CDMOs + energy costs + raw costs = ? 3rd November 2022
By Kenneth Drew, Ph.D,Vice-President at Flamma USA
Over the past several years, our world has changed more than we are used to. Much of this is expected, but much of it is not.
Nobody was prepared for a pandemic regardless of what they say today. The fallout from the pandemic is still playing out with supply chain shortages and nations struggling to deal with the aftermath across many industries. Adding the unprovoked invasion of Ukraine by Russia has provided a ripple effect that now has carried over to CDMOs.
The rise of inflation has caused great pain across the globe, specifically in Europe and North America. It is very easy to see that everything costs more today. For example, the cost of natural gas and electricity has risen dramatically over the past few years. Depending on where you look for your data, energy costs have increased anywhere from 3X to 10X when compared to 2020.
This has a ‘trickle down’ effect to almost everything. Specifically, those CDMOs that produce APIs have been hit hard. Recent reviews of pricing models that were put into place two to four years ago for quoting purposes are now being shown to be off by huge amounts. Many pharmaceutical drugs made today come from very sophisticated starting materials that can often be 10-20 steps to make. Since the starting materials are so sophisticated, the lead times for these APIs could be well over 12 months.
What many CDMOs are finding is that proposals given in 2018 to 2021 are completely out of touch with the real costs of today’s manufacturing. For example, a PO placed in late 2020 for material due in 2022 may barely cover the cost of the material, leaving the CDMO to figure out how they can continue to survive when they are making a material with no margin.
The supply chain issues also caused a rise for basic raw materials and solvents. Take the cost of solvents and the impact to manufacturing costs. The cost of THF has risen significantly since 2020. These basic raw materials and solvents impact the cost greatly.
Some larger CDMOs that produce a variety of products for the general market instituted a significant raise in pricing (some increased prices 40%). Other CDMOs have drilled down and learned that it is critical to begin having those hard conversations with customers to address the issue.
In speaking with friends within the industry, I have learned that some customers have decided that POs that have been placed cannot be changed and thus the CDMO must possibly make a very difficult choice – raise prices for the next proposal significantly and potentially risk losing the business or, alternatively, stop making the material in order to not lose money.
Creative ideas are being floated about, but there is no easy answer. Some companies are instituting energy surcharges of 10% atop the invoices for existing POs. This is not exactly being well-received by the innovator companies as they do not want to decrease their margins on their existing drugs and they cannot raise pricing on these drugs due to agreements already in place. It is a difficult position for all.
In the generic marketplace where price is everything, it is almost impossible to raise prices. The margins are already very small for these materials that customers are not likely to accept an energy surcharge. This has put everyone in an untenable situation.
Is there a solution?
It is important for an innovator to have a trusted, reliable supply chain. Jeopardising the loss of a manufacturing partner is not good for any of the parties involved. It is important that the CDMOs are able to reinvest into themselves. This allows the CDMO to bring forth new technologies, increase capacities, purchase new equipment, update existing equipment, hire more skilled workers and much more. While the current situation will likely pass or stabilise to a new level of cost, there must be some understanding that something must be done to find an acceptable solution for both parties.
Do you recall the iodine shortage back in 2011? When the nuclear accident at the Fukushima nuclear power plant took place in Japan thanks to an earthquake that triggered a tsunami, there was suddenly shortage of iodine. This caused a spike in iodine pricing and raw materials that contained iodine became expensive and challenging to source. Companies worked together to find a reasonable solution to address the cost increase and when things settled down, the pricing returned to normal.
This also occurred with valine and the spike in pricing due to the use of valine in energy drinks. The valine suppliers did not care about the pharma business since the drink manufacturers were willing to pay a significant premium for valine. For a short time, the pharma industry had to adjust to short supplies and higher costs. Fortunately, this issue ultimately subsided and pricing returned to a more reasonable cost.
It is clear that this will be a topic of conversation amongst the meetings held at the 2022 CPHI Worldwide. This will also lead to further discussions as agreements will likely become much more complex. It would not be surprising to see some sort of index that will be referenced in order to protect both parties from these sorts of price fluctuations. With that said, I am confident that the spirit of co-operation and understanding will allow all parties to find mutually agreeable solutions. Let us hope that the current inflationary and geo-political climate subsides and we all can focus on what the pharma industry provides – new and innovative drugs to help patients in need.
Kenneth Drew, Ph.D,Vice-President at Flamma USA – Kenneth Drew has been with the Flamma Group for nearly 13 years after being the first employee of Flamma USA. As an organic chemist, he worked in the lab on all facets of drug development, including medicinal chemistry, process chemistry and analytical chemistry. He transitioned to business development 17 years ago and has a strong understanding of what it takes to move a drug through the process to ultimately becoming approved by the FDA. Understanding the supply side of the API marketplace is difficult. He understands how pharma companies work with regards to their supply chain organisation, as well as their expectations and is willing to be a valued contact in the decision-making process.