Third Bridge专家称美国药企因本土制造和地缘风险偏好调整CDMO外包，但缺少新增政策或具体订单

[[00:01:26]]
How have the recent pushes for domestic manufacturing shifted big pharma's commercial sourcing budgets over the past 12 months in the US?

[[00:01:41]]
Depending on the company that's committed to these statements with the current administration, there would be more or less of an incentive to internalise within the US. For example, many of these companies within the landscape committed x amount of millions of dollars, and that spend could be allocated across not only internal site refurbishments or expansions, so not necessarily related to directly commercial products, but others might supplement that cost with awarding CMOs that are based in the US. That's been something we've seen as well, felt across the industry. All these companies are competing for the same limited capacity within all these US-based CMOs.

[[00:02:35]]
Where exactly are pharma customers investing regarding CDMO [contract development and manufacturing organisation] outsourcing capabilities? Conversely, where are they seeking to in-source work in place of relying on a CDMO?

[[00:02:52]]
For the most part, it's not necessarily investing in new capabilities, but it's just securing capacity for the routine manufacturing that could be done across almost any of the CMOs. Of course, there are some that require larger vessel sizes where not all of them have those large reactor sizes. For the most part, the technologies are straightforward, and it's really interchangeable whether it's going to be US-based or ex US, but it's just moving more of the future products into the US to alleviate the financial targets… To meet those financial targets committed to the current administration.

[[00:03:41]]
Where are pharma customers investing in regarding CDMO outsourcing capabilities? Conversely, where else are they seeking to in-source work in place of relying on a CDMO?

[[00:03:59]]
Within where? It would be certainly within the US and you'll probably see less from Europe or less from Asia. In terms of in-sourcing, not all pharma companies are developing that capability to have in-house. Some are reverting. I'll say in the past, a lot of the big pharma companies had divested their small molecule plants and their capabilities for small molecule because it's lower… More straightforward chemistry, so they want to invest more in the biologics and cell therapy, etc, which are more complex and fewer CMOs in that market. In recent years, we've seen a shift where some of these big pharmas are reentering making small molecule as a capability in-house. They are shifting some of that away. I would say some are doing that, but not majority. It really depends on the company and their portfolio because some of the portfolio, if it's heavily going to be still a blockbuster for a high-volume, small-molecule product, then there's more of an incentive to have that in-house vs if it's more limited in that space, whether it's volume is not going to be that drastic for demand. It's less cost savings to have it in-house.

[[00:05:24]]
When a legacy supplier is flagged for high geopolitical risk, is the standard response to freeze new volume allocations immediately, or is it ultimately to implement a phased multi-year transition?

[[00:05:41]]
Most of the time, it's the latter because big pharma is generally conservative in terms of making drastic changes. In addition, it's heavily regulated such that the switching costs will be very high. You can imagine multi-millions to do a tech transfer out of the site to another site as well as the resources involved to enable a new supplier to fulfil the same requirements. Many times, it's a wait-and-see approach. Sometimes the administration or regulations change so that there is still some flexibility. There's that aspect within the government. The other aspect is internally just awareness of the IP risk. With the IP risk, with that, each company has their own degree of tolerance. For the most part, I've seen anything earlier than API, so the RSMs, regulatory starting materials, there's much less proprietary content in those early manufacturing steps such that the risk of working with those like China, India, etc, are actually much lower and companies are still working with them in the earlier steps or raw material spaces just because in terms of the availability of other CMOs and the price point, it's really hard to compete. They're still really dominant there.

Once we talk about later phases where it's closer to the API, when it gets more proprietary, many of the big pharmas and biotechs are reluctant to work with them, the China-based CDMOs, primarily because of the history of challenging IP protection. With that, there's always that risk of being scooped with the same, whatever we share with those CMOs. That being said, anything that's still filed would remain there. There wouldn't be an official documentation of a blacklist, but it could be something where people are more mindful of in terms of placing work or if the administration changes its stance, there could be complete removal.

[[00:08:05]]
Does an elevated geopolitical risk profile automatically disqualify a CDMO from future commercial RFPs [requests for proposal]? Do major sponsors still allow them to compete for non-proprietary, commodity-type manufacturing steps?

[[00:08:26]]
Assuming it's for commercial non-proprietary, there's almost no impact. Anything super early on, as I mentioned, the raw materials or regulatory starting materials. Once we talk about the API or the penultimate, the step before API then that's where it gets more hazy. Sometimes there's a specific requirement where CMOs are reluctant to take on the project due to toxicity concerns, EHS concerns or it could be special equipment needed, maybe a bunker for explosions, etc, where it's not something that many CMOs have, so it's more specialised. At those times, those geopolitical countries like China would still be in the running just because there's limited option. I think if it's a generics company or something or if they have a generics division, there would be less concerns just because it's already a widely known IP just because of the patent coming off. It really depends on the situation of the life cycle of the product. Anything that's new up and coming or it has potential to be high sales, it's not going to really go through those markets unless it really has to.

[[00:09:59]]
With the formalisation of the Biosecure Act and the expansion of the US DoD [Department of Defense] 1260H list of Chinese military-linked companies, how is big pharma approaching immediate commercial contract renewals with the affected entities?

[[00:10:20]]
When you refer to contract renewals, most of the time, if there's already an existing contract, it would be placing orders on the POs yearly. The quantities that are forecast will be shared and that would be the considered renewal in the sense of additional work for the upcoming year. In this case, for those affected countries, it depends on to what degree. For example, if it's before API, then it would be less impacted. If it's API, then some of them, again, wait and see as much as they could try and negotiate on legal. Oftentimes, a big pharma would just crank it down, maybe even all the way to zero as there's often a second source or a third source in place. They would just put that up, increase that for the time being until things settle. Once there is more clarity in that space, they could adjust accordingly. For example, that China-based CMO, if regulations change, they could come back quite easily just with an issue of PO. There's no additional need to tech transfer or manage anything beyond that. It's more big pharma looking to take more of a temporary pause if needed after pressure testing if there are no other alternatives to work with them.

[[00:11:53]]
Would you say the broader industry is essentially mandating an outright ban on contract extensions with the affected entities? Is there operational flexibility to phase out spending based strictly on a product's remaining commercial life cycle?

[[00:12:11]]
I think that is really driven by the presidential administration. The industry as a whole is planning to first try a pressure test then react to it because it would make a lot of the supply chain quite unfavourable to not be able to leverage those companies just because they're widely used, especially in the earlier stages, the regulatory starting materials and the raw materials. They are predominant players in that space. Including clinical, they're also quite used heavily just because in that stage, it's less proprietary, but they are able to get the information and test the concepts of the product out at that stage. It would be hugely damaging if we had to reconsider a supply chain without using those companies for all phases of the product and from clinical as well as commercial as well as early stage in the manufacturing process. It would be a challenge for sure.

[[00:13:27]]
How high a cost premium would major sponsors typically tolerate for a domestic US manufacturing label before bypassing western options entirely in favour of alternative manufacturing regions such as South Korea?

[[00:13:47]]
I think it depends on the product. What I think I've been hearing from the industry colleagues is currently putting work in the US is not about price for that particular project. It's more about gaining those exemptions based off of the commitments with the administration. For example, if there is a commitment for x 100 million, and you're going to try to shoot than for domestic market. Even if that particular project costs more than European, more than Asian country CMOs, with that… It also depends, at the same time, they have to be mindful of the product life cycle and the business infrastructure and the relationships that exist. Some of the work that's ongoing or new does go to South Korea, it does go to other countries in Europe. It depends on the fit of the project as well as the life cycle of the product because if there's already an existing relationship for a product that might be close to the end of its life cycle, they're not going to immediately change and bring a new supplier in the US that doesn't make sense. If there's still longevity, then they might consider that if it makes sense to introduce them as a new supplier. US has become a preference, but it also has to make sense with the business needs.

[[00:15:24]]
Is commercial spending reallocation moving uniformly across the industry? Are sponsors taking a more staggered approach here?

[[00:15:36]]
Most of the commercial spend has been adjusting already, allocate for the higher cost of the US-based CMOs and production. Some of the budget for improvement also has prioritised for building restructure or renovations have been prioritised to the US-based buildings as well or investments in capabilities. Some of those budgets, as you've seen, these companies have introduced a new site that they're building within the US. You have a mix of those and it depends on the company's strategy in terms of what they see as the long-term state and how they plan to react to that.

[[00:16:29]]
How does the reallocation speed differ when evaluating small-molecule API [active pharmaceutical ingredient] portfolios vs complex large-molecule biologics?

[[00:16:42]]
Within the small-molecule products, there's a lot more exposure because in that list that you referenced, there's explicit, for example, WuXi AppTec, where there is a strong reliance on them across the industry. If they are explicitly blacklisted from the government, then there's a huge change and adjustment that needs to be made while other companies in biologics and the large molecule, complex molecules like WuXi Biologics, different entity, they have a different… They're not in that list that was referenced, but there is a different mindfulness associated with that just because it is a biologics CMO based in China. For example, within the clinical space, as referenced before, it's more okay to work with them without any major concerns. Once we start talking about commercial, then it becomes more, "Are there other alternatives we can rely on? Is it too complex and no one is a good fit for it, except them? That's where we have to make more of those considerations.

[[00:17:55]]
Are large drug sponsors intentionally restructuring their annual operating budgets to absorb the premium pricing tied to domestic or western manufacturing relocations?

[[00:18:10]]
I think it depends on the company, but many of the big pharmas actually already have internal capability for biologics. They would adjust more in-house, and many of them are based in the US. They would adjust more in their in-house production, while the others who do not have the capability might consider more in-house, more US-based CMOs. However, it's a very small playing field in that space. The ones based in the US are actually quite expensive. It depends on the business need there. You'll more likely see that swing with the small molecule space and with the big pharmas that have the US biologics sites as well as those that are growing or regrowing their US small molecule sites. I think within the big pharma, a lot of it would get internalised, while those in the biotech or that don't have those capabilities would have a preference for US, but it's not always going to be that immediate shift.

[[00:19:23]]
In terms of selection criteria, from a macro perspective, what does the standard end-to-end RFP workflow look like for an active commercial-phase asset? What specific triggers cause a sponsor to invite a new CDMO to bid?

[[00:19:41]]
First off, when a product is entering commercial stage, there's an RFP that would be sent out based off of an understanding of the network CMOs that have been leveraged by a company before and based off people's preferences, there would be typically 3-5 CMOs in that RFP, and it would be selected from the supply chain or strategic sourcing and procurement organisation depending on the company and the size. With that, they would go out, do due diligence on the sites with a site visit. Once the proposals are received, they would look at the timelines, the costs. However, number one factor is always quality. By quality, I'm referring to not only the product quality of right first-time history, but also the health authority track record. That's always number one just because if there's concerns with that, then there's always going to be rework and cost and timeline would get dramatically impacted.

Quality is number one criteria followed by, often, timeline and then cost is usually the third factor, assuming they have technical capability down already. With that, the process would be an RFP where the CMOs provide their proposals, their best price because this is oftentimes setup as a blind bid. Only one price across all proposals and then only one supplier will be awarded. Everyone is trying to put the best foot forward so there's no need to really negotiate on price. From there, it would move on to the contracting phase and negotiating on contract terms. Upon maybe a need for changing volume forecast, then the secondary RFP could be sent out to award another supplier and the same process would be followed.

[[00:22:08]]
Outside of pre-existing relationships, what formal operational milestones and quality audits does a new CDMO need to clear to successfully enter a big pharma commercial supply network?

[[00:22:23]]
It is very, very hard for a new CMO to enter a company's network. Oftentimes, the company feels like they have their set suppliers and many of them are not even being utilised that often. Some might have one contract, some might not have very many, while others could have the majority of the work. They would be deemed strategic or preferred partners. These companies do this intentionally so that there is a reduction in terms of the differences in management in terms of working with the business development contact as well as the understanding of contract terms would be more homogeneous and the spend would be easier to get approved. The main way a new supplier can enter the network of a big pharma or biotech, large biotech would be if there's new leadership in place and that leadership brought from them their experience of working with those CMOs. That can occur during a restructuring of a company or growth of the company such that it would bring someone with a different perspective.

In terms of how does the CMO get that exposure? It's quite frankly, really, really hard. I think having the brand visibility could be helpful as well as being able to get that first project. A lot of the big pharmas are waiting to see if a CMO has proven themselves before they want to work with us. Once they have that one or two projects with a big pharma client, then they can establish more of that credibility and then more companies will be willing to work with that CMO. Those first steps are definitely the hardest. Once they establish that, then there could be a lot more opportunity for further growth.

[[00:24:31]]
When major sponsors establish baseline vendor evaluation frameworks, how is the CDMO's unique technical capability and regional profile weighted against a more aggressive lower-cost offering from an emerging-market competitor?

[[00:24:49]]
For the most part, we're looking at the geographies to understand where the current projects are, but it's only a nice-to-have in terms of where they're allocated. For example, if it's in, let's say, Spain or Italy, if maybe all of the projects are too close, then it's like, "Okay, maybe we should reconsider," but it's not something that's going to be a determining factor. It more comes down to are they strategic or are they preferred, what site makes most sense based off of their proposal, they would often be the ones who propose the site to use because they know the site, they know their capacity and capabilities better than the sponsors would. The geography is not necessarily a determining factor of where we want to put the work, but it does come in as a factor when cost is dramatically different.

For example, if something is in Switzerland vs in Korea, the price point would be different. I know you referenced also vs China. Again, China has a more limited scope that they could be included on. If it is hard to make API or biologic, then they could be considered, but it would not be the preferred unless there's no other option. When you were talking about Europe, US, Korea or Japan, we're looking at it more holistically, and we're not necessarily placing work based off of geography. It's more quality timeline costs. Sorry, except with the US for US consideration where the companies would have to meet a certain threshold. That's when the US is a preference but otherwise, it's more holistically even.

[[00:26:49]]
Does a specialised, hard-to-find asset capability typically override premium pricing structures during the evaluation process?

[[00:27:01]]
Yes, for sure, especially since if it's one of those that no CMO has the capability of or they want to handle, then that would certainly take precedence. Cost usually is not a determined factor. It would be third highest at best because it's more important to ensure the product is made correctly because at that stage, you're still looking to see if it is possible to make a certain price point. Oftentimes, the price is more hand-wavy the first time around because no one really knows the exact percent yield for each step. It really comes down to trust and the capabilities more than anything else at that stage.

[[00:27:49]]
Historically, what core technical capabilities or manufacturing specialisations have been the most successful gate opener for CDMOs trying to break into established sponsor networks?

[[00:28:04]]
I think it's the new technologies or else work that no one is willing to take. For example, if it's a high potency API and there will be fewer options in that space or if it was hydrogenation or azide chemistry. Things that are oftentimes more difficult to manage and dangerous and not all CMOs have that capability would definitely be a leg up or if there is a new type of technology or interest as there's changing modalities, that could be an opportunity as well. I think it's really hard if it's just a similar CMO that has a standard set because everyone is going to always ask, "Oh, why should we go to them? Do they have a long history of health authority success as well as other success for other complex products that they've manufactured?" They're always looking for that track record and credibility.

[[00:29:19]]
Once a commercial contract is active and running, what operational or regulatory failures will cause a sponsor to reevaluate an incumbent supplier and look for alternatives?

[[00:29:34]]
For the most part, usually, there's quite a high degree of tolerance for bad work. The sponsor is willing to try to work through challenges because it might be just a bad instance or operator error where they don't expect it to happen again. You have to keep in mind that there is already multi-millions of dollars invested into the process of tech transfer and then regulatory filings to enable the CMO. Therefore, there's always going to be a desire to try to work with the company. However, if there is immediate, drastic things that break the contract terms, such as an intent of wrong doing, then, of course, that's very extreme, but that would be an immediate stop of the relationship of the work, and that's a breach of the contract. For the most part, let's say if there are quality issues, the teams would try to work through. Oftentimes, the sponsors would already have planned at least dual sourcing, if not triple source for a certain product, so they can increase manufacturing at the other two options or the other, one, option and decrease manufacturing at this one that's troubling. There wouldn't be a need to bring on another one because there's already another one. Assuming there isn't, then they would do another RFP.

[[00:31:17]]
How do MSAs [master service agreements] and long-term volume commitments typically function to lock out new CDMO entrants once the relationship is established? Does anything in particular cause this relationship to be so sticky?

[[00:31:36]]
First off, once you have the tech transfer contract in place, so the initial first try of it, that will be the first scope. That's their opportunity to test that, okay, does the CMO do a good job. For the most part, 90% of the time, there is no issue. Therefore, they proved that they're able to manufacture and they would get the larger longer-term commercial contract. By longer-term commercial contract, I'm referring to they would… Potentially, there could be another RFP or there cannot be. It would be something that we would expect to have the manufacturer x percent of the market, the global needs until the life cycle pretty much dies off. Let's say that's a good, I don't know, 5-10 years depending on the product. They would be manufacturing similar amounts most likely throughout until the product declines and then maybe things can adjust from there. The reason why it's so sticky is because once you enable a supplier, then there wouldn't be… It will be pretty easy to just continue manufacturing in the following years.

The price usually doesn't fluctuate too much beyond inflation. The terms are pretty straightforward with price and capabilities you're accustomed to, you have the flow, you have the contacts in place or relationship. That's why adding a new supplier when you don't necessarily need it is more challenging because then you have to do another multi-million dollar tech transfer, another contract, understand each company works differently. The communication style, project management style as well as you never know if the other CMO would be able to execute the same way. Yes, usually, there are two or three sources but once you have that, you're probably not going to change unless you need to.

[[00:33:44]]
Regarding multi-sourcing and stockpiling for high-volume commercial blockbusters, what are the standard industry volume allocation models and percentage splits used between a primary and secondary CDMO?

[[00:34:03]]
I think a lot of it depends, but many times, at the very least, for a blockbuster, you want to be more mindful of and it depends on if it's small molecule or biologics. For example, small molecule to manufacture, it's much less costly than biologics as well as the inventory for small molecule often have longer expiry relative to biologics. Some of the small molecules, if it's an oral solid dose, like a pill or tablet, it might not even have an expiry technically. I've seen APIs where they don't expire. Once you convert into a tablet, then you start the clock. With that, there could be a strategy to hold higher inventories across the API because upon each step of manufacturing, you add a new expiration date depending on what it's been validated for.

At the very least, I haven't really seen anything lower than 12 months for a product, API. Sometimes, depending on strategy and the reliability of the sourcing of the CMOs and their track record of production, it might be even higher than 12 months. It depends on the profile of the drug and the life cycle. I would say 12-24 months, and that would typically be for an API step. Once you get closer to drug product, you don't want as much just because then you already have the expiry in place and some markets are very strict in terms of how much shelf life needs to remain on product before it can be sold there.

[[00:35:49]]
To what degree are major sponsors adjusting the ratio of their dual-sourcing splits to favour western or domestic footprints over legacy locations?

[[00:36:01]]
I think that one comes down to the commitments they have with the administration as well as the product portfolio of what's new vs what's existing. Much of it that's existing may not even have a US-based because it might not make sense for life cycle. The newer products are the ones with longer longevity, many of them would at least have gone through an assessment of including US CMO and most of them would already have a US CMO at this stage given the push in the recent years. With that, I would say a lot of it has adjusted to US-based CMOs. If they don't have the US in-house capability, it would be US CMO. It's hard to say what percentage because it depends on the product. There would be a target to have the US CMOs fulfil 100% of the US market demand. That's the underlying goal for the sponsor because outside the US, like in Europe, they don't really care as many in US. There's no advantage. If it's going to be sold in the US, that's one that matters. We're looking at that specific volume, and it depends on the products. Usually, the US is the largest market, but in terms of how much, it's really dependent on the exact products that we're referring to.

[[00:37:45]]
What would you say is the standard industry strategy and commercial rationale when a sponsor chooses to tolerate high inventory-carrying costs to aggressively stockpile materials from a legacy regional supplier?

[[00:37:58]]
I think in biologics, stockpiling is less common just because complexity of costs and expiration and you want more flexibility. Within small molecule, yes, stockpiling is, oftentimes, used to mitigate risk, especially if there's a newly launched product that only has, let's say, one CMO, then the months on hand target would be higher than it would be once there's two or three CMOs in place. With stockpiling, the cost to warehouse inventory is much, much less than the cost to manufacture or the cost of not having enough product where there's a shortage. It's not as much of a concern to have extra material as long as it's not too much such that it would lead to expiry or not be used because the life cycle ends. Those are the only factors that need to be mindful of. Fixed costs, working capital, not having capital you can use right away, but those are much more minor in terms of their impacts relative to not having enough product.

[[00:39:16]]
How many months or years of a strategic inventory buffer do major sponsors typically build before completely freezing future production in a high-risk market?

[[00:39:27]]
This is more circumstantial. It sounds like it's more for building inventory in China before something happens where you might need to go to zero. In this case, it depends on the product life cycle. Many of the sponsors are assessing the situation where you're looking at how much is needed because API, let's say, from China is already being made there, how much is needed to fulfil the life cycle of the product, assuming a balance against the expiration. They're looking to max out, making it in China before you can't make it any more for some of these products. They are looking at that situation because oftentimes, it is the cheapest by far to make it out there as well as the fact that they might be losing that material, which most likely would be globally filed just because it would, oftentimes, be the powerhouse of the source if you do manufacturing in China for API. There is a high stockpiling of that. The number of years depends on the product and the expiration, but it could be multi-years, let's say, two or more years, depends on what the product is and longevity.

[[00:40:59]]
Does the intentional stockpiling behaviour create an artificial short-term demand spike for legacy suppliers, ultimately masking the underlying rate of spend reallocation?

[[00:41:13]]
Yes, it would have a short-term spike for those China-based CMOs, but they would know this is the case. Oftentimes, the sponsor would tell them so they're not caught off guard, and they can look at their capacity in the near term. It doesn't necessarily change the budgeting. It just would need approval for that budgeting to make that change.

[[00:41:49]]
With major drug makers committing to multi-billion-dollar internal capacity expansions, how do sponsors evaluate the trade-offs of in-sourcing an asset vs outsourcing it to a CDMO?

[[00:42:05]]
I think with those big pharma that have developed that in-house capability, that would certainly be the priority to fill the capacity in-house up to an 80% capacity usage rate. Then they would consider CMOs to supplement depending on the need of the product. Ultimately, much of the commercial needs would go in-house as a first option unless they can't do it in-house or for whatever reason, it doesn't make sense. For example, if they want to prioritise another product in-house and this is a smaller product, they might outsource that just so it's easier to manage because it won't be there long term. They're looking for a lot of efficiencies and to prioritise their own sites before CMOs. At the same time, I want to emphasise not all sponsors are using that approach, but many of them are. Some still do not intend to make in-house capability for those commercial manufacturing.

[[00:43:15]]
Has the broader industry shift towards internal asset ownership altered long-term volume growth projections for external tier 1 CDMO partners?

[[00:43:30]]
Within those sponsors, yes, for sure. It would decrease in terms of assuming the pipeline remains the same. It's hard to predict the pipeline because with the IRA Inflation Reduction Act, the sponsors have changed their strategy a little bit. Before, it was about identifying those blockbusters, but now they're looking to develop more shots on goals such that there's more products that get approved, even though if it's a smaller market for that product. With that, it is that balance of is there could be more work coming out in the future years, but it might not be as high volume work. It's hard to say. For those sponsors who do have in-house capability, yes, most likely, it would impact their external spend with CMOs, while those who don't have an in-house capability, it wouldn't necessarily change it. Because the pipeline could be more wide, there is that chance that, hey, there's more projects that just need to go external as well because they just have so many projects coming through. It's hard to say.

[[00:44:49]]
Looking at the severe capacity constraints at premium western facilities currently, how are the backlogs structurally impacting big pharma's ability to execute planned sourcing timelines?

[[00:45:03]]
Currently, it hasn't gotten to that point yet where the timelines will be massively delayed. Many times, actually, the sponsors look ahead for RFPs to account for additional buffer. Even before COVID times, they're always trying to find that sweet spot of making a decision early on, so you have some flexibility such that you don't have to be committed, but at the same time, you don't have to worry about your timeline. Right now, it hasn't gotten to that stage. In addition, just the landscape of things, before the push for the US manufacturing, you can imagine these products most likely already had other sources. Therefore, the need for a US source is not really time-bound. It's more of we just needed to show the administration that we're spending this amount for US CDMOs. It's not the same as you're launching and you're depending on this US CMO. Sure, there could be for a few of them, but most likely, it's not a time-sensitive thing. Timeline hasn't really become a concern yet.

[[00:46:31]]
When backlogged western CDMOs prioritise blockbuster commercial lines and wait-list smaller clients, where does that displace biotech demand flow in the current market?

[[00:46:45]]
Biotech, unfortunately, will be hit the hardest, the smaller of the company. You have your large biotechs who could be hit depending on if they have projects with the CMO. I've seen or heard a situation where there would be a notification of a delay or a lack of commitment from the CMO for upwards of one year. It depends on the product and profitability for them.

[[00:47:14]]
How fundamentally different are commercial contract structures and sourcing models when evaluating a small-molecule chemical API vs a complex large-molecule biologic portfolio?

[[00:47:29]]
In terms of contracts, there's a lot more leverage from the sponsor when it's a small molecule just because there are several other CMOs who can fulfil that same requirement to make the product. Once you switch into large molecule, much of the contract terms favour the large molecule CMO just because there's so few players. If a company needs to externalise it, then they're 100% at mercy from those CMOs. These CMOs know which sponsors have in-house capability and which do not. That's another concern. With that, some examples would be the forecasting for biologics, you need to commit well in advance of your intended date, while in small molecule, you can wait the year before to firm up your forecast vs in… For API vs in biologics drug substance, you have to commit beyond one year. It could be like you're committing two years before it's actually made as well as other terms. Sometimes in biologics, you would have to also put in terms to maintain inventory or a certain amount of raw materials such that there's no shortage concerns and that can also cost the sponsor more to have those terms as well as getting out of the contract, it might be harder for a sponsor to be able to get out of the contract if a product fails the clinic in biologics vs in small molecule.

[[00:49:19]]
Given the baseline risk and regulatory qualification barriers inherent to biologics, are any major sponsors significantly more hesitant to execute vendor switches for large molecules vs standard chemical API steps?

[[00:49:35]]
When vendors switch, I think they're both reluctant to switch in general, just given the switching costs and the time of tech transfer, etc. In terms of biologics, there's just so few players out there, and they're all really expensive. The tech transfer is more expensive than a small molecule tech transfer. Yes, it would be more hesitation to switch if you didn't need to switch. Instead, many times, they would look at like, "Okay, we need to bring at least two CMOs on board or have two sources. Can we just adjust the other source if it's already in place?" In a situation where you have two sourcing, but then that one failed and you need to find another one, then you just have to act on it because assuming the demand is too high that you cannot adjust the secondary CMO, then there has been no choice with the switch. It's always, you want to work around to find other alternatives before switching for both, but certainly for biologics, more because of the cost.

[[00:50:50]]
When evaluating commercial site transfers, what are the standard industry timelines, regulatory hurdles and overall costs associated with moving an active, filed commercial asset?

[[00:51:08]]
I think it depends on the need for a product. For the most part, we anticipate tech's transfer for APIs to take about one year. For the drug product stage, it would be much shorter, maybe half a year. Within biologics, it would be one year to maybe 1.5 years for drug substance and it's probably another year for the drug product for biologics. It depends also on the complexity. Of course, they could make that more or less, but those are general time frames. The expectation is usually the RFP is sent out in advance such that you can accommodate for some buffer if there is a competing capacity concern or whatnot.

[[00:52:02]]
Overall, when evaluating commercial site transfers, what are the standard industry timelines, regulatory hurdles and structural costs associated with moving an active, filed commercial asset?

[[00:52:18]]
Regulatory, usually, it comes down to having the CMO share their track record across the various health authorities. FDA, of course, EMA and PMDA, all those major country health authorities. It comes down to just seeing, okay, check, check, check. Most of the time, there's no concern with the ones that would be considered. Then there would be a quality site visit, which usually is done after the award so that it's more of like, "Okay, you say you were able to meet these requirements, but let's also have a chance to take a deeper look." Oftentimes, that's something that's passing as well. That's not really on the rate-limiting step. In terms of the actual tech transfer itself, there would be a partnership of the tech team going on site a few times, to help with the processes, and there will be a lot of communication weekly at the operating level to ensure the reliability and the accuracy of the tech transfer.

[[00:53:30]]
Could you break down the standard operational timeline of an active site transfer and outline why the process creates such significant supply chain friction?

[[00:53:41]]
It usually takes one year to do the tech transfer. You can use some of that material for commercial, but then the following year would be a commercial campaign. In terms of the friction, it's just the resourcing involved because you need internal resourcing to help with the technical troubleshooting. From tech transfer, you need analytical to get involved so they can assess all the steps and impurities that might be involved, the nuances with the equipment to be used. From quality, you have to set them up in the system as well as from supply chain to enable them in your systems so that they can be communicated when they have shipments. A lot of the setup cost is quite resource-intensive as well as the actual physical tech transfer process. Why it might cause friction is because you have to establish a new relationship and you never know when something… Maybe they don't like to disclose them as much as you'd hope when something is going wrong. Once something goes wrong too far, then it's too late to have the support. You might feel that disconnect depending on working styles. I think those are the main factors.

[[00:55:10]]
How exactly does a product's current life cycle position determine whether a procurement team will choose to execute an active site migration or essentially leave the asset in place?

[[00:55:23]]
For the most part, we're looking at the demand for the upcoming years, let's say, five years until the end of the life cycle of the product. You have some sense. Of course, the later years are less accurate per se and vs the two years. You're getting all this input from the market intelligence from competitors entering the market, generics getting ready to enter the market as well as understanding other options for patients. That would help you make those decisions. Oftentimes, once it hits past the growth phase, the more stable, there wouldn't really be additional CMOs being considered unless there's a poor performance for one or some other reason where there's a changing business need. Most of the sourcing actually occurs on the front-end shortly after launch, you would have ideally two sources, one immediate for launch and one supporting in the upcoming year or so, so that there's at least two or maybe even three depending on the product.

[[00:56:31]]
If a commercial product is already registered from a high-risk geographic area, what operational or even regulatory barriers prevent a sponsor from removing that filing completely, rather than simply drawing order volumes down to zero?

[[00:56:49]]
Most likely, there's no advantage to removing the filing completely unless it's directed by the government. just because there's more work to remove it and it also gives you more flexibility as a company to have it enabled even if it's zero in the short term, maybe in the future, things can change. You might need some support from that or maybe the government might change its perspective. Unless it's a must-do, the companies would not necessarily remove a filing.

[[00:57:24]]
I understand that, for raw and proprietary commodity materials, the supply risk is often seen as much lower. Does this imply that, even if primary commercial API synthesis is successfully moved to western locations, the underlying starting materials and chemical intermediates will structurally remain dependent on legacy Asian supply chains?

[[00:57:48]]
To my knowledge and based off of what I know from industry colleagues at this given time based on the government's stance currently, it would most likely remain unchanged. Again, it depends on how things shape up in the governmental landscape. It's hard to say because there's also other factors like ESG, environmental, social and governance where some of these companies need to demonstrate this as this is a new concern, especially within the Scandinavian Nordic countries. They're looking to have the sponsors prepare better content to support responsible sourcing. Some of these companies based in these countries don't necessarily have that information yet.

[[00:58:38]]
Thanks for that. I recognise we're getting close to the top of the hour. Is there anything else you'd like to highlight?

[[00:58:52]]
No, I think we covered a lot of ground here and happy to support any future inquiries on the space or similar space topics.

[[00:59:00]]
Thank you so much. This is a great Interview, and I appreciate your time and your insight. Hopefully, we can work together again in the future.

[[00:59:09]]
Thank you, everyone. Thank you.

Transcription ends at 00:59:17 of the recorded material