It may seem odd to be discussing sourcing challenges considering the overwhelming evidence we now have of what can happen to global (and even local) supply chains when disaster strikes, but while the coronavirus pandemic certainly has put the spotlight on the risks of global supply chains, it by no means created those risks. Indeed, they have been with us for quite some time as a smoldering fire that finally raged and nearly engulfed the entire house.
Sourcing challenges, such as trade, geopolitics, emerging diseases, environmental & weather-related issues or compliance, have traced their way around the world.
Other Common Challenges to API Supply Chains
Many other circumstances also can impact the security of API supply chains, such as:
- Changing suppliers for a key raw material or late stage intermediate, which often can be as complicated as changing an API source.
- Sudden and unpredictable price increases, on raw materials, key intermediates or API.
- Changing suppliers unexpectedly, which can incur significant delays in order to identify and approve new viable manufacturers, followed by delays while material is produced, shipped, imported, tested and repacked for distribution.
- Back orders due to shortages of key raw materials
- A lack of viable alternate manufacturers, leading to production delays.
All of these sourcing challenges have grave implications for the pharma and biopharmaceutical industries, and companies should be aware of the role advance planning can play in mitigating supply chain risks.
API Sourcing: The Importance of Advance Planning
One critical (and often overlooked) task bio/pharma companies must undertake as they move into commercial manufacturing is advance and sophisticated supply chain planning. Maintaining a ‘safety stock’ or ‘safety inventory’ is critical.
Single Sourcing Obstacles
Sometimes drug companies face difficulties implementing advance planning. This is particularly common in cases where just a single DMF holder of a desired API exists.
It occurs most frequently with generic formulations (even for 505(b)(2) filings the API still typically is a generic). There are a number of reasons only a single DMF holder might exist:
- The API is new and is about to – or recently did – go off-patent.
- The API might be very complex and difficult to produce, and perhaps just a single manufacturer has pursued it.
- The API might have limited market potential.
- The ingredient is an older API and market dynamics have shifted.
Custom & Innovator APIs
Some of the biggest advance planning mistakes we’ve witnessed involve companies who try to source only the bare minimum of an API needed for a particular stage of drug development or commercialization. Doing this ignores the longer-term picture and can produce unpleasant surprises for companies when they request more material and then find themselves paying a hefty price or facing significant delays in the supply chain.
The ideal solution is to order more upfront material, especially if raw materials are relatively inexpensive. For example, consider an API which costs $100k/kilo. In cases where it would take the same amount of time and labor for the manufacturer to produce a 2.5 kilogram batch, the cost might be higher (perhaps $25,000 more) – but substantially lower than two-and-a-half individual batches, ordered separately. Repeating a batch – or ordering a new batch – always will be more costly in the long run, given the premiums for labor and capacity.
Ensuring Supply of Generic APIs
With generics, there tend to be fewer supply issues overall since manufacturers – already carrying out constant production – often maintain an existing inventory of an API. In these cases, there may be less need to order excess. It might be a good idea for you to have at least some excess on hand, depending on your needs, on the API, its availability and any other sourcing risk factors that may exist.
Companies who fail to place orders well in advance or are not maintaining appropriate inventories can find themselves in the tricky position of not getting material when it’s needed.
You don’t want to find yourself dealing with supply chain delays.
Supply chain delays inevitably cost more than ordering excess material at the outset.
Building Up a Supply for Drug Development
It is vital to plan in advance, building and maintaining a safety inventory. Typically, drug development firms will purchase and maintain a safety stock of (on average) six months’ worth of product. For example, we’ve seen cases where an amount equal to half of the initial material order is requested and supplied. To mitigate supply chain risks some manufacturers also can maintain certain inventory levels for you. Keeping safety inventory available for your needs is key to controlling API costs.
Manufacturers often produce APIs on a per batch basis, or on an as-needed basis. Also, as they generally produce APIs for multiple clients, you may not be on their production schedule. This could result in delays of several months – and up to a year – before you receive your material.
What Measures Can You Take to Enhance Supply Chain Stability?
There are steps companies can take to mitigate supply chain risk. The earlier these steps are taken (or implemented), the more effective risk mitigation efforts will be. This is especially important with early stage companies or those with little sourcing experience, and there are several solutions which may apply.
- Plan your API delivery timing – independent of manufacturer availability and production cycles.
- When you receive notice of an API price increase, take time to evaluate all your options.
- If a manufacturer is facing regulatory challenges, immediately evaluate your options.
- Consider guaranteed US-based inventory to prepare for just-in-time (JIT) delivery, in case of unexpected increased demand or supply chain interruptions.
- Depending on project size, it may make sense at the earliest stages of a project (before submitting the DMF) to approve 2 API sources in order to have an established backstop.
- The geographic location of manufacturers can play an important role, as unforeseen interruptions to supply (e.g., as recently experienced with COVID-19) may emerge.
It’s always best to search for and secure two sources of an API (we typically line up three short-listed suppliers on behalf of clients). Unfortunately, this isn’t always possible, for a number of reasons:
- Depending on a project’s budget, you may or may not be able to have a backup source.
- Shelf life also can dictate whether you can maintain a safety stock of finished goods.
- If you try to buy only small quantities of an API and try to secure exclusivity on it, it can be difficult (if not impossible) to establish multiple sources. This is also true of niche products.
- Existing agreements with manufacturers may prevent your attempt to secure multiple procurement sources.
- Some products are campaign-based. With such products, manufacturers determine production levels & frequency according to forecasts, along with how much to maintain on hand.
As much as planning and preparation can help mitigate supply issues, they cannot eliminate them completely.
LGM can help companies de-risk their supply chains. Two ways we have done this in the past have been:
- Consulting with clients to determine what steps they can take – and how much they should invest – in order to de-risk their supply chains. At times, a client needs to incentivize a supplier/manufacturer to develop a process and file a DMF for their API. A common incentive would be to negotiate geographic exclusivity.
- We have sought out past DMF holders who are no longer active to determine if they are willing to re-activate their DMF and start producing the API again.
Supply Chain Security Depends on Effective Communication
We’ve found that frequent communication and transparency with clients is critical to success. It’s important across the entire lifecycle of drug development and manufacturing and becomes even more essential in the event suppliers need to be changed or if other supply issues arise.
From LGM Pharma’s standpoint, communication with suppliers is equally vital. An open line of communication with suppliers can provide early warning of complications, enabling a broader range of options in the event changes need to occur, with less impact on the project.
Problems with your supply chain? Contact LGM Pharma for help!