The ongoing pandemic is putting pharmaceutical R&D strategies to the test and also challenging manufacturing planning and supply chain management. Particularly in this industry segment, the supply chain is global, complex and interconnected. Each link must be strong enough to ensure that the road from lab to final drug product is as smooth as possible, even under the most difficult circumstances.

In addition to the pandemic, the growing threat of a no-deal-Brexit amid old and new trade conflicts and increasing protectionism, is putting even more stress on companies operating in the pharma sector.

In cooperation with Wombat Capital, a cross-border investment bank, CHEManager asked executives and experts of CMOs, CDMOs and CROs operating in the pharmaceutical sector to share their opinion on current challenges for their industry and how these challenges may influence changes in their market.

What in your opinion and from your perspective are the main impacts of the coronavirus pandemic on the drug supply chains?

Jean-Luc Herbeaux: While Covid-19 placed some strain on global supply chains and logistics, the pharma industry overall showed surprising resilience considering the severity of the situation.

The pandemic highlighted the strong reliance and dependence of drug and medical product supply on China and India and the limitations of such a supply model. It caused governments to look at pharmaceutical manufacturing in a more strategic manner, including potential repatriation, to guarantee access to life-saving medicines to cater to the most extreme demands. A new type of “nationalism” promoting preferential (or even exclusive) access to therapies and vaccines has emerged in the meantime and it has the potential to greatly disrupt the established global manufacturing and supply models.

Many Western CDMOs have already shifted operations back to the USA and Europe as intensive business activity in China has driven up labor costs. In addition, national policies, trade-related developments such as Brexit and the US-China dispute and impacts of pandemics are likely to require repatriation of at least part of the supply chain in many countries. Could CMOs/CDMOs be beneficiaries of restructured supply chains?

J.-L. Herbeaux: CMOs/CDMOs have a chance to benefit from the repatriation trend, which already started some years back. The first wave of relocation, which started some 4 or 5 years ago, stemmed from quality and regulatory considerations. This repatriation was very beneficial to CDMOs with assets and quality systems in good standing as they were able to gain access to business which had escaped them up to that point.

The new wave seems to be driven by countries and their citizens coming to terms with the fact that most of their medical supplies are from foreign countries and entities. The recent Covid-19 crisis has revealed the limits associated with reliance on third party country supplies and the ongoing Covid-19 vaccine and therapy “nationalism” further exacerbated the sentiment that repatriation of pharma assets is now a strategic priority.

We ought to recognize that the Covid-19 pandemic is extreme in terms of impact and medical supply needs. It has overwhelmed the global supply chains in unprecedented ways and no economically sound supply strategy could have prepared us for an event of such global proportion. In these special times, there is a risk of overheating and of wrong capital investment decisions. Investments need to make sense not only for the short term (i.e. in Covid-19 times) but also for the long haul (once the world returns to a more normal reality). In this overheated environment, experienced western CDMO´s with flexible assets and operating models and with meaningful engineering capabilities are probably the best bet for this industry. They know how to ramp up and run assets in an effective and nimble manner and make best use of these assets now and in the future thanks to their ability to accommodate an ever-changing portfolio.

What do you think the impact of the repatriation of the drug supply chain will have on the M&A activity in the CMO/CDMO industry? Do you think that this would create an impact on valuations?

J.-L. Herbeaux: The pharma industry is very likely to weather the Covid-19 crisis better than other sectors and accordingly, one can expect valuation to go up at a time when investors may be looking for safe heavens. The demand-supply balance for M&A candidates in the USA will also drive multiples. One can foresee that the high availability of cash and short-term hype may result in some misguided investment decisions in parties and/or assets, which do not represent mid to long-term value. In the pharma CDMO space, assets are important but not sufficient. The right-to-win stems from established competencies in quality, regulatory and manufacturing service excellence and these attributes take time to develop.

Has the inability to hold face-to-face meetings with prospective clients and conduct client visits to sites affected your new business development since the outbreak of the coronavirus pandemic?

J.-L. Herbeaux: New business development has become more difficult as travel restrictions have curtailed opportunities for face-to-face interactions. Physical closeness is known to help individuals (or groups of individuals) form interpersonal relations and develop trust. Proximity and face-to-face communication are therefore particularly important for first-time interactions. We see this clearly in our commercial activities: it is a lot easier to maintain or even further established relationships than to develop new ones. Add to this the need for pharma companies to audit new partners and you will understand why existing partnerships are preferred to new ones at this moment.

The CMO/CDMO industry has managed to support efforts to develop vaccines and therapeutics for Covid-19 despite already being at a high level of utilization. What made that possible?

J.-L. Herbeaux: From what is published, there is significant cash being deployed to ramp up vaccine production and capacity repurposing or reactivation is also on the agenda. Some of this cash came from governments and public organizations to secure supply.

As for Hovione, we are involved in several steep capacity ramp-up exercises and these have been made possible by very strong partnerships with our clients and suppliers. Everyone understands that these are extraordinary times, and all agree that only shared commitments can result in success. The rest is fueled by a sheer desire to save lives. We push our organizations, systems, and processes to new levels of speed and productivity relying on decades of experience, expertise and best-in-class practices. Under these extreme conditions, CAPEX, resources, and associated capacities are deployed faster and products become available in record time. This is what leading and agile CMOs do for a living: deal with the cross-functional and cross-discipline complexity associated with production ramp-up and compress timelines.

For the biopharma CMO/CDMO industry, the pandemic crisis has created great opportunities. What is your opinion on whether and to what degree the CDMO industry will enjoy long-term benefits from its role in tackling the current crisis?

J.-L. Herbeaux: One may assume that the public opinion of the pharma industry will have improved during the last months and that any company, including CDMOs, which contributed to solving or alleviating the Covid-19 humanitarian crisis, would have a chance to boost its image externally but also with its own staff. There is little which can compete with being a contributor to tackling a global health crisis and saving lives.

Leading CDMOs have certainly showed that they can be trusted and that supply chains supported by CDMOS/CMOs are robust. Moreover, their demonstrated ability to step up and make capacity available on short notice, absorbing much of the complexity associated with reaching new levels of supply, has positioned CDMOs at the core of the industry’s journey to provide therapies and vaccines to billions of individuals. The co-dependence between CDMOs and Pharma companies is stronger than ever, and this should increase the propensity of pharma to outsource.

One of Hovione’s facilities is located in Macau, China. How was the site in particular and your business in China in general affected by the outbreak of the coronavirus pandemic?

J.-L. Herbeaux: Macau is a good example of Hovione’s success in controlling the risks associated with Covid-19. Extensive measures were quickly put in place to protect the team members and to ensure the continuity of our manufacturing operations. Many of the raw materials for Macau come from mainland Chinese suppliers and the site was also able to secure its supply chain. The site was even able to adapt to repair specialized equipment with its own staff as technical visits from suppliers were not possible. Our other sites, which have also been running without interruption or disruption, learned from the Macau response and organization. Best practices were quickly rolled out globally under the leadership of a global task force. All our sites are now operating safely according to this new reality. One of our most important decisions has been to offer free testing to our employees with an elevated risk profile, e.g. as they return from holiday.

The race is on to develop treatments and vaccines against Covid-19, and so is the need to assure supply of these potential drugs and vaccines. Pharma companies are leveraging their internal manufacturing networks but also partnering with CMOs/CDMOs. What supply and manufacturing strategies/alliances are in play?

J.-L. Herbeaux: The Covid-19 pandemic has engendered an all-out search for treatment options. Many hundreds of compounds for prophylactic and therapeutic use have been tested in the race against this deadly disease. No drug candidate or route of administration has been neglected and innovative formulation concepts are given due consideration under the assumption that regulatory authorities will likely grant accelerated approval to treatment options which show positive clinical outcomes.

The patient population is considerable, and the urgency is absolute. The manufacturing capacities for the few treatments that have demonstrated some efficacy (or promise of efficacy) to date are being ramped up to scales and with speeds which transcend anything the industry had seen so far.

Pharma companies have sought the help of their partners to ramp up raw material supply and custom manufacturing services to help them deal with this colossal challenge. In times of pressing requirements, strong partnerships are key and unsurprisingly pharma companies have tended to reach out to their existing partners – especially those who demonstrated the ability to meet complicated supply challenges involving new asset deployment and commissioning. We, at Hovione, are part of this select group of CDMOs working closely with partners on both new formulation concepts and steep upscaling of industrial production capacities.

“Emerging”, “virtual” and other small (bio)pharmaceutical companies are driving the discovery and development of new drugs but are mostly dependent on the availability of financing – which could become more restricted due to the economic downturn cause by the economic and epidemiologic disruptions to the global economy. As emerging biopharma companies are important customers of CMOs/CDMOs, how is this going to affect your business?

J.-L. Herbeaux: As a leading CDMO known for helping pharmaceutical companies of all sizes bring new and off-patent drugs to market, Hovione is of course dependent on the health of the biotech industry and its pipeline. So far, our business has remained extremely vibrant as our customers do not appear to be short of cash and pipeline projects are progressing as per plan. The last 3 years have been good in terms of biotech financing (the biotech sector in NASDAQ is at an all-time high). So, one may contend that biotech companies’ strong cash positions will allow them to weather the storm as long as the crisis does not perdure and investments do not stop abruptly. After a few months of increasing disruptions in clinical trials due to Covid-19, data now suggest that clinical trial disruptions have started to recede. Most trial disruptions appear to be due to suspension of enrollment – not financials.

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