Recession? We're Not Even Over COVID
By Louis Garguilo, Chief Editor, Outsourced Pharma
I was surprised by recent discussions on supply-chain challenges and impacts of the macroeconomic environment on drug development and manufacturing outsourcing activities.
Executives say what began with the COVID-19 outbreak, and now the red flags raised over the state of the overall economy, feel like an inseparable continuum.
The former hasn’t measurably ended – causing most of my surprise – and the latter suddenly begun. And the unfortunate amalgam is expected to continue throughout 2023.
While in part one of this ongoing series we provided some historic background on how economic downturns can impact outsourcing behaviors, here in part two we’ll focus on exactly where we stand heading into 2023.
According to the biopharma executives I’ve spoken with, we have an economy reversing momentum due to pervasive inflation causing rising prices on materials and services; skyrocketing interest rates; worker shortages and rising salaries; irresponsible fiscal policy in the U.S.; a war in Europe; and circumstances in China, all piling on lingering capacity concerns, and outsourcers still playing catch up for the past few years.
Hoarding And Inflating
“Covid didn't go away!” he said when I inferred supply-chain challenges had at least begun to work themselves out from mid-pandemic levels.
“CDMOs are still busy making vaccines and drugs for COVID. There are companies out there still trying to come up with new and better vaccines and drugs, and getting the attention of service providers.”
COVID continues to vacuum up capacity and resources away from other developers. According to Calias and nearly all the outsourcing professionals I’ve spoken to, the direst consequences of this are material shortages of all kinds.
“People are hoarding reagents, filters … all this stuff because shortages continue,” Calias says.
“It's like toilet paper during COVID. Everyone went and grabbed it off the shelves when they could. We haven't recovered from that in our industry.”
Small companies and startups particularly are spending time trying to find what they need and how to get it, and having the difficulties of securing and maintaining timeslots at the same time.
Enter the economy.
“Now,” Calias continues, “everything also costs more. Drug sponsors are paying 20% more for materials and services than in the past.” He expects another 20% to 40% increase year-over-year, because of what CDMOs are calling cost-of-living or cost-of-business inflation.
Bottom line?
“For so many drug sponsors, the economy will continue to be less than ideal,” says Calias.
“We have scarcity and price increases. Booking a slot for something like a GMP run is getting more difficult.”
That dynamic is affecting behaviors, causing materials stockpiling, and more risk-taking when it comes to advanced purchases of materials, or contracting with CDMOs for production slots further out than normal.
“We not only need to understand constraints of our suppliers, but also the constraints of their suppliers. We’re discussing supply strategies through 2023 with our CDMO’s. We need the CDMO’s to secure supplies of the key materials that they purchase, including excipients, disposable items, and processing supplies."
“We take nothing for granted.”
Another example several professionals mentioned is secondary packaging. Procuring cartons, labels, and package inserts require combined lead times of up to 16 weeks, when they had been about a month.
“You need to work with the packaging companies to give them plenty of time to procure all the necessary components,” says Kosewski.
Back to Calias. He says there is one consolation within all he’s had to go through.
He believes this altered state of affairs reinforces the utility of strategies and philosophies for working with external partners that he has practiced over the years. I’ll detail those soon in a separate editorial, where Calias names the service providers, as Kosewski intimates above, that are working collaboratively with sponsors to come up with the best solutions for both sides in these difficult times.
And speaking of collaboration …
We’re In This Together
“We need to find a different way to contract with CDMOs,” he says. “The contracts of 2018 and 2019 can’t be the contracts of 2022-23.”
Above we talked about longer-term planning; Sapirstein advocates for shorter-term contracts.
“Even if you were not experienced as a CEO, there's a good chance you were able to find capital during the past years. Now, it’s very hard to raise capital,” he explains.
The financial runway is shorter, and biotechs and CDMOs alike “are going to have to be a bit more inventive.”
“I always say when these challenges are happening, you have to go from a permanent to a temporary mentality in terms of hiring and contracting. Like we do with hiring, we must think about more ‘temporary contracts,’ or piecemeal-like agreements, instead of two- or three-year commitments.
While long-term can at times be better for the CDMOs for predictability of business, he says this can actually be bad for their biotech customers. And in the long run, that’s bad for the CDMOs themselves.
“We need to work things through in partnership, figure out how to survive first,” Sapirstein says.
“People still don't understand we are one industry. We're all in this together, dependent on each other, and now is not the time to get greedy.
“Now is the time for everybody to get to the same foxhole, and figure out how do we survive this.”