Transforming Global Procurement a Key Goal for Teva in 2014

By Patricia Van Arnum - DCAT Editorial Director

March 4, 2014

Facing a need to realize $2.0 billion in cost savings, Teva Pharmaceutical Industries Ltd. turns to Procurement to contribute to that goal as the company begins the process to organize its Global Procurement function.

For pharmaceutical companies facing increased cost pressures, Procurement plays an important role in realizing strategic goals, including cost-reduction objectives. Such is the case for Teva Pharmaceutical Industries Ltd., which announced in October 2013, that it is accelerating a plan to realize cost-savings of $2.0 billion by 2017 (1). The company estimates that $1.0 billion, or 50% of the annual cost savings, will be realized by the end of 2014, and 70% by the end of 2015. The savings will come from various sources, including a reduction in the company's cost of goods with Procurement contributing a substantial percentage of that goal (1). The effort is part of the company's Reshape initiative, a company-wide program announced in late 2012 that is intended to accelerate growth, improve efficiency, and reduce operating costs, an area in which Procurement will play a significant role.  

Lisa Martin
Senior Vice-President,
Global Procurement and
Chief Procurement Officer
Teva Pharmaceutical Industries, Ltd.

Lisa Martin, senior vice-president, global procurement and chief procurement officer at Teva Pharmaceutical Industries Ltd., is part of a senior team tasked with the goal of transforming Teva's Procurement organization from a decentralized, regionalized organization to a global, holistic one. Martin joined Teva in April 2013 after 15 years at Pfizer, where she was senior vice-president, global procurement and operations, to assist the company in achieving that goal. She brings the understanding of the common problems faced between innovator and generic-drug companies and also of the unique challenges faced by generic-drug companies in managing procurement. "Throughout the pharmaceutical industry, the key procurement challenges are typically the same: managing supply, quality, and price risks," says Martin. "These challenges can be more complex in generic-drug companies where there is greater need for pricing and supply flexibility due to the volatility of the market, number of competitors, and broad product portfolio." 

For Teva, the challenge is managing the supply lines of a large product portfolio from the company's generic-drug business as well as a narrower base from its specialty medicines and over-the-counter (OTC) businesses. In 2013, approximately 50% of the company's revenues were generated from generic medicines, including APIs sold to third parties (2). Approximately 41% of its revenues were generated from specialty medicines, primarily Copaxone (glatiramer acetate injection), used to treat relapsing remitting multiple sclerosis (3), with the balance generated from its OTC business, primarily its joint venture with Procter & Gamble (P&G) and other activities, including its Hungarian and Israeli distribution services for third parties (3).

To illustrate the size and diversity and its product portfolio in the US, Teva marketed more than 375 generic products in more than 1100 dosage strengths and packaging sizes, including oral, injectables, and inhaled products in 2013 (3). On a supply basis, the company uses both internal and external manufacturing capacity for its active pharmaceutical ingredient (API) and finished product manufacturing. Internally, as of the end of 2013, the company had 21 API production facilities located in Israel, Hungary, Italy, the United States, the Czech Republic, India, Mexico, Puerto Rico, Monaco, China and Croatia that produced 300 APIs (3). This includes the activity of TAPI, a standalone unit within Teva Pharmaceutical Industries that provides third-party sales of APIs. At the end of 2013, the company operated 50 finished dosage pharmaceutical plants in North America, Europe, Latin America, Asia, and Israel that manufactured solid dosage forms, sterile injectables, liquids, semisolids, inhalers and medical devices (3). In 2013, Teva produced approximately 64 billion tablets and capsules and over 700 million sterile units (3). On a procurement basis, manufacturing goods and services, including third-party operations, account for $4.9 billion of spend for Teva, notes Martin. The company works with nearly 20,000 external suppliers in the supply of direct materials (chemicals, APIs, finished product manufacturing, and manufacturing goods & services).

Creating the transformation
Martin points out that the more decentralized, regionalized approach taken until 2013 in the company's Procurement organization is in part a by-product of the company's growth strategy by acquisitions, both large-scale and bolt-on acquisitions. To transform the procurement function, Teva has created a procurement strategy team of senior leaders to prioritize goals and set resource allocation. "This process will involve evaluating spend throughout the organization and in how the portfolio changes," says Martin, noting that such evaluation will be applied in R&D, operations, commercialization, and governance, including how the company works with and manages external suppliers. The team started to map out the strategy, which includes evaluation of category management and opportunity analysis, in 2013. "Stakeholder mapping will be another key area of focus," says Martin. Stakeholder mapping will identify the internal key stakeholders served by Procurement as well as better define the roles and responsibilities of the Procurement organization and the staff serving a procurement function. Stakeholder mapping will enable a more matrix-driven procurement model, notes Martin. 

Stakeholder engagement is important in procurement, but it is particularly so when dealing with a generic-drug portfolio, where first-to-file status and time to market is particularly important. "Early involvement and alignment with internal stakeholders and suppliers is essential," says Martin. "A procurement function that actively participates in the development of the portfolio strategy can bring significant value that leads to competitive advantage. An engaged procurement function will develop a pool of suppliers that is aligned with company goals and capable of meeting those objectives."

Martin says two company-wide initiatives for Teva in 2014 that will complement the procurement function's transformation are the planning and subsequent implementation of an enterprise-resource planning (ERP) system and the near-term adoption of Ariba tools to enable aggregation and identification of key spending areas and streamline Purchase to Pay processes.  Martin notes that supplier segmentation on a global basis using, for example, criticality and spend as metrics for such segmentation, is another issue that may be on the table in the company's planning sessions. With its decentralized approach, the procurement function currently does not segment suppliers on a tiered basis. "Supplier diversity is another target that we will examine as well," adds Martin. "Supplier diversity programs distinguish leading global companies and ensure that diverse suppliers have fair access to our business partnership opportunities. As we transform Teva's procurement function, we are setting up a structure and process that will provide meaningful support for a Supplier Diversity program."

As to the overall timeframe for the transformation of its procurement function, Martin concludes: "Planning is underway, and we are continuously evaluating our strategy and partnerships."

References
1. Teva Pharmaceutical Industries, "Teva Accelerates Cost Reduction Program" Press Release (Oct. 10, 2013). 
2. Teva Pharmaceutical Industries, "Teva Reports Fourth Quarter and Full Year 2013 Results" Press Release (February 6, 2014).
3. US SEC, Teva Pharmaceutical Industries 20-F (2013).