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Risks and resiliency in the drug supply chain

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Table of contentsCOVID-19 accelerating risks ........................3Supply risks ...............................................4Short-term drug supply constraints .............5Operations risks .........................................5Regulatory risks ........................................6Geopolitical risks ........................................7Implications for pharma ..............................8Taking action .............................................9Contacts ..................................................10

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COVID-19 accelerating risks The pharmaceutical value chain is made up of many connected components that have been significantly decentralized and optimized to reduce the cost of production and distribution. The COVID-19 pandemic has further exposed the potential for disruption to the supply chain on which this model relies. While it is too early to tell whether there will be even further shortages of medications, supplies and equipment needed to treat the growing demand due to the pandemic, it is essential for pharma executives to understand where potential points of failure are and what dependencies exist in the value chain beyond manufacturing. It is also critical for pharmaceutical companies to revisit the design of their value chain, evaluating each step to see where there is potential for failure and to determine where more flexibility needs to be built in.

The following considerations prioritize the most critical areas that should be reviewed (by industry, regulators and other key stakeholders) for a resilient and reliable drug value chain that is facing unprecedented pressures and disruptions.

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Supply risksThere are several key components involved in manufacturing and packaging any drug. Companies should review the areas where supplies of these components are subject to disruption.

Active pharmaceutical ingredients (APIs): Raw materials, including chemical building blocks, regulatory starting materials and chemical intermediates are critical components needed for manufacturing APIs. All drug manufacturers rely on access to safe APIs to manufacture their product. APIs are largely synthesized, fermented, extracted or isolated in countries outside the US before they are packaged and exported.

Formulated drug products: APIs and excipients (which are inactive substances serving as the vehicle or medium for a drug) are formulated into bulk capsules, tablets and other semifinished product forms. They are typically manufactured in a geographic region nearer to their ultimate end market. Still, it is not uncommon for bulk products and even some fully finished and packaged products to be manufactured in other countries and exported to the US.

Packaging and labeling: Beyond the active ingredients and excipients that are necessary for the production and distribution of drugs is packaging, often made outside the US. Packaging and labels rely on components like resin-based bottles and films, paper cartons and labels, stainless steel needles and other materials required to safely contain, transport and administer medication. National lockdowns in key export countries may occur sporadically and intermittently and are likely to contribute to risks of inconsistently reliable supply.

Chemical building blocks, regulatory starting materialsand chemical intermediates

Resin-based bottles and films, paper cartons and labels, stainless steel needles and other materials

API manufacturing

Formulation manufacturing

Marketing and distribution

Consumers

Wholesalers

Hospitals/state departments

Retailers/ pharmacy

Excipients and other chemicals

and materials

Packaging and labeling

Material procurement and manufacturing Drug marketing, distribution and dispensing

Raw material sourcing from different parts of the world

Pharmaceutical supply chain: areas of potential disruption and interruption

• Disruption of any of the connected components in the pharmaceutical supply chain can lead to potential drug delays.

• Manufacturer reliance on sporadic raw material supplies for drug APIs, excipients and formulation, as well as packaging and labeling, can cause production and supply bottlenecks.

APIs and excipients formulated into the

finished drug product are often sourced from

outside the US

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Short-term drug supply constraintsEven after the various components are combined to create the finished drugs, there can still be disruptions to the distribution of those drugs. Several indicators point to a potential short-term shortage of certain drugs because of temporary lockdowns of manufacturing plants and delays or suspension of international shipments. Further contributing to disruptions are border restrictions and suspensions on air cargo carriers. The sporadic and continued flare-ups of infections, increasing numbers of patients on ventilators and the high demand for ventilator-related drugs are contributing to short-term supply shortages. Drug shortages seen so far are mostly for products used for COVID-19 patients in ICUs or on ventilators. Some of the shortages are artificial and a result of stockpiling, protectionist trade restrictions or lack of enough inventory.

Operations risksRisks and delays may occur due to critical-employee absenteeism, plant capacity constraints, production limits, distribution and transportation (domestic and cross-border) issues, shipping capacity (inbound container and maritime shipping volumes) and increased inspections or quarantines. Changes in personnel work shifts to reduce the number of people in the facility at any given time may translate to reduced output. There is also evidence that capacity within parts of certain supply chains, such as cold chain storage, is becoming constrained as more companies try to increase inventory to offset the unprecedented fluctuations in the demand signals for products. Over the longer term, capital projects that were aimed at increasing capacity or are necessary for new product introductions may be halted, delayed or only slowly implemented.

Receiving Warehouse Shipping

Pharmaceutical manufacturer Distribution/wholesalers Dispensing

Retailers/ pharmacy

Hospital

Patients

Suspension of international

flights can lead to delay in

distribution of drugs around

the globe.

International shipment

Temporary lockdown can delay manufacturing and packaging

due to high dependabilityon external material.

Manufacturing Packaging Warehouse

Short-term drug supply constraints: a focus on distribution

• Some shortages can be artificially created and can result in stockpiling and demand creation

• Delays or suspension of operations anywhere in the supply chain have a ripple effect that ultimately impacts patients and treatment rates

High demand and delay in procurement can result in shortage

of stock (e.g. the US imports ~40% of its generic drugs from India)

Increase in number of patients on ventilators and high demand for

ventilator-related drugs are contributing to short-term supply shortages

Increase in cases

Decrease in supply

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Regulatory risksFacility inspection delays for new products, generics and biosimilar applications could lead to longer approval timelines, extending the time it takes for critical new therapies and lower-cost alternatives to reach consumers. Additionally, intensified inspection efforts following importation could further delay drugs reaching patients in need. Assessing the full breadth of regulatory impacts on facilities across the drug portfolio will inform what strategic planning is necessary for the post-pandemic environment.

Re vie w by OGD/CDER

An abbreviated new drug application (ANDA) is an application for a US generic drug approval for an existing licensed medication or approved drug. The ANDA is submitted to the Food and Drug Administration, which provides for the review and ultimate approval of a generic drug product.

ANDAApplicant

Labeling reviewRequest for plantinspection

Chemistry/microreview

Bioequivalencereview

Preapprovalinspection acceptable

ANDA approved

12–18 months

Assessing the breadth of regulatory impacts on facilities across drug portfolio will inform what strategic planning is needed for post-pandemic environment

• Facility inspection delays for new products, generics and biosimilar applications could lead to longer approval timelines, extending the time it takes for critical new therapies and lower-cost alternatives to reach consumers.

• Intensified inspection efforts following importation could further delay drugs from reaching patients in need.

ANDA approval process

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Geopolitical risksEven if organizations can work around structural vulnerabilities, the influence of geopolitical factors is complex and very difficult to predict. For instance, COVID-19 has exacerbated US-China tensions, eclipsing the positive messages and economic benefits from the “Phase 1” trade deal that was agreed to in January. This has further added another thread to the expanding narrative of superpower rivalry, increasing the level of geopolitical risk faced by companies that have operations in both countries.

A key geopolitical risk for pharmaceutical companies in the COVID-19 era is shifting trade policies. Governments have quickly closed borders in a rush to reinforce notions of national security. COVID-19 could escalate nationalist and populist sentiments, as people embrace “buy national” attitudes. Post-COVID-19, these sentiments may propel some governments to impose new restrictions on the movement of people, goods and technologies. They may also mandate onshore R&D, manufacturing and stockpiling of pharmaceuticals, medical gear such as ventilators and test systems, and personal protective equipment.

Policy responses to the pandemic are therefore highlighting supply chain risks — especially if a firm is dependent on a single supplier or country. Supply bottlenecks and, in some cases, export restrictions have exacerbated supply chain pressures, which in turn will cause firms to re-examine long and vulnerable supply chains. COVID-19 is therefore likely to ramp up “China-plus-one” strategies, which allow companies in China to diversify their operations by adding another location in Asia, as well as other supply chain diversification efforts. Developing more resilient supply chains will be a business imperative and, for pharmaceuticals, likely will be mandated by governments.

Raw material(suppliers in one country) Manufacturing

ConsumptionImport

Exports decrease, even in countrieswith functioningproduction

Raw materials not fully accessible; company can’t produce enough

Dur

ing

pan

dem

ic

Domestic

Export

Raw material Manufacturing

Consumption Domestic

Bef

ore

pan

dem

ic

Manufacturing

ConsumptionImport

Domestic

Export

Import

• Companies that depend on a single supplier or country experience greater impact

• Post-pandemic governments may impose new restrictions

Rec

omm

ende

d

Raw material(suppliers in multiply countries)

• Need to adopt resilience-enhancing strategies like “China-plus-one,” adding additional supplier locations and develop more supply chain diversification efforts

How do geopolitical factors affect supply chains?

• Pandemic leads to change in policies, causing home production or seeking alternative strategies• Lockdown of factories creates a chain reaction, affecting the trade across countries

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Implications for pharmaIn the short term, there may be an increased risk to the generic drug supply chain. Generic drug companies have greater sensitivity to supply chain risk, as their profit margins are generally lower than those of branded companies; generic companies also depend more on India and China for their supply chain and often maintain less safety stock than their peers that primarily manufacture branded drugs. Additionally, API costs represent a larger portion of revenues for generic companies, so cost increases due to shortages would hit them harder.

There is less risk for pharma companies making branded products, as they have at least several months of safety stock in APIs, finished products and products in the distribution channel. Additionally, given the economic model of branded pharma products, even an unexpected increase in the price of APIs would not likely have a material impact on the business.

Though many pharmaceutical companies have sophisticated models in place for their manufacturing and supply chains, the pandemic should be used as an opportunity to consider the following questions:

Do we need redundancy to pivot to a secondary supplier in a different location?

What if significant events like a pandemic are not a “less than zero” probability?

What should the new model look like? Do we need to turn it on its head or just refine it to bolt on additional measures of security to reduce the short-term impact and address future risk?

Low High

High

LowBusiness impact

Even

t pr

obab

ility

Generic drug manufacturers

Branded drug manufacturers

Generic drug manufacturers face more risks from pandemics such as COVID-19 owing to lower profit margins, higher dependence on other countries for supply chain and higher impact of API shortages.

Companies need to rethink whether current models can manage risks associated with low-probability and high-impact events.

Implications of COVID-19 on pharma

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Taking actionWhile each product has a unique supply chain, the following is a list of things to consider in value chain modeling during and after the pandemic:

Evaluate each step of the current value and supply chain to identify potential weak links, risks and failure points; include an objective assessment of the reliability and health of dependent organizations and process dependencies

Establish inventory adjustments, based on fluctuating demand scenarios

Determine access to raw materials being held with suppliers (and their suppliers)

Assess existing relationships and reliance on external partners or suppliers

Determine whether opportunity exists to diversify or create capacity redundancy in the event of business interruption

Develop dynamic financial models to enable more iterations for financial models, projections and forecasts; assess lost revenue vs. cost of capital/holding inventory

Redesign the model to include redundancies, backup plans and new contracted partnerships (public/private) that can be activated immediately

Include past and potential geopolitical actions in the risk assessment and assign a score both to the probability and impact to the business

Diversify reliance on global sources and revisit service-level and performance guarantees to include requirements for backup and business continuity plans

Evaluate the potential for long-term partnerships, leveraging current collaboration opportunities

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Alex JungEY-Parthenon, Ernst & Young LLP+1 312 879 2778 alex.jung@ey.com

Derron StarkEY-Parthenon, Ernst & Young LLP+1 609 510 1954derron.stark@ey.com

Mary Karol Cline, Courtney Rickert McCaffrey, Devon Weiss, Ankit Goel and Prabuddha Mathur also contributed to this article.

Contacts

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