The Evolving Pharmaceutical Supply Chain
The Outsourcing Issue Feature: Part 2
The biopharmaceutical supply chain has been more resilient than expected in the wake of the COVID-19 pandemic, but the near-total dependence on suppliers from China and India has driven politicians, particularly in the United States, to consider steps needed to encourage local supplies for critical medications and medical devices. Changes in outsourcing can be expected, but overall impacts on the pharma supply chain are likely to be more subtle than dramatic.
Fairly Resilient Supply Chain
Despite extended shutdowns of many chemical and pharmaceutical production facilities in China (both domestic and foreign-owned) in early February and a slow return to production once lockdowns were eased and plants could restart, the overall consensus — at least for the first few months of the pandemic — is that the pharmaceutical supply chain has proven to be fairly resilient. While there were difficulties, most had to do with local procurement issues rather than access to key raw materials, intermediates, or active pharmaceutical ingredients (APIs) from distant suppliers.1
Many companies responded rapidly, implementing safety protocols and finding solutions that enabled operators to remain at work or return after a two-week quarantine period. Shutdowns for the production of life-saving medicines were limited, owing to the essential nature of these operations. Most firms also had sufficient stockpiles of products to ensure uninterrupted supply.
In fact, integration of pharmaceutical supply chains has been a focus for many contract manufacturers and their customers in recent years, as has the establishment of dual sourcing for key materials. In China, most facilities unable to weather the challenges created by the COVID-19 pandemic had already been closed as the result of the Chinese government’s recent campaign to eliminate companies that didn’t meet environmental and quality performance requirements.1
Most of the operational and personnel-related problems experienced by biopharma manufacturers have resulted not from plant closures but from increased activity, according to market research firm BioPlan Associates.2 Companies have continued operations despite the need to make changes to onsite staff management and the movement of non-essential personnel working remotely. Business plans have remained unchanged, and most firms expect to move forward with long-term plans for capital investments and merger/acquisition activity. Overall, most suppliers are experiencing (and expect to continue to realize) revenue growth.
Glocalization Equals Localization
The pandemic has, however, accelerated the glocalization movement, which was driving an increase in local production in many countries even before the emergence of COVID-19. Large, international drug producers have established manufacturing facilities in many different geographic locations, either directly or through partnerships with local companies or contract service providers. Domestic manufacturers, meanwhile, have increased their presence in most emerging markets.
According to the United Nations Industrial Development Organization, local pharmaceutical production (LPP) can help vulnerable populations gain access to quality medicines, reduce dependency on international donations, and facilitate control of fraudulent drug products entering emerging markets.3 In addition, local manufacturers generally provide products that serve local populations, regulators have greater control over quality, and the local economy benefits from the income generated by local workers.4,5
In the pharma industry, glocalization has been facilitated by increased outsourcing to contract development and manufacturing organizations (CDMOs) and contract research organizations (CROs), the advent of modular manufacturing solutions, and the rising adoption of flow chemistry/continuous processing.
Outsourcing provides access to specialized technologies and can increase efficiency and productivity while reducing costs. For small/emerging firms that often operate under a virtual manufacturing model, it is a fundamental business strategy. For all drug developers, outsourcing also provides a means to establish a presence in countries that require local production. As importantly, CDMOs/CROs with global networks offer dual/multiple sourcing solutions. Modular and flexible manufacturing systems enable the replication of small production facilities in multiple countries to meet government requirements for LPP.6 Meanwhile, continuous manufacturing solutions combined with state-of-the-art cloud computing and automation systems are creating opportunities for cost-competitive in-country drug production using advanced manufacturing technologies.6
Repatriating Drug Manufacturing in the United States
Interest in moving both outsourced and internal drug substance and drug product manufacturing back to the West from Asia was already an important topic of discussion before the emergence of the COVID-19 pandemic. Manufacturing initially moved to China owing to the lower costs associated with the production of pharmaceutical raw materials, intermediates, and APIs.
Wages have since risen, however, reducing that cost advantage. At the same time, transportation costs have risen, and the complexity of the logistics involved in dealing with manufacturing sites located across the world has increased. Different time zones and languages and cultural barriers present challenges to establishing close collaboration and strategic partnerships, which are becoming a requirement. Quality issues have also arisen with production sites in China and India, leading to plant closures and in some cases product recalls.
The COVID-19 pandemic has added to the list of vulnerabilities associated with complete reliance on low-cost supply chain solutions.7 The potential for serious disruptions to the supply chain leading to shortages of crucial drugs has drawn the attention of policy makers and politicians in the United States.8
In May, Donald Trump announced a plan to restructure the Strategic National Stockpile to use predictive analytics to determine needed quantities of critical products and increase supplies of them, as well as to establish real-time visibility into supply chains and reduce U.S. dependence on foreign supplies. Earlier in March, Director of the Office of Trade and Manufacturing Peter Navarro indicated the President was working on an executive order to provide long-term incentives for U.S.-based companies to manufacture drugs, medical devices, and related supplies in the United States.8 It has also been reported that a White House “Buy American” executive order would require government agencies to purchase American-made medical products, potentially including pharmaceuticals.9
In early July, presumptive Democratic presidential nominee Joe Biden proposed a plan to “ensure the U.S. has the domestic manufacturing capacity necessary for critical supply chains” through development and implementation of a national strategy that includes building “long-term supply-chain resilience for pharmaceuticals.”8
Several bills have also been introduced by members of Congress, most in response to the COVID-19 pandemic, but some before the emergence of the SARS-CoV-2 virus.9 They include the U.S. Pharmaceutical Supply Chain Review Act, the Strengthening America’s Supply Chain and National Security Act, the Securing America’s Medicine Cabinet Act, the Protecting Our Pharmaceutical Supply Chain from China Act of 2020, the Medical Supply Chain Security Act, and the Pharmaceutical Independent Long-Term Readiness Reform Act. These various House and Senate bills are largely focused on assessing the role of foreign — particularly Chinese — suppliers within the pharmaceutical supply chain and the impact that reliance on such suppliers means for U.S. security.
In a practical move in May, the U.S. Department of Health and Human Services (HHS) announced that it will work with a team of private industry partners led by the Phlow Corporation of Richmond, Virginia, to expand pharmaceutical manufacturing in the United States for use in producing medicines needed during the COVID-19 response and future public health emergencies.10 To lower production costs, reduce waste, and improve yields of these ingredients, the team will use advanced manufacturing processes, including continuous manufacturing. Under the four-year, $354 million agreement with the Biomedical Advanced Research and Development Authority (BARDA), part of the Office of the Assistant Secretary for Preparedness and Response at HHS, the Phlow-led team will manufacture the supplies for medicines for patients hospitalized with COVID-19. The contract can be extended for up to $812 million over a total of 10 years to maintain the system and supplies.
The U.S. Department of Defense is also dedicating funds to increase U.S.-based pharmaceutical and medical device manufacturing, committing $100 million authorized by the CARES Act through a collaboration with the newly created U.S. International Development Finance Corporation (DFC). Specifically, a request for proposals have been issued to companies seeking financing under the Defense Production Act.11
One of the challenges in changing the current pharmaceutical supply chain structure is the expectation — which is ever-increasing — of American consumers and politicians for lower-priced drugs. Another is the involvement of such a large number of players in the delivery of drugs to patients, including API suppliers, formulators, wholesalers, distributors, pharmacy benefit managers, and pharmacies.7 One contract manufacturer suggests that U.S.-based manufacturers of the top 50 critical drugs should get preferential treatment for scheduling of inspections. The creation of a semi-artificial market for these strategic products would encourage local production for stockpiling. Simplification of regulations from agencies, including the EPA, the FDA, OSHA, the DEA, the Department of Labor, and state agencies would also encourage more chemical and pharmaceutical manufacturing in America.
The COVID-19 pandemic has only increased interest in ensuring supply chain robustness in Europe and other parts of the world, with domestic control a key factor.
Similar Reactions Elsewhere
The efforts in the United States to increase domestic pharmaceutical manufacturing are seen by some as a pivot point for the industry.1 Concerns about the potential for China to weaponize pharmaceutical production were already heightened due to the Trump administration’s ongoing trade war, and the COVID-19 pandemic has only increased interest in ensuring supply chain robustness in Europe and other parts of the world, with domestic control a key factor.
EFCG in Europe is calling for fast-track approval of alternate suppliers of critical drugs and the development of a Europe-wide database containing information on drug and raw material shortages and other supply chain issues.1 The Indian government, meanwhile, has pledged over $1 billion to the promotion of domestic manufacture of pharmaceutical ingredients to address its heavy reliance on Chinese raw materials.
The World Health Organization (WHO) has warned countries about the focus on cost reduction that has led to the concentration of pharmaceutical manufacturing in a limited region of the world.12 What is needed, according to the WHO, are policies that promote a combination of domestic and global pharmaceutical capacity, because governments, in addition to ensuring quality, must also ensure sustainable supply.
Chinese Companies Look Westward
Chinese companies have come to a similar realization, but in reverse. Many are looking to establish manufacturing footholds in Europe, the United States, and other markets outside of Asia (and particularly outside of China). Impacts of the shutdown of production in China due to COVID-19 has come full circle, with Chinese pharma companies experiencing delays in the delivery of materials from Europe and India, because these suppliers are having trouble getting the raw materials they need from China.1 There is also interest in establishing manufacturing sites in the other markets — largely through acquisition — to support pharmaceutical companies that switch to domestically located suppliers.
Retooling Production in Response to COVID-19
Glocalization is not the only impact COVID-19 is having on the pharmaceutical supply chain. Many pharmaceutical companies and their contract service providers are restructuring operations to support the production of therapeutics and vaccines against the SARS-CoV-2 virus.
In order to free capacity for the production of hundreds of millions of doses of its possible COVID-19 vaccine, Pfizer plans to outsource production of some of its existing drug portfolio that would otherwise be manufactured in-house.13 The company has also indicated it will offer excess manufacturing capacity and potentially shift additional production to support other efforts to bring life-saving COVID-19 therapies and vaccines to the market.14
Several contract manufacturers are investigating the addition of emergency production capacity to meet demand for shifted and existing projects, as well as projects that would directly support COVID-19 candidates.1 Many of the Pharma & Biopharma Outsourcing Association’s CMO/CDMO members and affiliate members, for instance, are involved in all aspects of the pandemic response.14
Changes in Outsourcing Expected
The investment in emergency production capacity is not the only change occurring in the pharma outsourcing market as a result of COVID-19. The drive to increase speed and efficiency while reducing cost, yet maintaining quality, has become even more important as CDMOs support COVID-19 projects.15
That means a greater emphasis on flexible and modular manufacturing and collaborative, strategic partnerships between sponsors and their service providers.15 The shift in focus to domestic manufacturing will likely lead to more of those relationships with CDMOs in the West for discovery, formulation, early-stage development, testing services, APIs, and finished-dose services. More investment in the pharma outsourcing sector should also be expected, particularly in CDMOs and CROs that are involved in the development of COVID-19 therapeutics, vaccines, and diagnostics.
Overall, service providers are, according to a recent survey, experiencing an increased level of inquiries and orders, many related to COVID-19 vaccine and therapeutic projects.2 This increased activity is also leading to higher demand for equipment and materials. One market research firm predicts that the global biotechnology and pharmaceutical outsourcing market will expand “at a considerable rate” from 2020 to 2025.16
Many leading CDMOs agree that the pandemic, while horrific, is creating opportunities for business growth. This growth is attributed to both small and large companies developing COVID-19 therapies and vaccines who will gain access to additional development and manufacturing capacity.17 There is some concern, however, that delays in approvals of new drugs, facility inspections for the manufacture of new products, and clinical trials due to the pandemic, could negatively impact the industry in the future.
Subtle Shifts Are Most Likely
From a big-picture perspective, changes to the pharmaceutical supply chain due to COVID-19 will be more subtle than dramatic. Domestic manufacturing will be expanded to some degree, but manufacturing is unlikely to completely move away from China and India. Pricing and other fundamental drivers of decision-making will continue to play a similar role going forward.
Established relationships will mostly remain in place, but it is likely that new projects, particularly those from virtual and small start-up firms that require venture capital money, will be awarded to Western CDMOs.1 Policies to support the rapid approval of alternative suppliers to ensure dual/multiple supply of key ingredients from different regions of the world may become the norm. Similarly, stockpiling of critical medicines and national strategies to ensure robust supply chains for these products will also be realized.
Biopharmaceutical firms are prioritizing more collaborative relationships across the supply chain and expanding business continuity strategies, as well as crisis response plans, to avoid supply shortages in the event of a future pandemic.2 An increase in the number of global facilities can be expected to support new COVID-19 vaccine and therapy production, and in response to the above political changes. The market for biologics will continue to expand, driving growth in the biopharma outsourcing and materials markets. With only so much capacity, projects are likely to be prioritized; COVID-19–related activity is currently the focus, but prioritization can be expected to continue as part of the “new normal.” As this growth occurs, companies in the pharma supply chain will be exerting greater oversight and establishing more control deeper into their supply chains.
The drive for greater efficiency and flexibility will lead to greater adoption of single-use technologies and modular facility designs, which will also enable the replication of smaller production units for placement in multiple regions around the world to support local manufacturing.2 More automation will also occur in response to the drive for greater efficiency through the support of process intensification and to address shortages of skilled labor.
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Rader, Ronald A. and Eric S. Langer. “Covid 19: Impact on Bioprocessing and Outsourcing.” Contract Pharma. 5 May 2020. Web.
“Pharmaceutical production in developing countries.” UNIDO. n.d. Web.
“Q&A: How local pharmaceutical production can improve access to quality medicines.” Devex. 30 Apr. 2019. Web.
Kurian, Oommen C. “Expanding pharmaceutical local production in Africa: An idea whose time has come?” ORF Online. 10 Apr. 2019. Web.
Riley, Darren L., Ian Strydom, Rachel Chikwamba, and Jenny-Lee Panayides. “Landscape and opportunities for active pharmaceutical ingredient manufacturing in developing African economies.” Reaction Chemistry & Engineering. 2019. Web.
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Industry Partners Expand U.S.-Based Pharmaceutical Manufacturing for COVID-19 Response. U.S. Department of Health and Human Services. 19 May 2020. Web.
Crotti, Nancy. “DOD launches $100m initiative to return COVID-19-related medtech. pharma manufacturing to the U.S.” MassDevice Medical Network. 22 Jun. 2020. Web.
Howells, Richard. “Will COVID-19 Change Global Supply Chains Forever?” Forbes. 3 Jun. 2020. Web.
Blankenship, Kyle. “Pfizer plans to farm out manufacturing for some of its drugs to make way for COVID-19 vaccine.” Fierce Pharma. 11 May 2020. Web.
Pharma & “PBOA COVID-19 Resources.” Biopharma Outsourcing Association. n.d. Web.
Cohen, Daniel and Howard Dingle. “COVID-19: a catalyst for change in pharma outsourcing.” RBC Capital Markets. n.d. Web.
Global Biotechnology and Pharmaceutical Services Outsourcing Market impact of COVID-19 on Share. Size 2020 Movements by Growth Status. Trend Analysis. Revenue Expectation to 2025 Research Report by Research Reports World. Market Watch. 18 Jun. 2020. Web.
MacDonald, Gareth. “COVID-19 an opportunity for outsourcing sector, say leading CDMOs.” Bioprocess International. 24 Apr. 2020. Web.
Baldwin, Richard and Rebecca Freeman. “Supply chain contagion waves: Thinking ahead on manufacturing ‘contagion and reinfection” from the COVID concussion.” VOX EU. 1 Apr. 2020. Web.