How Pharma Sustainability Commitments Are Affecting Contract Manufacturers

At the Glasgow Conference of Parties (COP26), governments and the private sector sought to put the global economy on the path to net-zero carbon emissions. Governments made promises across sectors, with 46 countries committed to developing low-carbon healthcare systems. China, the country with the largest CO2 emission volume in the world, demonstrates strong determination to reduce its carbon emissions. In its 14th Five-Year Plan, it sets the goal of “reaching peak emission by 2030 and carbon neutrality by 2060”, acting as a guiding principle at the national level.

Many leading pharma companies are already ahead of the curve, having made carbon neutrality and net-zero pledges, some for as early as the next decade. These commitments will also cover Scope 3 greenhouse gas (GHG) emissions, i.e. those in the companies’ value chain not emitted from assets directly owned or controlled by them, such as those associated with purchased goods and services. An analysis of GHG emissions of five top pharmas showed that Scope 3 emissions accounted for over 80% of the companies’ total GHG emissions in 2020 (see Figure 1). Any increased emphasis by pharmas on controlling emissions will inevitably put pressure on suppliers, including contract manufacturing organisations (CMOs) and contract development and manufacturing organisations (CDMOs).

As the largest active pharmaceutical ingredient (API) producer and exporter globally, China has highlighted the objective to “develop green and low carbon pharmaceutical value chains” in the 14th Five-Year Plan, even though the Chinese government has not yet set specific goals around Scope 3 emissions for the pharmaceutical industry. Establishing high-standard, centralized API production bases; developing and using green technology; setting waste management standards; developing plans for reducing carbon emissions; and promoting Environmental, Health and Safety (EHS) systems are listed as the key initiatives (see Figure 2).

Faced with increasing pressure from internal and external stakeholders, pharmas have made sustainability commitments beyond GHG emissions. Key themes include waste reduction, reduction in water usage and reduced API discharge into water streams. 

For example, GSK is pledging water neutrality for key suppliers in water-stressed regions and a 10% waste reduction from the supply chain by 2030, while MSD is planning for 90% of its high-impact suppliers to define and work towards water use reduction targets (see Figure 3).

Based on global initiatives, multinational pharmas such as GSK, Novartis and Novo Nordisk have also committed to either high-level or specific environmental targets for China. In some cases, commitments have been in place for years. For example, Novo Nordisk’s Tianjin plant has become the lowest energy-consumption plant among all Novo Nordisk’s manufacturing operations.

“Our production sites in China plan to save 5% of electricity and 3% of water compared to last year. We will conduct a diagnostic at each site to determine specific implementation plans for water and electricity savings. All plants follow a ‘zero landfill’ goal, ensuring that waste generated at the plant is recycled rather than disposed of in a landfill.”

-GSK China

Below, we explore how pharmas’ increasing attention to the environmental impact of their supply chains creates action points for contract manufacturers (CMOs and CDMOs), and what these organisations should keep in mind when preparing for change.¹

Two sides of the same coin: Pharma vs CMO/CDMO sustainability dynamics

Pharma companies have long monitored the regulatory compliance of their suppliers, and environmental performance is being added to the list of demands, with pharmas setting expectations in their supplier codes of conduct. The level of pressure which pharmas are putting on suppliers varies by pharma size and geography and is particularly pronounced among U.S. and European pharma companies, while Asian pharmas that sell predominately into local markets are expected to place less emphasis on the environmental performance of their suppliers. But what are the tangible implications when supply chains are vast and complex and suppliers and pharmas alike are navigating new territory?

Suppliers will have to navigate differing levels of ambition among their pharma customers and varying time frames for achieving targets. This ranges, for instance, from companies which have just started collecting data about Scope 3 emissions to those that have issued firm commitments to require the use of renewable energy among all suppliers by 2030. Immediate scrutiny and action are directed at high-risk suppliers, such as those accounting for a larger proportion of spend and/or emissions. 

While technology, track record, capacity and cost are still the most important criteria for selecting CMOs/CDMOs, demonstrating progress in reducing environmental footprint is becoming increasingly important, and CMOs/CDMOs will have to be mindful of future performance requirements. This is particularly relevant for the new capacity which CMOs/CDMOs are adding currently, and which will become operational in the next 18 to 36 months. 

“Engaging with suppliers is a multi-step process, compris[ed] of informing suppliers that they are expected to act on their environmental footprint, getting them to set targets and create action plans, and then monitoring their progress. Pharma companies are at various stages in this process, but the industry as a whole understands that it needs to move towards reducing the environmental impact of its suppliers …. The inclusion of environmental performance as a criterion is new but will become more important as the industry matures and sets targets for its footprint across the value chain.”

-HSE and sustainability expert at a leading pharmaceutical company

Kickstarting action through collecting data and setting targets

As supplier sustainability moves into focus for pharmas, CMOs/CDMOs must act fast, and they should begin by gathering and analysing data regarding their environmental footprint. CMOs/CDMOs should use this data to identify issues on which they can have the most impact and which are most relevant to stakeholders, such as reducing water consumption in water-stressed areas. 

An analysis of leading CMOs/CDMOs²  identified five key themes of initiatives, data collection and targets — GHG emissions and energy efficiency; water intensity of production; pharmaceuticals in the environment and API discharges; solid waste; and environmental expectations in supplier codes of conduct (see Figure 4).³ These align well with the environmental commitments published by leading pharma companies (see Figure 3 above).

Greenhouse gas emissions and energy efficiency: Given the share of Scope 3 emissions of pharmas’ total emissions and near-term emissions reduction targets, CMOs/CDMOs will face the heat to reduce their emissions fast. They will have to choose between actual emission reductions (such as through the increased use of renewable energy) and carbon offsets, with pharma customers — especially those with science-based targets — favouring the former. Science-based targets allow a very limited use of offsets, are verified by the Science Based Targets Initiative (SBTi) and are aligned with the sector decarbonisation pathways set out by the SBTi.⁴  For instance, a major pharma company’s science-based target requires a 35% reduction in absolute emissions across the value chain without using carbon offsets. Large CMOs/CDMOs will likely face pressure to set their own science-based targets.

“The pace of action required from suppliers will accelerate, especially for GHG emissions. Some pharma net zero commitments are only nine years away, during which time they have to collect data, engage with suppliers and create roadmaps.”

-HSE and sustainability expert at a leading pharma company

Water intensity, pharmaceuticals in the environment and API discharges: Industry experts interviewed by L.E.K. Consulting believe that existing regulations do not adequately address these issues and that pharma companies are now expecting suppliers to go beyond regulatory requirements. The increased demand for manufacturing high potency APIs (or HPAPIs), which are often cytotoxic, increases the risk associated with environmental breaches and employee exposure. Adoption of stronger containment systems will be required to address this. 

Solid waste management: The increased share of biologics will pose a challenge to managing waste since biologics manufacturing uses more single use elements, such as single use bioreactors, than does the manufacturing of small molecules. This change in product mix can increase solid waste not just in absolute terms, but also when measured per unit of output. Consequently, CMOs/CDMOs will have to take stronger measures to demonstrate progress in solid waste reduction. 

Environmental expectations in supplier codes of conduct: To ensure compliance and action, CMOs/CDMOs are implementing supplier assessment systems and sustainable procurement policies, such as a large CDMO’s policy to prioritise low carbon purchases. Supplier codes of conduct require legal compliance at minimum and specify appropriate management and handling systems for waste, wastewater and spills. Additional clauses in supplier codes of conduct vary but may include expectations to improve resource efficiency and reduce GHG emissions, the latter being particularly important for CMOs/CDMOs looking to reduce their Scope 3 emissions. 

How far and fast a CMO/CDMO should progress while setting targets must be decided based on careful discussions with pharma customers, given that environmental performance is not yet the game changer in receiving business. Pharma expectations will depend on the CMO’s/CDMO’s share of manufacturing costs, the CMO’s/CDMO’s performance on key supplier selection criteria relative to competitors and the ease of switching CMOs/CDMOs. With pharmas approaching the supplier transition with a “partnership” mindset, CMOs/CDMOs should leverage the growing number of industry initiatives for support. One example is ENERGISE, an initiative by 10 pharmaceutical companies and Schneider Electric to make renewable energy more easily available to their suppliers.⁵  The initiative will educate pharma suppliers regarding renewable energy contracting and allow them to purchase renewable energy through a collaborative buyers’ cohort. This is expected to lower the barriers to adopting renewable energy, such as negotiating complex contracting processes, and enable long-term power purchase agreements.

From concept to strategy

As pharmas’ scrutiny increases over time, CMOs/CDMOs need to be prepared for changes in expectations and resulting shifts in pharmas’ key supplier selection criteria. Staying ahead of the curve by setting in motion tangible action today can create a competitive advantage in the future. 

Developing a roadmap will require careful planning, particularly considering the relative nascency of pharmas’ interest in supply chain sustainability as well as the varying sustainability maturity levels and ambitions among pharma companies. This will involve:

• Assessing external expectations and competitive positioning: A resilient strategy will incorporate expectations from external stakeholders — pharmas, investors and regulators — and an analysis of the CMO’s/CDMO’s competitive landscape and positioning, in order to inform which actions need to be taken.

• Prioritising opportunities for action: CMOs/CDMOs will then need to evaluate and prioritise opportunities for action carefully and weigh them against other business objectives and the demand for resources. For example, fast-growing CMOs/CDMOs might struggle to set absolute environmental performance targets and may have to define targets relative to output, such as GHG emissions per unit of revenue. The latter will necessitate discussions with pharma customers, which will likely prefer absolute targets in the future and a plan for transitioning to these.

• Building the business case and seeking internal alignment: A business case will be required, demonstrating the expected impact of sustainability action on revenues and costs, as well as required investments, before attaining the internal organisational alignment needed to drive change.

Sustainability performance is undoubtedly becoming more important in winning business and hence must be built into CMOs’/CDMOs’ long-term commercial strategy. To know more about how L.E.K. can help CMOs/CDMOs develop and leverage a successful sustainability strategy, contact us at sustainability@lek.com.

Endnotes
¹Beyond environmental topics, pharma companies are undertaking initiatives to align their policies and processes with ESG (environmental, social and governance) principles. These are not covered in this article, but will be topics of subsequent publications.

²The analysis covered seven CMOs/CDMOs: Samsung Biologics, Boehringer Ingelheim, Lonza, Catalent, Recipharm, Siegfried and Bachem

³Some organisations also mention incorporating and innovating in green chemistry

⁴The SBTi is a partnership between the Carbon Disclosure Project, the U.N. Global Compact, the World Resources Institute and the World Wildlife Fund. It certifies emissions-reductions targets as being “science based” provided they meet the decarbonization levels required to achieve the targets of the Paris Agreement and are aligned with scientific best practices for emissions calculations and reduction. Visit the SBTi website here.

⁵The 10 companies are AstraZeneca, Biogen, GSK, Johnson & Johnson, MSD, Novartis, Novo Nordisk, Pfizer, Sanofi and Takeda. Read more about the ENERGISE program here.