Tariffs On Toys … And API? Biopharma As The Next Battleground

By Louis Garguilo, Chief Editor, Outsourced Pharma

Outsourcing drug development and manufacturing is an attempt to undertake purposeful action in a web of interdependent contingencies.

The contingency top of mind today is U.S. President Trump’s attempt to reduce global tariffs and non-tariff barriers, and increase activity in the U.S., by first increasing tariffs as a main strategy.

For our industry, some consider his tariff tantrum as potentially potent as lingering challenges in the clinic or regulatory miscues.

Others see this as burdensome but less derisive – a short-duration turbulence that must be monitored and weathered.

Whichever you think, the current global tariff negotiations have ushered in a moment of supply-chain disquietude.

Tariff On Active Pharmaceutical Ingredients?

Of course the tariff talk reaches far outside our industry, where we hear statements such as:

The U.S. will never manufacture sneakers or toys. Some supply chains and production will forever stay in lower cost nations set up for such economic activity.

Thinking across our value chain, asks Ali Pashazadeh, founder, Chairman and CEO of Treehill Partners, “What areas are unrealistic for us to expect will be appreciably taken up in the U.S.?”

Surprisingly, because we already do a fair share of this activity here, Pashazadeh answers active pharmaceutical ingredients (API).

But if you are producing generics, antibiotics, vaccines, or other large-scale, large-demand and lower-priced medicines, then you have our industries sneakers and toys.

“Then I was also thinking,” Pashazadeh interjects, “if I were going to apply tariffs to try and affect CDMO production here, where would I apply them?”

“I'd figure that APIs come from India, China, parts of Europe, etc. So I’ll tariff those.”

Would that level the API manufacturing field?

Well, consider what the Trump administration seems to understand most viscerally is that basic materials are vital to supply chains.

So our biopharma starting materials and precursors are also obvious tariff targets.

That would then mean: More expensive materials are now required to create API that you already will need to pay more for if produced at a CDMO based in the U.S.

“You're going to have a shockwave right at the beginning of many supply chains, and I'm not sure whether those chains will continue,” Pashazadeh says.

“If it's a generic, for example, and you now need to produce your API in the U.S., are you better off just pulling the generic off the U.S market?”

So How Can CDMOs Help?

The above illustrates the uncertainties in our industry at this moment.

I recently heard an interivew with investment guru Jeffrey Gundlach (CEO, DoubleLine) in which he said something like, "I need to see 10 risks where only 3 currently exist."

To mitigate such risks in our world, although CDMOs themselves are facing many question marks, Pashazadeh says sponsors should ask their external partners:

"Realistically and immediately regarding the current but evolving situation, how can you help me better ensure outsourcing reliability?”

It almost feels like an unfair question. But a more detailed interrogation would include these following questions:

• Do you have a network of capabilities in the U.S., and in India, China, or Europe to better assure business continuity through supply-chain uncertainty?
• If as a biotech or specialty pharma, I am suddenly in need of switching material sources or production locations, are you going to make me wait a year until you can accomplish that for me?
• Will you favor your larger clients and send me to the back of the queue?

Within potential gyrations in our outsourcing economics, markets, and supply-chain logistics, we also have to anticipate that CDMOs will actually learn to take advantage of tariff shake outs.

“So this is a real point of planning and assessing business continuity,” says Pashazadeh. “Are you my partner in all this or are you a service provider?

“If you're a service provider, then I need other service providers to address risks.

“If you're my partner, and we can work out contractually that you can flex with me as the world flexes, then let’s expand our conversations and relationships.”

The Future Of CDMO Contracting

Such conversations may include negotiating "a new pricing regiment."

“Say goodbye to fixed pricing, and by extension fixed-volume forecasting as predictive of future pricing," says Pashazadeh, “because tomorrow if the world changes, the CDMO is not going to be able to honor the previous price you were basing your business assumptions on.”

He says if the price of your API fluxuates, it causes a value-chain gyration, “like when you twiddle the end of a long rope.”

If you sell a commercial drug at a certain price, and via a fixed volume through a distributor, unless you can successfully negotiate contracts all the way down the value chain, at some point in that chain it's not going to work financially.

“People want to fix variability through contracting – let’s look at a fixed price if I give you this volume so both sides have less uncertainty. That's how contracts have been written,” says Pashazadeh.

“My gut feel is in five years contracts will include stronger and wider contingencies, more ‘if bad stuff happens’ clauses, and I’m not talking about natural disasters and the like.

“I’ll be advising clients that with CDMO contracts, there needs to be a clause of some kind covering fundamentally unexpected market condition changes, so we can either get out of or amend supply contracts.”

In fact, consider we have experienced the massive COVID supply-and-demand disruptions, years of a financial gloom for biotechs, and growing stressors between the U.S. and China.

Our entire biopharma outsourcing ecosystem, if we are worth our salt, should have already become more flexible in attitude and malleable to supply-chain adjustments.

Enough so to face any eventuality about to come our way.

Let's just hope salt isn't tariffed as well.