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Industry experts from ZS—Maria Whitman, global head of the company’s pharmaceutical and biotech practice, and Anshul Agarwal, who leads the global supply chain and manufacturing practice—offer their perspectives on the current and future supply chain challenges facing global biopharma, and how these challenges are being met by a shift to technology adoption that owes much of its urgency to COVID.
Pharma Commerce: As we move beyond the pandemic, what are the supply chain challenges that pharma is facing?
Maria Whitman: Before we even get to the challenges, we see that the pandemic actually propelled supply chain from a necessary function to a very strategic group with a seat at the table in terms of how global pharma companies move forward and in terms of decisions that will affect patient experience and profitability—all the things that were more traditionally part of the brand sphere. And there’s a very big difference now between paying attention to and driving the supply chain. This isn’t from a globalization and efficiency perspective, but from a perspective of resilience across regions and countries, and also in terms of what else the supply chain can do to support the business and patients.
Of course, there were a number of vulnerabilities exposed. The conversion to an efficient global supply chain was well-intentioned and made economic sense, but in a pandemic became a significant challenge. But that did not result in a catastrophic effect on drug availability; most companies were able to do what they needed to do and supply disruptions were short lived.
Anshul Agarwal: From my perspective, working with many different clients, there are three key challenges; as Maria indicates, none of these are new or related to pandemic. Rather, they are, in general, part of the life cycle or journey; they’ve just become more apparent, more visible, and companies are focusing more on addressing them to avoid falling flat on their faces.
The first challenge is in running the manufacturing capacity. There has been a shift from blockbusters to molecules with a smaller revenue pipeline; there’s now a lot more complex manufacturing versus small molecule manufacturing, such as gene therapies. This has put pressure on manufacturing capacity; producing one small molecule and thousands of batches is, of course, much easier than having to keep changing batches from one to another or maintaining a complex production cycle. Companies are investing millions of dollars in opening new manufacturing capacities, but it takes three to five years and a huge CapEx investment to get things running.
The second challenge we see is on the logistics side. Many products, such as cell and gene therapies and vaccines, require cold chain storage. The latest data shows that an estimated 50% of the future launches will require some kind of a cold chain storage. So that has made things more complex, and there are a lot of wastage in that area.
Whitman: There is also a problem on the provider reception side, having the facility to actually accept those cold-chain materials and store them for any period of time.
Agarwal: Yes, from the manufacturing side to logistics and then to the providers, there is around 20% spoilage rate for non-COVID-19 vaccine due to temperature failures, which is a huge number.
The third challenge is to do with the suppliers, who are still fairly concentrated in a few countries outside the US. Then there is a fourth challenge—a price pressure. Typically, pharma companies would not think as much about the cost, but that is no longer the case. And now the situation in Ukraine is adding to these pressures. These are not problems that can be solved very easily.
Just to touch on the pandemic again, it brought the industry’s reliance on sourcing materials from India and China into sharp focus. Is that something the industry was already trying to move away from, having very few or sole sources, before the crisis?
Agarwal: Not before COVID. As Maria mentioned, the general trend was “Let's optimize, globalize, reduce the inventory as much as we can. Let’s do just-in-time production.” All those well-known terms, supply chain gospels, were being implemented at that time. There were some efforts in terms of diversifying suppliers, but it was more a case of India versus China. Now, the question is more about risk and resilience versus more about cost.
Whitman: I think about one-third of pharma leaders are now trying to manage risk by dual-sourcing, but, still, 80% of all active pharmaceutical ingredients (APIs) that are used in medicines in the US have no domestic manufacturing source. So, we’re still very, very far from having that closed internal resilience. But having at least a dual mechanism of supply will help to reduce the risk.
Some organizations are making ambitious claims about establishing more manufacturing in the US. Do you see that as a feasible way forward?
Whitman: I believe it is necessary to create more local support and sourcing. You do have companies producing more capacity and trying to vertically integrate with certain types of APIs. And there are some companies, plasma-based companies for example, that produce all of their own raw material. You’ll see some non-traditional companies coming into this space too, Kodak for example, using their own manufacturing facilities to try to meet some of these challenges. I think we will see more conversion to a US-centric supply source, but I think it’s going take a very long time for us to achieve a significant lack of dependence on some of the bigger countries. There is just too much supply needed.
Agarwal: When we think about manufacturing, there’s the manufacturing that companies were already doing that is now moving to the US. In the last six months, Eli Lilly, Pfizer, Catalent, Cambrex, etc., have all announced plans to set up sites in the US, but this was manufacturing they were already doing. But if we talk about API manufacturing, that can only happen if the government comes into the picture. Generic medicines and APIs, that’s a big shift, a $160-billion market. There are efforts being made toward setting up an infrastructure hub in the US, and government will have to play a significant role in helping that. But it will be a longer journey.
Whitman: The other thing to consider is that other countries’ governments are concerned about the global supply chain and their citizens’ accessibility to medicine. So, you are seeing around the world a bit more stipulation around having manufacturing sites in proximity. For example, for cell and gene therapies, there were a lot of companies relying on one or two sites for all manufacturing capacity. They'll be challenged with that part of the equation in the future, because of the requirements that countries are looking for.
We mentioned the Ukraine–Russia situation, which isn’t yet having a huge impact on the industry in terms of sales, but there is the disruption to the supply chain and pricing. Can you talk about what may happen if this conflict goes on for much longer?
Agarwal: When we look into the direct supply of either raw materials or MedTech devices, a very small percentage (single digits) comes from Russia or Ukraine directly. For example, only 138M of a 160B market comes from Russia. However, there are indirect effects on raw materials, and on logistics, which have affected pricing. The shift is not as significant as it was with COVID; at the moment, it is impacting the margins. What we are noticing is that companies are working to address those margins in different ways. There’s a whole discussion in Europe right now, for example, to adjust the pricing so companies can maintain some of the margins. Companies are investing heavily in terms of manufacturing to digitalize it so that they can improve the yield and reduce the cost. If the conflict continues for longer—a few years—we are likely to see another shift in supply chain and manufacturing. Like the way COVID shifted things to digitalization, to connectivity, this shift will result into pharma finally becoming more sensitive about making decisions related to cost and investment in supply chain and manufacturing.
Whitman: I will add that the Russian API market is less than 0.01% of the total API market, so it’s not a player in that sense. Early in the conflict, I was tracking the impact on supply as it relates to clinical trials and overall clinical trial accessibility in Ukraine and Russia, because pharmaceutical supply would be exempt from any sanctions. Fortunately, they tend to stock about six months of supply for clinical trials. So many trials remained unaffected in the beginning. As of March, only about 4.4% of global trials were halted in the Ukraine and Russia, and some patients from the Ukraine were able to enter trials in Poland.
How are you advising companies that come to you for help with supply chain matters?
Whitman: With every challenge comes an amazing opportunity. There's a lot of technology that has been evolving that supply chain organizations hadn’t necessarily implemented in the way we can now. As I look forward and think about how they need to address supply chain in the future, there’s three things. One is building an end-to-end, transparent supply chain; we now have the data and the technology capabilities to do that. Another is investing in those digital technologies so that you can innovate with that data in multiple directions. The third thing is, as we were discussing, the dual- or multiple-sourcing perspective.
Agarwal: What companies have realized is that they need to be very quick, if something happens, in deciding what options they have and then taking action. Fortunately, there is a lot of new technology around and its adoption has been accelerated. For example, there is Smart Factory 4.0, which incorporates the Internet of Things (IOT) and offers real-time tracking data. Another example, in cold storage, you can place very cheap sensors and get real-time information about where the product is, what kind of a temperature is it holding, and whether there are any risks that can be adjusted. This technology has existed for several years, but only now is it being adopted. We want more people know about this technology so that they can increase their adoption. It’s a cheap and easy way for a company to reduce cold-chain risk by 20 or 30 percent.
So, it was a case of companies not adopting new technology because they hadn't been exposed to the kind of risk that made them see the need for it?
Whitman: That and the idea that it was about efficiency and optimization, right? “Why would we fix something that's not broken?” But now there’s an opportunity. We have to fix what’s broken, so why not build it better than it was, and in a more sophisticated way.
Agarwal: Yes, it’s like with blockchain. What pharma has adopted in blockchain has been one step forward, one step back. Pharma sends information to the distributors and the distributors share that information so that they can validate to avoid drug counterfeiting. But I would say to the industry, you should not only connect to the distributors, but also to your downstream hospitals, to providers, and others. If that happens, pharma can have visibility across the entire supply chain, optimizing its inventory and making sure that the drug access is there. That end-to-end visibility is not yet there. But I am hoping there will be a common trigger, which will push everyone to adopt the new approach.
Whitman: I hope that cell and gene therapy will be a trigger, because in some of these cases they have to have a connected approach. If we’re doing that for the most complex technologies, why would we not replicate it for a more resilient system across all medications?