The Impact of Covid-19 on the Pharmaceutical Industry
The Covid-19 pandemic has uncovered the limits of the current pharma manufacturing model
Being in the public eye, the pharmaceutical industry has responded extremely well to the coronavirus pandemic. However, the Corona crisis has uncovered some issues that are smoldering under the surface and need to be addressed by the industry and by politics alike.
For instance, the pandemic puts pharmaceutical research and development strategies to the test and challenges manufacturing planning and supply chain management. Andrew Badrot, CEO of C2 Pharma, a Luxembourg-based manufacturer, and distributor of active pharmaceutical ingredients (APls), is a senior pharma expert and a close observer of industry trends. For CHEManager, he analyzes the current situation and how this pandemic may kick of changes in the pharma market.
Questions by Michael Reubold.
CHEManager: Mr. Badrot, the Covid-19 pandemic is having an unprecedented worldwide impact. After a half year of living and working under pandemic conditions, what in your opinion are the most important lessons learned so far?
Andrew Badrot: Across the board, we have learned the hard way not to take anything for granted. In the industry, the hardest lesson has been about what true supply chain security means. Over the past few decades, many industries have worked to redesign supply chains to reduce costs, which has led to a greater reliance on global sourcing and networks. But the leveraging of global supply chains has gone so far in the pharma industry that quality and reliability of supply have suffered. After the 2007/2008 Heparin scandal in China, where patients died due to a low-quality material cover up, regulatory agencies have put tighter restrictions on quality levels and sourcing across the industry. While there have been improvements, what these standards have yet to address are the true cost of companies outsourcing necessary materials globally. There was a naive belief that these global networks could not be disrupted, but Covid — and a resulting trade war — have shown us otherwise.
“We have learned the hard way
not to take anything for granted.”
Do we have to halt or even turn back the wheel of globalization?
A. Badrot: Looking at the big picture, just a while ago in 2016, it was still unconceivable to go against the wind of globalization in the mainstream western world. Politicians took the stance that globalization was the inevitable direction of history for our civilization and this narrative was supported by economic theory and large corporation activities.
Carrying forward to pharma, the threat of temporary bans on raw materials exports from China during Covid has sent shivers around the world. This was further amplified by the reality of India‘s partial and temporary ban on some APIs. With China and India being two of the largest providers of APIs and source materials in today’s pharma market, the reality that this industry could be “held hostage” without exports became very real.
“The core theory underlying the concept
of globalization has been proven wrong.”
In today’s market, I do not believe any politician would continue arguing that globalization is a “necessary thing” because we now see that the core theory underlying the concept of globalization has been proven wrong. Wealth will not transform dictatorships into democracies. Quite the opposite, in fact. New wealth in dictatorships combined with open communication platforms will threaten democracies at their core and transform some of them into populist authoritarian regimes. And while pharma will continue to be a global industry, business as usual is going to look a little different going forward.
The pandemic has uncovered the limits of the pharma manufacturing model, in particular its reliance on China and India for many starting materials and even some APIs and drug products. Will this lead to a relocation of certain manufacturing back to the US and Europe?
A. Badrot: We believe that the most enduring consequence of Covid-19 in this industry will be a re-evaluation of pharma supply chains with a more regional and failsafe approach. We expect that manufacturers will look to redesign their supply chains with multiple suppliers, and with a much greater reliance on regional manufacturing hubs in the United States, Europe, and Japan.
This will not happen overnight, of course. We expect that it will be a 10-year long journey where the industry looks at how to re-shore pharmaceutical manufacturing. Initially the challenges will be based on finances and capacity because so much of the existing capacity for chemical assets in the US, Europe and Japan no longer exist. This means that a great deal of money will need to be spent to re-build infrastructure. Another challenge will be the politics of reshoring, as these types of facilities are often misunderstood and unwelcomed by residents.
“A great deal of money
will need to be spent to re-build infrastructure.”
Still, these challenges can be overcome, and from a longevity perspective, they will have a great deal of positive impact if addressed properly. Not only will re-shoring bring dependable jobs back to the west, but it will increase the quality of drugs being manufactured, and ultimately lower costs over time.
Close to C2 Pharma’s “home” in Luxembourg, we expect to see historical chemical sites like the ones in Frankfurt-Hoechst or Leverkusen in Germany, and in Lyon, France, see a resurgence of activity.
Apart from reshoring manufacturing, what else can Western countries do to reduce the risk of supply shortages and safeguard their healthcare systems in future crises?
A. Badrot: We believe that three decisive actions by Western governments can change the course of affairs in pharmaceutical manufacturing and eliminate the reliance on imports for essential drugs:
First, the creation of preferred access regulations mandating domestic supply of essential API and drugs via a combination of financial grants and import duties. This will be most effective if the supply chains are built to allow drug products to be made from the “cradle to the grave”. This means the APIs, solvents, and excipients must all be readily available for sourcing at the quality level needed close—or closer—to home.
Second, strengthening of global quality standards for medicine by allowing the US FDA, European, Japanese, and other regulatory authorities to audit foreign manufacturing facilities without notice. No notifications mean no time to cover-up bad behavior, resulting in a rise in quality compliance.
And finally, transparent labelling at the pharmacy, listing the “country of origin” that the ingredients were sourced from and where the final drug product was formulated and filled in, will allow patients to make more informed decisions.
If these three things are done concurrently, there would be strong incentive to build innovative and flexible local manufacturing assets for essential materials and drug product manufacturing because there would be sustainable profitability in the supply chain. Ultimately, a lack of profitability — which is necessary to keep a business running — is what lead to so much outsourcing of the supply chain in the first place.
While change in the pharma business is continuing, M&A are one element of pharma companies to strengthen their position and create value.
Will this consolidation even intensify due to the Corona crisis?
A. Badrot: Mergers and acquisition activity ebb and flow but is always an underlying factor of growth in this industry. Due to the pandemic, we may see companies that were already in weaker positions go into bankruptcy, and perhaps this could create a bargain-hunting mindset. But this pandemic has also presented new opportunities for companies to enhance strengths and leverage financial interests.
Even if Covid-19 encourages more of a buyer’s market, there will be big winners. For instance, Biontech will likely be an acquisition target. Its collaboration with Pfizer has sent its valuation sky-high, tripling in value since January to reach nearly $18 billion, which is immense for any company, but particularly for one with no track record of products or sales.
Undoubtedly, the shifting acceleration of R&D will certainly drive intense M&A activity with big winners and bigger losers.
Speaking of R&D: In the past, pharma companies worked on their R&D projects internally. Today, external innovation is a key success factor, and collaborations with industry peers or research organizations are a daily occurrence. How do you expect the R&D model to evolve in the post-Covid era?
A. Badrot: We do not believe Covid-19 will have a negative impact on pharmaceutical R&D and its reliance on a mix of internal/proprietary and external partners to drive innovation. The overall approach to development and manufacturing have not proven to be a pain point. Rather, we expect that governments will get more active in financing, or even dictating, R&D and manufacturing programs catered to pressing public health interests. This would be a positive development for the local market and the global markets, as innovation happens and inspires true change. We would be hopeful to see programs such as this have an impact on the search for things like novel antibiotics.
Does consolidation in the pharma industry also create a necessity for the CMO industry to consolidate? Which other trends do you see that are changing the CMO industry?
A. Badrot: The CMO industry does not necessarily need to consolidate, but most likely will. Re-shoring will create tremendous opportunity for players who can expand their manufacturing asset base quickly and organically. In parallel, we expect massive private-equity liquidity to be injected in the industry. Private equity does not do “organic growth” particularly well, so the liquidity will drive a flurry of consolidation of small and mid-scale players. This will push the big players to continue accelerating their growth bigger and bigger, which will change the overall landscape of outsourcing. In the coming ten years, we may finally see the emergence of a handful of very large CMOs — that has been a topic of debate in the last 5 years—because of re-shoring.
“The CMO industry does not necessarily need to consolidate,
but most likely will.”
You established C2 Pharma combining the strengths of Brazil’s Centroflora and Switzerland’s CMS Pharma. This explains the origin of the company name.
A. Badrot: Yes, C2 Pharma is a name that nods to our past and looks ahead at our future. The company was originally named Centroflora CMS, and when we branched out in 2014, this created a lot of confusion with many customers. Looking to overcome this challenge, we changed the name to C2 Pharma, and subsequently split from Centroflora Brazil, which no longer held any ownership in the company. The C2 refers to the past with the C from CMS Pharma and the C from Centroflora. And it looks ahead at the two C’s our team is driven by for the future: competence and confidence.
In 2014, you acquired assets from German drug maker Boehringer Ingelheim along with a multi-year agreement to supply the market with phytochemical APIs. How did this deal expand your technology base and market reach?
A. Badrot: The transaction established C2 Pharma in the API manufacturing business. The portfolio we acquired was mainly a phytochemical portfolio of APIs, meaning APIs extracted from plants. Although much of this portfolio was marred with quality problems, we managed them transparently with our customers and gradually eliminated the problems one by one. We concurrently tech-transferred those APIs to a new manufacturing site.
Today, most of our API developments are based on chemical synthesis, but we have also kept our phytochemical heritage in the company and worked to enhance competence in that space. We have established our own source of Digitalis leaves for the manufacturing of Digoxin API, and are engaged in early stage R&D work in the field of hemp and Cannabis and other undisclosed naturally derived raw materials.
How do you evaluate the potential of plant-based APIs in the future?
A. Badrot: Plant-based APIs are considered a niche business in pharma. Phytochemicals require sustainable crops to source from and can often be expensive and complex to extract, which requires the expertise to do so. Even though the industry has trended towards more reliable organic synthesis, phytochemicals will always have a place. Nature is valuable and can surprise us with the resources it offers.
Take the recent pharma industry interest in cannabis and CBD. Globally, interest is growing in these products, and the plant-based approach has shown to have features that may not be reproducible in a chemical facility. This means that phytochemical expertise, while niche, remains valuable and necessary to innovation.
A key sponsor of the “Partnerships for a Better World” program, C2 Pharma is committed to build a sustainable pharma supply chain. What are the goals of this program and does it have in its tool box to reach them?
A. Badrot: The “Partnership for a Better World” program started in 2003 with Centroflora to support sustainable, traceable, and ethical harvesting of medicinal plants used in the manufacturing of phytochemical APIs for pharmaceutical and nutraceutical products. The program was designed to positively impact all aspects of the supply chain for harvests of various native plants from the Amazon forest and other Brazilian biomes, such as Pilocarpine.
The program’s focus on longevity recognizes the critical importance harvesting has on biodiversity as well as the fact that it is the only source of income for more than one thousand families in Brazil. Five core principles of the program actively infuse and promote ethical trade and sustainability concepts into the harvesting process, including:
- Fair Trade principles to improve working conditions for families of pickers by increasing their income by 5 to 10 times.
- Socio-environmental development of local communities from Brazil’s most disadvantaged regions, whose livelihoods depend on the gathering of native plants. Rather than depending on single- plant harvests, multiple harvest cycles are created for different plants to ensure a year-round income stream for families of pickers.
- Sustainable harvesting techniques to help end illegal picking and reduce the risk of extinction for native plants and preserve biodiversity.
- Increasing the quality of phytochemical markers in the harvests by implementing Good Harvesting Principles.
- Enhancing traceability of harvests to build in long-term quality and sustainability of ingredients.
At C2 Pharma, we carry forward this work by providing firm purchase commitments and full pre-payments of harvests a year in advance. We pay 30% higher prices for the harvests than equivalent farmed crops and ultimately accept lower product margins for the API with the knowledge that these crops have extended lifespans and value.