procurement faces in diverse supplier engagements, is identifying a service provider that can meet the demand scope of the project outsourced. There are few services, wherein the diverse suppliers are very small in size. In this scenario, two choices emerge based on whether the requirement is urgent or for near future; investing with a diverse service provider that has a network partner or ready to financially invest with a diverse service provider to scale-up. Problem Statement: A clinical trial is set to take place across the USA and UK. The requirement is to identify and engage with a diverse service provider for patient recruitment services. Initial market scan shows multiple service providers having presence in one of the two countries: Look at urgency of the request, based on these two scenarios. Scenario 1: Requirement is immediate Look for network partnerships among the identified service providers. These network partnerships are common among diverse suppliers as it offers an opportunity to increase their scope/ scale of service offerings. Scenario 2: Requirement is for near future Identify a quality diverse supplier and invest with them to scale up in other geography. Result: Choose for strategic relationships rather than tactical engagements. With diverse suppliers are beneficial. Financial investments Today, diverse suppliers are actively participating in network partnerships to enhance their service capabilities, capacities and geographic footprint. This is also facilitated by third parties such as non-profit entities, certifying bodies, etc. As a result, large pharma buyers are showing interest in engaging with such entities. Therefore challenges in terms of scope and scale can be mitigated through proactive network partnerships among diverse suppliers. As a buyer, you can invest in your diverse supplier, help them scale-up and grow. Quality of services Issues regarding quality of services, arising from lack of good governance structure, less visibility in supply chain, etc., are most common challenges in engagement with diverse suppliers. The mitigation of this challenge is a long arduous process. It involves sharing of information, best practices, case studies, active mentoring and training of diverse suppliers. 3 Copyright Beroe Inc, 2015. All Rights Reserved

Non-Clinical Services Contract Labs Drug Safety/PV Biostatisics Clinical Staffing Regulatory & Audit Services Data Management Clinical Trial Management Diverse Suppliers (%) Supplier Diversity in Pharmaceutical R&D Ten years ago. What Spend Categories? A large pharma engaged with a diverse supplier for IT related services. At that time, the supplier was facing issues in terms of quality and sustainability. In fact, most of their business came from one client. However, through the mentorship of the large pharma, the diverse supplier has grown in size, and added the service lines. Today, they cater to multiple Fortune 1000 clients with diversified service offerings and most importantly have a better visibility in the supply chain. 12% 12% 8% 4% 5% 6% 15% 20% In fact, today, several large pharma have dedicated mentoring and training programs for their diverse service providers. So be it challenges arising from quality, governance or decision making, mitigation strategies that include - better communication, networking, sharing of knowledge in process development, best practices or experiences. This mutual sharing of information can usher in better diverse supplier engagements. Which Geographies? Diverse groups are present and recognized worldwide however; few countries have legislation and policies that promote them. Apart from the USA, Australia and Canada that have legislative policies to promote minority and women owned enterprises; South Africa also has similar broad based black economic empowerment act to promote minority or formerly underprivileged groups for African tribes, colored and Indians. Over 100 diverse suppliers analyzed in pharmaceutical R&D services, ~20% are associated with clinical trial management services, ~ 15% with clinical data management services, ~12% with Clinical staffing services and regulatory and audit services. Hence, large pharmaceuticals can consider engaging with diverse service providers for clinical trial management, data management services and clinical staffing services alongside other services like IRB services, PV, Contract lab services etc. How to access Diverse Suppliers? There are several hundreds of ways to access diverse suppliers; this whitepaper focusses on few prevalent methods 1. Creation of diverse supplier database 2. Independent Sourcing Consultancies 3. Advertise in publications that appeal to diverse suppliers 4. Networking Events, Workshops and Conferences 5. Consortiums Europe through the Rome Act believes in equality to all. However in particular they have R&D Tax Credits to innovative companies. As mentioned earlier, France provisions a 30% with additional 5% R&D tax credits. Therefore, pharma in the USA, Canada and Australia that operate in highly penetrated spend pools should leverage the availability of diverse suppliers. 1. Creation of diverse supplier database Sponsors can build proprietary database of diverse suppliers by the pharma sponsor and can create their own database, by promoting diverse supplier to register in the database. The suppliers would be requested to submit their certification by third parties along with service capabilities and capacities. These entries are then evaluated and added to procurement department supplier repository. 4 Copyright Beroe Inc, 2015. All Rights Reserved

2. Independent Sourcing Consultancies Herein, the creation and curating of database of diverse suppliers is carried out by a third party consultants The sponsor pays an annual fee to access this database. There are 2 types of sourcing consultancies. The first type they just confirm the diversity status of registered companies. Here the large pharma sponsor is required to carry out evaluations regarding service capabilities and capabilities. The second type of consultancies, carry out Auditing and benchmarking services. 5. Consortiums Sponsors can also aid diverse suppliers and form consortiums. These consortiums help in better networking among diverse service providers. Diversity alliance for Science This is a non-profit organization that is dedicated to diversity suppliers in Life sciences, with a goal to train, mentor and develop diverse suppliers, It also aims at fostering relationships with corporate, academic and governmental entities. Several large pharma are a part of this organization such as Roche, Pfizer, GSK, Novartis, Sanofi, J&J, Merck, BMS, Takeda, etc. The key to better access to diverse suppliers lies in networking and willingness to invest with them, financially and sharing knowledge. 3. Advertise in publications that appeal to diverse suppliers Sponsors can advertise in publications that appeal to diverse suppliers. There are many magazines that cater to diverse communities, newsletters of certifying agencies, diversity communities, etc. How to access Diverse Suppliers? The suppliers can be engaged as tier 1 suppliers wherein the buyer directly engages with the supplier for provision of products or services. Diversity suppliers can be subcontractors for non-diverse tier 1 suppliers. In this case, the diverse supplier becomes tier2 supplier for the buyer. Some popular magazines are Diversity 2000 Diversity Inc Hispanic Business.com ISM MBE magazine NMSDC Vetrepreneur WBENC WEUSA 4. Networking Events, Workshops and Conferences These include community meetings that are organized by diversity organizations, non-profits and even certifying agencies that help in networking between sponsors and service providers. These networking events also provide platforms for exchanging best practices, addressing concerns and challenges that may arise from engagements with diverse suppliers The engagements with diverse suppliers are reported on quarterly or annual basis. The tier 1 diverse supplier engagement reporting is quite simple, the large pharma sponsor must track spend with diverse supplier. 5 Copyright Beroe Inc, 2015. All Rights Reserved

However, Tier 2 reporting is a little complicated as it involves tier 1 suppliers, tier 1 suppliers must identify the spend subcontracted to diverse supplier, for a large pharma sponsor s projects/business. These tier 1 spend data are consolidated and reported by large pharma as tier 2 spend Large pharma are increasing emphasis in tier 2 engagements. Notably, tier 2 engagements with diverse suppliers are becoming a part of master service contracts. Recently, a large pharma raised the bar for their tier 1 supplier for diverse supplier engagements; they challenged their tier 1 suppliers to increase the tier 2 diverse supplier spend by 10%. Tier 1 versus Tier 2 Engagements The diverse supplier engagements both tier 1 and tier 2 are relevant to procurement of pharmaceutical R&D services. The choice between the two, depends on three parameters - the outsourcing rate, maturity of outsourced spend categories and the number of service providers engaged. Feasibility of diverse supplier engagement of few spend categories are discussed below. Central Laboratory Services is a spend category, that is completely outsourced. The outsourcing maturity is high. The outsourced spend is consolidated with 1-3 service providers. In this scenario, a tier 1 engagement with diverse service providers is not feasible. However, diverse service providers can be a part of this spend category through tier 2 engagements. A top 10 large pharma, utilises ~USD 0.5 million of its laboratory consumable spend, to procure columns for chromatography from a diverse service provider. Clinical data management services, clinical trial management services are similar to central laboratory services in terms of outsourcing maturity, and number of service providers engaged. Preclinical and non-clinical spend categories are at the other end of the spectrum. The outsourcing penetrations of these spend categories ranges from 25-30% and outsourcing maturity is medium to low. Further the number of service providers engaged ranges from 10-50. In this situation, both tier 1 and tier 2 diverse service provider engagements are feasible. However, tier 2 engagements would bring in more complexities in reporting. For example there are 15 tier 1 suppliers, who in turn engage with 5 diverse suppliers each. Spend reporting will include 15 tier1 suppliers and 75 tier 2 suppliers. This gets further complicated when tier 1 don t track the tier 2 spend directly. Thus, tier 2 diverse supplier engagements offer a strategic opportunity to large pharma in spend categories that are highly outsourced; especially in those categories that are externalized to a few strategic partners such as central laboratory services, clinical data management services, etc. While tier1 diverse supplier engagements are preferable in services where multiple service providers are engaged. 6 Copyright Beroe Inc, 2015. All Rights Reserved

Industry Speak/Acknowledgement Consultant: To ensure a successful relationship with diverse supplier, communication plays key role. Furthermore, investing with diverse supplier in terms of knowledge, know-how and capital. Consultant: Engagement with a diverse supplier can foster stronger relationships with suppliers, bring in supply chain agility, spread supply chain risks and at the same time meeting the internal requirements 7 Copyright Beroe Inc, 2015. All Rights Reserved

Metadata Industry to be impacted (Highlight the industry to be impacted) Pharmaceutical Food, Beverage & Tobacco Metal, Mining & Minerals Chemicals Oil & Gas Personal Products Bank & Financial Services Hi-tech Domain to be impacted Preclinical Focus Area (Highlight the Focus Area) Sourcing Opportunity Supplier Intelligence Technology Substitute Opportunity Supply chain Risk Input Cost Price Outlook Sustainability Keywords Used Supplier Diversity. References 8 Copyright Beroe Inc, 2015. All Rights Reserved

About the Author Meenakshi L Lead Analyst Meenakshi L is a Lead Analyst with Beroe Inc., a global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. Meenakshi specializes in tracking various research biology services. She has worked on multiple projects for many Fortune 500 clients involving categories such as drug discovery biology services, in vitro assay services, biomarker services, target identification, deconvolution and validation services. Meenakshi earned her degree in Genetics (Masters) from the Osmania University, Hyderabad. Disclaimer: Strictly no photocopying or redistribution is allowed without prior written consent from Beroe Inc. The information contained in this publication was derived from carefully selected sources. Any opinions expressed reflect the current judgment of the author and are subject to change without notice. Beroe Inc accepts no responsibility for any liability arising from use of this document or its contents. For more information, please contact: info@beroe-inc.com. 9 Copyright Beroe Inc, 2015. All Rights Reserved