Inflation Fears: Supply-Chain Lessons From Past Periods In US, And USSR
By Louis Garguilo, Chief Editor, Outsourced Pharma
I’m old enough to be concerned with inflation because of direct experiences in the 1970s and early ‘80s. To say the least, it was a difficult time for consumers and businesses alike. In some ways, it was economically – and politically – altering.
Direct experience was also Vadim Klyushnichenko’s starting point for a discussion he and I had on today’s inflation. His experience, though, was in Russia in the 1990s.
Klyushnichenko is Vice President, Pharmaceutical Development, Calibr, a subsidiary of the Scripps Research Institute. His career in the U.S. spans similar roles at big and small biopharma, as well at CDMOs.
Perhaps both he and I are overreacting?
“Friends and colleagues from other countries that went through rapid political and economic changes express the same opinion,” replies Klyushnichenko.
“Meanwhile, most U.S. citizens have never experienced strong inflation, and do not have a benchmark to understand the seriousness of the situation.”
He puts little faith in the most recently recorded 6.2% monthly consumer inflation as “a real number.” He points to everyday, tangible experiences for most everyone in the U.S.: gas, food, electricity, housing – all more like 50% price increases.
“People don't understand this accumulates from year to year,” he says. “Salaries get adjusted, but they do not keep up.”
He saw it get so bad in the U.S.S.R., he says, “Our salaries rose often, but goal number one was still to spend it the same day. Tomorrow the price will be higher, or the products will disappear for a while.”
“That inflation also created a so-called brain drain, when young scientists – like me – were moving abroad, or switching to different professional activities.”
Consumers Of CDMO Support
It’s safe to stipulate Outsourced Pharma readers’ outsourcing challenges have been exacerbated by the COVID pandemic. Klyushnichenko’s have; Calibr utilizes CDMOs for most all its development and manufacturing needs.
“Many materials were already restricted for purchase because they were reserved for COVID-19 products” says Klyushnichenko. He names all types of chromatographic resins, filters, and media bags, as examples.
Now with surging inflation, he’s set out to mitigate risk by purchasing materials well in advance, “just in case we need them, and in larger quantities than usual.”
The conundrum?
“For example, we suddenly learned certain resins we might need for a development process would not be available for six or twelve months,” he explains.
A year later, they still were not available. He ended up purchasing a much larger quantity of the resins than would be normal for a development project, and without actually knowing whether the material would be useful.
“It reminds me again of that time in the U.S.S.R., when all purchases for lab or production inventory were done based on difficult long-term projections,” says Klyushnichenko.
“Now, I find myself in a difficult situation. I cannot utilize those resins we purchased – our technology and purification process went in a different direction.”
Moreover, he says, “this also creates difficulties for another company who really needs this resin. It creates a complete disturbance in the purchasing market, not to mention the actual companies who supply materials.”
“And,” he interjects, getting back to inflation directly, “the prices of this material and related services continue to rise.”
CDMOs are thus forced to spend more on advanced material purchasing – including increased costs for storage, and even the disposal of unused materials – not to mention the new market shortages this causes.
“Some CMOs go to extremes,” says Klyushnichenko. “I’m familiar with a CDMO that has ordered 6,000L of WFI [water for injection], over 1000ft of silicone tubing, and hundreds of kilos of dry media components for a 50L GMP upstream part of the process. This can only drive operational costs up.”
Rising Again
Later in our conversation, Klyushnichenko mentions the cost of CDMOs “has increased again about 30%.”
Again?
If you think back over several years, he explains, you see there’s been a steady rise in prices, due in large part to “the fast development of pharmaceutical products at small and virtual companies that prefer to outsource most everything to CDMOs.”
Even large pharma, says Klyushnichenko, actively use CDMOs more than ever for the development of their products. Those market dynamics have increased prices at CDMOs over the years.
“Now, we’ve added another 30% price increase with COVID,” he says.
“Everybody seems to be rushing to CDMOs to get projects accelerated again. CMOs regulate this demand with increased prices. I used to pay about 3 million dollars for bacterial process development and manufacturing projects; now it's more like 4 or 5 million dollars for the same type of projects.”
Rethink Our Future
Given all this, what does the future hold for the biopharma industry, and particularly drug development and commercializing entities like Calibr?
“In general, I'm an optimistic person,” he says, and having known him for a while, I can attest to that assessment.
“I believe the industry will react quickly. For example, our Institute is adjusting operations, and improving our financial conditions. Our business development group is working actively with sponsors and potential partners. We will bring in additional streams of money. Others will find new models of operation, I’m certain.”
He continues: “But again, this is related to inflation; basically, the price of services will grow further. It will be a constant game of catching up to current prices, and less resources.
“For the last 20 years, there’s been a steady and reliable development of our industry, in an almost ideal environment when compared to other countries. For example, Lean 6-Sigma, and just-in-time delivery was implemented based on the reliable supply chain.
“These principles have been applied very well, but now, with a broken supply chain for materials, and challenges with hiring workers, we will need to rethink and figure out how to work in this new economic climate.”
In fact, figuring out solutions to drug development and manufacturing outsourcing challenges is our goal at Outsourced Pharma. At times, this must start by clearly identifying those challenges, and where they may be heading. Thanks to Klyushnichenko for sharing his thoughts and experiences on the risks and repurcussions of the inflation equation.