A Guide to ERP for the Pharmaceutical Industry
For emerging pharma manufacturers, the finish line of clinical trials is the starting gate for a whole new range of business challenges.
After going public and going commercial, you still have plenty of FDA regulations, but now you’re adding a new host of new obligations, reporting and business essentials. Typically, that list includes:
- SEC Reporting,
- SOX Compliance,
- managing a company of hundreds of (soon to be) employees with expenses,
- managing a supply chain with multiple stages, stops, and starts,
- as well as negotiating gross-to-net, insurance and Medicare reimbursements.
It’s pretty obvious QuickBooks can no longer manage your budding enterprise. It’s time for ERP software. But there’s many considerations to keep in mind when considering ERP for the Pharmaceutical Industry.
ERP-The Operational Backbone
ERP – it stands for Enterprise Resource Planning and the resources it covers includes your entire enterprise — which includes accounting, inventory, purchasing, billing, supply chain, manufacturing, and reporting. Almost every department is affected by ERP either directly or indirectly. Having a system that pulls it all together can improve productivity, increase efficiencies, decrease costs and streamline processes. That can add up to millions of dollars in difference for companies (see case studies).
While QuickBooks is a great option when the company is less than 10 people, there are many options after QuickBooks. For most CFO’s the question is “Should we jump into ERP before going public or before going commercial?” The answer is “YES” – you should make the leap as soon as it’s feasibly possible.
But it’s more than just replacing QuickBooks with another ERP software. There’s multiple moving parts, software and processes that help you move your business forward. Here’s a brief guide.
ERP for the Pharmaceutical Industry
Decision one is what kind of pharma manufacturer are we going to be?
Option 1. Pharmaceutical Manufacturers
Manufacturing– If you plan to operate your own pharmaceutical manufacturing plant, historically, you were looking at software such as Oracle, SAP, Microsoft Dynamics AX, or Lawson M3. These are large, Tier One software products that handle the entire manufacturing process, including the creation of FDA controlled batch records, full lot traceability, and product genealogy from sourcing to distribution center.
As you’ll be using this software to produce regulated products, it will require validation as a medical device – a three- to six-month process. You will need staff to support a Tier One solution, including dedicated IT staff and ongoing consulting support. Cost range from $700k to $3m – and annual maintenance, server support and upgrades are a cost to include in every annual budget.
Mid Market options include Sage x3, Ross by Aptean and as of recently, NetSuite has developed a workable validation protocol to manage a cloud based ERP within the FDA regulated pharma environment (Watch for more on this exciting development in a later blogpost.)
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Mid Market ERP packages range from roughly $200k – $400k – and while you wouldn’t want to manage multiple factories and hundreds of products, companies in the $5m – $500m annual revenue range find Mid Market solutions viable and affordable.
Option 2. Contract Manufacturing, or a Distributor
Contract Manufacturing– While your firm is considered the manufacturer of record by the FDA, if you completely outsource to CMOs (Contract Manufacturing Organization) and distribute through industry standard 3PL’s (Third Party Logistics) you are in effect, a distributor – which opens up many more options.
In this case, the software at the CMO and 3PL ERP are the system of record for manufacturing and product genealogy. In the event of a product recall or needing to trace and track, the system of record is with the outside contractors who are actually handling the pharmaceuticals. This eliminates the need for ERP validation within the contract manufacturer and opens us up many more options. Now, we can include cloud based ERP and products like NetSuite, Sage X3, Acumatica, Microsoft Dynamics NAV and Dynamics365. Costs range from $150k to $500k.
NetSuite is particularly interesting. Built for the cloud and launched in 2005, NetSuite is the market leader in ERP for mid-sized companies, and many contract pharma companies are turning to NetSuite. Published figures are not available, but market estimates say over 30 different emerging pharma contract manufacturers have launched NetSuite projects in the last 24 months.
There are caveats. With NetSuite resellers, partners and support firms numbering several hundred options nationwide, not every NetSuite reseller is a good choice for an emerging pharma company.
Ideally, you’ll engage an outside consulting team familiar with pharma requirements and who have helped other emerging pharma companies make the moves from QuickBooks to ERP. Starting with a best-practices approach allows you to cover the basics of what’s needed to meet numerous regulatory and business issues, and get your team through the start-up phases.
Then, should your team want to deviate from practiced norms or take a different approach, you can systematically handle those initiatives once the company is up and running.
It should also be noted that evaluating and setting up ERP software is a time-consuming task for your internal team. There’s training, configuration, accounting processes to be determined, business issues to decide – many of which are completely new processes to a completely new team. It’s a daunting task. You need to have the right people and clearly defined task teams as well as a realistic project plan to manage the workload. Software selection and evaluation is normally a 4-6 month process, with full implementation and optimization being the next 5-9 months. Some of these processes can run concurrently – but that assumes you’ve staffed up to a level allowing separate project teams working in tandem.
Also, as you bring in many people with different experience using other, older technologies – putting everyone into the design architecture process is not the most efficient method of doing business. We want buy-in from the entire staff, but understanding the future requirements of the company should supersede the wishes of individual team members.
Component ERP – Building Out
Given the complexities of the pharmaceutical business, there is no ideal, one-size-fits-all software solution. So the current concept is to start with a modern, cloud based backend ERP, and connect all the other elements we need.
At one time, different software programs used proprietary languages, networking protocols and the only way one system talked to another was through middleware – a cumbersome strategy whereby 3 or more systems needed to be maintained. And an upgrade to any one system could require an upgrade to the rest – if only the software vendors relied on the same release schedule.
Enter the internet.
Today, the one common feature of cloud-based software is the connecting network, the internet. Today, we’re not having to translate between languages as the interface is in common in both. This allows us to take different software components and create our own overall solution, integrating where needed, and freely passing information back and forth.
Here are the most common components deployed by emerging pharma companies:
Initially, most emerging pharma companies are managing a single drug with a single strength and indication. If only life stayed that simple.
Knowing your inventory position at all times as well as being able to forecast and plan your supply chain years into the future requires understanding what is happening at your offsite partners, CMO’s and 3PL’s. While all good supply chain partner companies will report what’s going on, the ideal situation is to mirror the inventory position within your own ERP – providing instant access for all users, financial transaction data and allowing your ERP to do the hard work of projecting shortages and alerting you months prior to an impending outage.
There are generally three ways to connect a pharma ERP to the CMO/3PL systems of record. Blockchain developments are on the horizon, but until that technology is proven, we’re recommending the following systems:
EDI (Electronic Data Interchange) is one solution. It’s a complex, pre-internet system developed by General Motors. It’s very expensive and quite cumbersome. While newer versions promise simplicity, most manufacturers relying on EDI will also have an IT resource dedicated to managing and troubleshooting EDI.
FTP (File Transfer Protocol)– many CMO’s and 3PL’s maintain FTP sites. At the end of the day (or other agreed upon interval), the internal software of the 3PL will post a .csv file on an FTP site (or SFTP for Secured File Transfer Protocol). Setting up an automated process to go out and ‘sweep’ the FTP site, data is then uploaded into the ERP system. Inventory transfers, sales, incoming shipments – all activities are reported and mirrored within the ERP system – giving us both a visibility to our inventory and allowing the ERP’s MRP (Material Resource Planning) an opportunity to track supply chain performance.
Email Reports– similarly, some CMO’s will email a nightly report to a dedicated mailbox maintained at the pharma company site which can be swept by the ERP system and transactions uploaded.
Initially, these approaches might seem to be overkill for a single product. However, as a pharmaceutical manufacturer grows and expands – this automates one of the most daunting challenges a manufacturer faces.
Most CMO processes are multi-stage. Ingredients are created at Laboratory One and shipped to an encapsulator or tablet processing facility. From there it could be blister packaging, or bottling. Then onto the cartoning facility for inserts, boxes and labels. A final packing into cases. Finally, it is shipped to the 3PL.
In all, we’re supporting a complex, interrelated bill of materials to include version controlled inserts and labels, cycle times at different processors, shipping time – all while managing the artwork and copy for boxes, labels and inserts from printing houses. Running a few different products and strengths adds complexity.
The time to master the ERP controls of the entire supply chain is during the initial commercialization process – bringing the first drug to market. Then, as our supply chain expands and complexities multiply, we’re using a reliable, trusted automation process to forecast complete manufacturing lead times and track both raw materials and finished goods at multiple, offsite locations.
FP&A – Financial Planning & Analysis
Generally known as EPM (Enterprise Performance Management) or CPM (Corporate Planning Management), this software extends the reporting functionality found in most ERP systems. It transfers or connects to underlying transactional data, and provides the following functions:
- Budgets – It automates the budgeting process by collecting data from each department and collating multiple budgets and what-if scenarios. This allows pharma companies to track long term clinical phase testing cost forecasts and expected revenue streams.
- Consolidation – In multiple company structures, combining financial statements is quicker and period end closes are faster and more reliable using this software.
- SEC Reporting – It gathers data to compile Q’s and K’s. The first step is the EPM system, which pulls the relevant data.
Some of the more common EPM software includes Adaptive Insights, Host Analytics, Prophix, Anaplan – with dozens of other potential solutions available. Workiva automates SEC reporting using the data from EPM. All of these systems have their own strengths and weaknesses and are evaluated toward the specific company requirements prior to purchase.
Consultants familiar with the process and tools will have a significant advantage in planning the process and in identifying the best tools for the emerging pharma manufacturers, which can translate into significant time savings and often sizable discounts on the products themselves.
R&D – Research & Development
Tracking R&D, both before and after commercialization is best handled by Project Accounting within the ERP package. Project Managers can create budgets, issue PO’s, track status, percent completion, committed budgets and expenditures within the PA module. After commercialization, we can produce a P&L (profit & loss) report for each indication, strength and formulation.
CRM – Customer Relationship Management
A program such as Salesforce CRM will allow the sales team to track potential subscribing physicians, align territories, track sales activities and related data.
Sunshine Law Requirements
Pharma companies have additional regulations when sales staff interacts with prescribing physicians and other health care providers – The Sunshine Law (Open Payments) requires that if a pharma manufacturer provides anything of value whether it’s lunch or a honorarium for speaking about a drug product, those payments must be reported to the CMS (Centers for Medicare & Medicaid Services).
Concur does a good job of maintaining a national directory of health care providers and allows the employee to code the line items of the expense statement to the NPI (National Provider Identification) number.
Combining Concur reports with ERP reports allows the pharma manufacturer to either format and upload to CMS.gov or use an outside vendor or software program to submit the required reports.
Normally, payroll and HR are supplied by outside providers. ADP, UltiPro, Paychex and other platforms handle employee self-service for HR and payroll processes are managed externally. While many ERP programs offer a Payroll module, keeping current tax information for multiple jurisdictions and the general risk of payroll as well as changing HR regulation is better served by a dedicated outside organization.
Gross to Net (G2N)
There are many factors that affect the sales price of a prescription such as insurance coverage, negotiated pricing, Medicare, Medicaid, discount programs for uninsured and other factors. While pharma contract manufacturers generally rely on a 3PL to handle sales to the specialty and retail pharmacies, as well as collections, using a data aggregation site allows the business office to analyze actual sales data as reported from the retail pharmacies to determine a gross revenue number. As with multi-payer systems, this data may be 60-90-120 days in coming. Until then, a gross-to-net revenue adjustment is entered into the ERP to avoid overstating revenue. While the data aggregator does not directly tie into ERP, selecting the right provider can make life much easier.
And on and on…
There are also software systems to manage investments, employee stock options and trading. Many pharma companies also invest in Business Intelligence (BI) tools to analyze large data sets. This is by no means a comprehensive list of everything for every contract pharma manufacturer but designed to give the emerging company managers an idea of the scope and magnitude of bringing a QuickBooks managed company to full commercialization.
The important thing to remember is each of these component software systems requires a software selection process to select the best fit for a particular company in terms of features, budgets and functionality. All have differing levels of implementation, integration and configuration. Don’t forget about the effort needed for user acceptance testing and end user training.
When done right, these technology investments cut future costs and drive efficiencies – allowing the company to grow further with fewer staff additions.
Simplify Your Path To Profits
There are a lot of moving parts. When setting up ERP for the Pharmaceutical Industry, there are many different software products, processes to manage, integrations to set up and much work to be done. While consultants from each of these software providers know their individual systems, there’s one place to turn for ProfitFromERP.com. Get the whole picture from our consultants. We help you see how it all fits together faster, smoother and with greater certainty. Avoid the many pitfalls on the journey from clinical trial to commercial with some guidance. We make the process simpler and easier, so you and your team can get back to work, doing what makes you great.
Gene Hammons, MBA has specialized in process manufacturing including pharmaceutical ERP software since 2006. A veteran of over 400 ERP projects, he can be reached at gene@profitfromERP.com