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?

Peter Pekos: There are several key areas of impact:

• Shortages in the supply of critical components; vials, stoppers, filters, tubing etc.
• Collateral supply disruptions for usually available ingredients like soybean oil
• Pressure on CDMO’s to quickly develop and manufacture Covid treatments in the last quarter of 2020 while dealing with supply constraints.
• In Canada, CDMO’s were deemed to be essential services, so while the rest of the economy was shut down to protect employees, CDMO leadership had to continue operations while figuring out how to follow health authority guidelines to protect staff. This required us to delve into their personal circumstances to ensure their living environment was not putting other Dalton staff at risk. Travel plans and other risk factors needed to be considered. Now with schools reopening there is a further risk that needs to be managed to control possible infection of staff from other sources.
• All sponsors using CDMOs must, as part of their regulatory compliance, carry out site inspections and vendor qualifications. With borders closed and self-isolation protocols for international travelers in place, we had to adapt to a remote audit environment.
• Business development activities required a move to remote meetings. With the removal of conferences from marketing, the strategies, tactics and tools also evolved. Social media has taken a larger role in brand awareness and the use of conference video tools has amplified the power of the now necessary remote conference.

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?

P. Pekos: Made in the west is not that much more expensive than Asian suppliers and travel limitations challenge relationship building. A Western supplier is now preferred for the North American new drug development industry.

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?

P. Pekos: Valuations are at record highs and as the impacts of repatriation play out in marketed products it could lead to new company creations to provide specialized manufacturing capability for complex pharmaceutical product manufacturing. This in turn will lead to more takeover targets with specialized manufacturing expertise.

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?

P. Pekos: We have reduced marketing costs and we now employ more targeted marketing strategies. This leverages technology to find and communicate with new potential clients.

EU regulatory authorities and the FDA have issued guidance on conducting clinical trials during the Covid-19 outbreak. Have you as a CMO/CDMO been affected by these changes?

P. Pekos: No.

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?

P. Pekos: A big push to repurpose existing molecules for Covid-19 is under way. As we learn more about the virus and its biology, the chemistry teams are adapting to target better treatment outcomes. Massive amounts of money are being invested by governments to facilitate this work and the CDMO industry is benefiting. Where this leaves us longer term is not clear. Once this surge is over there will be a new normal in capacity utilization and we do not know if the current project flow will be maintained.

Immunotherapy development activities have been targeting cancer and viruses prior to Covid-19 and this space will likely get more attention. Especially the development of specialized adjuvants and RNA based vaccine therapeutics with broad spectrum activity against infectious agents.

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?

P. Pekos: Over the last 5 years the emphasis on finding and making immunotherapies as platforms for innovative approaches to cancer and infectious disease treatments has allowed us to repurpose these approaches rapidly to fight Covid-19.

“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?

P. Pekos: The identification of pandemics as an existential threat to humans and a reversion to protectionism in the supply of critical medicines has led to massive amounts of capital being funneled into the biopharmaceutical space by governments. This new source of funding is being leveraged with venture and other sources of risk capital to fund these new companies. So, we now have more capital in the space looking for new medicines, therefore CDMO’s have benefited.

Also, the use of IPOs to provide exits for investors has made biotech more attractive for investment by sophisticated investors looking for higher returns in the low interest rate environment.

While there might be an economic downturn its impacts are very sector specific. The pharma sector is doing very well right now.

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?

P. Pekos: Our role in the pharma ecosystem continues to be underappreciated by investors, governments, large pharma and small biotech. There is a constant struggle with sponsors attempting to transfer risk to the CDMO. This is not how our business model works. Successful CDMOs manage risk, we do not take risks. The pricing model we use is “cost plus”, there is not enough margin to take the type of risks encountered in the development of new medicines. The reality of the drug business is that most products fail to get to market and Covid-19 therapies and vaccines will also have this type of attrition.

I think we will see more acknowledgement of the important role that CDMOs have in the development and manufacture of life saving medicines.

Dalton Pharma Services: Earlier this year Dalton Pharma Services was acquired by Japan’s Seikagaku Corporation (SKK). What changes has the acquisition brought about for Dalton, and how has the integration been in the middle of the pandemic?

P. Pekos: No operational change has been encountered as SKK has expected that Dalton’s business strategy and staff are maintained. I am still the CEO and the leadership team at Dalton has not changed.

We have access to more capital, at a lower cost, to invest in infrastructure to support our ambitious growth plans.

 

www.dalton.com

 

This interview was conducted in cooperation with Wombat Capital, a cross-border investment bank providing mergers and acquisitions and strategic advisory services. With offices in New York and Paris, Wombat Capital focuses on the CDMO/CRO and pharma outsourcing sectors.