At the time of writing, the virus has recorded a staggering 10 million cases, and resulted in over 500,000 fatalities globally[i]. Beyond this human catastrophe, the global economy has contracted quickly as lockdown restrictions have forced a significant amount of businesses to close, leaving millions unemployed, and consumer spending subsequently suppressed. But in this moment of crisis, the pharmaceutical industry has emerged front and centre both in the good it is doing to develop cures and in the ongoing durability of its global supply chains.
The lockdown restrictions have resulted in severe, global logistical disruptions, which have had knock-on effects on the supply chains across all industries. But how exactly has the pandemic impacted the pharmaceutical supply chain – what have been the main challenges with regards to security, and how can pharma best prepare for potential future global crises?
For this feature we sat down with Bikash Chatterjee, President & CTO at Pharmatech Associates, and Alan Sheppard, now an independent analyst, and formerly of IQVIA. Together they explore the short- and long-term implications of COVID-19 and evaluate the possible ways in which pharma can de-risk its approach, while keeping the benefits of what has worked well in recent times.
Supply chain resilience
In spite of logistical disruptions and challenges arising as a result of the pandemic, the global pharmaceutical supply chain has proven to be relatively robust and reliable throughout. The industry is well-known to stockpile APIs, excipients, and other ingredients for drug manufacturing to ensure continuous supply, and subsequently operations have continued with a good degree of robustness. In fact, the benefits of a global supply chain have been shown, as when the outbreak restricted trade and manufacturing output in Asia, the West continued to manufacture. Then, as the pandemic took hold in Europe and the USA, we saw manufacturing returning in China. Ultimately this meant that much of global pharma retained good production throughout the course of the pandemic.
In corroboration with this, both our experts commended the resilience seen in the global pharma supply chain. In particular, Chatterjee praised the preparedness of pharma companies in dealing with potential supply chain challenges, with regards to sourcing APIs and ingredients.
“With regards to the supply chain, we have been fortunate that the industry is not a just-in-time industry – we realise the importance of having a good supply of API, excipients and packaging materials, so that when an issue arises, we are in a good position to meet demand. Wherever possible we have alternatives to our manufacturing resources, not only in terms of equipment, but also in terms of APIs and excipients” Sheppard commented.
Chatterjee was however, also clear in tempering his praise, stating that the pharma supply chain has, albeit unsurprisingly, still shown fragilities in light of the global crisis. He highlights that in the past ‘three months, 15 new drugs have been added to the drug shortages list in the US’, and adds that, despite companies having done well to stockpile necessary ingredients, a significant percentage of the supply chain has still been disrupted. “When you look at the logistics associated with supply chains, around 60% of jobs can be managed remotely – but not everyone was initially set up to do so [following lockdown]. The other 40% require workers to be hands-on and on site, physically moving inventory, and that didn’t help in terms of the industry’s response to the pandemic.” Chatterjee commented.
In fact, what the global crisis has particularly highlighted is just how dependent the US and Europe are on China for supply of APIs, excipients and other raw materials. This is nothing new of course – the West have been procuring APIs and other materials from China (and India as well) for decades as they serve as significantly cheaper alternatives to respective domestic suppliers. But the world has never experienced such a crisis in this time period, and now the US, Europe, and even India, are seeking to reduce their dependence on China for supply of APIs and other starting materials, as well as finished drugs.
For example, in the USA murmurings previously just heard in the back corridors of congress have started to translate into the wider industry and even public awareness. While much of this may well be political posturing, a number of initiatives such as the ‘Buy American’ and the ‘Protecting Our Pharmaceutical Supply Chain from China Act’ have been proposed to try reduce US manufacturers’ reliance on overseas supply during the next few yearsii. This has been recently demonstrated through the awarding of a $354m, 4-year contract to Phlow Corporation – a US start-up – to build a new generic medicine and API plant for the manufacturing and provision of COVID-19 treatments and key APIs[ii]. This raised a lot of questions, namely, why invest in a new start-up when there are already a number of experienced manufacturers in the US? The contract definitely implies that there is still a lack of trust in the current industry from the US government, but Sheppard believes the move could trigger a shift towards future local manufacturing of supplies, stating “I think the awarding of this contract shows us that governments around the world are now probably going to be looking for home-grown suppliers of products, especially for key generics and APIs.”
Meanwhile, many Indian companies have looked to seize the opportunity and further establish themselves as a global chemistry and manufacturing hub. They are benefiting from dual drivers of risk mitigation from big pharma who are now looking for geographically diverse sourcing strategies, and continued strength in its sold dose generics sector. Yet what goes somewhat under the radar in the West is just how dependent India are on China for material imports. As it currently stands, India import 70% of their APIs from China, which are primarily used for generics manufacturing[iii]. The country suffered a great scare a few years ago when China shut down a number of chemical precursor and API manufacturers that were failing its newer more stringent environmental policies. Consequently, around 25% of the manufacturers in China were unable to meet the new standards, which had a hugely adverse impact on Indian pharma as prices for supplies soared. Essentially wiping out Indian pharma’s profit margins. More recently, the pandemic and subsequent supply chain challenges have seen the Indian Prime Minister emphasise the importance of the country’s ability to source domestically. His comments have strengthened the ‘Make in India’ movement, with India’s Union Cabinet approving a COVID-19 $1.3 billion care package to boost the country’s pharma economy and API manufacturing[iv]. But despite all the challenges of the above, the industry has adopted multinational and interconnected R&D and manufacturing strategies for good reasons and they have been built over decades.
Chatterjee and Sheppard both acknowledge that gradually reducing dependence on China for supplies in pharma, although conferring some benefits, would prove to be a lot more challenging than it has been made out to be by some commentators – particularly political voices in the US, Europe and India. And it may in fact not be desirable. The primary issue is that it would simply be impossible for these markets to replace the volume of APIs, excipients and other raw materials coming from China. And by going down the route of sourcing local materials, governments and health providers will start to realise the ultimate cost-savings benefits of procuring materials from China. Sheppard added “There is no way we can match the prices that we are getting in China at the moment for materials that are to be used by European or US manufacturers. There is not a huge difference in costs, but with the volumes that we import, it would be a huge increase in the budget requirements for the provision of medicines in many countries.” Chatterjee elaborated on this, stating that 25-30% of APIs in Europe and the US are imported from India, whilst a staggering 80% of starting materials are imported from China. Both Sheppard and Chatterjee attribute a lot of the talk regarding the US initiatives to reduce dependence on China in the pharma supply chain as ‘patriotic rhetoric’.
The long-term impact of technology on the global supply chain
The emergence of new, disruptive technologies must be mentioned, as they have the potential to help de-risk the supply chain through more remote working. For example, China is currently a global drug discovery powerhouse due to the astonishing number of PhD chemists that the country has produced. However, the disruption of discovery via artificial intelligence and big data may enable other markets to reduce outsourcing of discovery to China. And Chatterjee sees technology disrupting the market irrespective of COVID. “In discovery we may gradually see some of this done nearer to home markets with tools like AI improving the hit-to-lead ratios and reducing the need for labour intensive chemistry services.” In fact, the challenges posed by the pandemic may just accelerate the adoption of technology such as AI across the global pharma supply chain, and in particular for discovery it may enable companies to expedite discovery and increase hit-to-lead ratios remotely. The US and China lead the way with regards to AI in pharma – so what we may see are US companies that have outsourced discovery to China leveraging AI to narrow down drug candidate selection, therefore significantly reducing the number of Chinese R&D chemists needed for the process. The possibilities of using automation for supply chain management and clinical trials as well cannot be ignored, and it is likely that this will be an area of interest in pharma over the medium- to long-term. For example, monitoring the Asian pharma supply chain in real-time remotely in the West and utilising technologies such as AI and predictive analytics may enable organisations to accurately predict when possible supply chain issues may arise. The potential of 3D printing dosage forms also presents a huge possibility to bring drugs closer to the patient. If pharmacies are able to 3D print drugs for patients, the need to outsource manufacturing – most likely to China or India – is no longer there, and all that would be needed on-hand are the relevant materials and API. This could be a truly revolutionary way in which the industry produces drugs, and would greatly enhance supply chain security.
The future of APIs in China
So it is clear that China is pivotal in the global pharma supply chain – and it is important to note that it is not going to change any time soon. Our experts believe that China will continue to enjoy its advantages over other major pharma economies in terms of their large-volume, low-cost material supply. Even if countries began to invest in local API manufacturing capacity to reduce dependence, China still prevail as the biggest supplier of raw materials. As well, the benefits of outsourcing discovery chemistry, development, and manufacturing to China cannot be ignored, as even beyond their lower costs they can significantly expedite drug development timelines. Despite the economic impact caused by COVID-19, there is still healthy projected growth within all global pharma economies. And in particular, the growth in emerging economies may present a new, encouraging strategy for de-risking the supply chain by providing China with healthy competition, opening up the possibility for a global, hybrid market built on dual sourcing.
Chatterjee suggested that this could very well be the case, and highlighted that investments are continuing to be made in alternative, low-cost emerging pharma economies such as Southeast Asia, South America, and Northern Africa. In particular, Southeast Asia’s maturation in recent years has been extremely hopeful, with the region-wide adoption of PIC/S having drastically improved their capabilities and potential to provide high-quality, GMP API and drug product in the future. The pharma economies of Egypt, Tunisia, and Algeria are also expected to grow dramatically over the next 5-10 years, and these too could increase available choice within global pharma with regards to APIs, raw materials, and services. “I think the ‘lesser countries’ and ‘lesser markets’ are now going to enjoy some interest, much more renewed interest than they have enjoyed in the last decade. Companies will look more broadly when they try to understand what other alternative markets can be leveraged to try and mitigate the risk” commented Chatterjee.
Through the development of new, emerging pharma economies, who will provide healthy competition to China with regards to raw materials through to finished dose, the development of a hybrid market with dual sourcing will very much be possible. Markets will continue to use China as a primary source of raw materials, APIs, and contract services. But by switching their secondary suppliers and contract providers to economies such as Southeast Asia or South America the same benefits of low-cost, high-volume sourcing and services could still be obtained, whilst de-risking the supply chain and reducing dependence on any single country. This of course won’t happen overnight – slight and subtle changes must be made over a long period of time to an otherwise durable supply chain.
Sheppard believes that the global pharma supply chain is now going through a slow but significant change. Pharma, particularly in the generics space, has always been looking to achieve vertical integration to control costs. But now the scare from COVID-19 has emphasised the need for pharma to not just control costs, but the continuity of supply as well. Sheppard also emphasises the need to strengthen relationships with existing suppliers to establish continuity of supply and business continuity. “We have always had good relationships with our suppliers, but it is a commercial world – one thing suppliers always dread is the annual review of your pricing, and they always know you are going to ask to reduce prices. But without a good source of supply, you haven’t got a product. You have to trust your supplier and have a good relationship” commented Sheppard.
De-risking the future
Overall, the global pharma supply chain has shown good resilience and robustness amidst the COVID-19 situation, but the potential benefits of de-risking the supply chain are there to see, and perhaps to stay. In the coming years, primarily as a result of investment and growth in emerging markets such as Southeast Asia, there will be increased competition for China. The global pharma supply chain will undoubtedly strengthen through the opening of new hubs for starting materials and contract services, and potential supply risks will be reduced by a diversified geographic spread. But with regards to global outsourcing, we do not anticipate geographic location to be the driving force behind any partnering decisions – we still believe that drug innovators will partner with the contract provider that they believe is best-equipped to advance their compound through its drug lifecycle as quickly and cost-effectively as possible. The quality of service will still prevail as the most important factor for primary suppliers. But by having alternative suppliers and contract providers in different geographical regions, western markets can de-risk their supply chains by dual sourcing materials and services and using these new markets as secondary suppliers, reducing dependence on China whilst simultaneously strengthening these new emerging markets. Unlike many industries, the overall forecast for pharma industry growth remains promising in the medium- to long-term in spite of the pandemic, and will be enough to sustain all economies in the global supply chain. But through the gradual adoption of a more widespread, hybrid supply model, pharma and generic companies could greatly mitigate the risk of potential future supply chain challenges in the event of another global crisis – whether health, natural or geo-political in causation.