From joint manufacturing to 'hub-and-spoke' localization, pharma's supply chain future will be a team effort: report

The genesis of a small molecule drug is often an international affair. The medication might begin its life at an active pharmaceutical ingredient (API) manufacturing facility in Puerto Rico, then stop off for formulation in the Netherlands before going through packaging steps in Greece, China, Japan or the U.S. Along the way, the production process gobbles up myriad consumables and raw materials from an even more diverse geographic spread.

All told, pharmaceutical supply chains have proven remarkably resilient during the COVID-19 pandemic. Thanks to regulatory flexibility, increased government cooperation and some good old-fashioned industry elbow grease, biopharma has largely avoided disruptions like those plaguing the semiconductor-starved consumer electronics sector.

But that’s not to say drugmakers’ supply chains have made it through the past two-and-a-half years unscathed. Companies have reported difficulties getting their hands on raw materials such as ethanol, toluene, acetonitrile, magnesium and neodymium, plus single-use consumables like biobags and sterile filters. At times, drugmakers have even had to compete with COVID-19 vaccine manufacturers for those resources.

Now, with the pandemic poised to stretch into the foreseeable future, not to mention an intensification of the war in Ukraine, it’s important to understand what the future of the industry’s supply chains might look like, as well as the steps the industry can take to bolster resilience.

Consulting firm EY has set out to do just that with its new report, “Pharma supply chains of the future,” which pools the insights of 17 global heads of manufacturing and supply chain operations at companies enrolled in the Pharmaceutical Manufacturing Forum.

The future is nigh

Even in the pandemic’s third year, it’s essential to keep resilience-bolstering measures top of mind, Olaf Zweig, life sciences partner at EY, said in an interview. He flagged the emergence of export bans, trade policy changes and armed conflicts, too, suggesting that “it will become the new normal that we see this kind of mini or bigger crisis on a more continuous basis.”

Don’t just take EY’s word for it. Earlier this year, the CEO of Enamine, a Ukrainian chemical building blocks outfit, warned the company was “under threat to be destroyed,” thanks to Russia’s heightened aggression, noting it helps supply the world’s stock of chemical building blocks and reagents.

Separately, Germany’s Merck KGaA cautioned in May that its 2022 financial forecast could suffer from “increased uncertainty and volatility,” thanks to the pandemic, fresh COVID lockdowns in China and Russia’s invasion of Ukraine. The drugmaker noted that the string of events had put a squeeze on global supply chains and fueled a spike in operational costs.

Meanwhile, changes in the pharma industry's operations typically play out on a three- to five-year timeline, Derron Stark, principal at EY for strategy and transactions, told Fierce Pharma. That means certain efforts that kicked off in the pandemic’s early days are just now being put into practice, he said. Meanwhile, COVID-19 certainly won’t be the last globe spanning crisis the pharma industry has to contend with, so it's important for the industry to stay focused on supply issues.

Rusty links

The typical supply chain for a small molecule drug involves globe-trotting production and an elaborate mix of raw materials and consumables, EY notes in its report. The process typically begins with API production, followed by formulation, then primary and secondary packaging.

API manufacturing alone could require, for instance, complex intermediates from Europe and base or specialty chemicals from China plus regulatory starting materials from India or Spain, EY noted. That only covers upstream chemicals, while solvents and reagents like ethanol, piperidine and dibasic calcium phosphate might be sourced from the U.S., France and Belgium, respectively.

Ultimately, EY envisions this “fully globalized” supply model shifting to a “hybrid model” balanced across global, regional and local sites. That could in turn boost supply chain resilience by establishing “redundant capabilities with multiple suppliers,” plus increased cooperation with contract manufacturers.

Collaboration across companies, whether in the form of joint warehousing, manufacturing or other shared functions—could play a bigger role moving forward, antitrust regulations permitting, EY pointed out.

The fivefold path

So, what does a “resilient’ supply chain look like? According to EY, there are five factors involved. There’s reliability, or the degree to which a supply chain yields consistent performance and quality; then there’s time to innovate, or the time it takes to bring a new product to market when weighing the complexity of chemistry, manufacturing and controls development and regulatory approvals for the manufacturing system.

Another important factor is agility, or the supply chain’s reaction speed to changes in the market, demand or regulations. Risk exposure is also important and refers to the degree to which a supply chain is exposed to new or existing threats. Finally comes efficiency, EY said.

“One of the key learnings in the pandemic was that many companies were not sufficiently dual sourced on input materials and consumables like raw materials,” EY’s Stark said.

Establishing multiple supply routes for those materials and consumables is first on the agenda for many drugmakers. Next, many are looking at whether they can boost resilience by calling upon contract manufacturing organizations. Digital solutions offer another avenue to boost supply chain strength and visibility.

Elsewhere, countries and companies alike have recently turned to onshoring, or domestic manufacturing, in a bid to bolster resilience. Even still, “localization alone will not increase resilience,” Zweig added.

The onshoring dilemma

Over the past two and a half years, there’s been an “intensified government-regulatory demand to explore increased localization,” Zweig pointed out. At the simplest level, this can look like increasing local stockpiles of materials. At its most ambitious, localization typically refers to the buildout of full end-to-end production and supply chain capabilities in a given region or country.

Localizing later parts of the supply chain, like packaging, wouldn’t be a huge lift for companies, EY said. Things get more complicated at the earlier links in the chain, such as API production, the consulting firm explained.

Localizing drug ingredient production would likely prove the biggest hurdle for pharma companies “both in terms of the scale of capital investment and the levels of technical and quality competency required,” EY said in its report.

Comprehensive manufacturing localization would “significantly” boost supply chain agility, EY noted, but that agility “would be purchased at the cost of a considerable loss of efficiency given the need to build and maintain infrastructure, services and talent at local sites.”

EY’s message is clear: “Ultimately, some combination of localization and other strategies may provide the most satisfactory answer.”

How to future-proof your supply chain

The alternative to pure localization could take many forms, EY noted, though three measures in particular stand out to the team.

For one, the "hub-and-spoke" concept describes a localized manufacturing setup where satellite sites around the globe, or the "spokes," complement the capabilities of a central "hub." EY figures this approach could shore up enough locally based production capacity to meet the requirements of the relevant domestic market.

EY figures a “spoke” in Mexico, for instance, could shift indirect services like planning, procurement and quality control to a global “hub” in the U.S. This would boost supply chain agility in turn, “without incurring the level of expenditure needed for a full-scale local site,” EY said.

Another strategy is to utilize a so-called procurement clearing house, or a virtual and potentially AI-supported organization that weighs the supply of raw materials and consumables against industry demand, EY said. The company envisions the clearinghouse could offer drugmakers an order management vehicle to consolidate and forward bids for common resources to suppliers.

Joint custody

The pharma industry, long-known for its multibillion-dollar rivalries, has engaged in an unprecedented level of collaboration during the COVID-19 pandemic, and EY is proposing companies take that one step further.

Enter joint warehousing and manufacturing, which EY thinks could ease supply transfers in the face of supply chain disruptions and grant companies access to “full-scale” local production sites, respectively.

EY admitted that establishing extra warehousing space wouldn’t be cheap. Meanwhile, coordinating manufacturing operations across companies “would obviously affect strategic planning and potentially necessitate negotiations and mutual compromises between companies over access,” EY said. Still, the benefits to shared warehousing and production could extend beyond a boost to supply chain agility.

As an aside, EY noted that the rollout of hybrid supply models will be an increasingly costly endeavor for the industry, “at least until the introduction of newer enabling technologies." Ultimately, digital capabilities like automation, artificial intelligence and end-to-end-supply production and supply chain operations will be essential “to support these increasingly complex supply chains in the long term," the company notes.