Cash Preservation in the Biopharmaceutical Industry: Navigating Uncertainty
Find out how biopharma companies can extend their cash reserve to ensure operations beyond value-inflection points.

Supply chain challenges have emerged in a pronounced way globally and across industries during the past several years. For the biopharmaceutical industry, this can eventuate in multibillion-dollar losses if companies do not anticipate delays, changes and obstacles. To avoid this, the industry must seize the right moment and create opportunities rather than settle for being stymied by supply chain challenges. L.E.K. Consulting has developed important questions to consider within four key areas to help identify when to take action that mitigates potential missteps such as significant monetary and ownership losses.

The potential for multibillion-dollar value destruction and how to avoid it 

An efficient and effective supply chain is critical to the success of biopharmaceutical companies, as it plays a vital role in ensuring that drugs and medical devices are delivered to the right place at the right time. The pharmaceutical industry has experienced tremendous growth over the past decade — not only in terms of the volume of products that need to be supported (approximately $950 billion of revenue in 2012 to around $1.5 trillion in 2020) but also in terms of product complexity and just-in-time manufacturing needs (due to the growth of advanced modalities such as cell and gene therapies). 

Pharmaceutical supply chains are complex networks of manufacturers, analytical testing sites, distributors, pharmacies, logistics providers, input suppliers and other players. The efficient management of these various components can optimize production costs, increase efficiency, minimize waste and improve patient outcomes with timely product delivery. 

In addition, it enables companies to respond quickly to market changes, such as competitor approvals, product recalls or natural disasters, and ensures that critical medicines and supplies are available when needed. The COVID-19 pandemic revealed the precarious nature of supply chains all around the world, with the pharma industry seeing a 350% increase in supply disruptions from 2019 to 2021 and a roughly 3x increase in lead times for some raw materials and consumables.

Beyond the impact of COVID-19, failures of pharma supply chains can carry significant consequences for pharmaceutical companies and patients. Product losses and drug shortages due to supply chain failures cost the industry tens of billions of dollars each year and can be catastrophic for individual biopharma companies (see Figure 1). 

In addition, product loss or inadequate supply chain issues can impact a company’s ability to get a product approved and on the market. L.E.K.’s analysis demonstrated that about 50% of complete response letters (CRLs) cite chemistry, manufacturing and controls (CMC) and supply chain deficiencies as reasons for rejections. Interestingly, these issues are not helped just by outsourcing to contract development and manufacturing organizations (CDMOs), as up to 40% of CMC CRLs are due to issues at CDMO sites. Following CMC-related CRLs, the vast majority (around 83%) of products are approved, but typically with a significant (eight-to-18-month) delay that can result in tens or hundreds of millions of dollars in lost revenues. Moreover, some of these products receive a second CRL (about 8%) or pause/permanently stop development (also about 8%) (see Figure 2).

Key inflection points for supply chain evaluation: When may be too late?

Pharmaceutical companies need to be proactive in assessing their supply chain strategies and making adjustments to stay ahead of market trends, respond to disruptions, and meet the needs of patients and healthcare providers. The time it takes to set up a pharmaceutical supply chain can vary widely depending on the size and complexity of the supply chain, the regulatory requirements of the countries involved, and the availability of experienced staff. Key milestones include selecting and validating manufacturing sites, scaling up to commercial volumes, implementing quality control measures across the network, establishing readiness for regulatory inspections, and obtaining site regulatory approvals.

Timelines for creating a supply network depend on the design choices made — for example, building a greenfield facility instead of using a CDMO would significantly extend timelines but would provide greater control over the manufacturing process.

In practice, most biopharmas should begin thinking about supply chain strategy and design earlier than they may expect. Planning ahead will ensure that the optimal decisions are made — shortcuts taken due to time or budget constraints may have drastic consequences down the line (see Figure 3).

L.E.K. identified the following six inflection points to be most relevant for supply chain strategy assessment:  

  1. Start of clinical trials – Initiating clinical trials is an appropriate inflection point to set the future supply chain strategy for a product. One CDMO may be used to manufacture product for early clinical trials, but different capabilities and scale may be necessary for late clinical development and commercial production. As setting up commercially ready supply chains likely takes at least two years, companies should begin the process when their product is just beginning phase 1.  

  2. Upcoming first product launch – Companies need to ensure that their suppliers have the right capabilities to produce the product as well as sufficient capacity to meet expected product demand. A key consideration at this stage is determining whether to outsource production or manufacture in-house. Ideally, timing for assessment of commercial-scale manufacturing capabilities is at least 24 months prior to product launch. 

  3. Geographic expansion – Entry into new global markets may require changes to the existing supply network — this may be due to existing nodes not having regulatory approval for production in the new geography or in-country testing requirements. The geographic location of supply chain nodes and efficiency of the global network constitute another key consideration — patients, especially those on time-sensitive treatments like cell therapies, cannot afford supply chain disruptions if materials are held up in customs.  

  4. Portfolio expansion – The launch of new products may call for additional manufacturing capacity or novel capabilities (e.g., if expanding into a new modality), which can be accomplished by acquiring new supply chain nodes or contracting CDMOs.  

  5. M&A – Merging with or acquiring another company necessitates the integration of two separate supply chains, which may involve a complex process of consolidating suppliers and streamlining logistics.  

  6. Cash runway extension – The supply chain network could provide companies with substantial savings but requires well-designed strategy and execution given potentially drastic downstream implications.

Outside the situations described above, companies with established manufacturing processes should “pressure test” their supply chains on an annual basis, as part of a corporate strategy review process, and conduct quarterly operational health checks.

Key steps to optimize a pharma supply network strategy

Effective supply chain strategy requires an upfront vision outlined in Figure 4 below, as well as the careful assessment of the following key choices:

  • Enterprise and portfolio context should set the tone for how a company approaches its supply chain and should be overlaid with key considerations such as expected future demand, geographic regions for product sales and desired product presentation, among others. Ultimately, each biopharma will have its own approach to supply chain management, but that approach needs to be guided by the enterprise strategy and tailored to the unique needs of the portfolio.

    • Service level – What is our optimal service level (probability of meeting demand from current inventory) that ensures we meet the majority of product demand while mitigating over-/undersupply of portfolio products? 

    • Quality vs. cost – What is our optimal balance of quality standards across our suppliers versus target product margins? 

    • Network redundancy – How much redundancy should exist in our network to ensure supply continuity? 

    • Flexibility – How much flexibility is desired for our network to account for new product types, upside capacity or new contracts? 

    • Differentiating capabilities – Are there any unique capabilities required to maintain the company’s proprietary intellectual property? Additionally, do the product characteristics require a differentiated supply chain (e.g., just-in-time therapies)?

  • Careful consideration of key network choices and timing is necessary to ensure supply demands are met and near- and long-term goals are achieved. Network choices are upcoming decisions that must be made through the supply chain strategy process, such as extension of CDMO contracts, updating of supply management systems, establishment of a new manufacturing site and others. Some decisions must be made before others, so prioritization of network choices is an important consideration (e.g., CDMO contract renewals may be coming up next quarter versus a longer-term decision to build a new site). 

  • Once network choices are assessed, network design analysis and the development of recommendations become possible. Supply networks must be tailored to the unique needs and portfolio considerations of the company (see Figure 5).

The top three key design choices for the network are most often: 

  1. Outsourcing vs. internal sites – Companies must determine the optimal balance of internally owned manufacturing sites relative to the use of CDMOs. This decision can vary based on geography (e.g., use only CDMOs for supplying a certain country) or product component (e.g., drug substance is manufactured at internal sites while labeling/packing is done at CDMOs). 

  2. Geographic focus of supply chain – Companies must also identify the optimal geographic distribution of the network. These decisions impact product shipping times/costs, regulatory efforts to secure site approval and the operational burden of the network and thus are critical to optimize. 

  3. Mix and vertical integration – Companies need to determine whether manufacturing sites are low-mix and thus produce only one component of the final product (e.g., bulk drug substance only) or are vertically integrated/high-mix and thus produce all components from the application programming interface to a ready-to-ship product. Low-mix and specialized sites usually have higher technical capabilities, while high-mix and integrated sites are usually more efficient and help streamline network operations. 

Once the design of the supply chain strategy is complete, a roadmap to a steady state should be developed to guide execution. The roadmap should clearly outline upcoming decisions and key considerations, the impact of decision outcomes, which functions should own decisions versus provide input on them, and the timeline for making the decisions.  

Staying ahead of biopharma supply chain issues: Readiness self-assessment  

Supply chain planning is critical to biopharma companies as it helps ensure product availability, speed to market, quality/safety and cost control. Consider the questions outlined in Figure 6 below to determine whether supply chain strategy establishment or review may be appropriate for you: 

Your answers may signal that a supply chain strategy review could be warranted for your company. If you are considering an evaluation or evolution of your supply chain model, L.E.K. can help support your decision-making process.

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