Pharma Value Chain & COVID-19

Expert Profile

Section 1: Pre-COVID-19 Pharma Value Chains

1.1. How would you describe the pharma value chain before the outbreak of COVID-19?

Firstly, it’s always a complex setup, especially for generics. Of course, one tries to have several resources for certain APIs, but in reality, many of the APIs are still single sourced or not as diversified throughout continents as it might make sense in the light of COVID.

So many products come from Asia especially China and India. I would say 60-70% of generic products are manufactured in both these countries.

1.2. Before the COVID-19 outbreak, what were the largest issues and bottlenecks in pharma value chains?

There have been initiatives, it’s a trend independent from COVID that pharma companies have been looking at diversifying their supply lines. However, COVID will have accelerated this topic to ensure solid backups for important suppliers.

From a risk perspective, we’ve already has seen some disruptions in China prior to COVID such as factory explosions and shutdowns in several regions which had already triggered this initiative. But of course, the current crisis has accelerated these processes.

1.3. How differentiated was the pharma value chain across competitors prior to the COVID-19 outbreak?

I think pharma companies have different strategies, so some companies rely a lot on contracts with a limited supplier basis, some companies rely more on let’s say opportunistic purchasing behaviour where prices are the main driver. There are these two different ways of how to look at things, so either it’s the price or supply security, quality and reliability factors. It’s always a balance and to which extreme a company tends to or if they are able to make a good compromise in between.

Section 2: Impact of COVID-19

2.1. What difficulties have you seen emerge in the value chains for drugs since the emergence of COVID-19?

I think the impact from China was not so huge. Mainly the Hubei province was closed, and there are not many API facilities based there. Other regions in China would have been harder hit. All in all, the impact was not so widespread, especially as pharmaceutical companies always were, in most cases, able to still operate at least at a certain capacity. We have not seen a huge impact from China yet.

Of course, there were slow downs with distribution, especially with air flights, so that was the main challenge. With the outbreak now reaching India, I think it has reached a different level, and with other regions in the world of course. For India we’ve seen massive disruptions in the supply chain from transportation logistics so far, but as it’s relatively new in India and pharma supply chains, you will see the impact in three to six, sometimes even only nine months as companies have to procure starting materials with several lead times with manufacturers then shipping APIs to Europe. They even have a turnover of three to four months. We see that companies in India are having problems getting personal air flights, so although we have enough operators it will have some impact. You don’t see it yet, but I would expect that will come.

I think if the pandemic lasts longer than May, I would expect that we see drug shortages this summer.

2.2. How are health bodies, such as NICE or the FDA, looking to collaborate with pharma companies to ensure supply chain stability?

So far, we haven’t seen any stockout, so I think it has not reached the finished product market yet. There are currently not any real shortages. All companies, as far as I know, are still delivering. There are, of course, all these shortages which I’ve discussed and then there was some panic buying in recent time on products such as paracetamol. Other panic buying was also around so potential COVID treatments that you might need or people stocking up their usual demands on cardiovascular medicine.

There is a shortage in this regard with people just buying more, but other than this there are not yet any discussions going on simplifying approval of additional sources or supporting supply chains. So far, the situation is not as bad that immediate stockouts would affect the bench of important drugs.

2.3. Could you elaborate on the impact of API availability in supply chains given the restrictions in China and India?

Given the increased emergence of the virus in India, it is potentially a big problem in the way that it wasn’t in China, because in China the virus was more restricted to the Hubei province whilst in India I think it’s more the whole country affected especially in Hyderabad, which is where the main hub of API manufacturing is located. It really depends, I mean India is flexible, we’ll see how they manage to get the transportation organized. It’s still allowed to operate, especially pharmaceutical companies because India heavily depends on it and knows about their impact on the world, so I think they’ll try to keep that side open. We still have obviously received shipments from India, so it’s not fully blocked.

Costs are increasing for transportation and if you have to book charter flights instead of normal air shipments, it becomes much more expensive. It’s the cost factor on the one hand but also, I think the API sites will need to start choosing what to produce and whom to serve.

2.4. How has COVID-19 affected the supply chains of generic vs. branded drugs? Is one more impacted than the other?

I mean, generic drugs rely to a broad extent, if not fully, on external manufacturing, so mainly all APIs on the market are externally manufactured. There are some exceptions like Teva, they have their own API business, as well as other companies who have that integrated, and it’s a little bit different for them. However, a large portion of the players rely still on external suppliers. Also, Teva have other manufacturers of external supplies too. In the supply chain, while pharma companies or innovators usually have a more diversified approach, they have at least in many cases internal manufacturing or at least two robust alternate sources implemented.

It’s just the value chain behind these products, innovative products, might have a turnover of billions easily, while typical generic products, if they are good, they make a couple of hundred million, even less. In this case, you don’t diversify your supply chain as much, or you don’t invest into too much diversification and risk management.

2.5. Which drug classes and groups will be most affected by API supply chain restrictions in India and China?

I think the list was, at least at first glance, not really well understood why they chose these 26 molecules specifically. For sure there are molecules on the list which are under testing against COVID now, so the programs running with WHO and in several countries where different drugs are tested, especially antiviral drugs for HIV and anti-flu medicines.

These would be the classical suspects. Maybe these drugs were somewhere associated with potentially curing or being a treatment for COVID, and that’s why India restricted them. Also, some antibiotics are affected but this is the main area, but there are also some substances which I cannot really understand why they’re on this list.

2.6. Are supply chains of certain drug groups being prioritized? If so, what groups are these?

I think originators would classify by value, then it also will depend of course on how balanced they are in their supply chain here. If you have two or three suppliers in different regions, it’s maybe not so critical to prioritize these products. I think they would prioritize more based on what is their supply chain, what is the value creation, and some companies for sure also what is the demand side. So first will be potentially COVID treatments, for example, that get additional attention.

Section 3: Risk Mitigation

3.1. What actions are pharmaceutical companies taking to maintain stable supply lines in the longer term given the potential re-emergence of COVID-19 later this year?

Pharma companies are looking now onto alternate sources for the most important drugs, so trying to diversify the supply chain as quickly as possible. But these things are unfortunately not so easy with internal guidelines for quality and external requirements. In the past, what you could do is a variation with maybe three to six months lead time at another source.

If they have all the CP approvals, for example, then it might be a little bit faster, then it can be done maybe in three months to add an additional source. However, you have to qualify them, send the documents to the authorities, get approvals. Maybe it could be worked out that this process can be sped up, and also with regards to orders and requirements. I think this is what currently is going on, that if you identify that one of the important drugs has a single source from India then you will try to implement alternate sources ideally from Europe or if not, everything is available here then from China.

3.2. Will there be future changes in the drug manufacturing process post COVID-19?

I think pharma companies will look to move API facilities towards Eastern Europe. I think that might be interesting to explore. As well, for originators that also have European manufacturing, most of this is CMO-based, so they will not build up new facilities but partner more with European CMOs. I think companies will think twice before single sourcing with India or China in the future. I believe it will increase the trend to diversify more and bring more products back to Europe for manufacturing.

I don’t know if companies such as GSK and Pfizer would really integrate the API facilities directly into their own business, I think that’s really something which is special about Sanofi. I wouldn’t say that everybody will go that far but there are of course many CMOs which also have sites in Europe, which will be getting more attention from big pharma and from generics.

I think supplier reduction is still a trend, to focus on less suppliers, which are more selected. I think that’s a trend throughout companies. But who would also think about self-manufacturing? Again, I don’t think that many companies would do it at the moment.

3.3. Will pharma companies look to spread their manufacturing facilities across more locations?

Sanofi is different to the other pharma companies in this respect. It’s opposite to the trend, which started 10 to 15 years ago, with AstraZeneca completely relying on external supply only. They outsourced the finished product and API manufacturing, and that’s a trend we see in many pharma and innovator companies.

Sanofi already buy API manufacturing sites and bring their own products into their own manufacturing is an opposite trend from that externalization. We still have companies like Novartis externalizing a lot, looking more to close their own manufacturing sites and rely on external partners.

In terms of the supply lines Sanofi is a bit of an exception and pharma companies wouldn’t necessarily look to integrate API manufacturing facilities into their own system but rather they would look to diversify the pool of API manufacturers so that they don’t have all their eggs in one basket.

Especially with respect to regional locations, you might have a partner that is quite diversified across different regions and this would be an ideal setup. If you don’t have that, then you would partner with maybe two or three different sources for one product.

3.4. Could we see the return of API manufacturing to the EU5, US or Japanese markets?

I think Europe would probably fit, it’s partly Eastern Europe for basic chemicals and for generics. Italy and Spain also have a good footprint, they have many sites there, especially with the SPC waiver coming. This also might be an opportunity for Europe because there was always a reason to go outside of Europe, which was patents for generic launches to avoid patent conflicts. I don’t see many other regions, though there are some suppliers of course in Latin America, and in the US. For certain products in the US there’s a substantial business and supply chain there.

I believe companies will try to at least diversify their supply chain to the extent that you have at least also a European supplier for example in your dossier registered and you can use it. Then, of course, generics is a cost-sensitive area. Of course, you can always play a little bit with effect of how you split your demand between the two suppliers in your dossier. You don’t really have to split it 50/50, but, perhaps, 80/20, and then you still can benefit from having a molecule supply base with your cost base. Of course, always keeping in mind that certain capacities have to be there in case of an emergency and that’s what we usually see when one big supplier in India, China has a quality problem or another COVID crisis. All the other suppliers usually don’t have the capacity to jump in and fulfil 100% of the demand. That’s normally not possible now.

I believe COVID will have a long-term lasting effect and actually is a bit of a wake-up call to pharmaceutical companies that they can’t just rely on one or two locations to fulfil their supply lines.

I also think pressure, especially with these shortages, from authorities has a role to play. There are already discussions with the European Union that you cannot rely only, for anti-infectives for example, on China for lifesaving drug manufacturing. So, there is also political pressure to consider. It has not yet turned into any regulations but only recommendations, but I think this crisis might bring this more on the agenda.