Since being declared a global pandemic in 2020, COVID-19 has impacted global supply chains with effects that are still being witnessed today. Each day comes news of “choked ports, out-of-place shipping containers, record freight rates and other problems that cause disruption and defy easy answer,” acknowledged the World Economic Forum.
Air transportation routes, as well as shipping, have suffered from the effects of the pandemic, with global air traffic falling by more than 90% in April 2020. With armed conflicts leading to airspace closures in early 2022, the effects of the pandemic and other disruptive global events seem set to continue for the foreseeable future.
Like other sectors, the pharma industry has had to absorb the impact of recent events on its supply chain operations. Throughout the pandemic, pharma has stood on the front line of the public health battle to develop and deliver vaccines and antivirals, working closely with governments and regulators. To their credit, these stakeholders have recognized the need for an unusual degree of regulatory flexibility during the pandemic, embracing a level of close collaboration with the pharma industry which will hopefully continue into the future.
But while acknowledging the industry’s achievements during the crisis and the potential longer-term benefits it may yield in terms of improved collaboration, we must also recognize that COVID-19 was a serious challenge for the industry’s supply chains. Leading pharma executives told us in the early months of the outbreak that their operations had already faced a ‘stress test’ of unprecedented dimensions.
Now, more than two years after COVID-19’s emergence, it is time to evaluate how pharma has coped with this test and what learnings for the future can be taken from its performance.
To this end, EY held discussions with 17 global heads of manufacturing and supply chain operations at companies that are members of the Pharmaceutical Manufacturing Forum (PMF). The goal of the discussions and subsequent analysis was to understand what the future of pharma supply chains may look like and what measures the industry can take to build greater resilience.
How pharma coped
“Pharma supply chains are essential for the national and health security and economic prosperity of the United States,” stated Janet Woodcock, the then-acting FDA Commissioner, in June 2021. “The COVID-19 pandemic revealed just how vulnerable the supply chain is in this country,” Woodcock added.
This comment from a leader of pharma’s chief U.S. regulatory body captured the fact that pharma’s supply chains are suddenly in the spotlight. The heightened level of attention to pharma supply chains is by no means confined to the U.S. Anxieties over pharma’s ability to supply key products have surfaced worldwide and major tensions, such as the disputes over resource priority for COVID-19 vaccines, have received significant media coverage.
Beyond the headlines, how vulnerable have pharma’s supply chains proven to be? In practice, the absolute number of shortages is relatively small when placed in context. In the U.S., in 2020 and 2021, supply issues have been reported for under 1.5% of the 20,000+ prescription drug products registered with the FDA.4 While shortages are reported by the manufacturers, stocks of products are typically kept by wholesalers, hospitals and pharmacies; hence, a reported shortage does not necessarily mean that patients are missing treatments.
Focusing on innovative pharma companies (i.e., the segment of the industry engaged in the research and development of new drugs), our interviews with PMF members revealed that this segment has confronted a number of challenges during the pandemic. In our discussions, senior executives at the industry’s leading companies described difficulties acquiring sufficient levels of certain raw materials and consumables. These included ethanol, toluene, acetonitrile, magnesium and neodymium, as well as specific single-use items such as biobags and other consumables required to maintain production output. For example, in 2021 there was a limited supply of the sterile filters used in biological drug manufacturing. Since vaccine manufacturers were depending on the same filters, the prioritization of mass vaccination programs resulted in a global shortfall. One respondent noted that “it has been even more challenging for small biotechnology companies to buy filters.” With filter shortages expected to last for up to two more years, delays to development programs are likely to continue.
Yet despite these issues, our data suggest that, to date, PMF member companies succeeded in solving or mitigating the challenges they faced during the pandemic. Our analysis, presented on the left of Exhibit 1, shows that there is no significant trend indicating increased shortages of innovative pharma products in the 2019–2021 period.
This is confirmed by the overall assessment of the PMF members we spoke to (on the right of Exhibit 1). Companies maintained pre-pandemic service levels throughout. Where companies did face shortages, these affected only specific products experiencing demand surges due to COVID-19. Indeed, some companies told us that supply chains had performed better than in ‘normal’ times. With a reduction in reporting demands (including a lower level of internal and external auditing) and a heightened focus on productivity, some companies paradoxically found themselves operating more efficiently and with better service levels.
Supply chain policy interventions
For pharma, as well as for the policymakers, providers, payers and patients that constitute its major stakeholders, the ultimate aim is the same: to allow patients to access the right drug at the right time.
Industry supply chains largely succeeded in that goal in 2020–2021. Nevertheless, governments and regulators demonstrated during the pandemic that they are willing to intervene to help ensure the security of pharma supply. The three main economic and political global centers and trading blocs — the U.S., the EU and China — have all implemented wide-ranging measures since early 2020 aimed at securing supply of medical and pharmaceutical products.
In recent decades, we have witnessed increasing globalization of pharma supply chains. The policies in the three major trading blocs suggest that we are seeing the start of a countertrend toward increased localization of supply chains and greater emphasis on regional or national self-reliance.
This change is part of a far broader ongoing shift in national strategic thinking, which may have been accelerated by COVID-19
but is driven by deeper underlying factors that predate the pandemic. Among these factors:
- The globalization model is changing, with major trade regions increasingly seeking autonomy, resulting in sector supply mandates, including changes to trade, regulatory and tax policy
- Global trade agreements have declined in relevance as regionalized trade and bilateral agreements assume greater importance; the diminished role of the World Trade Organization underlines this shift
- All stakeholders increasingly acknowledge the importance of sustainability and the need to measure the impact of companies’ environmental, social and governance commitments, supported by the increased ease of tracking metrics such as carbon footprints and other externalities
Moreover, it hardly needs to be stated that COVID-19 will not be the last major crisis that must be confronted in the 21st century. Recent developments in Europe emphasize the dangerous tensions present at geopolitical fault lines. The long-term impacts of the present military turbulence for the pharmaceutical sector specifically remain unclear for now, but supply chain operations across all industries will inevitably be affected by an increase in logistical complexity and cost. We can also anticipate that trade with regions at the center of ongoing military disruption will be negatively affected by difficulties in exchanging currency and/or executing bank transfers, as well as a lack of trusted institutions to serve as contract guarantors. Moreover, pharma companies may confront increased IP and cyber challenges if warring nations decide to breach norms on patent protection or block key external data connections.
Beyond these immediate impacts, the larger consequences of the military conflict — from sanctions and escalating inflation to the broader human and economic dislocation — will be felt across the global macroeconomic landscape. This will have ongoing and potentially significant consequences for industry supply chains. Beyond the current crises, moreover, the world will inevitably also face other, less predictable shocks in the future. From new pandemic outbreaks to cyber attacks (or even cyber war) to the effects of climate change, developments are all likely to aggravate geopolitical tensions further. As a result, we can expect states to continue pursuing self-reliance through supply chain localization over the coming decade.
There is reason to believe that pharma will have an enlarged role in these national strategic calculations. In the wake of the national public health crises unleashed by the pandemic, governments are beginning to acknowledge pharma as a ‘strategic sector’ vital to economic and national security. The raft of recent policy measures to secure pharma supply chains taken in the U.S., the EU and China are evidence of this growing recognition. Ensuring a sufficient supply of pharma products to support public health objectives is becoming an increasing priority worldwide.
We can therefore expect to see policymakers explore a broader range of interventions in the industry’s operations. Exhibit 2 sets out the range of possible measures policymakers may choose to implement in the future. Our analysis estimates the political likelihood of each of the possible measures governments may implement (plotted on the x-axis across the bottom) and their potential impact on supply chain operations (shown on the y-axis).
The measures were obtained and evaluated based on EY research into recently-passed laws, bills and statements from policymakers and competent authorities. Based on this assessment, six of the measures identified have the highest potential impact on the industry. These ‘Tier 1 policies to monitor’ appear in the upper right quadrant of Exhibit 2. The majority of these measures would encourage greater national or regional ‘localization’ of supply chains.
Already, pharma companies themselves are exploring multiple initiatives to increase supply chain resilience. For example, a number of companies have implemented multi-sourcing and leverage local contract development and manufacturing organizations. These measures can benefit resilience and are relatively simple to implement.
Certain other possible approaches may have a greater impact but will require longer-term investment and commitment to realize.
At this point, the industry and its stakeholders need to evaluate what measure, or combination of measures, can deliver the results they seek. They have a range of viable options available to them to increase supply chain resilience. Among these options, they can consider:
- Pursuing varying degrees of localization and other complementary or alternative approaches, including establishing a hub-and-spoke manufacturing model
- Setting up joint manufacturing, or a joint physical warehouse (where antitrust regulations permit)
- Establishing a procurement clearinghouse (an order management vehicle that could consolidate and forward pharma companies’ orders for common raw materials and consumables to suppliers and propose reallocations between companies, balancing excess stock in one area with shortages in another)
- Improving end-to-end supply chain visibility and transparency
- Optimizing regulatory requirements such as introducing regulatory notification principles instead of product approval
Each of these measures carries associated costs and benefits, and as companies consider their options, there won’t be one single approach adopted industry-wide. However, although different companies will pursue different specific supply chain strategies, we can anticipate certain broader general trends.
The most significant of these will be the transformation of the fully globalized supply model to a hybrid model, balanced more strategically across global, regional and local sites. This hybrid model will aim to enhance supply resilience through companies building redundant capabilities with multiple suppliers, working with CDMOs and developing internal sites or holding more inventory.
Because these and other resilience-boosting measures are likely to be implemented, the supply chains of the future will be more expensive to operate, at least until the introduction of newer enabling technologies. In the long term, these increasingly complex supply chains will need to be supported by increased digital capabilities, including automation, artificial intelligence, and end-to-end supply chain systems.
Greater collaboration and cooperation between pharma and its stakeholders will be key to successfully building resilient and sustainable supply chains for the future — and delivering the outcomes sought by patients and by all parties in the ecosystem that serve them. While there exists various possibilities for rethinking supply chains, it’s important to emphasize that there will not be a single or simple path forward from this point.