Pandemic Perspectives: Cracks In Global Supply Chain Lead To Localization Trend

Source : IN VIVO

One year on from the formal designation by the World Health Organization of the coronavirus outbreak as a pandemic, the disruptive effects on the global pharmaceutical supply chain, especially for the off-patent industry, are still being seen.

For years, the pharmaceuticals industry and the generics industry in particular have become increasingly reliant on supplies of ingredients and formulations from specific geographies in Asia, notably India and China, with the globalization of the supply network offering opportunities to cut costs at a time when constant price pressures continue to be felt.

The COVID-19 crisis not only cast a spotlight on existing weaknesses in the supply chain, in the form of this over-reliance on certain regions to produce active pharmaceutical ingredients or formulations of critical medicines. It also hugely exacerbated the risks of this concentration of supply.

Barriers such as local lockdowns, suspension of key freight routes and national restrictions on the movement of key drugs and ingredients all combined with a pandemic-driven scramble for medicines to create what one industry executive described as a “perfect storm of a massive increase in demand at a time of new supply pressures.” ()

Richard Saynor, CEO of leading generics firm Sandoz, highlighted early on in the COVID-19 crisis that he was “very concerned about reports that prices for basic medicines such as painkillers and antibiotics are rising substantially as a result of a tightening supply situation for APIs out of China,” calling for a “co-ordinated and long-term approach to address the complex and interconnected issues of pricing, supply and quality.”

In the weeks and months following the coronavirus outbreak, major regions around the world began to re-examine their position as part of the international supply chain. And over the past year, several territories have put in motion initiatives that have the potential to significantly reshape the global model, pursuing localized manufacturing policies aimed at bolstering domestic production capacity and protecting themselves from a repeat of the supply-chain crisis that was prompted by COVID-19.

As far back as May last year, US off-patent industry association the Association for Accessible Medicines had proposed a detailed policy “blueprint” aimed at enhancing the security of the US supply chain, which sought government purchasing commitments in exchange for industry manufacturing expansion.

“Modern pharmaceutical manufacturing facilities can take five to seven years and cost up to $1bn to build,” the AAM pointed out at the time, demanding a long-term, consistent commitment from Congress and the White House to bolster local supply through an expanded domestic generic manufacturing base.

In the months to follow, the US government acted to bolster domestic production – notably through a federal government award worth over $800m to domestic start-up firm Phlow Corp for “advanced manufacturing of America’s most essential medicines at risk of shortage.” And shortly after, Kodak’s new pharmaceuticals unit received a $765m loan from the US International Development Finance Corporation to bolster supplies of products in shortage.

And the moves seen in 2020 to bolster US production may only be the tip of the iceberg. More recently, newly elected US president Joe Biden has signed executive orders calling for a 100-day review – as well as a more in-depth one-year review – of supply chain vulnerabilities in key industrial sectors, including pharmaceuticals, with the 100-day review focusing on API supplies.

“We expect that by taking this type of comprehensive approach to supply chain resilience, we’ll be able to strengthen our supply chains for the long term.”

The Biden administration’s actions were welcomed by the AAM as a “prudent, considered approach to fully understanding the scope and capacity of current US pharmaceutical manufacturing, while identifying specific vulnerabilities that can be targeted for resolution both immediately with the COVID-19 pandemic and longer-term as the country prepares for future public health challenges.”

As part of the yearlong assessment of supply chain risks, US agencies will focus on identifying critical goods and materials, the capabilities needed to produce them and the vulnerabilities that result from any lack of domestic manufacturing capabilities. Agencies will also identify key manufacturing assets, availability of substitutes or alternative sources, workforce skills gaps and the role of transportation systems.

“We expect that by taking this type of comprehensive approach to supply chain resilience, we’ll be able to strengthen our supply chains for the long term,” summarized Peter Harrell, senior director of international economics and competitiveness for the US National Security Council.

Meanwhile, the Canadian Generic Pharmaceutical Association also set out its own detailed “blueprint” document midway through last year, calling for fresh investment in domestic manufacturing and insisting that an enhanced international role is needed for Canada, as well as urging engagement with Canadian manufacturers to create a local stockpile of essential drugs. ()

Among its recommendations were “incentives, grants, guaranteed price and volume agreements and other supports” aimed at areas such as manufacturing and R&D, as well as warehousing and distribution.

CGPA president Jim Keon recently suggested that years of government price-cutting initiatives in Canada had “served to weaken Canada’s domestic pharmaceutical sector and resulted in job losses, increased reliance on imports, and a more vulnerable pharmaceutical supply chain for Canadians.”

Acknowledging that the pharmaceutical industry and supply chain were “fully globalized” – with ingredients sourced internationally regardless of where manufacturing takes place – Keon conceded that it was “unrealistic to believe that all medicines, or the ingredients required to produce them, could be manufactured or sourced in Canada in a sustainable way.”

But he insisted that it was “possible to strengthen Canada’s existing pharmaceutical manufacturing capacity, promote a well-functioning global supply chain, and adopt a co-ordinated approach to better equip Canada for future health emergencies, such as identifying essential generic medicines to domestically produce and stockpile for Canadian needs.”

In Europe, the effects of supply chain disruptions caused by the coronavirus outbreak were keenly felt from early on in the pandemic, despite detailed epidemiological modelling and unprecedented collaboration among competitors that helped to keep essential supplies moving at the height of the first wave of COVID-19.

This included engagement at the level of the European Commission to allow such close co-ordination between different companies without raising competition concerns. ()

More recently, however, the Commission has moved from short-term fixes to longer-term thinking that takes into account the need for a stronger local manufacturing base, as well as new approaches to procurement that will focus on more than just negotiating the lowest price.

In particular, a “structured dialog” with industry stakeholders has just been initiated by the Commission, as part of efforts to bolster the environment for local manufacturing and address weaknesses in the stability and security of the supply chain.

Health commissioner Stella Kyriakides outlined the Commission’s intention to “reinforce the resilience and open strategic autonomy of our medical supply chains,” with security of supply an “essential aim after a year of COVID-19 disruption.”

The move has been welcomed by local industry, with off-patent body Medicines for Europe describing the initiative “a springboard to address the long-standing issue of securing predictable and sustainable supplies of medicines in Europe.”

Medicines for Europe’s president, Teva’s Christoph Stoller, said it had been “very painful to see Europe gradually losing its essential pharmaceutical production. This cannot continue.”

But the dialog represented “a first concrete step to map and assess strengths and vulnerabilities,” he suggested, as well as to “define policy changes and funds to secure and attract significant investments in Europe.”

The Commission’s structured dialog comes soon after it set out a broad EU-wide pharmaceutical strategy that promises to create a more sustainable environment for medicines, in part by promoting the incorporation of non-price criteria into procurement processes.

Insisting that actions in the area of public procurement “can foster competition and improve access,” the Commission urged public buyers to “design smart and innovative procurement procedures, e.g. by assessing the role of ‘winner-takes it all’ procedures and improving related aspects such as price conditionality, timely delivery, ‘green production’ and security and continuity of supply.”

Another major factor promising to affect the European manufacturing environment is Sanofi’s creation in Europe of what it has billed the world’s second-largest API manufacturer, Euroapi, with sales expectations of over $1bn by 2022. While not directly prompted by the COVID-19 pandemic, the move is nevertheless expected to play a role in easing European drugmakers’ dependence on supplies of raw materials from China and India.

“Significant competitive strengths” cited by Sanofi include “a broad portfolio of 200 APIs with both volume and niche products, high standards of quality and industrial means, and competitive pricing and technologies across Europe,” with the company noting that Euroapi “will leverage an extensive commercial network covering more than 80 countries.” These would “help secure significant API manufacturing and supply capacities that are critical for patients in Europe and beyond.”

However, some industry players have expressed caution over how far it is feasible to bring production back to Europe. Rex Clements, CEO of antibiotics specialist Centrient, recently told In Vivo that while there was “clearly an interest in having local manufacturing” in Europe, “at the same time we don’t believe in being fully Europe-sourced.”

“I believe there is an importance in diversified sources" - Rex Clements

“I believe there is an importance in diversified sources,” Clements explained. “So we do have emerging markets sites, we have global sites with diversified sourcing so that if we have an interruption in one location we have alternatives by which we can supply ... What we believe is that yes, there is a role for European sourcing. And we do believe that in Europe especially – and in the US as well – more attention needs to be paid” to this area. “But the more important point is the diversified nature of the sourcing.”

Ultimately, Clements said, the pandemic “has sensitized the industry to the security of supply chains, definitely in generics manufacturing and API manufacturing, and also on the policy side: policy makers at all levels are under pressure to really take the issue seriously. And with the EU pharmaceutical strategy, we really see that coming to fruition.”

While Indian and Chinese suppliers are both often talked about in the same breath when describing the global supply chain’s reliance on production in Asia, a supply relationship also exists between these two major production hubs. And the events of the pandemic – especially given the initial disruptions in China – have seen India reassess its own reliance on Chinese imports.

In mid-2020, India’s government unveiled its Production Linked Incentive scheme to promote domestic manufacturing of critical key starting materials, intermediates and APIs by attracting investment into the sector, as part of efforts to make Indian industry more “self-reliant.”

And just recently, at the start of March, the Indian government’s Department of Pharmaceuticals has restated the goals of the approved scheme – to “enhance India’s manufacturing capabilities by increasing investment and production in the sector and contributing to product diversification to high value goods in the pharmaceutical sector” – and has set out plans for the initiative to also cover a range of other products including finished-dose drugs, biopharmaceuticals and complex generics.

A report published last year by the Indian Pharmaceutical Alliance had warned that, absent meaningful action, Indian manufacturers were “at risk of supply disruptions and unexpected price movements” because of their heavy reliance on Chinese exports.

IPA secretary general Sudarshan Jain acknowledged that the pandemic had “revealed the challenges of depending on a single source for imports,” observing that “owing to this, many countries have taken cognizance of the issue and are trying to diversify imports of Chinese APIs and intermediaries.”

One notable recent addition to the list of countries exploring policies to bolster domestic manufacturing is Australia, which within the last month has seen its government set out a “roadmap” for pharmaceuticals that is aimed at reinforcing the supply chain and strengthening its local manufacturing capabilities.

Aiming to “identify and set a future vision for the priority areas with clear goals, opportunities and actions over the next two, five and 10 years,” the roadmap highlights opportunities for Australian businesses to build scale and capability while strengthening the integration of local and global supply chains and enhancing competition and collaboration across the sector.

While the road map largely focuses on “high value-add medicines” and “cutting-edge treatments,” it also picks out complex generics and biosimilars for special mention.

Acknowledging that “generic pharmaceuticals and biosimilars command lower profit margins,” the document nevertheless suggests that “investing in highly efficient and automated facilities could offer Australia some opportunities to manufacture certain generics and biosimilars which are particularly complex products.”

Welcoming the proposals, Australia’s Generic and Biosimilar Medicines Association said the roadmap “recognizes that Australia needs to build its own sovereign medicine manufacturing capability whilst ensuring patients can still access a reliable and resilient global supply chain of medicines.”

“We know medicine manufacturing has long been a sector slowly disappearing from our shores,” said Dennis Bastas, chair and CEO of Australia’s Arrotex. “But with the advanced technology, innovation, the right policy levers, funding and industry will, we can see a vibrant and burgeoning home-grown, export-driven pharmaceutical sector develop again.”

With the COVID-19 pandemic far from over and pressures continuing to be exerted on the supply chain, it remains to be seen to what extent the “new normal” for the global pharmaceutical supply chain will reflect these recent moves towards localization and domestic production once the dust settles.

Few industry onlookers expect individual markets to become largely self-sufficient, given the practicalities of producing such a wide range of ingredients and formulations, which makes it unfeasible for a single nation or region to produce all of the medicines they need. And given the timelines required, major manufacturing infrastructure projects will be the work of many years, rather than months. 

However, given the prominence of localization initiatives in so many major markets, it does seem likely that industry will see countries make a greater investment in domestic production to some degree, as industry stakeholders seek to address the supply chain’s over-reliance on a handful of specific geographies that resulted in so many supply constraints in the immediate wake of the coronavirus outbreak.

Also worth bearing in mind is the importance of political will, as well as industry action, to keep the supply chain functioning smoothly. Medicines for Europe recently summed up how recent experiences had demonstrated the need for improved international co-operation when it came to the pharmaceutical supply chain.

“During COVID-19, Medicines for Europe was strongly engaged to ensure continued access to medicines for patients while protectionism, hoarding measures and panic policies undermined these efforts,” the association noted.

“The emergency has highlighted the need for closer international health collaboration and for governments to work together with industry to balance emergency health measures with free flow of medicine supply chains.”

By David Wallace