Climate Change, Supply Chains and Compliance

Regulatory requirements dictate that large companies carefully evaluate their supply chains’ exposure to risks from extreme weather. Done properly, however, the exercise can bring far wider benefits.

Climate continues to cost the earth – in all senses. According to insurance broker Aon, insured losses from natural catastrophes, like hurricanes and floods, reached $118 billion last year. The losses, across almost 400 events, were more than a fifth above the average for the century. There were also 37 events that saw losses of $1bn or more – a new, dismal record.

The costliest event of the year was still earthquakes, with those in Turkey and Syria seeing insurers pay out $5.7 billion. However, New Zealand, Italy, Greece, Slovenia and Croatia all saw the most expensive weather-related insurance events on record.

And that’s just insured losses.

Most damage is not insured, and the actual losses to individuals and businesses are many times higher. The economic loss of the Turkey and Syria earthquakes alone is estimated at $92bn. The death toll was 95,000 – the highest in more than a decade.

Again, that is driven not just by 64,000 fatalities from earthquakes but 16,500 deaths from heatwaves around the globe.

Last year was the hottest on record.

Just the Start: Climate Losses will Mount, Fear Insurers

Such losses are changing the very way insurers think about risk.

Traditionally, the insurance industry has distinguished between the big-ticket primary perils, such as tropical cyclones, earthquakes, and European windstorms, which are relatively infrequent but cause massive losses and secondary perils.

More frequent but traditionally considered more manageable because of the smaller losses, are natural catastrophes like thunderstorms, floods and wildfires.

Climate change is altering insurers’ perspective.

Aon’s report showed that these “secondary” perils have caused significantly more losses to insurers than primary perils over the last decade due to their increased frequency and severity. In 2023, primary losses were a distant second, accounting for only 14 percent of global losses.

As the chief climate scientist of Munich Re (the biggest “reinsurer” that provides cover for insurers against really large losses) recently told the Financial Times: “We no longer can call such events secondary. They have reached in the aggregate the order of magnitude of a major hurricane, or tropical cyclone, or winter storm.”

As the FT article makes clear, this is not just a problem for insurers but for businesses and individuals, too, as underwriters decide there are risks they just do not want to take. We face the prospect of certain locations becoming uninsurable.

Moreover, it is a problem that may only get worse. Last year, Lloyd’s of London warned insurers that the full impact of climate change had yet to be fully felt when it comes to claims. According to the FT, again, it is urging insurers to be proactive in addressing the risk.

“By the time we can definitely see the impact in claims, it will be too late,” Lloyd’s director of portfolio risk management told a private meeting.

Pharma Supply Chains: TCFD and Beyond

Since the pharma sector is no stranger to the risks of weather impacting its supply chains, all this provides one good reason for it to take climate change seriously.

Another is that it increasingly does not have a choice.

It’s not just insurers who have become increasingly aware of the financial risks posed by more frequent extreme weather events.

Governments and regulators, too, have recognised the growing danger and the possibility that it could pose systemic risks to financial stability. States have, therefore, been putting ever greater pressure on businesses to identify, quantify and address those risks.

As we’ve discussed before, that was led by the Task Force on Climate-Related Financial Disclosures in the UK. It introduced the requirement for big businesses (to apply to all businesses by 2025) to report the impact of climate change on their supply chains. It was disbanded last Summer – but only to be replaced by the IFRS Foundation, which was tasked with taking forward its work by the Financial Stability Board.

The IFRS has already clarified that the International Sustainability Standards Board (ISSB) standards launched in June 2023, fully incorporate the TCFD requirements.

You can read our earlier blog for a fuller explanation of the requirements and why tools like our supply chain risk assessment SCAIR® are so valuable in helping businesses comply.

However, here, I’ll concentrate on just two aspects, which we have highlighted in our recent video on TCFD, climate change and quantifying risk.

Bringing Value at Risk into the Real World

The first is that SCAIR® doesn’t just provide a tool and framework to accelerate the process, enabling organisations to comply more efficiently. It also helps avoid common pitfalls and ensures the exercise has real organisational value.

For example, SCAIR® helps identify risks to products and focuses on those with the highest revenues. This can quickly help companies reach a robust figure for the value at risk at each location. Crucially, though, it doesn’t just estimate the potential losses in terms of pure gross profits.

In the event of a catastrophic climate-related event, no business will simply watch as their primary sources for profitable products vanish.

They will use their existing stocks, inventories and reserves and quickly seek to source other suppliers and additional production capacity.

SCAIR® accounts for that and seeks to provide a real-world value at risk – not simply a box-ticking exercise for regulators but a genuinely helpful and crucial piece of business intelligence.

Climate Change Supply Chain Location Mapping

That grounding in the real world needs to be replicated when evaluating the risks of climate change.

Existing risk assessment methods suffer significant faults. In many cases, they are not location-specific, substituting an evaluation of the specific risk of a site with broad, regional risk evaluations.

Even worse, existing solutions are usually backward-looking. They assess the risk to a location by reference to the past without accounting for the impact of climate change in worsening extreme weather.

In a sense, this ignores the entire purpose of the exercise.

SCAIR® addresses this drawback by interfacing with Location Risk Intelligence, reinsurer Munich Re’s solution for assessing physical risks from natural hazards (previously called NATHAN) and climate change.

Munich Re’s Risk Management Partners division uses the world’s most comprehensive disaster database and sophisticated modelling to provide robust, location-specific climate change predictions.

Again, this ensures that it is not simply a compliance issue but an exercise with real value. The intelligence from SCAIR® and Location Risk Intelligence enables businesses to focus on locations at the highest risk from further natural catastrophes due to climate change.

A Boon for Business Continuity

Indeed, this is the real value of the exercise beyond compliance.

Identifying vulnerabilities in the supply chain and developing robust intelligence for both values at risk and the risk itself enables businesses to anticipate and address their business interruption exposure at critical nodes.

That might mean diversifying supplies to build increased resilience into the supply chain. It might mean putting in place extra measures, such as increased stocks or other ways to mitigate losses. Credible figures for the value that could be lost at a site can be used to justify investments to protect against them.

If interruptions to a site prove unavoidable, SCAIR® gives businesses the tools to lessen the impact.

It can enable businesses to assess the impact of catastrophic events more rapidly and respond more effectively than those without such planning, for example.

Read our case study on how it helped a large pharmaceutical manufacturer quickly implement continuity plans to lessen the impact of a Puerto Rican hurricane.

Finally, if all else fails, a better understanding of exposures and the value at risk in each location provides a basis for calculating the insurance required for the residual risks that cannot be addressed.

It provides businesses with the insights needed to purchase an appropriate level of business interruption cover and, perhaps, to make their case to secure affordable premiums in a tough market going forward.

Preventing Medicine Shortages: Governments are Saying it’s Time for Transparency

Continuing legislative developments in the US and new government strategies in the UK and EU show that pressure for pharma supply chain visibility is growing.

It’s a new year, but the same pressures on pharma supply chains remain – and the increasingly similar responses from governments across the globe.

In the US, momentum continues towards regulation. Last year, Michigan Senator Gary Peters introduced the Mapping America’s Pharmaceutical Supply Act into the US Senate. The Act aims to boost the visibility of the pharma supply chain to identify reliance on foreign manufacturers and “chokepoints” in the supply.

As our guide to MAPS explains, the Act would require the Department of Health and Human Services (HHS) to establish a federal database to map the origin of each drug, including the location of manufacturing facilities and associated inspections and risks, and use this to identify risks to the supply chain and boost resiliency.

The bill is currently working its way through the Senate, having been referred to the Committee on Health, Education, Labor, and Pensions.

A New Legal Boost for Supply Chain Transparency

In the meantime, in January, the US House of Representatives saw its own version of the MAPS Act – again enjoying bilateral support being introduced by the Democrat representative for California Doris Matsui, and Indiana Republican Larry Bucshon. The content is largely the same, with a requirement for the HHS to establish a list of essential drugs and APIs and provide visibility of pharma supply chains.

“The [HHS], in coordination with the heads of other relevant agencies, shall support efforts, including through public-private partnerships, to map the entire United States pharmaceutical supply chain, from inception to distribution,” the bill mandates. The information should then be used to identify supply chain vulnerabilities “and other national security threats”.

As Matsui herself explained: “Recent drug shortages across the nation have made it acutely clear that we need to improve our ability to anticipate, identify, and respond to cracks in the system.

“The lack of end-to-end visibility into every step of our pharmaceutical supply chain means we don’t know the extent of our reliance on foreign agents for key drug ingredients, or how a natural disaster would impact the drug supply. The MAPS Act is a crucial step to provide us with a comprehensive roadmap. By increasing transparency, we can bolster the weaknesses in our supply chain and prevent future public health emergencies.”

Like the Senate bill, the House’s effort is also winning outside praise, with the American Hospital Association (AHA) lending its support.

“The AHA appreciates the efforts of Representatives Matsui and Bucshon to address the chronic and increasing drug shortages hospitals, health systems and patients are facing across the country,” said Lisa Kidder Hrobsky, AHA senior vice president for advocacy and political affairs.

A Wider Move to Supply Chain Resilience

The MAPS Act is not the only way the US legislature and government are taking a more active approach to boosting pharma supply chain resiliency.

As noted previously, another of Senator Peters’ bills is the Rolling Active Pharmaceutical Ingredient and Drug (RAPID) Reserve Act. Also focused on the HHS, it would require the department to contract OECD generic drug manufacturers to build reserves of critical drugs and prioritise domestic producers for federal contracts.

January also saw Florida become the first US state to gain FDA approval to import cheaper drugs from Canada to tackle surging prices in the US. While it’s the result of a law passed more than two decades ago, pressure has grown in recent years to see the freedom used.

President Biden’s executive order in 2021 called on the FDA to work on such import plans.

The FDA approval came despite opposition from the Pharmaceutical Research and Manufacturers of America (PhRMA) and the Partnership for Safe Medicines, which say imports of unapproved drugs from Canada pose a danger to public health.

The FDA, however, said it was committed to working with states on such proposals so long as they “demonstrate the programs would result in significant cost savings to consumers without adding risk of exposure to unsafe or ineffective drugs”.

It’s not just the US, either, however.

A New UK Pharma Supply Chain Strategy

Like the US, the UK continues to suffer frequent supply chain shortages for essential medicines. Far from getting better since the end of the pandemic, they’ve worsened.

According to the British Generic Manufacturers Association, shortages have doubled since the start of 2022. Community Pharmacy England chief executive Janet Morrison said the shortages were unprecedented.

“Pharmacy teams have been struggling to get hold of prescription medicines for many months, but the problem is now worse than ever,” she told The Guardian.

Just a few days later, the government published its new strategy to protect critical imports and supply chains.

“The events of recent years have shown the world that we cannot afford to take for granted the resilience of the global supply chains which we rely on for our critical imports,” the foreword notes. “The COVID-19 pandemic, Russia’s illegal invasion of Ukraine, and disruption to shipping routes have all demonstrated the potential impact of global events on the reliable flow of vital goods.”

Its response is the strategy: The UK’s “first overarching strategy focussing on reliable access to the goods we need now and in the future”.

Among those it considers critical goods are those whose disruption would significantly impact essential services, the economy, national security or “life”, which includes “medicines and delivery of patient care”.

The health sector is also one of those considered as critical national infrastructure.

Promoting UK Supply Chain Transparency

The strategy notes that supply chain resilience is “a shared objective” for both government and suppliers, requiring dialogue between all parties. It also notes a range of measures already in place to promote transparency and resilience.

These include requirements for medicine manufacturers to report shortages to the Department for Health and Social Care (DHSC) and the National Supply Disruption Response established as a central point of contact for healthcare providers that have exhausted other options to maintain supply.

“Supply chain resilience is also an important consideration of awarding contracts to suppliers when procuring medicines and medical products, with a focus on developing available buffer stocks on British soil, such as in the case of generic medicines or high-use clinical consumables,” it adds.

In other sectors, it notes, the government has directly intervened in markets to ensure protection against profound shocks – requiring specific sectors such as defence to maintain stockpiles of critical goods for national security.

That is currently reserved for the most serious case, but the next steps in the government strategy will include a “framework to formalise government approach to supply chain shocks, setting out how government will work with business to ensure a coordinated response”.

EU Efforts for Supply Chain Resilience

What that framework will look like in the end is unclear. Different governments take different approaches, and there is no single solution to supply chain issues. Indeed, individual governments are – as in the US – employing a variety of strategies to keep essential medicines available and affordable.

It’s a similar story in the EU. Its recommendations published last summer to prevent antibiotics shortages included boosting production, monitoring supply and demand and promoting “prudent use” among the public. In December, meanwhile, the European Medicines Agency published its list of 260 critical drugs, including vaccines, painkillers and asthma medicines, which the European medicines regulatory network is to prioritise in EU-wide actions to strengthen their supply chain.

As the Financial Times reports, “proposals could include measures to encourage companies to stockpile products and diversify suppliers, investment incentives for new manufacturing plants in the EU and the introduction of joint procurement protocols as the bloc did with Covid-19 vaccines”.

The First Step Towards Improved Supply Chain Visibility

Whatever and wherever action is taken, however, supply chain transparency is an essential ingredient and a necessary first step.

Whether that comes directly through MAPS-type regulation or indirectly, in response to regulatory demands to identify and address vulnerabilities, will, in the end, make little difference.

It is the pharma businesses who are best placed to identify the criticalities and vulnerabilities that must be addressed to ensure resilience – and it is they who will face irresistible pressure to do so. It’s through technology such as SCAIR®, which helps identify choke points and common dependencies on APIs or manufacturing sources, that they can do so.

We can’t see the future for pharma supply chains, but we can know it’s going to have to be a lot more transparent.

TCFD And Supply Chains: Why There's No COP Out for Businesses on Climate Disclosures

SCAIR® can quantify the impact of climate change on supply chains

Businesses can leverage existing technology to meet the requirements of the TCFD that live on.

Goodbye TCFD. Hello ISSB. Regardless, climate risk disclosure requirements aren’t going anywhere.

Cop28 saw all the drama we’ve come to expect from climate summits, culminating in either a “historic” deal or a missed opportunity – depending on your point of view. The headline was an international agreement to “transition away” from fossil fuels and to speed up action before 2030 with “ambitious” national emissions targets over the next two years.

Away from the headlines and targets, however, there was also stock-taking and housekeeping. Among these announcements during the summit was news from the Financial Stability Board – the international body promoting stability in the global financial system – that the work of the TCFD (the Task Force on Climate-Related Financial Disclosures) was done.

“[T]he work of the TCFD has been completed, with the ISSB's Standards marking the culmination of the work of the TCFD,” came the news.

A Short History of the TCFD

The TCFD was formed in response to the failings of the 2015 Paris Climate Accords by the G20 group of nations and the Financial Stability Board.

Recognising that climate presented systemic financial risks to the economy akin to those revealed by the 2008 banking crisis, the TCFD was tasked with creating recommendations for companies to inform investors about their efforts to address these risks.

As the TCFD put it: “Financial markets need clear, comprehensive, high-quality information on the impacts of climate change. This includes the risks and opportunities of rising temperatures, climate-related policy, and emerging technologies in our changing world.”

The recommendations provide a framework for disclosure across four pillars:

Governance, disclosing the organisation’s the organization’s governance around climate-related risks and opportunities
Strategy, detailing actual and potential impacts of these risks and opportunities on the organisation’s businesses, strategy, and financial planning (where material)
Risk management, disclosing how the organisation identifies, assesses, and manages climate-related risks
Metrics and targets, telling investors the quantitative and concrete measures for assessing and managing relevant climate-related risks and opportunities, where such information is material.

Initially voluntary, the recommendations have rapidly worked their way into national and international regulatory regimes.

The UK took an early lead, announcing in 2021 that it would become the first to mandate climate-related data disclosures for the country’s largest companies to align with the TCFD recommendations – spreading to all organisations by 2025.

Internationally, standards bodies such as the UN PRI (Principles for Responsible Investment) also require mandatory reporting from signatories.

TCFD and Supply Chains

Crucially, the TCFD recommendations go beyond existing regulations on reporting Scope 1 (direct) greenhouse gas emissions or Scope 2 emissions (from energy consumption). It includes collecting data on Scope 3 emissions (from organisations up and down its value chain), which has been voluntary to date and much more – encompassing all material risks and opportunities.

That includes physical risks (such as flooding and other extreme weather events) and transitional – the policy and legal, technology, market and reputational risks arising from the world’s efforts to tackle climate change.

Again, as the TCFD makes clear, risks should be considered (and disclosed) in terms of not just their effect on the organisation directly, but also where they impact the supply chain. “Physical risks may have financial implications for organisations, such as direct damage to assets and indirect impacts from supply chain disruption,” it noted.

Organisations’ financial performance may also be affected by changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting organisations’ premises, operations, supply chain, transport needs, and employee safety.

That applies equally to transition risks – such as policy and legal issues: “Organisations should assess not only the potential direct effects of policy actions on their operations, but also the potential second and third order effects on their supply and distribution chains,” the TCFD noted.

Gone but not Forgotten: TCFD Requirements Remain

While the TCFD might have been disbanded its recommendations live on; its work has been completed, but for many businesses their work has just begun.

According to the IFRS, the ISSB (International Sustainability Standards Board) Standards – IFRS S1 and IFRS S2 – launched in June 2023, fully incorporate the TCFD recommendations. The standards are, in fact, “the culmination of the work of the TCFD”, according to the FSB.

IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term.

References to governance, strategy, risk identification, and performance assessment will be familiar from the TCFD recommendations. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1. The TCFD recommendations’ influence is obvious again, with discussion of both physical and transition risks.

The standards are built on the concepts that underpin the IFRS Accounting Standard used worldwide, and the IFRS Foundation will take over the monitoring of companies’ progress on climate-related disclosures.

Consequently, the need to identify, evaluate and report on climate-related risks in the supply chain remains pressing– and not just in the UK.

New Zealand is another mandating disclosures, even ahead of the UK, while TCFD has regulatory backing across jurisdictions, from the European Union and Canada to Japan, Singapore, and South Africa.

SCAIR® and TCFD

There is, however, no need to reinvent the wheel. Much of the analysis required to satisfy the TCFD requirements can be performed by existing risk management technology that is the same or similar to that required for supply chain risk management.

In fact, for those using solutions such as SCAIR®, there is a significant risk of repeating work already done if organisations turn to consultants or others for help with TCFD/IFRS disclosures without first examining the information they already hold.

SCAIR® has long been more than TCFD ready. Watch this video on how SCAIR quantifies the impact of climate change on supply chains.

As part of its general loss estimate algorithms, it can generate mitigated and unmitigated figures across nodes, sites, and entire product portfolios.

Not only does it automatically calculate these figures in greater detail and with more nuance and confidence than consultants will achieve manually; it also does so according to a methodology accepted by the London Insurance Market.

That is a crucial point, given that standardisation and consistency in climate risk disclosures, as well as visibility, have been key aims of the FSB, TCFD and IFRS.

Using SCAIR®, businesses can quickly identify key exposures across different geographies to evaluate transition risks and get the most accurate data on natural catastrophe and climate change-related risks by tapping into Munich Re’s Location Risk Intelligence Suite , one of the most trusted names in location-based Natural Hazards risk intelligence.

With clear – and up-to-date – views on their own exposures through the supply chain, businesses can easily provide the required disclosures to investors, regulators and other interested parties.

More importantly, they can effectively manage the risks – to prepare for the future, whatever happens at the climate summits ahead.

What is the MAPS Act? A Guide to the Mapping America’s Pharmaceutical Supply Act

In a muddle over MAPS? Read our brief introduction to the pharma supply chain visibility legislation currently making its way through the US Senate.

Pressure for government action to bolster the resilience of pharma supply chains has been building in the US for some time.

Among Joe Biden’s first actions as US President, a little more than a month after coming to power in January 2021, was Executive Order 14017. It aimed to “strengthen the resilience of America’s supply chains”.

Pharmaceuticals were a key focus.

That led to the 100-day supply chain review in June that year and, subsequently, the Department of Health and Human Services (HHS) Essential Medicines Supply Chain and Manufacturing Resilience Assessment the following May.

Background – The Road to the First Pharma Supply Chain Bill

But while the executive continues to cajole the industry, other branches of government are pushing forward their plans. In the legislature, Michigan Senator Gary Peters has long taken an interest in pharma shortages and the supply chain issues that often underpin them.

In August 2019, as Ranking Member of the Senate Homeland Security and Governmental Affairs Committee, Peters wrote to the FDA expressing concern over ongoing drug shortages – at the time, the highest in almost five years.

“Drug shortages are creating devastating health and economic consequences for patients, hospitals, and consumers. For patients, the impact on care is significant, as shortages cause delays when receiving emergency medications, undergoing medical procedures, and obtaining needed prescription drugs,” he warned.

That led to a report later in the year on “skyrocketing prescription drug prices and drug shortages”. It noted many of the now familiar issues around drug supply chain resilience, such as the reliance on China and India for active pharmaceutical ingredients. Rising prices and the shortages that often prompted them weren’t just a public health issue, Peters maintained, but a “national security crisis”.

By this year, and in the aftermath of the pandemic, the senator’s focus on supply chain vulnerabilities had intensified. A new report in March showed that “[D]rug shortages, as well as a lack of transparency into our pharmaceutical supply chains, present an ongoing national security risk and have made it harder for health care professionals to treat patients.”

The report found that between 2021 and 2022, new drug shortages increased by nearly 30 per cent. It also found that over 90 per cent of generic injectable drugs used to treat serious injuries or illnesses in the US relied on critical materials from China and India, and nearly 90 per cent of generic API manufacturing sites were located overseas.

Supply Chain Visibility as a Critical Issue

According to the report, tackling vulnerabilities was complicated by a lack of visibility in the supply chain.

“Neither the federal government nor industry has end-to-end visibility of the pharmaceutical supply chain – from the key starting materials, APIs, finished dosage and various other manufacturers that are ‘upstream’ – to the ‘downstream’ suppliers, which include purchasers and providers. This lack of transparency limits the federal government’s ability to proactively identify and address drug shortages,” the report notes.

It continues: “Although some generic drugs appear to have multiple and diverse drug suppliers, they in fact may rely on the same API source or manufacturer. As a result, the universe of actual suppliers for a particular drug may be much smaller than it appears, increasing the risk of shortage if that API source or manufacturer withdraws supply. The FDA is currently unable to assess the percentage of life-supporting and life-sustaining medications that have fewer than three manufacturers or rely on only one API supplier because the FDA does not have a list of life-supporting and life-sustaining drugs.”

Following the report’s release, Peters convened a full Homeland Security and Governmental Affairs Committee hearing to discuss its findings and recommendations.

“Drug shortages are not new. There are a number of factors that contribute to drug shortages, including economic drivers that lead to a lack of manufacturers willing to enter or remain in the market or invest in quality manufacturing systems, insufficient visibility into the entire supply chain for critical medications, and an overreliance on foreign and geographically concentrated sources for the materials needed to make these drugs,” Peters said at the opening of the hearing.

MAPS Introduced

All this led Peters and other senators to introduce two pieces of legislation to the Senate in July.

One, the Rolling Active Pharmaceutical Ingredient and Drug (RAPID) Reserve Act, introduced on July 26, 2023, aims to increase the supply of critical medications and mitigate “the national security threat posed by our nation’s overreliance on China for critical medications”.

It would do so by requiring the Department of Health and Human Services (HHS) to award contracts to “quality generic drug manufacturers” in the US or another OECD country to build and maintain reserves of critical drugs; oblige these contractors to keep sufficient reserves of key ingredients and finished drug products and production capacity to prevent potential shortages; and prioritise domestic producers for federal contracts.

The other, introduced just over a week before on July 18, with senators James Lankford and Mike Braun, was The Mapping America’s Pharmaceutical Supply (MAPS) Act – specifically aimed at boosting supply chain visibility as key to building resilience.

“As we saw firsthand during the COVID-19 pandemic, federal agencies did not have enough visibility into our reliance on foreign manufacturers and other chokepoints in the supply chain, limiting their ability to anticipate and respond to drug shortages and related challenges,” said Peters, introducing the bill. “This bipartisan legislation will provide the federal government with a more comprehensive understanding of the weaknesses in our pharmaceutical supply chains so we can take steps to address them and prevent future shortages.”

“This bill will shed light on the weaknesses in our pharmaceutical supply chains and allow us to make better informed decisions to address vulnerabilities in our drug supply chain,” added his cosponsor Senator Braun.

Mapping America’s Pharmaceutical Supply Act – Key Provisions

The bill consists of three key requirements:

The HHS is to establish a federal database to map the origin of each drug, with the location of manufacturing facilities and associated inspections and risks, such as recalls and import alerts.
It is to use this information to make data-driven decisions on supply chain threats and how to increase resiliency through strategic investments in domestic manufacturing.
It must report to Congress on how it is doing so and any gaps in the remaining data.

It also requires the HSS to identify and regularly update a list of essential medicines, including both the drugs of their APIs.

These are defined as those likely to be required to respond to a public health emergency or chemical, biological, radiological, or nuclear threat and those for which a shortage would pose a significant risk to the US health system or at-risk populations.

The bill's text makes clear how ambitious this is, stating that the intention is to map “the entire United States pharmaceutical supply chain, from inception to distribution”.

That includes the location of API and finished dosage forms of the essential medicines, including “the amount of such ingredients and finished dosage forms produced at each such establishment” and establishments involved in producing the key starting materials and excipients needed to produce the APIs.

It also requires the HSS to keep a database of regulatory actions, including with respect to labelling requirements, registration and listing information, recalls, inclusion on current and prior drug shortage lists and discontinuances of the medicines.

A Joint Effort – Pharma Industry Responsibilities Under MAPS

The need for private sector involvement is clearly stated in the bill’s text.

First, right at the outset, the proposed legislation clarifies that the supply chain mapping by the HSS is to be done in coordination with other relevant agencies, such as the Secretary of Defense and the Secretary of Homeland Security, “including through public-private partnerships”.

Second, the list of essential medicines is also to be drawn up (and maintained) “in coordination with the private sector”.

Moreover, where obligations on the industry are not explicitly set out in the text, they are heavily implied. Without massive industry input, it is impossible to see how the HSS could map the “entire” supply chain – from inception to distribution.

Should it try, its efforts are unlikely to be the last word: The bill provides that within 18 months of its enactment, the HSS must report on “gaps in data needed for full implementation”.

Next Steps for the MAPS Act

The Act has already received significant bipartisan support inside the Senate and from outside organisations, such as the American Society of Health-System Pharmacists (ASHP), the American Society of Clinical Oncology, the American Hospital Association (AHA), United States Pharmacopeia (USP).

In a virtual summit in September on Drug Shortages co-hosted by USP, Peters reiterated his call to push through legislation: “We must urgently put these solutions in place to ensure that everyone can access the lifesaving medications that they need,” Peters told summit attendees.

While MAPS is not yet law, previous efforts will give supporters cause for optimism: In June, the President signed three bipartisan bills authored by Peters to bolster cybersecurity, including the Supply Chain Security Training Act.

His bill to strengthen US supply chains and domestic production capacity in relation to homeland security has also passed the committee stage.

It may be some time before MAPS is signed into law – or perhaps it will be usurped by legislation originating elsewhere. However, as we’ve said before, change is coming. The proposed legislation vindicates what we’ve long argued: That supply chain resilience begins with supply chain visibility.

Pharmaceutical supply chain risk management software such as SCAIR® is specifically designed to address the issues highlighted by the Senate report that helped prompt the legislation, such as the concentration of risk through reliance on common API or manufacturing sources. As it noted, the “universe of actual suppliers for a particular drug may be much smaller than it appears”. SCAIR® is the x-ray vision that reveals these hidden vulnerabilities.

Likewise, the Act is right to focus on identifying critical drugs and points of vulnerability – not relying on the impossible task of identifying all the potential sources of disruption. Again, this is the approach we’ve long taken with SCAIR® – helping focus on impacts, not causes.

We’ve long believed this is the best route to supply chain resilience. Increasingly, it seems likely to be the approach governments will insist the industry takes to ensure the supply of critical drugs is maintained.

Acting now, using tools such as SCAIR® to gain visibility – and sharing it as required – will enable pharma businesses to ensure the relevant authorities see them as allies rather than obstacles in that effort.

Get Ready for the MAPS (Mapping America’s Pharmaceutical Supply) Act: Pharma Supply Chain Obligations Move Closer

With draft legislation to force end-to-end mapping of the US pharma supply chains to work through Congress in the year ahead, time is running out to embrace supply chain visibility.

We can’t say we weren’t warned. Regulation to force life sciences to take supply chains seriously has been on the cards for a while. Ever since the incoming Biden administration’s 100-day supply chain review in 2021, the writing has been on the wall regarding regulation to bolster supply chain resiliency in the US.

With the publication of the Department of Health and Human Services (HHS) Essential Medicines Supply Chain and Manufacturing Resilience Assessment report the following May, that seemed a certainty. As we noted at the time, “legislation… now looks inevitable”.

As we head towards the end of the year, though, we now have a better idea of what that legislation might look like. It looks like the Mapping America’s Pharmaceutical Supply (MAPS) Act or, as we like to call it, the SCAIR® Act.

Mapping America's Pharmaceutical Supply (MAPS) Act

Introduced in the Senate in July with support from both Republicans and Democrats, the proposed legislation has been a long time coming.

A pet project of Michigan Senator Gary Peters, it builds on his earlier reports from 2019 (on lowering prescription drug costs) and in March 2023 (specifically on drug shortages). According to Peters, those reports identified an “overdependence on foreign sources for critical drug products” and – crucially – “insufficient visibility into US pharmaceutical supply chains”.

This is what the MAPS Act would address.

As Peters explained, “As we saw first-hand during the COVID-19 pandemic, federal agencies did not have enough visibility into our reliance on foreign manufacturers and other chokepoints in the supply chain, limiting their ability to anticipate and respond to drug shortages and related challenges.

“This bipartisan legislation will provide the federal government with a more comprehensive understanding of the weaknesses in our pharmaceutical supply chains so we can take steps to address them and prevent future shortages.”

The Act would require the Secretary of the HHS to establish a federal database mapping the origin of each drug, the location of its manufacturing facilities and associated inspections and risks to supply, such as recalls and import alerts. It could then make “data-driven decisions” on supply chain threats and investments in domestic manufacturing, says Peters.

It supports another bill the Senator announced the previous month, again with bipartisan support: The Pharmaceutical Supply Chain Risk Assessment Act. That would require the HHS, along with the Departments of Defense and Homeland Security and the White House Office of Pandemic Preparedness and Response Policy, to determine how potential drug shortages can impact national security and public health.

Both proposed pieces of legislation have been referred to the Senate Health, Education, Labor, and Pensions Committee.

Gaining Traction: Support for Pharma Supply Chain Action

The legislation is not without faults or challenges.

Key to the proposed laws, for instance, is not just the belief that there needs to be better visibility of supply chains and their vulnerabilities but also an antipathy to reliance on foreign manufacturers, particularly China.

As Peters’ 2019 report identified (and the 2023 report reiterates): “[M]ore than 80% of the active pharmaceutical ingredients for prescription drugs sold in the US come from overseas, primarily China and India.”

This poses a national security risk, he contends, but – as we’ve discussed before – it will not be easy to address and arguably conflicts with Peters’ other priorities such as affordable drugs.

Onshoring production, particularly of APIs and generic drugs, in supply chains that have evolved over decades and pushed manufacturing overseas for good reasons is unlikely to happen overnight.

Many of Peters’ ideas from his reports, such as prohibiting “unjustified price increases” and encouraging competition in (the already exceptionally tight margin world of) generics are, to put it mildly, easier said than done.

Nevertheless, the proposed legislation has gained significant support – and not just from both sides of the Senate, but outside.

The MAPS bill has so far been endorsed by the Michigan Health & Hospital Association, the American Society of Health-System Pharmacists (ASHP), the American Society of Clinical Oncology, the American Hospital Association (AHA), United States Pharmacopeia, and nonprofit generic drug company CivicaRx.

“Addressing drug shortages is complex and costly to hospitals and health systems in terms of staff time and other resources required to manage the shortages,” noted Lisa Kidder Hrobsky, a Senior Vice President of the AHA.

“A critical step in protecting America’s drug supply chain is understanding its vulnerabilities from the beginning of production to the moment a drug is administered to a patient. The MAPS Act creates a plan for the Food and Drug Administration and the Department of Defense to map the US pharmaceutical supply chain. The Act also includes use of data analytics to identify and predict supply chain vulnerabilities and other national security threats.”

The ASHP also stated it strongly supports the Act. “By requiring the Department of Health and Human services to coordinate with other agencies and the private sector to map the pharmaceutical supply chain, threats to the US pharmaceutical supply chain can be identified and addressed before they place patients at risk,” said Tom Kraus, vice president of ASHP government relations.

A New Supply Chain Data Duty

That private sector involvement will be central to the effectively implementing any MAPS-type legislation.

As the draft legislation makes clear, the HHS is to support efforts “including through public-private partnerships, to map the entire United States pharmaceutical supply chain, from inception to distribution”. It can then use data analytics to identify supply chain vulnerabilities, the bill proposes.

Neither the HHS nor any other agency can get that data on its own. It will need to come from the private sector.

Consequently, while the obligations under the Act nominally fall on the HHS, they ultimately impose a duty on the industry. The nation-wide map of the US pharma supply chain cannot be constructed unless pharma businesses are required to supply detailed information about their supply chains to the HSS.

It can then consolidate the information from across the industry to build its national picture.

To be able to supply that information, pharma businesses need to have it – and in a way they can share. In practice, they need to be doing the supply chain mapping themselves.

The benefits of using pharmaceutical supply chain risk management tools such as SCAIR® that are available to do precisely what the proposed Act requires have long been obvious in terms of improved resilience, inventory optimisation, reputation protection, and investor relations.

Visibility of the supply chain provides a clear competitive advantage.

That’s the carrot for early adoption of mapping, and it’s long been available to those willing to grasp it.

The legislative moves in the US, though, mean we’ll discover what the stick looks like sooner rather than later.

An Enterprise Risk Management Approach for Pharma Supply Chains

A changing risk landscape as disruptions become more persistent and frequent while regulators’ demands for resilience grow calls for a broader, more structured approach to managing supply chains.

When does “disruption” become the norm? Whether it is extreme weather, political and trade disputes or regulatory action, pharma and life sciences businesses – and their customers – have long contended with periodic interruptions to supplies.

Various trends in recent decades have put increasing strain on pharmaceutical supply chains. The complexity of pharma supplies, the move towards just-in-time manufacturing, the reliance on India and China for active ingredients, low prices, climate change and ever tighter regulatory requirements (more on this later) have all contributed to an environment where disruption, if not inevitable, is expected.

In that context, the Covid pandemic and its impact (including drug shortages from surging demand) added to the supply chain risk vocabulary, but it didn’t invent the language.

Cancer Drug Shortages

There are, however, two trends in the aftermath that have subtly altered the landscape. The first is the persistence of shortages.

One commentator notes: “The US has faced shortages of medical devices, drugs, and other key healthcare products since the onset of the pandemic, but these shortages have continued into this year.”

For some supply chains, disruptions are not just temporary blips in production but evolving yet permanent features. In US non-profit ECRI’s survey of nearly 2,000 respondents on drug, supply, and equipment shortages, a majority said shortages compromised patient care.

“Many of the respondents clearly communicated their struggles to address shortages which are occurring at an alarming rate, making it nearly impossible to provide safe, high-quality patient care in a fiscally responsible manner,” it noted. For good measure, it added that many were concerned that tornado damage to the Pfizer plant in North Carolina could worsen drug shortages – a reminder that traditional disruptions are never far away.

Disruptions are increasingly persistent, frequent and widespread. And they’re often as serious as can be. Only in September was the Biden administration in the US able to announce that supplies of cisplatin, a critical chemotherapy drug, were up to almost pre-shortage levels, but even for it, shortages remain, while shortages of carboplatin and methotrexate, though improving, persisted and concerns were growing for other cancer drugs.

In the National Comprehensive Cancer Network survey of 29 cancer centres over 86% reported a shortage of at least one cancer drug.

New Supply Chain Regulation

The other trend is not unrelated: A new interest in and interventionist attitude to supply chain shortages on the part of governments.

Of course, as mentioned, regulation has long been a contributor to supply chain shortages. High quality and safety standards across life sciences ensure safety but frequently jeopardise supply. Non-compliance with consequent regulatory action is a common cause underlying many shortages. It’s why SCAIR®'s Regulatory Incident Monitor, providing compliance trending and alerts, is such a simple yet powerful tool, giving rapid access to any supplier’s complete non-compliance history.

Regulatory enforcement actions continue to cause disruptions to supply chains. More broadly, new regulations can threaten to disrupt supplies. (The European Federation of Pharmaceutical Industries and Associations is currently warning that EU proposals to ban fluorinated substances could put 600 essential medicines at risk, leading manufacturing in Europe to “grind to a halt). Rule makers rightly determined to protect the public, sometimes can inadvertently put them at risk.

But in addition to restrictions that can disrupt supplies, recent regulatory developments could arguably put more direct pressure on businesses to enhance their supply chain resilience. Governments are increasingly looking at positive obligations to ensure supply. As one consultant has written, the stream of disruptions we’ve seen, from Covid and Brexit to the invasion of Ukraine and the Suez Canal obstructions, have focused governments and public bodies on the issue.

“[M]ajor health authorities around the world have been issuing new recommendations to Life Sciences manufacturers and their supply chain partners to ensure that in the future vital drug supplies remain continuously, safely and conveniently available to the patients that need them, right around the world,” he writes.

That move has seen new guidance on risk management from the FDA requiring risk management plans for critical products that identify stakeholders, drugs for which shortage assessments are needed, and risk mitigation plans, ideally based on ICH Q9 principles (defined by the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use to encourage science and risk-based approaches to ensuring quality).

And outside the US, where businesses may have yet to see regulation, they face investor pressure. As we’ve noted before, change is coming.

A New Enterprise Risk Management Framework for the Pharmaceutical Industry

Crucially, the change in the nature of the risk they face requires a new response from the industry.

First, the regulatory focus on proactive steps to ensure resilience (rather than just reactive responses to tackle quality issues) argues for a more systematic, documented approach to supply chain risk management. That will require an investment of effort, time and probably money.

Fortunately, at the same time – the trend (recently accelerated) for more long-term and more frequent disruptions also helps justify investment in resilience. Sourcing and validating alternative supplies, building up inventories, or looking to more expensive but more reliable (whether in terms of quality or logistical simplicity through sourcing close to end markets) is hard to justify if disruptions are short and infrequent. The return on investment is more obvious when the impact of disruptions and fragility of supplies have been clearly and repeatedly illustrated.

One approach long suggested is to take lessons from other highly regulated industries, such as financial services and energy sectors, which have faced their own challenges with heavy regulation, increased government expectations and evolving risks.

As a piece by consultants McKinsey noted a few years ago, while pharma businesses face unique risks there are also plenty of similarities between it and other industries.

“Like energy companies, pharma companies have high capital expenditure and long payoff periods for assets. Like banks, pharma companies operate in a highly regulated environment in which compliance risks are very high (for instance, for improper or poor filings) and other risks (such as sales-conduct risks) are present across many markets globally.”

Crucially, the key lesson to learn is to put supply chain risk management within the context of enterprise risk management – linking risks and mitigations back to the organisation’s objectives.

That means identifying, evaluating and prioritising risks according to their potential impact on the business; reviewing risk mitigation – both reactive and proactive, so that due diligence on new suppliers, products and markets considers risks; establishing a risk appetite so that decisions to mitigate or accept risk are conscious, considered and weighed against the impact to the business, and stakeholders, including customers; and putting in place crisis management plans – so that mitigation plans swing swiftly into place should disruptions occur.

The Cost of Mitigation and the Value at Risk

The benefits of such a structured, considered approach are numerous. For a start, setting the risks of disruption in the context of the overall business case takes us beyond simple mitigations to consider broader questions such as the sustainability of low-price production for some generic drugs, that might prevent effective mitigation. Even where there is no resolution, it enables businesses to distinguish between problems they can solve and those they cannot to make the best use of their time and resources.

Moreover, the exercise, properly structured and documented, will go a long way to reassuring stakeholders, such as investors, and, should the time come, satisfying regulators’ demands for evidence that supply chain risks are being appropriately and proportionately mitigated.

Finally, it enables the business to determine their risks and define and justify appropriate investments in mitigation more accurately. It does so by helping focus businesses on what really matters: Not defining and anticipating the wide range of risks they may face through their suppliers (which are often impossible to predict and outside the business’s control) but the value at risk from each supplier.

That’s where SCAIR® comes into its own, helping identify the single source, long lead time suppliers for high-value products for better business decisions, mitigation and contingency plans. As we work towards more resilient supply chains, it’s such tools that will help chart the way.

Pharma Supply Chain Risk: Why Assessing it Correctly to Minimise Disruption is Notoriously Tricky

Pharma supply chain risk and supply side failure can have catastrophic consequences for life science organisations – the results could have financial impacts as well as cost lives. Beyond developing treatments, it is the industry’s raison d’être to make drugs available where they’re required. A failure to do so is a fundamental flaw.

Globalised, complex supply chains make it challenging to avoid disruptions, but that only makes it more important to prepare for failure. Pharma businesses should concentrate on what they can control.

The risks of supply side failure are all too frequent. As this recent piece notes, there are currently over 200 drugs in short supply on the US Food and Drug Administration’s online drug shortage database.

Moreover, shortages have grown over the past decade. A study published last year by the National Academies of Sciences, Engineering, and Medicine shows ongoing and active drug shortages are more frequent and last much longer than in the past.

It was cited in a letter by Republican leaders on the House Committee on Energy and Commerce to the FDA Commissioner in March, calling for action.

There are options for mitigating such shortages: sourcing an alternative supply and/or increasing stock levels to either carry through temporary disruption or switch to the alternative. In practice, both are costly, but alternative sourcing is complicated by limited options and, more often, by the ability to even identify the vulnerability and risk.

Several related factors contribute to the identification challenge – some common across industries, others more specific to pharmaceuticals and life sciences.

Assessing Pharma Supply Chain Risk - Common Issues Facing Pharma Supplies

Perhaps the most obvious factors that make achieving resilient supply chains across industries difficult, are the related issues of globalisation, supply chain complexities and concentrations of risk.

These impact life sciences just as other sectors, and more than many. We’ve discussed before Western pharma businesses' heavy reliance on overseas manufacturers, particularly China and India, when it comes to active ingredients.

Such globalised supply chains are perhaps unavoidable, particularly for low-cost generics, where margins require low-cost production centres.

But they mean that pharma supply chains are vulnerable to a wider range of risks than they would be were production onshore – whether that’s export restrictions by foreign governments, hurricanes hitting Caribbean islands, or the difficulty maintaining standards – and avoiding dreaded FDA Warning Letters in remote production locations.

Far from reducing globalisation, recent years have, if anything, accelerated it. US pharmaceutical imports from China (and exports to it), for example, are booming.

This contributes to the second challenge of complexity. Both risks and dependencies are more difficult to identify with supply chains that span the globe and can reach across industries – from laboratory facilities to farms.

Over a decade ago, for example, the life science industry saw a huge recall of heparin, an anticoagulant used to prevent harmful blood clots and extracted from pigs’ intestines, in small workshops based in China. This dependency may change in time with new production methods, but where animal derived products are concerned, this type of dependency is unavoidable.

Complexity may also disguise concentrations of risk – even if these are avoidable: Reliance on common manufacturers by a vast range of manufacturers is nothing new; one thinks again of the explosion in Shin Etsu’s manufacturing facility at Naoetsu in 2007 – disrupting the supply of chemicals for cellulose derivatives used by many major pharma groups for their tablet formulations and coatings. More recent examples are not hard to find.

Even where alternative suppliers exist, pharma businesses are left scrambling and competing for this extra capacity – at a minimum, driving up costs.

Pharma-Specific Supply Challenges

Other factors exacerbate these challenges. Some are, again, common across industries: The rise in just-in-time manufacturing and its spread from automotive businesses across industries has undoubtedly had an impact.

While reducing inventory may have merits in terms of efficiency, it is not necessarily well suited to complex, globalised supply chains. We’ve considered before whether time is up for just in time – at least when it comes to pharmaceuticals.

Other challenges also may affect pharma manufacturers more acutely, if not uniquely. One is the scale of manufacture: pharma and biotech companies’ influence over some suppliers is limited because the volumes purchased are often small – even while the supplies have a disproportionately high value at risk attached to them.

In the ordinary course of trading, there may be no issues; in times of crisis, however, perhaps due to soaring demand from other sectors sourcing the same supplies, pharma businesses can find they are a low priority where supplies are limited.

This can be a particular problem because the drug development process starts small, and sometimes specific sources will be identified in the regulatory dossier that are difficult to change post-approval.

And that leads us to the critical challenge that particularly affects pharma: The regulatory demands the industry faces.

On the one hand, as the reference above to Warning Letters and OAIs (Official Action Indicated) notices indicates, the rightly strict standards for pharma and other life sciences products contribute to the risk of quality issues and subsequent regulatory action.

Quality related issues remain the leading root cause of supply chain disruption historically.

At the same time, bolstered by the experience of Covid, government interest is also increasingly focussed on not just quality but continuance of supplies. In June, US Senators put forward a bill to force government agencies to investigate weaknesses in the country’s pharma supply chain and develop plans to reduce dependence on foreign countries. It is just the latest example of the trend towards governments pushing for increased resilience.

That these twin priorities – of ever stricter quality requirements, making setting up new production facilities prohibitively expensive, and continuity of supply on the other – may conflict, goes largely unacknowledged.

Mitigating Measures for Pharma Supply Chain Risk

The range and difficulty of these challenges should lead us to a critical conclusion: attempts to anticipate the specific events that lead to major supply chain disruptions are largely futile.

In general terms, identifying issues that may cause an interruption, such as the weather, political action or regulatory enforcement, may be possible.

In most cases, however, predicting the wide range of specific threats that might impact first, second or third-order suppliers is impossible. Even if it weren’t, most events that may affect their supply chains are outside companies' power to control.

It also suggests a solution because the risk is not simply determined by the chances of disruption – but also by its impact. The first is very difficult to quantify; the second is more feasible.

As a consequence, rather than looking to precisely predict the sources of major disruption, businesses are better off assessing their supply nodes: determining which are most critical by focusing on those that are unique or difficult to replace and estimating the potential loss from their disruption.

Quantifying that loss will help prioritise mitigation efforts.

This will also provide the justification – or otherwise – for the cost of mitigation, whether that’s investing in alternative facilities, holding more inventory or establishing alternative sources.

In truth, there may not always be a cost-effective solution for avoiding shortages. Onshoring prospects for low cost generics are particularly limited . Low cost drugs come with that price.

However, two issues should be noted: first, the visibility of the supply chain that the exercise promotes can also lead to opportunities to drive efficiency, particularly as technology advances; and second, whether mitigation is worth it, is a calculation that can only be made once you know the cost of failure.

And if you do not understand the value at risk at each supply point, your competition still might.

Pharma Supply Chain Challenges: Common Vulnerabilities that Must be Addressed

It’s a standard refrain when looking at pharma supply chain challenges that every company is different: Businesses face unique vulnerabilities that can only be understood and addressed by an in-depth understanding of their particular supply chain.

And yet, as is repeatedly illustrated, many have common points of failure: Significant sections of the pharmaceutical industry, like others, are frequently hit with widespread shortages due to common dependencies. They are, in a sense, similar to the systemic risks of the financial centre revealed during the financial crisis. Or, to put it another way, they are an example of “the seemingly unrelated consequences and vulnerabilities stemming from global connectivity”.

Often, these dependencies are buried deep in the supply chain: second or third-order suppliers that share a common critical source of raw materials, for example. As a result, such risks can evade detection – until the problem materialises. Even if they are detected, the major challenge remains: Identifying them is one thing; addressing them is another.

Nevertheless, as ever, understanding and identifying the causes of common vulnerabilities is an essential first step.

Regional Supply Chain Dependencies

Perhaps the most obvious and most exposed source of common points of vulnerability is the geographic concentration of certain suppliers. Past years have seen numerous examples across industries – from the Thai floods and Japanese earthquake over a decade ago that disrupted automotive supply chains; to semi-conductor shortages during Covid – exacerbated by the fact that 75 percent of the manufacturing capacity and key materials are located in China and East Asia.

Examples in pharmaceuticals and life sciences are relatively easy to find, too: from the hurricanes that continually hit key pharma production centres such as Puerto Rico to the dependency on China and India for active pharmaceutical ingredients.

The incidents that may see such risks manifest will depend, in large part, on the extent of the concentration in supply: Often, suppliers are tightly clustered regionally within a county so that even a localised weather event can cause widespread disruption. Even if suppliers are dispersed nationally, they remain vulnerable to common risks – whether that’s a pandemic, trade war, civil unrest or regulatory issues.

Such concentration is not always possible to avoid. As we’ve noted before, tight margins favour particular production centres, particularly for low-cost generics, while regulatory requirements add to the cost of establishing new manufacturing bases.

Scarce Resources

It is a similar story when industries rely on rare materials, where regional or supplier–based concentrations may be unavoidable.

Technetium-99m (Tc-99m) is a good example. Used in approximately 80 percent of radiopharmaceuticals (pharmaceutical drugs containing radioactive isotopes), it is produced at only five reactors in the world. It saw shortages in the late 2000s due to repeated shutdowns of two of these, in Canada and the Netherlands, responsible for about two-thirds of global production of molybdenum-99, which decays to Tc-99m. The problem persists today. As recently as November 2022, a mechanical failure in one reactor impacted the world's supply.

In some cases, shortages are naturally occurring. In others, they result from high barriers to entry that limit supply. That can be particularly common in highly regulated industries, such as pharmaceuticals.

Many pharma businesses are dependent across their portfolios on common feedstocks such as tablet excipients. Despite these being unsophisticated chemicals and theoretically simple to produce, strict regulatory requirements mean few chemical manufacturers have the capability to deliver a product to the United States Pharmacopeia standards. That was graphically illustrated by the explosion in March 2007 at chemical company Shin Etsu’s facility in Naoetsu, Japan, leading to a shortfall in a key ingredient for tablet formulations and coatings. The shortage lasted more than a year. Let’s hope that a recent FDA Warning Letter to Dupont’s manufacturing plant in Newark (which supplies many pharma companies with Microcrystalline Cellulose, a common tablet excipient) does not trigger a similar situation.

There, again is no easy answer, given the obvious need for strict regulation. Indeed, the shortages themselves illustrate this. See, for instance, the 2008 recall of heparin, an anticoagulant, by multiple companies following the identification of a contaminant, oversulfated chondroitin sulfate, responsible for the numerous deaths and traced to a chemical plant in Changzhou, China.

The Difficulty of Going it Alone

With potentially whole sectors exposed to single points of failure, a significant pharma supply chain challenge exists for individual companies seeking to address such risks.

The extent to which they can be mitigated will, in large part, depend on the particular circumstances. Where required commodities are necessarily constrained by the requirements for a specific environment or access to natural resources, there may be little companies can do to ensure resilience against weather or other disruptive events. In such cases, the best they may be able to manage is to offset potential losses through financial instruments.

Likewise, dependence on particular suppliers for highly specialised materials exposed to common threats, the opportunities to source or create another supply base may be few.

The challenge is exacerbated by two factors: First, the reliance on just-in-time manufacturing so that many manufacturers hold minimal stock. As a result, disruptions to the supply of anything more than a few days can halt production. This can be remedied to an extent, but not without cost, which could reduce competitiveness.

The second factor presents even more difficulties: the concentrations of risk are often not in their direct supply base but in their second or third-tier suppliers, over which their control is limited. Any solution requires oversight of not just vendors but their suppliers.

Building Supply Chain Resilience: Knowledge is Power

Acknowledging that there are pharma supply chain challenges is not, however, a counsel of despair.

For one thing, identifying common points of weakness that cannot be addressed individually makes it possible to at least make a case for industry or even state-sponsored efforts to manage them.

The Covid pandemic, for instance, has prompted public-private manufacturing partnerships, such as contract development and manufacturing organizations (CDMO). The UK, likewise, has established the Medicines Manufacturing Innovation Centre, funded jointly by the industry and regulators, a state-of-the-art facility for small molecule and fine chemical manufacturing. Increasingly, governments see the value of onshoring.

Even more recently, the war in Ukraine saw governments stockpiling iodine pills, offering protection against radioactive exposure. Outside pharma, we’ve witnessed joint anti-piracy initiatives from the shipping industry.

Such cases will, necessarily, be rare, however. In their absence, though, increased visibility of weaknesses in the supply chain and their potential impact are rarely wasted. It gives businesses the tools to focus their efforts – whether that’s in discussions with vendors to strengthen their own supply chain risk assessments and mitigation; seek alternatives; or increase inventories.

It also prevents manufacturers from taking – and potentially wasting time with – alternative suppliers that ultimately share the same points of vulnerability.

Common vulnerabilities are not easily overcome. However, as with any supply chain challenge, they are never best ignored. And, if they cannot be successfully addressed, businesses at least have one comfort: We’re all in it together.

SCAIR® highlights supply chain dependencies and vulnerabilities within pharma supply chains. It quantifies value at risk to help build resilience and improve profitability.

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Supply Chain Cyber Security: A Growing Threat

As reliance on technology has increased, digital vulnerabilities in the pharma supply chain have grown – and it makes a tempting target for bad actors. Supply chain cyber security is now a key vulnerability.

With SCAIR®, we spend a lot of time thinking about the flow of goods across the supply chain. As companies have discovered to their cost, disruptions to seemingly small players can have big consequences. But increasingly in the last decade or so, it’s not just goods and services that flow: It’s data, too. And that produces a whole new set of vulnerabilities.

It’s not just industry worrying. It’s governments too. In January, the US government launched a new office for cyber supply chain risk management (C-SCRM) within the Cybersecurity and Infrastructure Security Agency (CISA)- the United States Department of Homeland Security body – which is responsible for strengthening cybersecurity and infrastructure protection across government.

As Shon Lyublanovits, head of the new office noted, while some government agencies like NASA were well advanced in managing supply chain risks, others still needed help with the basics.

“I think the thing that plagues agencies the most are two things: One, where to start? And two, how do I have that conversation with my leadership?” said Lyublanovits. The issue wasn’t just a government or industry problem, she noted. It was a national one.

Others seemingly agree. Not long after CISA announced its new office, the UK’s National Cyber Security Centre, which performs some similar roles to CISA, also issued new guidance on mapping the flow of information from providers. As with the physical flows of materials and goods through the supply chain, an essential first step in managing cyber risks is mapping your connections. Organisations need to understand who their suppliers are, what they provide and how they provide it.

Just as you can’t manage what you can’t measure, you can’t protect what you can’t see.

Supply Chain Cyber Security Risk Drivers

To manage the risk, though, organisations also need to understand it. There are several drivers for the increasing interest in cyber supply chain risks – all of which have relevance to pharma businesses.

Perhaps most obvious is the increasing frequency, severity and sophistication of attacks. Ransomware alone has the potential to cost the pharmaceutical manufacturing supply chain $31 million, according to research in 2021. It’s only likely to have grown since.

It’s not simply the ubiquity of risk nor the widespread availability of sophisticated tools that even inexperienced attackers can access through resources such as the dark web: it’s the scale. Widespread reliance on common, widely used platforms means a single breach can have consequences for organisations globally. The recent SolarWinds attack – among the biggest breaches of the 21^st century, affecting thousands of companies and governments worldwide – was a striking example.

It was also an illustration of the threat from not just criminals but state actors – with that attack traced to Russia’s Foreign Intelligence Service. In a period of volatile geopolitics, the risk is heightened, but it’s already not wholly unfamiliar to pharma businesses, as China’s attacks on Moderna showed.

Increasing Connectivity, Increasing Risk

There are other drivers, too. In some cases, changes have improved supply chain management but nevertheless increased potential vulnerabilities. The sprawling network of connected sensors, devices and systems on the Internet of things, for example, has been invaluable in managing cold chain distribution. Indeed, the potential for using RFID for temperature logging individual packets of drugs was part of the ReMediES (Reconfiguring Medicines End-To-End Supply) project.

With cheap and ubiquitous sensors, cloud computing and other devices, the availability of real-time data and potential applications have rapidly expanded. With that, though, comes the potential for data breaches and disruptions.

Similarly, connected medical devices offer new and potentially dangerous vulnerabilities. While that risk is well recognised and managed through a regulated Quality by Design process, it cannot be entirely eliminated. Personal devices and wearables that transmit data over public networks offer perhaps even greater potential for data breaches.

In life sciences, it is not simply the amount of data now available that heightens the risk, but its sensitivity. The large amount of sensitive personal data held, such as medical records for clinical trials, make the sector an attractive target for bad actors. Attacks that put systems or devices down, meanwhile, can have critical consequences.

As the US Health and Human Services deputy secretary has put it: “Cyberattacks are an increasing threat across all critical infrastructure sectors. For the health sector, cyberattacks are especially concerning because these attacks can directly threaten not just the security of our systems and information but also the health and safety of American patients.”

At the very least, attacks on systems have significant potential to disrupt the supply of drugs.

Back to Basics

Part of the problem for organisations is that so much is outside their control. As retailer Target showed many years ago, your own security is only as good as your suppliers. Its massive data breach came through its heating, ventilation, and air conditioning vendor, with an employee falling for a phishing trick, which ultimately enabled hackers to gain log-in credentials for Target’s systems.

It is, in reality, often impossible to avoid providing access to third parties and suppliers. Indeed, application programming interfaces that allow systems to communicate and automate the flow of information between each other are likely to play an increasing role in bringing efficiencies to the supply chains in future. Organisations must therefore try to ensure those they deal with have robust security in place – enforcing this contractually where they can.

Even then, though, there’s an additional challenge – one of ownership. As the FDA’s revisions to its medical device cybersecurity “playbook” last November made clear, it isn’t simply an IT issue. Rather cybersecurity requires a diverse team “including clinicians, health care technology management professionals, IT, emergency response, and risk management and facilities staff.”

Crucially, data security in the supply chain cannot be managed independently of the supply chain itself. To map connectivity and identify vulnerabilities and prioritise security, organisations need to bring the physical and digital flows together: Identifying their critical suppliers, evaluating the need for access, and examining the strength of critical partners’ cybersecurity.

As with any vulnerability, understanding your cyber supply chain risk starts with gaining a clear view of the suppliers within it.

SCAIR®'s parent company Intersys Ltd, provides cyber security services for many highly regulated sectors including bio-pharma, pharmaceuticals and life sciences.

The True Cost of Low Drug Prices: Undermining Pharma Supply Chains, Boosting Medicine Shortages

Governments might be about to discover that if they want resilient supply chains to avoid drug shortages, there’s going to be a cost.

As Warren Buffett’s famous adage has it, price is what you pay; value is what you get. When it comes to critical drugs, though, there needs to be a relationship between the two. And when prices are pushed down, the true cost of low drug prices becomes apparent on the pharmaceutical supply chain.

We saw during the pandemic how penny-pinching could undermine public health priorities. For all the complaints from the EU about AstraZeneca’s Covid19 Vaccine supply chain issues, there’s little doubt its quest to drive the price down (on a drug being produced at cost) contributed to the problem. Now European and the UK governments look like they could be making a similar mistake again.

Last month, the FT reported the tensions between governments and drug companies over clawback payment policies. In the UK, these are leading to pharma businesses paying back £3.3bn – over a quarter of their sales. Germany and France are also insisting on similar policies.

Already, AbbVie and Eli Lilly have pulled out of the voluntary UK pricing agreement, while German group Bayer has said it intends to “deprioritise” Europe, which it claims is becoming “innovation unfriendly.”

“European governments are trying to create incentives for research investments, but they are making our lives miserable on the commercial side,” its head of pharmaceuticals, Stefan Oelrich, told reporters.

It’s not just innovation that’s at risk, though. Governments’ determination to cut costs also has the potential to undermine another of their policy priorities: Ensuring the availability of critical drugs.

Short(age)-Sighted: Learning from Drug Shortage Data

Recent months have been a reminder of the continual problems all countries face with drug shortages. Last month, for instance, the US FDA issued its guidance on compounding ibuprofen oral suspension products to address supply shortages amidst record demand. Before the New Year, meanwhile, it was the UK government intervening to tackle the supply of penicillin during the Strep A outbreak.

“We are taking decisive action to address these temporary issues and improve access to these medicines by continuing to work with manufacturers and wholesalers to speed up deliveries, bring forward stock they have to help ensure it gets to where it’s needed, and boost supply to meet demand as quickly as possible,” the minister of state for health Will Quince reassured people.

But government efforts to push down prices may do entirely the opposite.

Our analysis of the causes for FDA Drug shortages collected between 2018 and 2022 (as published at https://www.accessdata.fda.gov/scripts/drugshortages/default.cfm), reveal that 33% were due to discontinuations. Lack of profitability is never explicitly cited as a reason, but it is most likely that that drug will be discontinued because it is no longer commercially viable. Another 15% was down to demand variability. Again, supply is much less likely to be sufficient to soak up spikes in demand where the profitability of the drug is marginal.

The other feature of the Drug Shortages dataset is the frequent recurrence of certain older, less profitable drugs, which are perpetually in shortage because there are simply not enough manufacturers of those drugs. It does not take much to go wrong with one manufacturer, before there is an overall shortage of that particular medicine. Even if the demand invariably exceeds supply, new manufacturers have no incentive to make that drug if there is little reward.

Closer to Home

Two other government policy priorities only exacerbate the problem. The first is the desire to see pharmaceuticals manufactured closer to home. Onshoring was among the big ideas in the US Department of Health and Human Services report on essential medicines’ supply chain resiliency published last year.

As we’ve noted before, though, it’s most often low-cost generic drugs that see shortages and are least likely to be viable to onshore from cheap production centres abroad. And it’s even less likely if governments are going to squeeze the margins yet further.

The second area where government – through the best intentions – makes shortages more likely is regulation. Regulatory action can often itself be a cause of disruptions to supplies, but it also adds to costs and discourages competition that could bring down prices naturally. Again, artificially reducing the price governments pay for drugs while keeping the costs of manufacturers high through regulatory requirements is not necessarily a recipe for success. The true cost of low drug prices becomes apparent in many other ways.

In short, if governments really want resilient, abundant and local supplies of critical generic drugs, they’re probably not going the right way about it.

Investments in Technology

Of course, it’s not solely down to governments. The pharma industry itself has to play its part in ensuring supply chain resiliency. But there’s little evidence it’s shirking this responsibility.

Pharma businesses, like everyone else, are investing heavily in supply chain risk management post Covid. It is a trend across industries, with Gartner finding that almost eight in ten large organisations are focussing on supply chain resilience and risk management. It has also found organisations far more likely to be planning to invest in making their supply chains more agile and resilient (89 and 87%, respectively) than they are to be favouring domestic operations (52%) or shifting from a global to regional supply chain model (30%).

There is a lot more that can be done here. As Gartner had noted previously, Covid 19 put supply chain risk management (SCRM) front and centre, as many found their existing capabilities ineffective. Despite this, there was still “no clear owner of the process across supply chain functions”. What’s required is a re-examination of SCRM strategies and “targeted investments,” the consultant said.

Technology will be a big part of that, with organisations drawing from a wide range of solutions and approaches from the supply chain control tower and digital twins, to artificial intelligence, supply chain as a service, blockchain, predictive analytics and so on. Crucially, though, the technologies are at various levels of maturity. Supply chain risk assessment software such as SCAIR®, have a long track record. They’re field proven. But for many, particularly newer technologies, the return on investment, while promising, is still uncertain.

You Get What You Pay For

That’s going to be important because, as Gartner also found – while supply chain resilience is a big issue for chief supply chain officers, it trails just behind cost optimisation. Gartner says those responsible for supply chains must balance investments in nascent, evolving and mature capabilities. That’s sensible – enabling businesses to back a variety of technologies and see which turn out the winners. We predict that Enterprise Supply Chain Risk Management (ESCRM) will shortly join their Magic Quadrant analysis. But budgets are not unlimited.

The amount businesses are prepared to invest in protecting their supply chains must be influenced by what those supply chains are worth. The higher the value, the larger pot there will be to share around the various potential technologies that can strengthen the supply chain and prevent shortages. Businesses – in pharma or elsewhere – will not invest heavily to protect supply chains for products with little profitability.

To put it another way, governments may find that for at least some drugs, they can have either very low prices or dependable supply – but not both.