Supply chain is broadly defined as the network between a company, its internal operations and its suppliers serving to procure, produce and distribute a product to the final customer. It covers all steps required to get a product or a service from its original state to the customer.

Until recently the two words “supply chain” were largely unheard of—if not even unknown—to the layman. Instead, it belonged to the professional slang used in operation management cenacles.

The Covid-19 pandemic has completely changed this situation. The general public is increasingly bombarded by articles and reports making extensive reference to “supply chain” so much so that it’s becoming a “buzzword” among the media and governmental bodies.

The catalyst that propelled supply chain discussion to headlines across the globe was the shortages witnessed during in the first months of the Covid-19 pandemic. These were observed in several Western countries for items viewed as critical—if not even vital—such as surgical masks, ventilators and some drugs.

The Covid situation, combined with the disruptions noted since 2017 for some important imports from China caused by the wave of site closures imposed by the authorities in the aftermath of major industrial accidents that resulted in the effective enforcement of regulations, have acted as revelators of the dependence of Western countries on imports and of vulnerabilities of supply chains to disruptions.

The grounding in March 2021 of the Ever Given jumbo container ship in the Suez Canal and the resulting week-long blockade of the canal further fueled these concerns. The incident brought further to light the extensive hollowing of entire sectors of Western industry following its offshoring. 

Supply chain reassessment
As a result of the fallout from the aforementioned international incidents, companies are increasingly reassessing their supply chains. In addition to efficiency and cost optimization—traditionally the two main considerations—supply continuity and resilience to disruption risks are becoming increasingly critical.

The shocks created by the Covid-19 pandemic on public emotions and on the economy have led governments and public authorities all around the world to make supply chain security one of their top policy priorities. Further impetus has been provided in the EU by the renewal of the European Commission and in the U.S. the advent of the Bidden administration making the redeployment and greening of their economies one of their top priorities.

Massive funds have been set aside for financing these objectives. Various initiatives and task forces are being launched to evaluate how to make supply chains for critical items more resilient to reduce disruption risks while reviving local production. The rationale behind such moves appears as compelling and beneficial to all stakeholders. Besides contributing to GDP growth, the creation of well-paid jobs and allowing the reduction of trade imbalances, the moves also support sustainability by decreasing the environmental footprint and greenhouse gases emissions associated with transport over long distances.

Examples of such initiatives include in the U.S. the Presidential order of February 24, 2021 and the Industrial Strategy for Europe proposed in 2020 by the European Commission.

The pharmaceutical supply chain
All industries are impacted by this quest and scrutiny for more resilient supply chains.

Given the importance of its products for public health and its high profile—the pharmaceutical industry is no exception.

Together with other industries viewed as critical like semiconductors, key minerals and materials and advanced batteries—pharmaceuticals have been retained both in the EU and the U.S. as a priority area for industrial redeployment and supply chain integrity programs.

The first phase of these aims to identify, through consultation with the relevant stakeholders, the risks associated with current supply chains. The goal is to lay the ground for formulating recommendations and ultimately taking tangible action steps for mitigating these risks and ensuring the continuing availability of critical items.

As illustrated in Figure 1, the pharmaceutical industry is characterized by a complex supply chain covering multiple inputs and operations. These can be broadly subdivided between the supply of drug substance and drug product covering the “molecule building” activities associated with access to the API and its transformation in a dosage form suitable for administration to the patient—be these through traditional organic synthesis or bioprocesses.

Similar to most other industries such as automotive, aerospace, consumer electronics or even food and beverage, the pharmaceutical supply chain draws from various inputs. These include solvents, reagents and formulation ingredients, as well as operations that include synthesis, purification, physical processing or tableting. These are most often performed by a number of different intervenants—be they internal resources of pharmaceutical companies or third-party vendors—some located in different geographies. Obviously, like in all other industries managing this complexity requires careful orchestration and coordination to avoid hiccups.

What differentiates the pharmaceutical industry is the extensive set of regulations and procedures imposed by the health authorities on its products and operations. These are associated with the very nature of pharmaceutical products whose function is to prevent, cure or alleviate illnesses. The underlying rationale of these regulations is to guarantee that products marketed by pharmaceutical companies do not deviate from what is reported in the registration files served to obtain the marketing license. On top of the data on safety and efficacy, these files indicate the end product specifications, associated analytical procedures and production steps, all of which have a critical impact on product quality. How and where each of these steps is performed and by whom is also reported together with inputs used, their analytical specifications and supply sources. In fact, the files describe how a substantial part of the product supply chain relating to the last process steps is structured.

The marketing license is granted following the review and approval by the health authorities of these and often involve a physical inspection of the facilities where the described steps are performed in order to check their suitability and alignment with what reported. As a result, any deviation and change from what was originally filed has the potential to impact the product quality and must be notified to the authorities.

While these regulations and scrutiny have a legitimate purpose to guarantee and protect the general public against either voluntary frauds or unvoluntary deviations—these create for pharmaceutical companies an additional layer of complexity and hurdles for responding to possible supply chain disruptions. Such disruption may include unforeseen shortages of inputs like reagents or intermediates caused by unforeseen closures of supplier production capacity or compliance problems encountered by vendors or their own facilities handling a given step of the production process. Due to these regulations, in the pharmaceutical industry changing vendors or raw material sources is subject to the approval not only by internal stakeholders but also often by regulatory agencies, restricting degrees of freedom to swiftly respond to possible disruptions.

It is therefore critical for pharmaceutical companies to have in place suitable contingency plans and alternatives, taking into account potential vulnerabilities while addressing supply disruption risks.

Strengthening supply chains
No “one-fits-all” solution exists on how to structure a robust supply chain. Instead, it requires careful crafting on a case-by-case basis and taking into account the specificities of each product. These include factors such as the products strategic value, volumes, position in the life cycle, the technologies involved in its production process and associated inputs—solvents, reagents, intermediates or other starting materials.

While in an ideal world it would be desirable to guarantee supply chain security and continuing availability of all products, in practice, associated costs and hurdles make the attainment of such an objective unpractical.

Therefore, it is important to prioritize among the various products to focus on those where a supply disruption would have the most severe consequences and impact. The criteria applied for such a prioritization depends on the stakeholder.

Excluding reputational and image considerations, for a pharmaceutical company the products deserving the most attention in terms of supply chain continuity are those contributing or expected to contribute the most to its bottom line or growth. Such financial considerations matter little for governments or other public bodies, which have as their overriding priority to guarantee the access to medicines considered essential the population. This is reflected in the emphasis given by the U.S. authorities in defining a list of products whose continuing availability and supply chain continuity must be guaranteed. The EU has undertaken a comparable process.

Similarly, the issues involved differ depending on the product position in its life cycle and development status. For products whose patent has expired, the drug substance—similarly to related intermediates and starting materials—is often available from several sources. This gives generic and OTC marketers ampler degrees of freedom for including in their ANDA registration files multiple sources for the same API, allowing them to build flexibility in their supply chains without incurring major incremental complexity related costs.

These degrees of freedom are much lower for products still under patent protection. These are invariably produced either captively or through third party vendors under the frame of one-to-one exclusive supply agreements. For these products it is critical for the developer to timely have in place suitable contingency plans should problems trigger supply chain disruptions. Possible examples include an industrial accident that disrupts operations at one of the production sites or an unforeseen shortage of a key input.

Contingency plans are typically based on a combination of safety stocks and backups.

Safety stocks are distinct from the inventories associated with “routine” operational purposes. Their role is to guarantee that adequate product volumes are kept on hand for meeting demand during the period of time required for activating backup supply. These backups include transferring production to a different site or activating an alternative raw material supplier. In both cases, careful planning helps avoid being caught in a firestorm with unforeseen consequences. To avoid such a situation, it is wise to have in place technology transfer procedures while also requesting the third-party vendor to supply out of two sites.

The trend observed in new product development may flag an easing of the issues and physical—if not financial—burden associated with safety stocks for new products reaching the market. In Figure 2, an analysis using as proxy for NCEs recently launched or in late development a sample of more than fifty small molecule API based products, suggests that for most of these—even when expected to reach multi-billion USD “super blockbuster” sales—associated drug substance volumes will rarely exceed the ten of ton threshold.


This represents a radical change compared to what was observed in the past where API tonnages in the hundreds if not thousands range were not uncommon. For example, AbbVie’s updacitinib (Rinvoq) peak sales are predicted to exceed $5 billion while given low daily drug dosages in the order of the milligram per day substance requirements are unlikely to significantly exceed a few tons. Obviously, besides financial considerations associated with working capital requirements, for these types of products building up resilience in the supply chain through safety stocks is easier to envisage than for items characterized by larger volumes, such as anti-HIV like Biktavy where such an approach would be less practical.

While lower peak volume requirements characterizing the NCEs reaching the market potentially represents a development that looks like supply chain resilience, a complicating factor is the increasing NCE complexity. As illustrated in Figure 3 covering the same universe of products as those analyzed in Figure 2, two indicators of complexity—molecular weight and the complexity index as reported in the PubChem—National Library of Medicine Data Base (calculated based on Cactvus 3.4.6.11 released 2019.06.18)—are significantly higher compared to older products.


Without overly generalizing, this flags increasingly complex synthesis processes requiring more steps, each possibly involving distinctive technologies requiring particular equipment or procedures. As associated inputs such as starting materials or reagents become increasingly specific and they are difficult to source as off-the-shelf catalogue items.

Consequently, structuring a robust supply chain for these new products is creating new challenges, particularly given the need to often involve multiple parties. The skills and capabilities involved in the production process make it difficult, if not impossible, to be found under the same roof. These challenges and hurdles can be exponentially compounded when other constraints are at play. A good example is remdesivir. The supply chain for this product, which is already intrinsically complex due to a long synthesis process said to involve more than ten different vendors, had to be assembled on a crash basis given the urgency created by the explosion of the Covid-19 pandemic.

Despite these challenges, pharmaceutical companies shouldn’t take short cuts by delegating the entire supply chain to a third-party vendor.

No satisfactory alternative to undertaking appropriate due diligence exists. The key feasibility trigger in establishing a robust and resilient supply chain is to develop an in-depth understanding of its components—suppliers and inputs involved. Such an analysis is required for identifying potential vulnerabilities and risks.

It goes beyond the traditional quality audits and review of operating procedures. Other factors such as ESG (Environmental, Social & Governance) systems and financial strength of the third party considered have to be assessed.

Particular care should be exerted not to overlook the principle that supply chains are as strong as their weaker components. Contrary to common belief these are not necessarily associated with steps and inputs close to the final product that typically attract most of the attention. These risks rather lay in earlier phase steps or inputs viewed as more trivial such as building blocks, often falling below the radar screen.

Within this frame it is critical to assess the robustness of the supply chain applied by all third parties and vendors being considered to uncover unforeseen critical potential vulnerabilities. Insist on having full transparency between organizations.

It would be ironic to have spent considerable time and effort establishing multiple backups through third party vendors or own redundant sites for handling critical steps of the process to discover that all rely on the same raw material source or are exposed to the same systemic risk such as location in the same area. An example of such situation is represented by amino protecting groups such as Fmoc (fluorenylmethoxycarbonyl) or t-boc (tertio-buyloxycarbonyl) reagents where all users depend on supply from the same couple of Chinese suppliers all located in the same zone. Doing so creates a potential systematic risk. Besides attempting to find other sources, a possible lever for defusing such type of risk is to develop and have in place alternative synthesis schemes avoiding the use of these inputs.

Similarly, it would be of little help for a marketer of ibuprofen OTC formulations seeking to reduce its exposure to potential supply disruptions to establish multiple sourcing all based on ibuprofen producers all depending on the same tert-butyl benzene source and hence potentially be exposed to identical risks should the producer of this intermediate—Vinati—be impacted by disruption.

It is equally important to develop and maintain up-to-date intelligence on the interrelations and linkages existing between the required inputs with other products and outlets to understand and ideally anticipate how apparently unrelated events may impact supply chains. An example of such interdependencies is represented by the co-product relations intrinsic to several processes yielding substituted aromatic derivatives. These invariably yield mixtures of position isomers making process economic viability critically dependent on having an outlet for all these isomers, each often having different applications characterized by distinctive demand drivers. In such a set up the phase out or weaker demand for one of the isomers has domino effects on all other co-products with the risk of destabilizing the entire product tree possibly triggering supply disruptions. Here too a risk mitigating action step is to identify alternative starting materials or supply sources.

Establishing a robust supply chain also involves ensuring the continuing viability and commitment of the supply sources retained. This goes well beyond undertaking in-depth financial and operating audits of the supplier. Most importantly, it requires maintaining a healthy relation between the customer and the vendor—the former having to ensure congruence between expectations in terms of quality and service with what he is willing to pay. Often pharmaceutical companies are surprised to have established suppliers refusing to quote for bids involving products that, due to low volumes and/or low unit prices, are not rewarding enough for the producer. As a result, the customer may be forced to tap lower quality sources, and in doing so, risking to undermine the robustness of the overall supply chain. 

---

Dr. Michele Jermini is the Managing Director of Alfa Chemicals (Suisse) SA mjermini@alfachemicalsint.com

Dr. Enrico Polastro is a Vice-President of Arthur D.Little polastro.enrico@adlittle.com