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 Halkjaer-Knudsen: Speaking for Raybow – we had an 18-day shut-down in February/March before we were allowed to reopen under daily medical testing and supervision. This meant we could go into 4-shift manufacturing and resulted in all shipments being on time, our clients did not experience any delays due to Covid-19, so no real short-term impact.

Our fast start was supported by the fact that we manufacture several of the drugs on the WHO list of Essential Medicines for the World. The local Government supported us with priority equipment like walk-through thermal scanners etc. to assist us in fulfilling our international obligations.

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. Halkjaer-Knudsen: There are many statements in what you say – let us look at them individually.

The labor cost, while important, is only a fraction of the cost of a finished drug, so an increase in the actual labor is not the big driver of change. The major costs are in the manufacture, materials, environmental costs and financial costs of building and operating the facilities. The issue could be that many costs have changed and all of them with increases, together this makes for an increase in product pricing, of course. Some are probably permanent, and some could go back to a lower level when world trade has been re-established.

The increase in costs would have to be seen more differentiated than just “China” – for a lot of generics manufacturers, the price had for years been pushed down so low that they were unable to meet the environmental requirements of the Chinese government and thus were forced to close shop when the Chinese government started fully enforcing the existing law. This created a shortfall in the market for some drugs – not so much created by the Covid-19 pandemic as by the very low pricing and the rising requirements for environmentally acceptable manufacturing. More than 20.000 chemical companies in China were forced to close, just in 2019. Most of the large CDMOs had already, gradually, adapted to the new requirements and already operate according to modern environmental policies – Raybow was fully certified as one of the first large CDMOs and experienced no delays and did not have to change the existing procedures.

Regarding the Covid-19 pandemic – there has been effects in supply of raw materials if sites were located in the zones that were under repeated lock-down or prolonged lock-down, but with others stepping up production, the supply situation has experienced some tight spots but in general it has worked out. The shortage of some materials has not been due to Covid-19 but mostly to the continuous tightening of environmental standards and the tightening of safety regulations following an explosion in the chemical industry last year.

It seems like the outcome of the whole situation is still uncertain – reshoring the manufacture of API is an important topic, but from a Western perspective no firm commitment has been made by any government on how to allocate the significant costs involved in funding the shift of the manufacturing infrastructure out of Asia. These costs are huge, and China already has a very modern infrastructure today.

It does make a lot of sense to further strengthen the process of improving supply chain management to ensure that sourcing, manufacturing and logistics are safe and sustainable on a global perspective – but then the perspective has to be global, not national.

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. Halkjaer-Knudsen: It will definitely have an impact on the industry – building a new infrastructure will take time and require massive investments, and this might initially drive up the valuation. This again will initially drive up the cost of the medication to the patients.

With product pricing being capped, increased valuations and high demands for infrastructure investments might offer less incentive for suppliers to invest and set up manufacturing facilities when the overall profitability will be under even higher pressure than today. Possibly this would counter the tendency towards increasing valuation. I do not have a clear picture of where this will go.

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. Halkjaer-Knudsen: Naturally – much of what we do is strictly science driven and may very well be communicated by virtual meetings, but meetings with new clients is a matter of building the trust and understanding that is required for commissioning a very important project to a supplier. Building this trust is not a simple process whatever the physical distance. I think there will definitely be an impact in 2021 from meetings not conducted in 2020.

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. Halkjaer-Knudsen: Raybow manufactures drug substance within small molecules. Our sponsors have definitely been hurt by drug development being delayed by lacking availability of trials, be that clinical or toxicological. This has led to several projects being put on hold – which again might have a subsequent influence on availability of facilities and on the delivery time of clinical supplies when we see a surge of requests for manufacturing capacity as could be expected when the clinical trials spring back to full capacity, and many months of projects are backed up.

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. Halkjaer-Knudsen: This is not controlled or managed by few companies – all companies that I know of are pushing in the same direction. Competitors we may be – possibly – but in this situation we have definitely seen mutual support and very good collaboration between companies. Producing essential medication is a global requirement towards our industry and I see a dedicated effort and a will to solve issues and assure Global supply.

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. Halkjaer-Knudsen: Production might not be at a sustainable level right now – but everybody is going max effort. We might be “The Industry” but we are also parents and have parents. Medication against Covid-19 has highest priority. At Raybow we have allocated both R&D and manufacturing capacity to meet demands and – as I mentioned above – we moved into 4-shift 24/7/365 until we caught up with the backlog. Today we have Covid-related campaigns that do receive priority timelines.

“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. Halkjaer-Knudsen: It has not been our experience that there is a decreased availability of funding. Indeed, it has never been easy to get adequate funding, but funding seems to be relatively unaffected by Covid-19. Additional funding for the biotech sector is highly needed, let there be no doubt about that, but it is not strictly related to Covid. Meeting investors and securing new funding is very much a people-driven process and the lack of conferences and meetings has had an impact – this is the big effect.

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. Halkjaer-Knudsen: I fail to see the opportunities as such. At Raybow, our good fortune is that we see much ‘business as usual’ in a time where many other industries are hurting badly. Relative to the other industries around the world, our business is relatively unaffected since we typically work on very long projects and multi-year supply agreements.

In November 2019, Raybow Pharma acquired US-based PharmAgra Labs, a custom chemical research and development company and was planning an expansion project at the PharmAgra site. What is the status and strategy of this expansion?

P. Halkjaer-Knudsen: Raybow USA, the legend PharmAgra Labs, is operating independently in the US and servicing our EU and US customer base. The market for R&D and new process development has slowed down for sure, but we are seeing growth and expect to break ground with the first expansion of the facilities starting in Q4 of 2020, creating an expansion and quite a few new jobs.

There is a clear indication that some companies are averse to offshoring any novel IP. We have built the systems at Raybow China, Raybow Europe and Raybow USA to be completely independent and thus able to maintain the highest level of IP compartmentalization and security wherever required.

www.raybow.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.