Without a doubt, life sciences supply chain resilience will be markedly different post Covid-19. There will be a massive restructuring generally of supply chains for strategic products such as drugs, diagnostics, personal safety equipment, food, chemicals etc., driven by national governmental actions in response to the Covid-19 pandemic.
On the positive side, researchers have come together across academia and industry to co-operate on the push for a vaccine with the World Health Organisation (WHO) and The Coalition for Epidemic Preparedness Innovations (CEPI) working across groups to track and support over 44 programs. At a more protectionist level there have been examples of entities withholding key components such as reagents and enzymes to support their own needs. In the case of drug API, India, one of the largest producers of hydroxychloroquine (a drug claimed to be beneficial in treating Covid-19 infections), has prioritised the supply of the drug for its own people, banning exports with few exceptions on March 25, as the number of positive cases surged. There are also reports of US medtech companies limiting supply of personal protection equipment to ex-US countries, under direct pressure by the US government.
In the more general sense, the disruption to manufacturing in China and India of primary chemicals and to global air and sea freight will almost certainly lead to an imbalance in supply chains across a wide range of pharmaceuticals, which are not apparent today because of the very long lead times. This will accelerate a trend which has been happening for the last ten years.
For the life sciences sector (pharmaceutical, diagnostic and medtech) there will be an increase in the repatriation of national drug supply chains and the re-establishment of national strategic manufacturing capabilities for key drugs. This will, in all likelihood, have many affects, including slowing the externalisation of large pharma manufacturing and increased focus within pharma on securing supply over any cost efficiencies which could be obtained through divestment of manufacturing assets. Divestment of non-core pharma sites, particularly in the US and EU may become rarer and when these do arise, there will be stronger demand and competition for high quality assets.
The CMO industry will continue to grow and mature with continued consolidation of a currently very fragmented industry. CMOs captured c. $80bn of the commercial manufacturing market in 2019 and we expect the outsourced manufacturing market to grow at c. 6.8% until 2023 – well ahead of GDP growth. Whilst the top seven CROs capture over 50% of the market, the top 10 CMOs currently have less than a 20% share. Furthermore, the major CMO players currently only command 2-4% market share each and less than 2% of companies have reached a scale in excess of $500m revenue. Consolidation will be driven by pharma’s need for large, financially strong partners, with broad service offerings (as has been seen in the CRO sector) and a reduction in the overall number of suppliers to pharma (a long-term goal of pharma procurement groups). This will be offset by pharma re-evaluating their networks as the need for control of assets, global reach and localisation have become apparent in the current crisis. In the post-COVID analysis this may also be driven by Governments’ policies which will probably support a more strategic or “sovereign” view of healthcare markets. For more information on the CDMO sector, please see out recent Whitepaper¹ – ‘Outsourced Pharmaceutical Manufacturing 2020 – Current trends & future prospects’.
The acceleration in the trend for repatriation of manufacturing from India and China back to the US and Europe, is driven by a number of additional factors including:
Loss of Asian cost advantages
Asian manufacturers have lost much of their cost advantage since the 90s, as inflation of employment costs has been consistently much higher than in Western markets and compliance costs with increasingly stringent local safety and environmental regulations have risen substantially². Domestic and regional Asian markets have also continued to grow and in many cases have been the main engine for business growth for Chinese and Indian pharmaceutical and CDMO/CMO companies, therefore, servicing European and US markets has not been as important to these companies. Conversely, western-based CDMO’s have found it difficult to establish either scale or commercial success in China, India, Japan and other markets, faced with complex regulatory and cultural systems which are not well aligned with their traditional business models.
The current US-China trade war³ on its own may not have changed global supply chains significantly and may actually have resulted in more Chinese investment in the US and China. However, now, in combination with the Covid-19 pandemic, this is likely to drive the nationalisation of supply chains.
Higher quality standards and regulatory hurdles
Increased scrutiny of manufacturing quality and compliance by regulatory agencies such as the U.S. Food and Drug Administration (FDA) and the European Medicines Agency (EMA), operating in Asia, has resulted in serial critical observations and warning letters for manufacturing sites in both India and China. These have the potential to disrupt manufacturing and potentially lead to the loss of drug access for patients. In China, there has been a drive to increase pharmaceutical manufacturing standards, particularly for chemistry API producers, which has reduced the number of operating intermediate and API suppliers as well as making approval of dossiers and supply chains for overseas suppliers more uncertain⁴⁵.
Increasing supply chain risk
At the time of the SARS epidemic in 2003, China contributed to 4% of global GDP, now in 2020 it’s approximately 20%. For the pharmaceutical and broader life sciences industry, the drivers of future investment may lie in securing supply chains and serving local markets, rather than establishing global supply chains. This will mean there will also continue to be strong investment in Asia by Western life sciences companies as they seek access to these rapidly growing markets. In Europe and the US, a key driver will be securing supply security. For Asian firms looking for both growth outside local markets and accessing new technologies, acquiring European and US manufacturing assets with market access to Western geographies, will be a priority and we are seeing this trend in many of our currently active asset divestment transactions.
Another factor is the detailed reverse due diligence on potential buyers of pharmaceutical manufacturing site now being expected by sellers, particularly in situations where the new owner will continue to supply products to the original owner of the site under the auspice of an MSA. There is increased focus on the acquirer’s business plan, their ability to bring new business to the site and the financial strength of both the acquiring entity and any backing behind this, which will favour larger acquirers.
Challenging the “just in time” supply chain model
Across a number of industries, the concept of “just in time” manufacturing will be challenged and stocks of critical parts and materials will increase. For major pharmaceutical companies, safety stocks of key drugs and key reagents have always been a priority. In light of the recent disruption to supply chains in responses to Covid-19, we expect safety stock for key drugs to be reviewed again and potentially increased. For generic companies, allocation of safety stocks is often driven by market dynamics of reimbursement and here we have seen shortages of key drugs during this pandemic, which may lead countries to re-evaluate the cost benefit of many drug pricing policies. In the future there may need to be better managed reserves of key generic and over the counter medicines. Any demand to increase safety stocks across the life science sector will lead to increased short- to medium-term manufacturing activity.
Short-term impact on pharmaceutical manufacturing and life sciences in general
For European and US based CMOs and CDMOs, future growth will be enhanced by the repatriation of business from Asia to Europe and the US. The recent more nationalistic stance, exemplified by the US under the Trump administration and the UK with its exit from the EU, will necessitate investment in supply chain security and strategic manufacturing capabilities within those countries and near neighbour allies. Ironically, the UK response in this crisis has been partly mitigated by the planning effort and strategic stocks of a range of materials that were put in place to guard against a hard BREXIT. This will lead to demand for good quality ex-pharma sites and operations as well as the construction of greenfield developments. The price of this will be increased costs of goods and more investment in Western manufacturing operations. Globalisation of manufacturing and business has been a big factor in taking large numbers of people out of poverty, and the number of people in China who have had their lives improved by China’s transition to becoming the manufacturing hub for the world is testament to this. This focus on more nationalistic business goals will adversely impact the poorest and least developed countries the most.
The short-term focus on getting through the immediate crisis and its tragic consequences is being achieved through unimaginable fiscal measures. The extreme levels of borrowing will almost certainly result in governments having to challenge future spending plans and reallocate funds rather than increase spending long-term. In the short-term major healthcare companies will survive and may benefit from the situation although this must be in the context that very little routine healthcare is taking place. Where, the impact will be felt is in the impact on research in universities and other centres as they struggle to survive, and in the SME’s and innovative tech companies which are pre revenue and where access to VC and government funding will be too little for them to be successful.
1: Bottomley, Newzella. “Outsourced Pharmaceutical Manufacturing 2020: Current trends & future prospects.” Results Healthcare. 2020. click here
2: Mater Sociomed. 2013 Dec https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3914743/ click here
3: Warren, Cotton, Kaine, & Romney. 2019 Dec https://www.kaine.senate.gov/press-releases/in-bipartisan-letter-warren-cotton-kaine-and-romney-warn-of-national-security-and-public-health-risks-posed-by-chinas-influence-over-drug-supply-chain click here
4. Le Deu, Parekh, Zhang, and Zhou. 2012 Nov https://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/health-care-in-china-entering-uncharted-waters click here
5. World Health Organisation. 2017 https://www.who.int/phi/publications/2081China020517.pdf?ua=1 click here