Dealing with Tariffs and Other Uncertainties

It isn’t so much the tariffs imposed by the U.S. or China during their ongoing trade war that impact CDMOs as it is the uncertainty.  

It’s difficult to plan drug, nutraceutical, and specialty chemical projects when the U.S. administration says one thing today, something else the next day.  They announce they will impose tariffs on Chinese goods one day, publish a list of the items, then turn around and postpone the tariffs on some of the items to a later date.  The uncertainty is disruptive to business.   That’s not to say I’m for or against tariffs – if they make sense, bring it on, but with certainty.

This article will detail how tariff’s impact CDMOs—and offer the four strategies we’ve found most useful in dealing with tariffs and other uncertainties.

How much and when do tariffs matter to CDMOs?

In many ways we’re fortunate. We’re less impacted by tariffs than other CDMOs.  That’s because Seqens North America’s business is largely focused on API development and manufacturing.  As a result, we typically do not need to purchase materials in large volumes, except when manufacturing for late-stage clinical trials followed by producing commercial supply.  For other CDMOs that concentrate on manufacturing commercial products and require raw materials in large amounts, tariffs can be far more damaging.

Why? Most commercial products have supply contracts.  Prices for these contracts were set long before a trade war that no one anticipated began.  If the price of raw materials increases due to new tariffs and there’s no contingency written into the contract, they’re stuck. They may have no mechanism to recoup the increased cost of materials.  

While we also manufacture a number of  commercial products such as advanced intermediates, phosphonic acids, and imidazoles/imidazolines, among others, they are relatively small volume items.  A small price increase is immaterial to customers who need our products. 

However, we as an industry are constantly striving to keep drug development costs as low as possible through efficiencies, know-how and investments in technology.  As noted in Life Science Leader we are the only link in the entire chain that reduces the cost of drugs. But in our industry, if price increases for materials reach or exceed 10%, we have no choice but to pass them on to the pharma companies, who in turn pass the price increases on to patients, resulting in unpopular price hikes for drugs paid by consumers. 

Tariffs matter because we source 25-30% of our raw materials from China. Over the last two decades, China has become the world’s supplier of raw materials for drug development. India, Europe, and the U.S. all purchase many of their intermediates and starter materials from China.  Raising prices is not in keeping with our continuing efforts to reduce them.

Another major CDMO disruptor

Tariffs can be problematic, but an even bigger disruptor for our business is the shutdown of Chinese factories for environmental reasons.  The shutdowns of factories that produce raw materials can occur suddenly, forcing CDMOs to scramble to find, and then take the time to assess, alternative sources.  As we’ve often indicated, quality assurance starts with quality raw materials. 

We pay a great deal of attention to starting materials and mention it again here because they are key determinants to all the chemistry steps that follow.  For example, to assure high quality from the start, our quality assurance procedures begin even before the material is allowed to enter our doors: if any of the following applies to material sent to us, we refuse receipt:

• If the raw material packaging is damaged and could potentially comprise material integrity
• If the raw material received is different in identity from what was ordered
• If the raw material identity is uncertain
• If the materials cannot be safely unloaded

We also check the Certificate of Analysis and take a host of other steps before stocking.

Four tips to help cope with tariff and other uncertainty

Sourcing raw materials and maintaining adequate supplies makes up the bulk of our planning to avoid uncertainty. The following are among the strategies we’ve found most important in assuring our customers’ projects are not delayed in the event of an unexpected tariff, demise of a raw materials provider or major weather event.

1.  When seeking new suppliers, look everywhere
   There are numerous labs and factories throughout the world that produce starting materials, intermediates and other necessities for product development. Search for, and get recommendations from trusted experts for reliable, quality producers anywhere on the globe. Then carefully assess them yourselves.
   
2. Have multiple suppliers and sites for the same products
   Although China has become the raw materials capital of the world, there are suppliers in other countries. Whenever possible diversify your supply chain across countries– and factories as well.  You may recall the devastation that Hurricane Maria caused in 2017, bringing much of the pharmaceutical industry in Puerto Rico to a standstill.  Well-known drug companies with manufacturing plants on the island found that lack of power wasn’t the only issue to cause the ensuing shortage of critical drugs. Plant workers were unable to get to the plant as they dealt with their own personal crises brought on by the storm. Roads were blocked.  Gasoline was in short supply. And vital materials were not able to get into closed ports.
   
3. Maintain healthy inventories
   Yes it is expensive and yes it ties up cash to maintain healthy materials inventories, but you still may want to plan ahead for supply disruptions, especially if you begin to hear whispers of impending tariffs or long-term weather forecasts suggesting a bad hurricane season.  
   
   Whereas typically we think of 30-40 day inventories, think of tariffs—or potential tariffs–as a 90-120 day situation. Tariffs come; tariffs go. It’s a very dynamic environment. The only control you have is to maintain adequate supplies. And if you have no-risk supply contracts, with interest rates low right now it may pay to borrow to have larger inventories readily available to keep projects moving.
   
4. Stay close to trade association news
   Stay informed.  Our trade associations monitor developments in the CDMO field and publish important information that impacts our industry, intelligence that you can’t get from CNN, Fox News or your local newspaper.  Review trade associations lists of materials regularly to understand how they’ll affect your specific business and projects.

The Synthetic Organic Chemistry Manufacturers Association (SOCMA), the American Chemical Society (ACS) and the American Association for Clinical Chemistry (AACC) are among industry associations that can keep you up to date on developments, including tariffs, that can help you decide what and how much to stock.

We’ve written a lot about China and India in our blog and would be happy to talk answer questions you may have. Call us at (978) 462-5555 or email us info@pcisynthesis.com.