This pandemic has exposed the complexity of supply chains and their overall breakdown in the medical and pharmaceutical fields globally, and this is just as true for other strategic fields, such as telecommunications or energy. The COVID crisis demonstrates that we have lost sight of the fact that the multiplication of supply and the constant demand for low prices went hand-in-hand with production, manufacturing, and distribution spread across the globe.
Let’s dwell for a moment on an example of the drug supply chain for a common medication with a moderately complex chemical molecule. A prescription drug has two components: its active pharmaceutical ingredient (API, the molecule) and its pharmaceutical form, which includes the addition of excipients and its formulation (tablet, capsule, etc.). While the production capacities of pharmaceutical forms are still widely present in Europe and North America, this is no longer the case for the production of molecules. A molecule typically requires between 10 and 20 individual steps of synthesis from raw materials (from basic chemicals common to many sectors) to arrive at the API. The last three steps must be carried out under GMP conditions, according to strict standards to ensure quality.
These GMP sites are regularly inspected by national and international health authorities. Since the late 1990s, the first stages of synthesis have been mainly transferred to Asia, and more specifically to China. These programs left pharmaceutical groups that owned a number of factories to go to specialized subcontractors, and that was the start of the CMO/CDMO boom. Since these first manufacturing steps do not require regulatory control, it allowed the West to be more lax in regard to environmental protection.
This massive transfer to Asia resulted in many closures of industrial sites in Europe and the United States. Only the sites producing molecules with higher added value remained, and a minority of sites producing the chemical intermediates. From 2005 to 2010, as pressure on the selling price of medicines increased (especially in Europe), China saw a concentration of intermediate manufacturers. It is now no longer uncommon to see high-volume APIs based on a very small number of companies with no real contingency plans. Reactions to the COVID crisis have varied by country; for instance, India reacted to the pandemic by limiting the export of commonly used APIs.
Once the active ingredient has been manufactured, it is sent to pharmaceutical production sites either in Asia, Europe, or the United States. There, the final steps of the production of the drug are performed according to GMP conditions, namely formulation and packaging. Last but not least, wholesalers and distributors will step in so that the customers can access their treatment.
We can thus see that this supply chain — from the first elements of chemistry to the final box in the hands of the patient — involves dozens of intermediaries spread across many countries. For the latest generations of drugs, often called biologics, manufacturing is still mainly performed in Europe and the United States and production costs are not yet a critical element, but that could change especially as patents expire. However, the very large number of reagents and pieces of equipment involved in these processes are manufactured in Asia, which brings us back to the global supply chain.
This pandemic has exposed the complexity of supply chains and their overall breakdown in the medical and pharmaceutical fields globally, and this is just true for other strategic fields, such as telecommunications or energy.
The main difference between the active ingredient production sites and the pharmaceutical production sites is at the Capex level. It is much more expensive to build or even maintain a site for the production of chemical molecules than a site for the production of pharmaceutical forms. Moreover, safety and environmental standards are more restrictive for chemistry than they are for pharmacy. This explains why the outsourcing of manufacturing to countries with lower manufacturing costs started with chemistry before spreading to other operations.
Financial support has typically focused less on manufacturing, as it is considered de-prioritized compared with research or sales functions. However, over the last decade, we have seen a significant increase in the funding of biotechs — companies in the health sector seeking new drugs, treatments, or technologies. This financing is done through venture capital, private equity, or large pharmaceutical groups through partnership. Venture capital investments increased from $7 billion in 2014 to $14 billion in 2019, with a peak at $17 billion in 2018.1 It will be interesting to see if the investment flow is maintained at these levels for research only or if it’s in part devoted to developing regional means of production.
A very interesting report from Natixis research,2 published on March 30, 2020, suggests various alternatives for what could arise from the crisis. We see in particular four main points:
A return to regional value chains instead of global ones, to share risks;
An increase over time in public spending on health, unemployment compensation, and business support;
A recognition that the state must have a role in developing strategic industries; and
An understanding (even in the United States) that everyone benefits from proper social protections.
Figures 1A and 1B show that this movement may have already begun. We can see a drop in direct investment in China and a slowdown in world trade. However, it seems unlikely that there will be a massive and rapid return to what has taken more than 20 years to relocate.
This restoration could be done selectively, depending on the sectors defined as strategic by the states, with health being one of them. French industrials in the healthcare sector have been questioning the public authorities on the country’s excessive dependence on imports of drugs classified as “major therapeutic interests” and the impoverishment of the industrial network in France. A report from the French Senate underlined this issue in September 2018.3 The observation also arose at a symposium held on May 14, 2019, at Les Invalides in Paris, organized by healthcare professionals (and during which I had the pleasure of speaking) and at which solutions were proposed to be coordinated with the state.
This brings us to the role that countries can play in the economy. Nations do not always have the reputation of being excellent strategists or good managers. Likewise, the private sector is not exempt from all reproach. So, how can we combine the best of both?
The current crisis may offer a solution through the creation of sovereign wealth funds large enough to influence the economy, as suggested by Mark Gilbert from Bloomberg.4 Several countries have established such funds over many years, with the Norwegian fund the largest to date, valued at nearly $940 billion. Last summer, the EU planned to create a European sovereign fund, which proved difficult to finalize at the time for legal reasons because the EU is not actually a state.
The extraordinary economic recovery decisions made in a few days by major countries or institutions (e.g., the United States, the EU, Japan) show that large-scale solutions can be implemented. The means exist, the strategic sectors are known, the local and regional know-how is still present, and there is nothing to prevent a rebalancing of the means of production between the EU, the United States, and Asia.
The scale of the current crisis, from which we have not yet emerged, and which had not been seen since the Second World War, must lead to structural changes, otherwise, we will be none the wiser.
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