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Welcome to the EY health sciences and wellness experience podcast series. A series dedicated to exploring the trends that are reshaping the industry. Organizations worldwide have recognized the need to put health and wellness front and center. The health care industry has taken the lead, with a real focus on how technology, innovation, and collaboration is giving the traditional health system a radical, much needed overhaul. With so much happening at speed, keeping up is almost impossible – until now. So while everything around you continues to move at pace, take some time out from the day-to-day and join us to examine and embrace the age of health experience.

Derron Stark

Hi everybody, this is Derron Stark. I am a partner in our Health Sciences and Wellness supply chain practice in the US. I'd like to welcome everybody to a new episode of our EY Health Sciences and Wellness Experience podcast series. Today, we'll be discussing the future of pharmaceutical supply chains in the wake of the COVID-19 pandemic and other geopolitical events and shifts that are unfolding around us. The discussion will build on our EY 2022 report, Pharma Supply Chains of the Future, which was published in the July of 2022. It's available online at ey.com. With me today to talk through some of the findings and implications of this study are two of my co-authors, Olaf and Famke. I'll let them introduce themselves. Famke, would you like to start?

Famke Krumbmüller

Thank you, Derron. I'm Famke Krumbmüller, and I'm part of the EY Geostrategic Business Group.

Stark

Olaf?

Olaf Zweig

Yeah. Thank you Derron for the introduction. So, Olaf Zweig, I'm a Partner in EY here over in Europe, basically leading EY Parthenon on the strategy business in Health Sciences and Wellness. And, as Derron mentioned, had the pleasure, together with Famke and him, of being co-authors of the study.

Stark

Okay. So, just to tee up a first question for the group to talk about today. One of the study's key findings is that the geopolitical upheavals taking place at present have significant long-term implications for the pharma industry's supply chains. So, we suggest in the paper that many of these changes predate COVID-19 and may have been accelerated by the pandemic and the global response it prompted. Famke, can you talk us through some of these developments in a little more detail?

Krumbmüller

Yeah, sure. So, what has happened essentially is that we're coming from a place of a very globalized world, globalization, which had been developing for decades toward more integration, more common standards, relatively easy cross-border trade, and therefore also very global supply chains. And then much more recently, we've had a couple of events that started to really highlight the downsides of these highly integrated global value chains and supply chains, and have made these dependencies unacceptable. I think the most obvious example is the COVID-19 pandemic, which highlighted that certain parts of the pharma supply chain, for example, are located in countries. That would mean that we don't have timely access in other countries to things such as masks, to use the very obvious example, but on many other things that have happened as well. This is just a pharma example and is very linked to COVID-19. But other examples came as well, the war in Ukraine started that again and highlighted what the consequences can be of global dependencies. And, as a result of that, these events really cemented a trend that had started slightly earlier around the fact that globalization is now essentially rebalancing, I like to call it. So, this idea that there's of course a lot of upsides to it, but that recent events have highlighted downsides of these global dependencies, and now politicians are working to try and rebalance that a little bit. So, the result of that is essentially looking into supply chains, identifying where these dependencies are and trying to make sure that, especially in what we call strategic sectors that are considered to be important to national security, but also national interests. And this is relatively broadly defined, that in these sectors there is a limit to global dependency or that you can, if for one reason or another for a pandemic or for war reason, for example, you get cut off from the global supply chain, you're still able to supply nationally or regionally. And it's in the context of the COVID-19 pandemic that pharma has become firmly a part of what is considered to be of national interest and a strategic sector. And this means that policy makers are watching, and they're interfering and intervening into these supply chains, to try and make sure that what they consider to be of best national interest is essentially met. So, this is the environment that we are in. And I think it's important to understand that when we look at what has happened over the past two years since the pandemic started, we've had essentially two sorts of policy measures that have impacted the pharmaceutical supply chain. We've had what we consider to be crisis measures, so measures that were introduced to just deal with the unexpected aspects of this global pandemic, and that we would not expect to last too long, such as, for example, export restrictions, and these types of very interventionist measures. But then there's a second type of measure, more structural measures, some of which were already introduced, but others which are currently being discussed, and which are essentially designed to reevaluate these global dependencies. So, what we did specifically here in the study is that we looked at what are some of these measures that we would expect from policy makers across key geographies, the biggest ones, the US, the EU, and China. What are some of these key policy measures that could be taken in the future or have already been taken by policy measures? And then we evaluated two things. First of all, what is the political likelihood that these measures get implemented over the next couple of years? And then second of all, how impactful would these measures be on the pharmaceutical supply chain? And when we then looked at the outcome of that, we saw a big majority, almost all of these measures actually linked to localization. So measures that would incentivize at the very least, if not in certain circumstances, even force, localizing pharma supply chains or parts of pharma supply chains, I should say, closer to home, if not home, to make sure that these famous national interests are met. So that's what I will say with regard to the policymakers’ aspects of this, Derron.

Stark

Great. Thank you, Famke. And just a follow-on question, is it fair to say that pharma was able to avoid or mitigate the worst effects of the pandemic and some of the other events following on from the pandemic in terms of rising freight costs, raw material shortages and challenges with the semiconductor deficit? I think in the paper we talk ultimately about how the industry responded to all those challenges.

Krumbmüller

Yes. I mean, it was, I think, important to acknowledge that it was kind of crisis mode for everybody because it was an unprecedented situation. But that on average, when you look at it, apart from some of the very obvious consequences that had been made quite public, the initial disruptions, I think the pharmaceutical supply chain actually surprisingly well managed all these disruptions that were out there in all of this unprecedented environment that all of a sudden came to life. So, yes, I would say, I'm actually curious to hear what you think about it, what your experience is.

Zweig

For the study, we had the opportunity to do 17 interviews with the PMF members and little surveys to feed in our statistics that we show in the first part of the study. And, when you see how service levels really developed over the pandemic, you probably find out that there are 15 PMF members saying either performance stayed at pre-pandemic levels or improved, which I think is quite a strong achievement, based on the substantial effort that the industry had to take. Two out of the 17 mentioned said that for particular products, there had been challenges to be overcome and that there had been temporary shortages based on the big demand.

Stark

Yeah, generally speaking, the industry was very resilient. We've explored that much of it was mitigated by high levels of inventory that the industry carries, but also there were relaxations in the government policies and requirements, and there were some partnerships with the government to relax audit requirements as an example, or bring things to the vaccines in particular, the COVID-19 medications through expedited approvals. So there was definitely some relaxation and day-to-day requirements that helped manage that resilience, which I think is important to the next question as we'll talk more and get Olaf’s opinion here as well. o, given all these changing geopolitical landscapes plus the increase in disruptive events like severe weather events and cyber attacks, what should pharma companies be expecting from governments, from international trade policy and from their own board of directors around risk in supply resilience in the future? And how should they adapt their supply chain strategies in response? So Olaf, I'll throw it to you to get your opening opinion.

Zweig

Yeah. So connecting to what just Famke said about the policy makers, and how important also from a national security point of view, in a sector and an industry like the pharmaceutical industry becomes, I think we need to expect that there are more for the moment incentives, but for sure initiatives toward regionalization of certain value chain steps, in the context of becoming more self-sufficient, and to ensure that for any upcoming event, not just from a trade point of view, in detentions. Famke mentioned to be prepared for something that is more self-sufficient on a national and or regional level, depending where you look into the US, Europe or China as part of our study different answers, but kind of same direction, mean with this localization effort here and there, we see certain policies coming up already, not just in the context of COVID-19 started, as Famke said, from a trade policy point of view. Before COVID-19, that we see as a watch out that can be tariffs, that can be R&D incentives that basically make pharmaceutical companies think on how to build their future supply and networks as well in order to cope with this request from the policy makers and regulatories on the one side, but at the same time also combine it to a seamless, secure, and again, self-sufficient supply chain, for them. Because this will not be the end of the globalization, but I think we are seeing more hybrid models going forward that are combining the globalized thinking still, and the impact and the results of a globalized thinking and supply chain. On the other hand, this asks for more localization and regionalization, for self-sufficiency. When it comes to the board, I would say one thing that we learned during preparing the study is that a couple of the answers are depending on the company-by-company level. So, there is no one-size-fits-all and everybody needs to turn at the same direction and doing it. Obviously, there is a legacy, of the firms in place, but the one common theme I would say for all of them is that resilience becomes much more important criteria in any forward-looking decisions when it comes to supplier network strategies and the likes. That's something that will be with us going forward as a key consideration for future setups.

Stark

Yeah, and I think you made an important point there that each company is evaluating their specific situation. But one of the common things I actually have heard from my clients is that no one is completely blowing up their existing supply chain and rebalancing it. It's fairly globally distributed on an end-to-end basis already, and they're really assessing is there a risk to the existing supply chain. And they're finding other measures to mitigate that risk rather than, looking for more localization or regionalization. But they are really looking at resilience and you set it all off resilience in the future for new supply chains and new modalities, like expansion of their biologics. They may be looking at either building local manufacturing facilities in each of the trade regions or leveraging contract manufacturers in each of those trade regions to build in more resilience, but also, partnering, really investing in new modalities, like cell and gene therapy, and looking at building in that resilience from the beginning, as they built up that supply chain infrastructure.

Zweig

I think you’re spot on with mentioning the measures and the very different measures that we came across while doing the study and also talking to all the senior guys in the industry, as the PMF members provided perspective on their particular companies as well into the study, there are measures that are existing already for a while and that have been applied in the past in order to get service levels high and no shipments missed, basically availability of product. Nevertheless, some measures have been identified that could be more forward looking, things that, also in a collaborative way maybe between different members, within the industry can be put forward and certain things that are currently high on the agenda, like end-to-end supply chain visibility. To just give an example, because most clients I think recognize that when they look upwards, upstream, into the manufacturing of their products, what are materials that have been key, and that maybe were an issue to get all the way from ingredients, but also things that are required for the manufacturing process itself. I think this end-to-end visibility of where potential bottlenecks can come from and basically what are the supply sources, they have not just at direct suppliers, but also the suppliers of the suppliers and so on, I think it's a key topic, and this kind of transparency and also understanding, and you mentioned in one of your first questions also the risk, I would say risk exposure, in certain areas. That's something that is one of the measures. But obviously we have also seen others that go toward what you said from a biologics point of view, where to put it, maybe regionalization, maybe do it together in a joint collaboration effort. And it could be with CMOs, but it could also be together with pharmacos or even public and private partnerships. I mean, if you see what's happening also in the COVID-19 vaccine context, I think we have examples that are already proving the success of such measures. And I think more of these success stories we'll see coming up, where pharmaceutical companies together with policy makers, together with regulatory bodies, hopefully work together in order to bring them forward.

Stark

Yeah, that's a critical point that we're seeing our clients invest heavily in “end-to-end supply chain visibility”. It's really that automation, digitization and connectivity of systems across the supply chain so that companies can clearly see where all their inventory is, where their manufacturing statuses are, where their service levels are, but also connecting into their customers and their suppliers, and as you mentioned, Olaf, being able to understand and see where their suppliers’ inventories are and understand what the risks are. And that's where we're also having discussions across companies where, if they can have that visibility into common materials and components that might be at risk for the entire industry, how do they mitigate and manage those potential risks collectively? And we've proposed a concept, and it's been implemented at a small scale around different parts of the industry, is procurement clearing house, where some collective body helps manage disruptions in supply of key components that are common to all the players in the industry. And it's really a matter of this end-to-end visibility can help enable that, and we're on a path to potentially enabling that solution, but it's certainly not solved at this point.  

Zweig

Derron, maybe one thing to add, if we are looking back and one part of the study had been to looking into what had been the supply issues really, when it really comes to the patient, are there particular products certain supply missed. I think the industry did quite well. If you really go to the SKUs that had been not available, most of them, in particular when it comes to very innovative products and pharmacos. I think most of the reasons were connected really to the fact that there was higher consumption and higher demand needed in the context of COVID-19 where the companies need to ramp up the manufacturing and supply. At the same time, I think also the companies learned that working together, and we had different initiatives seen in the US also over in Europe and saying, try to help each other. I'm short on that, but it's available on the other hand. We talked about [pall filters], these kind of materials, bio backs for biologic manufacturing, where companies have proven, together with the regulatory bodies, that you can cope with such a situation. I think the forward-looking piece would be to develop governance, tech solutions, processes that makes it more seamless, more automatic, and what you mentioned just as a procurement clearing house approach, that could be one aspect in a kind of trust center approach, to have an eye on certain things that potentially can become short and then preventing, by doing it in a smart way that on certain things something happened if some disruptions occurring are kind of a bank run for certain things, but a more balanced way of supply for everybody, in the value chain. So that continued manufacturing can take place even with some interruptions here and there happening because of geopolitical tensions, short-term crises or cyber attacks, you mentioned that.

Stark

Right. And I think that's also where we lead into how can policy makers work with the industry to boost that resilience and identify those at-risk materials and hold strategic national stockpiles, whether it be in the US, Europe or China, or other markets. And what does that relationship look like? From our research, not just in the pharma paper but other research that we've done more recently, the public sector is very interested in building on the learnings from the pandemic and extending those capabilities into a more resilient, strategic national stockpile in the US. And Europe has a number of measures out, being able to connect to the industry and share data and be more resilient and incentivizing certain measures, but it feels like there's not a roadmap to a solution with public and private partnerships. And I don't know if Famke or Olaf, you have an opinion on what are the potential paths to getting to a more integrated public private cooperation in the health care industry to the pharma industry in particular.

Krumbmüller

I will just say that definitely from a policy maker’s perspective and also from the industry's perspective, it is incredibly important to work together, and to really establish communication about what is the impact of some of the potential policy measures that policy makers are thinking about to remedy to, or to get to the ultimate aim where they want to get to. How do these measures actually work? What's the impact on the industry and will they allow to get to the goal? So it is, I think, incredibly important that industry kind of gets together and has an open channel of communication with policy makers to ensure that the measures are actually the right ones to achieve the outcome that everybody wants, which in this case is about supply chain resilience and agility. That's I think, key here to move forward.

Zweig

Yeah, and I think there's also a strong appetite, on the different stakeholders’ groups, to have a structured and continuous dialogue on the topic. Because in a way we're also building the plane while we are flying. So, I think this continuous dialogue between the pharmaceutical industry, the policy makers and regulatory bodies would be important, not just to convert the learnings that we derived out of the COVID-19 pandemic and things that we brought forward here as measures, but more, in a holistic sense, to build a going forward model together. So that's clear what everybody requires basically. And then we find why are this dialogue a balance of certain things. So, for the better at the end. So, it's not just about legislation and former stuff. I think it's also coming together and form together the future by exchanging more arguments and find the right pathway forward.

Stark

Yeah, so it sounds like in summary, there're measures that the industry can take internally, they probably can learn from each other and share some of those learnings to better cooperate both across companies. But then also to proactively seek dialogue and input and paths forward with governments and policy makers as well, to further build in that resilience for the future.

Zweig

We set I think earlier and then in the discussion that there is a hybrid approach that we expect to come when it comes to future supply chains. We also said there is not the one-size-fits-all on a solution end of these things. Putting this together, I think there is a lot of space for collaboration. Maybe that's for me also talking to clients and reading the news. I think, if there're joint forces of companies that in a way are similar and in their needs, obviously we have companies with a stronger footprint in the US maybe less strong, in Europe, vice versa. The question of all of the companies is how to cope with China, and what would be future footprints there. I think there is from my point of view, plenty of room for collaboration, and if there is one key theme beside the dialogue piece of the different stakeholders required here, I think is more collaboration on a continuous basis.

Stark

All right. Thanks everybody. I'd like to thank our participants today, Famke and Olaf, and let our listeners know they can access more information about our reports and points of view on Health Sciences and Wellness and supply chain at ey.com and our Health Sciences and Wellness and supply chain pages. Thanks everybody for listening and have a great day.

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