US China Trade War in 2025? Trump Puts Tariffs Back on the Menu

Donald Trump’s victory in the election renews questions about pharmaceuticals’ reliance on overseas production and China specifically. Is it bluster, or are supply chains about to get a shock?

So, it begins – again. The US China trade war was a central feature of President Trump’s first presidency – before the Covid crisis did a much more thorough job of disrupting trade. Given China’s role as a key source of active ingredients, it was a significant worry for the pharmaceuticals industry, even if most of those fears proved unfounded.

But is the industry ready for round two?

With Trump’s convincing victory in the US election, tariffs are back on the agenda. Again, China is a key focus, with Trump campaigning on a promise of tariffs of 60% or more on imports from China as part of a “national economic renaissance” fostering domestic industry.

However, it’s not just China targeted, with Trump seeming to promise blanket tariffs across US imports, valued at $3.8 trillion last year, according to the Bureau of Economic Analysis.

As he said on the campaign trail: “We're going to have 10 to 20% tariffs on foreign countries that have been ripping us off for years. Some might say it's economic nationalism. I call it common sense.”

Or, as he has put it on other occasion: “To me, the most beautiful word in the dictionary is ‘tariff’, and it’s my favourite word.”

Trump's tariffs: a devasting economic impact?

Were such tariffs universally applied; the effect would vary significantly by country. In Europe, it could be Ireland, not the UK, potentially hardest hit. Exports to the US from the Republic account for more than 10% of the country’s GDP, against 2% for the UK.

Even for the latter, though, the hit would be substantial – a “doomsday scenario”, as Liam Byrne, Labour chair of the House of Commons Business and Trade Committee put it.

“If Trump does go ahead, that is going to have a really significant impact on economic growth, inflation and interest rates in the UK,” he told the Today programme.

“Actually, it will probably set off a trade war more globally,” warned the other guest on the programme, former UK ambassador to the US Lord Darroch, who predicted retaliatory tariffs on US exports from Europe and elsewhere.

According to the National Institute of Economic and Social Research Growth, the UK’s already fairly gloomy economic outlook would be significantly darker as a result. Growth in 2025 and 2026 would halve, and inflation could be as much as three to four points higher, with interest rates up two to three points, too.

“The UK is a small, open economy and would be one of the countries most affected,” warned Ahmet Kaya, a NIESR economist.

Hopes for a trade deal

Optimists can take succour from several sources.

Some hope the realities of office will temper Trump’s ambitions and that the reality of the impact on US consumers and businesses will constrain him. After all, regardless of their favourite words, politicians campaign in poetry but govern in prose. As Darroch noted, though, even the experience of the last Trump presidency argues he’s unlikely to abandon his plans.

At a national level, some also hope that individual countries, such as the UK, may be exempt. New Jersey governor Phil Murphy - a Democrat - says he believes Mr Trump may consider not including the UK in his tariff plans.

“[T]he UK is not the target,” the head of transatlantic business trade groupBritishAmerican Business Duncan Edwards told Sky News. Like others, he also points to the opportunity to revive talks of a US-UK trade deal that stalled four years ago with Trump’s loss to President Biden.

Meanwhile, New Jersey Governor Phil Murphy also told the network he believed Trump may consider exempting the UK.

“But if I’m China, I'm fastening my seatbelt right now,” he added.

Will pharma continue to dodge the tariffs?

China, of course, brings the discussion firmly back to pharmaceuticals.

In Trump’s first term, the industry largely escaped the tariffs in 2019, and then the pandemic hit so there was little appetite for anything to further restrict scarce supplies.

US dependence on the China has increased since then. The US imported $6.95 billion of pharmaceuticals from China in 2022, up more than eightfold from the previous year. While that declined as the pandemic retreated, they remained much higher than historically in 2023.

This could function as an argument against tariffs. There is a strong argument that restricting pharmaceutical imports from China would be a self-inflicted wound – hurting US consumers and research.

However, there’s also increasing – and not entirely displaced – discomfort with the growing reliance on China and, to a lesser extent, India within the US. Together, the countries accounted for 58% of pharmaceutical imports by weight last year and a third of America’s total annual spending on pharmaceuticals. And as reliance on China has grown, domestic production has withered.

As the US Food and Drug Administration (FDA) noted as long ago as long ago as 2019: “The United States, through its investment in biomedical research, has become a world leader in drug discovery and development, but is no longer in the forefront of drug manufacturing.”

A revival for US production?

The indications are that Trump wants to address this as part of his phasing in of a complete ban on imports of key categories of Chinese-made goods like electronics, steel and pharmaceuticals.

As far back as February 2023, Trump was already outlining his vision of a high-tariff future. As he promised: “We will revoke China’s Most Favored Nation trade status and adopt a four-year plan to phase out all Chinese imports of essential goods – everything from electronics to steel to pharmaceuticals.”

It would be unwise to dismiss this as campaign bluster for two reasons.

First, the worries about the dependence on China are, at least to some extent, well placed. According to domestic producer campaign group the CPA (Coalition for a Prosperous America), there are 100 drugs prescribed in the US whose supply is dependent on a single factory in China.

Second, while there may not be consensus over tariffs (although Biden’s administration kept existing Chinese tariffs in place), both sides of Congress share worries about pharma’s dependence on overseas production.

It was the Biden administration that started with its 100-day supply chain review report in 2021 and followed on with the first government Essential Medicines Supply Chain and Manufacturing Resilience Assessment the following year. Expanding onshore or nearshore production capacity was among the key strategies it proposed for strengthening resilience to avoid shortages. Meanwhile, moves to strengthen requirements around supply chain transparency in the sector through the MAPS Act introduced in the US Senate have gained bipartisan support.

Indeed, Trump has been explicit that his pharma policy is not simply about protecting domestic production and stopping what he sees as the abuse of foreign exporters. Returning production of essential medicines to America is essential “to end Joe Biden’s pharmaceutical shortages”, he has argued.

“This is not just a public health crisis; it’s a national security crisis,” he said. “This is a matter of tremendous urgency. American lives are on the line, and it will be one of my top priorities as President. It will also create countless new American jobs.”

An early promise of his campaign was, therefore, to restore Executive Order 13944, dated from August 6, 2020. This directed the FDA to identify a list of essential medicines necessary to have available at all times to ensure sufficient and reliable, long-term domestic production and “to minimise potential shortages by reducing our dependence on foreign manufacturers of these products”.

No escaping the demand for supply chain clarity

How much of his campaign agenda Trump will ultimately be able to implement, how soon, and in what way remains highly uncertain. But at the very least, it seems certain there’s to be no let-up in the intensifying focus from government on pharma supply chains.

And where the US leads, Europe often follows. Around the world, governments are saying it’s time for transparency.

Whether it’s to answer government calls to strengthen supply chain resilience, have clear data to make the case for continuing to source oversees, or simply to be able to react effectively and quickly to a more volatile, unpredictable future, visibility of the supply chain has never been more needed.

Solutions such as SCAIR® can help.

Bringing clarity around dependencies, critical supply points, concentrations and values at risk, SCAIR® provides essential insights for better decisions. Whatever the Trump presidency may bring, pharma businesses can already be building a more resilient future for themselves and their customers.

Insurers and Climate Change: Weathering the Storms

First Helene, then Milton – and the Atlantic hurricane season still has a month to run. Early estimates of insured losses from Milton were that it could cost up to $100 billion. That would put the storm on a par with Hurricane Katrina in 2005 – still the largest insured loss hurricane event.

It's now clear the damage was less than feared, with a direct hit on Tampa in Florida avoided, and Morningstar DBRS cutting its forecasts. Nevertheless, the hurricane was still the second-most intense Atlantic hurricane ever recorded over the Gulf of Mexico, and the credit ratings agency put losses at between $30-60 billion. At least 35 people died.

Even with the lower losses, the storm will also sorely test the state’s property insurance market, following hard on Hurricane Helene, which was less costly but still estimated to have resulted in losses of up to $14 billion.

In 2002, the state established the Citizens Property Insurance Corporation as a last-resort insurer for those unable to secure coverage elsewhere. Today, it has 1.2 million homeowners on its books. As the Financial Times put it, “Florida has attempted to get its property insurance house in order. It looks like it may topple over anyway.”

The broader danger is that this becomes a problem beyond Florida. A report by risk modelling firm Verisk last month warned that the insurance industry should expect losses from catastrophes in the coming years to average $151 billion – with more in particularly bad years. Recent difficulties for the industry, which has seen natural catastrophe losses top $100 billion for four consecutive years, would prove not to be outliers, the company predicted.

Increased populations in at-risk areas, inflation in rebuilding costs and, crucially, climate change were all reasons pushing losses up.

As the FT piece said, “The world is awash in capital looking for returns. But it may be that a warming planet cannot be underwritten at any acceptable cost.”

Is climate change a systemic risk for insurers?

As we’ve detailed before, a big part of the problem is that it’s not just hurricanes or even earthquakes (the other, traditional big loss events) that insurers have to worry about. The so-called “secondary perils” are increasingly a primary concern, with more frequent and severe flooding, wildfires and other historically lower-loss events rapidly adding up.

Already, that’s meant even in years with no major hurricanes, like 2023, losses have still topped $100 billion. It’s unlikely to change in the future. In Verisk’s model, while hurricanes and earthquakes were still predicted to account for the biggest single losses, about half its estimated average, excluding crop losses, was down to secondary perils.

Such changes mean it’s not just hurricanes and it’s not just Florida, where some are beginning to question the insurance industry’s future. The Citizens Property Insurance Corporation in the Sunshine State might have seen a surge in the numbers using it as an insurer of last resort, but so has the Flood Re reinsurance scheme in rainy Britain.

The number of home insurance policies it underwrites is now 260,000, up from 150,000 in 2018. And, as this piece from the Ecologist earlier this year notes, it’s not just home insurance that has seen costs spiralling. Car insurance prices have also soared. In April, the rising cost of insurance was the single biggest contributor to rising inflation figures in the US.

The Ecologist spelt it out plainly: “What’s critical about climate change, from the financial system’s point of view, is that it makes it more and more likely that many disasters will arrive all at the same time – you get more and often bigger extreme weather events so at any point in time you, as the insurer, are likely to face more claims. It’s a guarantee of rising systemic risk in the financial system, with insurance companies the worst affected.”

Head in the sand – more time for modelling

Of course, Verisk’s revised estimate is a sign that the industry and its suppliers are not ignoring the problem. Reinsurer Swiss Re earlier this year noted that the sector consistently failed to estimate the impact of extreme weather with any accuracy.

“Whether it’s the Turkey quake . . . or the floods in Germany or the hailstorms in Italy, models were off by factors as opposed to 10 or 20 per cent,” its chief underwriting officer for property and casualty reinsurance told an event.

But Swiss Re was investing in feeding more data into its catastrophe models in an attempt to address this, he noted. Verisk’s upward revision of expected annual losses, too, suggests an industry keen to come to grips with the challenge.

There is no quick fix, however. As Verisk noted, “detecting [the] signal” of climate change in rising losses – and separating it from the other causes, such as inflation and increased populations – remains a challenge.

And re/insurers have arguably left it late. While the industry has modelled climate risks for years, some argue it has put off the difficult work of figuring out the potential impact of climate change on affordability.

“The insurance industry had its head in the sand around climate change,” one chief executive told the FT earlier this year. “It’s a gigantic pain, and it tried to avoid it.” In this analysis, it could be years before it gets to grips with it, if it can.

That’s supported by data from a study by ORIC International, the leading operational risk consortium for insurance, investment and pension sectors globally. ORIC’s member firm network comprises over 40 leading (re)insurers and investment firms. Collectively, they write £300 billion+ GWP, look after £5 billion+ of assets and operate in over 65 countries.

Its survey of firms exploring potential scenarios that would affect the industry found the largest impact of any scenario was from modelling error. Across survey participants, the median impact assessment for such a scenario was £125.5 million. For bigger firms, it would be many times this.

SCAIR®: supply chains and climate

As stated, there are no quick fixes, but technology like SCAIR® aims at least to be part of the solution rather than part of the problem.

While the big reinsurers work on their modelling to protect themselves, it helps bring the latest developments to a wider audience across the industry, both insurers and brokers. It uses Location Risk Intelligence, developed by reinsurer Munich Re for natural catastrophe risks. It has two crucial advantages that can help both insurers and their insureds.

First, providing location-specific mapping of weather risks and supply chain modelling helps increase the visibility of insurers’ exposures beyond property damage to business interruption covers. Insurers can see in detail – and in aggregate – which of their insureds may be affected, helping avoid or mitigate concentrations of exposures.

Moreover, when an event does hit, they can know which are likely to be affected so they can reach out with advice more quickly – potentially limiting losses.

Second, the tool integrates climate risk modelling predictions, including forecasts of how climate change will impact each location, from the experts at Munich Re – the world’s largest reinsurer. This helps insurers of any size begin to address the challenge involved in assessing the impact.

In a changing climate, there are no silver bullets, but if insurers are to meet the challenge of changing weather events, they need to use the resources available. SCAIR® could be one tool that helps tip the balance back in their favour.

Is Your Insurance Risk Management Software Prepared for Climate Change?

Hurricane Ernesto is just the most recent reminder of the risks of natural catastrophes to pharmaceutical supply chains – and they’re only going to grow. But technology may have the answer.

On balance, it was a lucky escape. Hurricane Ernesto was the fifth named storm and third hurricane of the 2024 Atlantic hurricane season, but in the end, it was only moderately strong – a category one (of five) hurricane.

After striking Puerto Rico as a tropical storm, it strengthened to a hurricane as it moved onto Bermuda. The latter, however, escaped major damage and loss of life. Forecasts that it would intensify to a category three hurricane, thankfully, remained unfulfilled.

Even so, it brought considerable disruption. Even in Puerto Rico, it knocked out power to more than half of homes and businesses, and a week later, 40,000 remained without electricity. In Bermuda, over 70% lost power. We should not get too comfortable though.

For a start, as this BBC piece makes clear, even category one hurricanes can bring severe damage. Ranked on windspeed, the scale makes little allowance for storm surges or rainfall that can bring widespread damage.

"Most damages are from water not wind," one expert told the reporter. Sandy, in 2012, among the costliest on record to hit the US, was also a category one hurricane.

Moreover, the Atlantic hurricane season, which runs to the end of November, is not halfway through, only reaching its peak in the first half of September. And, according to some, it’s only going to get worse. Meteorologists at commercial weather forecasting service AccuWeather predict a “Supercharged September” with a dramatic intensification of the season bringing a surge of hurricanes and tropical storms throughout the month.

“We could see a parade of storms,” its hurricane expert warned. With six to ten “tropical systems” predicted, it could rival the record-breaking year of 2020, when the region saw 10 storms in the month. There could even be multiple storms and hurricanes on the same day, the expert warned.

Overall, the weather service predicts we’ll see 20 to 25 named storms across the Atlantic basin by the end of the year – against a historical average of 14.

Nearshoring nightmares for pharma supplies

For the pharma industry, the threat of hurricanes in the region is not news. It has more interest than most in the fate of Puerto Rico, particularly.

Traditionally, the industry has accounted for over half of manufacturing on the island, about half of its exports and a quarter of its GDP. Attracted to the island by tax incentives in the 1960s and 1970s, the industry has been a fixture since. All the big names – and many others – are present, with 11 of the top 20 pharmaceutical companies present. Over half of the world’s top 10 bestselling prescription drugs are manufactured there.

The island’s attractions beyond the tax breaks are obvious: Offering cheap labour and relative proximity to the US, the unincorporated territory is a good location for nearshoring. The benefits of this have become ever more evident in recent years with logistics issues, the threats of trade war and other supply chain disruptions plaguing manufacturing centres further afield, such as China.

Unfortunately, the downsides have also been well and repeatedly illustrated. Even when the island gets off relatively lightly, as it seems to have with Ernesto, it’s just delaying a reckoning. In 2017, when Maria (a category four storm) hit, it “exposed the vulnerability of the island's pharmaceutical supply chains to the consequences of extreme weather risk”, as one academic puts it. It also coincided with the start of among the most severe influenza seasons on record.

“The impact of Hurricane Maria on the pharmaceutical supply chain led to serious negative consequences on the US health care system which lasted for several months,” the paper notes. Half of hospitals found themselves short of saline, for example.

Supply chain transparency pressures

While the risk is long-standing and well-recognised, two factors are now exacerbating it.

The first is an increased level of scrutiny and emphasis on resilience coming from governments. It’s perhaps ironic that nearshoring was one of the strategies pushed by the Department of Health and Human Services’ Essential Medicines Supply Chain and Manufacturing Resilience Assessment report in 2022 – emphasising the move towards government action to insist on greater supply chain resilience. In May, the Promoting Resilient Supply Chains Act of 2023 passed the House of Representatives by 390 to 19.

The second is climate change, which threatens more frequent and more severe extreme weather events, such as hurricanes, storms and cloud bursts. That has a number of consequences for pharma manufacturers – and they won’t be restricted to manufacturing in the Caribbean.

Most obviously, more extreme weather makes the risk of disruption that much greater, and means strategies to reduce vulnerabilities such as nearshoring must take this into account. Manufacturers, as ever, must consider the full range of risks and mitigations to ensure resilient supply chains.

Even before they may see that increased weather risk manifest, they face pressure on various fronts to address the rising risk of extreme weather.

Quite apart from new developments, regulation is already requiring large companies to large companies to evaluate their supply chains’ exposure to risks from extreme weather. In the UK, for instance, the Task Force on Climate-Related Financial Disclosures introduced the obligation for big businesses (and all from 2025) to report on this. Its requirements have now been incorporated in the International Sustainability Standards Board (ISSB) standards launched in June 2023.

Pharma and other businesses also face external pressure from other stakeholders to address the risks. That includes investors and, perhaps even more obviously, insurers – businesses even more exposed to the changing weather than pharma.

Secondary perils come to the fore

The insurance industry is not only suffering from rising losses from a long-term increase in the likes of floods and hurricanes (as well as earthquakes), which it has long been used to managing as a major risk. It is also increasingly concerned by rising losses from hailstorms, floods, droughts, and wildfires.

Traditionally, these events are smaller, causing fewer big losses and are, therefore, easier to manage for insurers. However, the increased frequency and sometimes severity of these events – so called “secondary perils” – has been rising up the agenda in recent years.

It’s already being felt: A report by rating agency AM Best in August suggested the hard (higher prices) reinsurance market was likely to persist longer than in previous market cycles in part because of losses from secondary perils.

“Every year since 2017 (except 2019) has generated insured losses in excess of US$100 billion. Despite no major hurricanes in 2023, natural catastrophe losses totalled an estimated US$108 billion,” the AM Best report noted. This, in turn, is likely to feed into the primary insurance market, where pharma businesses buy, resulting in higher premiums or more stringent conditions on them.

Fortunately, there are things businesses can do to limit any increases in premiums and make themselves a more attractive risk for insurers. One way to do that is to show insurers you understand the risk and help them to do so, too.

Unfortunately, in many cases, the technology and processes pharma businesses rely on to evaluate their risk doesn’t help. Many risk assessment tools suffer from inadequately specific mapping, so they can’t accurately account for the flooding that can cause significant damage with even low-category hurricanes, for example.

Moreover, when evaluating the level of risk, tools are often backwards looking: Forecasting the chance of extreme weather in a region by reference to historical incidents and losses. But the whole point of climate change is that the old rules don’t apply.

SCAIR®: Climate-ready value at risk calculations

SCAIR® addresses both these issues by using Location Risk Intelligence, reinsurer Munich Re technology for natural catastrophe risks. This provides detailed, location-specific mapping of weather risks so that businesses and their insurers can have confidence in a plant’s exposure to flooding and other risks. It also draws on Munich Re’s climate risk modelling experts’ predictions of how climate change will impact each location.

Integrating these insights within SCAIR® enables pharma businesses to develop value-at-risk calculations – that can inform decisions for today and the long term.

These technological tools provide businesses with visibly of their supply chain risk that they can use to make a compelling case to insurers – and help satisfy regulators as well.

Moreover, because SCAIR® focuses on the value at risk – the real potential impact on the business of any disruption – it can help direct investment in mitigation efforts to where they will be most effective in reducing financial exposures. It can even help pharma manufacturers respond more quickly if the worst does happen, limiting the disruption an incident causes.

To find out how our supply chain risk management software and consultancy can help you and your insurers manage the risks of a changing climate, get in touch today.

Ten Supply Chain Risk Mitigation Strategies in Pharma

In our second piece looking at tackling drug shortages, we examine common supplier risk mitigation strategies.

The sources of pharma supply chain risk are varied and ever-changing. As we discussed recently, disruptions can result from anything from conflict to climate change. In most cases, businesses can do little to address the cause; they can only mitigate the consequences.

Partly because of the range of risks, strategies to mitigate them are just as diverse. But it’s not simply the variety of potential causes requiring different responses. It is, first, that in many cases no single strategy can deliver the resilience required; and, second, that, organisations facing the same event, can see very different disruptions to their business. The vulnerabilities of each supply chain and the potential impact of interruptions are unique.

Given the range of risks and difficulty calculating the probability of disruptions, it is the impact – the real-world value at risk – that must determine the appropriate response, both in terms of the nature and extent of mitigation efforts. Here, then, are ten to consider.

1. Map and assess

This is not so much a mitigation measure as the foundation on which all mitigation must be based. Just as you cannot manage what you can’t measure, you cannot mitigate what you can’t map.

Improving transparency in the supply chain can quickly reveal potential vulnerabilities. Crucially, it can also show where there are concentrations of risk, with dependencies on multiple suppliers concentrated in a particular region, for example. Governments increasingly recognise the importance of transparency, too, as is reflected in legislative proposals such as the MAPS (Mapping America’s Pharmaceutical Supply) Act in the US and increasing discussion in the UK and Europe.

Regardless of regulatory pressure, however, visibility of the supply chain is the prerequisite for effective risk management. And it is eminently achievable with solutions such as SCAIR® available to help map suppliers and identify dependencies and choke points.

2. Monitor

The work is never done. Risk mitigation is an ongoing process and requires continual monitoring. There are multiple moving parts.

First, changes in the supply chain naturally occur as businesses go bust or merge and new threats, risks and vulnerabilities evolve. Supply chain maps and plans must remain current. Second, in a crisis, early warning and detection of disruption can significantly enhance responses, enabling businesses to secure alternative suppliers or services to restore production before those suppliers are overwhelmed by demand from competitors.

Again, supply chain monitoring is not a mitigation measure in itself but supports timely and appropriate action to prevent and alleviate disruptions.

And, again, SCAIR® makes this possible by, for instance, interfacing with Location Risk Intelligence, reinsurer Munich Re’s solution for assessing risks from natural hazards and climate change. It enables users to identify in near real-time where natural disasters impact their supply chain and benefit from robust, location-specific climate change predictions to help direct forward-looking investments in mitigation.

3. Broadening the supply base: The more the merrier

When moving from monitoring to mitigation measures, increasing the number of suppliers for critical ingredients or products is among the most obvious strategies. If one source is disrupted, they can simply turn to another. But it is, of course, not so simple, and the complications underline the importance of the previous steps.

First, the ability to map the supply chain and bring true transparency to its vulnerabilities will enable businesses to avoid the illusion of diversity: Where alternative suppliers do little to boost resilience because they are exposed to the same risks of disruption as existing suppliers. That is most likely to occur where the new business is located in the same region as existing suppliers and subject to the same weather, regulatory and geopolitical risks.

Second, even with alternative suppliers in place, a rapid response to disruptions can be essential to secure increased orders if a disruption also affects competitors’ supplies. Monitoring enables this.

Finally, the process of finding, validating and approving a new supplier can be time-consuming and costly. Consequently, as with all mitigation measures, it is important to prioritise the critical (but not necessarily costly) supplies essential for high-value products.

4. Quality and quantity: Removing the weak links

Expanding the supply base can improve resilience, but so can cutting out the dead wood. Improved visibility of the supply chain enables businesses to identify recurring issues with suppliers and more closely scrutinise their critical supplies for high-value products.

Where that scrutiny or repeated problems provide cause for concern, businesses can act to not simply identify potential alternative sources but replace unreliable suppliers with these. Again, a value-at-risk approach will inform them where the expense and trouble of doing so is justified.

5. Safety and buffer stock

Sometimes, just in time just isn’t enough. As we explored last month, the rise of just-in-time (JIT) manufacturing has always been, at best, a mixed blessing for pharma. A strategy to cut working capital developed in automotive businesses where suppliers and the assembly plants were relatively close is arguably less suitable for Western pharma businesses relying on China and India for their active ingredients.

Furthermore, as already noted, switching to alternative suppliers may be relatively simple for some manufacturers. In life sciences, by contrast, regulatory and safety issues can require lengthy qualification and process revalidations.

The accounting and business benefits of JIT mean its principles will always have an influence in pharma. Storage costs, particularly for supplies requiring careful control of temperature and humidity, are not negligible. In some cases, long-term storage is not even practical. Nevertheless, where it is, and where the value of end goods supports it, maintaining an extra stock of critical supplies remains a crucial bulwark against disruption.

6. Nearshoring

An obvious answer to some of the challenges of just-in-time production is to bring production closer to home. It’s been an essential element of government thoughts on boosting the resilience of critical drug supplies since the pandemic. Expanding onshore and nearshore production was among the strategies proposed early in the Biden presidency in its 100-day supply chain review report in 2021.

It might be an obvious answer, but it’s not a simple one. There is a reason that about 80% of active pharmaceutical ingredients are produced abroad in countries such as China and India: Cost. As we’ve discussed before, the case for onshoring is complicated by the costs of setting up and running domestic production facilities, particularly for low-margin, generic drugs.

Moreover, while one key public policy priority is ensuring the continuous supply of critical drugs, another is controlling their costs. Those two priorities can conflict.

7. Insurance: Cover for the unavoidable

Not all disruptions can be successfully mitigated. Losses occur, and that should be where insurance steps in.

In this respect, SCAIR®’s exposure assessment and Natural Catastrophe Monitor tools have a double use. First, they enable businesses to assess the potential impact of catastrophic events and respond more rapidly and effectively where they occur, potentially limiting losses. Second, they provide location-specific visibility of exposures and the value at risk to help simplify the task of calculating insurance coverage requirements.

The importance of such tools is likely to grow as the effects of climate change (already being felt in rising losses from “secondary perils”) grow. Here tools such as Location Risk Intelligence can help businesses not just ensure they have adequate business interruption cover today, but also plan for the future by showing how climate change could affect their critical suppliers in years to come.

8. Compliance strategies

Increasing risks from climate change have prompted regulatory requirements for large businesses to report risks to their supply chains from extreme weather. For many, this reporting is likely to be fairly basic – estimating losses from revenue dependency, for example, and using historical data for locations to assess risks (failing to account for the changing climate).

The tools mentioned above, however, provide an opportunity to make this more than a box-ticking exercise. Instead, it can be an exercise that brings value and true insight for risk mitigation efforts. With SCAIR®, users can assess contemporary climate threats, factors in mitigating actions, and calculate a robust value-at-risk assessment.

Since businesses have to do the exercise anyway, they may as well make it count.

9. Reducing dependencies

This entry is perhaps a bit of a cheat, because reducing dependencies is the heart of some of the steps above, such as expanding the supply base and removing weak links.

However, a benefit of the compliance process outlined above is that it enables firms to draw up a list of their most vulnerable manufacturing locations, taking account of the concentration of risk in locations – according to the value-at-risk.

With that information, they can examine solutions to reduce dependencies on these suppliers. That may be through diversifying or finding alternative suppliers, changing ingredients, or even diversifying their business and building up alternative revenue streams where the risks to a product’s supply can’t be sufficiently mitigated.

10. Due Diligence

Finally, it’s vital to remember that supply chain risk management is a dynamic process. Company events and the passage of time can introduce new risks. Mergers and acquisitions are just among the most visible and increasingly frequent examples.

Due diligence is vital to avoid issues, particularly when it comes to the regulatory risks that are so frequently behind supply disruptions in pharma. Failure to recognise and address legacy issues from acquisitions can lead to problems dragging on for years. As with so much when it comes to supply chain risk in life sciences, a stitch in time saves nine.

Ten Sources of Pharma Supply Chain Risk

Drug shortages are at record highs but what are the factors driving that? In the first of two blogs examining the issue, we look at ten common drivers of pharma supply chain risk, before exploring top strategies for increased supply chain resilience.

No matter where you look, drug shortages are worse than ever. In the US, the American Society of Health-System Pharmacists (ASHP) reported 323 active medication shortages in the first three months of 2024 – the highest since it started tracking in 2001. That includes 48 new shortages already in the first quarter of 2024 – against 156 in total for the entire year in 2023.

Chemotherapy drugs were among the top five types seeing shortages, according to the University of Utah Drug Information Service. Basic and life-saving products in short supply included oxytocin, Rho(D) immune globulin, standard-of-care chemotherapy, pain, sedation, and ADHD medications.

“All drug classes are vulnerable to shortage,” ASHP CEO Dr Paul Abramowitz told reporters. "Some of the most worrying shortages involve generic sterile injectable medications, including cancer chemotherapy drugs and emergency medications stored in hospital crash carts and procedural areas.”

It’s a similar story in the UK, with the chief executive of Community Pharmacy England saying the situation is “beyond critical”. Its survey found 79% of pharmacy staff saying that medicine shortages were putting patient health at risk. In Europe, meanwhile, said Janet Morrison, national pharmacy bodies across 26 European countries (all those participating in the PGEU survey) reported shortages in 2022 and 2023.

But what’s driving that? The answer is: No one thing. Pharma businesses have long faced a ramping up of risk to their supply chains due to everything from operating models to trade wars and weather. From 2000 to 2018, there was a 20-fold increase in recorded drug shortages in Europe. Here are ten factors that have ramped up risk for pharma supply chains.

1. Offshoring and Consolidation

This could otherwise be termed the quest for cost reduction. Looking for cheap manufacturing has resulted in about 80% of active pharmaceutical ingredients being produced abroad, mostly in China and India. That’s added to supply chain complexity and introduced or added to a wide range of the other risks listed below, from trade wars to weather risks and quality concerns.

Put simply, as we’ve noted before, cutting costs comes at a price. It means an increasing reliance, particularly for generics, on a small group of offshore suppliers in countries vulnerable to wide range of risks that are better but more expensively manged domestically.

2. Just in Time for Disruption

Closely related to and exacerbating the risks from offshoring is the move toward just-in-time (JiT) manufacturing. Over the last few decades, life sciences have increasingly adopted Toyota’s pioneering approach: “Making only what is needed, only when it is needed, and only in the amount that is needed.”

For life sciences, however, it works better in theory than practice. The concept of “need” is arguably different when it comes to cancer drugs than it is for headlights. Regulatory requirements making it difficult to simply switch suppliers in the event of a disruption, geographically dispersed supply chains, and difficulties anticipating demand surges (such as during Covid) also arguably made JiT less suitable for life sciences. Again, a cost-cutting measure exacerbated vulnerabilities to many existing supply chain risks.

3. Regulatory Risks

As stated, part of the reason for arguing just-in-time manufacturing is a poor fit for pharma and life sciences are the regulatory requirements. Apart from anything else, these require lengthy qualification or process revalidations for critical ingredients or components. Just swapping suppliers is often not that simple.

Regulatory action is also often behind disruptions to supply. A study led by Intersys with the Institute for Manufacturing at the University of Cambridge some years ago found that more than two thirds of life sciences shortages (69%) were linked to Official Action Indicated notices issued by the US FDA, with a higher prevalence of issues in China and India than in the US and Europe.

Nor is it just regulatory issues around quality and product safety that life sciences businesses must contend with. They also face all the other regulatory pressures and risks to supply chains common across industries, from employee safety to modern slavery.

4. Mergers and Acquisitions

Even if businesses don’t already have such risks in their supply chains, or have a handle on them, they can inherit them. Acquisitions can see companies take on the problems of their purchases that can dog them for months or years – one reason why due diligence is so important.

Even if they’re not involved themselves, M&A activity between suppliers can concentrate supply chain risks. Previously distinct suppliers can come to share common risk factors. It’s been an increasing risk in recent years, with the number of deals in the life sciences sector increasing by 13% between 2011 and 2021 and the rate doubling between 2019 and 2021, according to McKinsey. And while the global M&A market slowed in 2022 and 2023, life sciences bucked the trend: 2023 saw deal values up almost a quarter.

Successful M&A deals are notoriously difficult in the sector – as the McKinsey article notes:

“Culture looms especially large in pharmaceutical deals because so many deals involve large companies acquiring small companies. Many small companies owe much of their success to their distinctive culture and ways of working. The acquirer is buying not only the target’s tangible assets, but also the talent and culture that nurture the company’s innovation engine and entrepreneurial spirit.”

5. Cyber Risks

Cyber and data protection risks are also among the regulatory risks common across industries. They are, however, particularly acute for pharma and life sciences businesses. The data managed at points in the supply chain – patient data and medical information – could not be more sensitive, or the risks of disruption or intrusion from bad actors – to hospital systems or connected medical devices – more serious.

“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,” the US Health and Human Services deputy secretary has said.

As we’ve noted previously, the risks continue to increase as attacks become more frequent and sophisticated, and an explosion of data from sensors, cloud computing and other devices expands potential points of vulnerability.

6. Weather Risks and Climate Change

Acts of God will always be a risk, but offshoring to regions at greater risk of and less resilient to extreme weather events has exacerbated the life science industry’s exposure. Even while manufacturing relatively close to home, however, the sector can be exposed to a concentration of manufacturing in particular regions. The reliance on hurricane-prone Puerto Rico as a key production centre for pharma manufacturers is an obvious and old example.

Climate change and increasing evidence of more frequent extreme weather events continue to bring these risks to the fore for pharma – whether through disruption to their own or suppliers’ operations, rising insurance premiums as underwriters become increasingly wary of the risk, or regulatory requirements to report on the impact of climate change on their supply chains.

7. Transport and Logistics

Transport risk is a function of the global supply chains that have come to dominate pharma industry. The greater distances involved inevitably introduce increased uncertainty and risk to the supply chain.

It’s not just major events like the Suez Canal blockage in 2021 but the attritional impacts of less significant delays, damage, and theft that can add to uncertainty and costs. Temperature requirements for many pharmaceutical goods add to the challenge. While connected sensors, devices and systems on the Internet of things have been valuable aids to managing cold chain distribution, the scope for disruption remains.

8. Demand Shocks

It’s not just supplies that determine shortages. As with disruption to supply chains, rapid increases in demand can result in shortfalls.

There was plenty of evidence during Covid, when analysis of FDA data from early 2020 with SCAIR® showed that demand surges caused the majority of shortages. It doesn’t take a pandemic to bring it about, either. Take the export ban on hormone replacement therapy drugs in October 2019, introduced in response to shortages. As Jansen, one of the manufacturers, offered at the time, it wasn’t supply disruptions causing the problem but simply an “unprecedented increase in demand.”

Part of the difficulty in predicting such surges is that many drugs serve as alternatives to others – as in the Jansen case. A supply chain disruption to one alternative, then, can rapidly lead to shortages in another.

9. Trade Wars and Real Wars - Geopolitical Risks

The ongoing conflict in Ukraine (which few predicted) is a powerful reminder of the geopolitical uncertainty facing global supply chains. But problems can occur long before anyone picks up arms.

Before Ukraine and a bigger direct risk to many pharma supply chains, the US-China trade war was the dominant geopolitical issue preoccupying many in previous years. With Donald Trump again the presumptive nominee of the Republican Party for the 2024 election, it’s an issue that could soon return to the fore.

Along with the pandemic and global shipping disruption, such risks have been a driver for increased government efforts and demands to protect critical supply chains. As the UK government’s strategy noted, “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.”

10. Quality, Counterfeiting, Fire, Flood, Theft and Everything Else

The bucket for all the rest of the risks facing pharma supply chains is big. Pharma and life sciences face the risks of supply chain disruption common across industries – and a few of their own.

Being aware of the range of risks is essential to mitigating and managing them. However, calculating the likelihood of disruption from any, given the unpredictability and complexity of the issues, is near impossible. That’s why SCAIR® focuses on impact rather than probability. Companies can’t necessarily predict what might happen, but they can quantify the potential impact of supply chain disruptions – regardless of their source.

Calling Time on Just in Time: New Answers to Efficiency and Resilience in Life Sciences Manufacturing

Like many disasters, just-in-time (JIT) manufacturing started as a good idea. Pioneered by the car manufacturers, notably Japan’s Toyota, in the 1950s and 1960s, aligning production directly with demand in terms of orders and supplies with the consequent production schedules. As Toyota’s handbook explained: “Making only what is needed, only when it is needed, and only in the amount that is needed.”

It brought significant efficiencies to the industry, eliminating waste from overproduction, transport and excess inventory, among other areas. Little wonder, then, that it has been widely adopted across other industries, from retail to technology. Apple’s Tim Cook has been among its most evangelical supporters, describing inventory as “fundamentally evil”. Inevitably, it was also widely adopted in pharmaceuticals.

But while accountants seized on the JIT concept because it meant less working capital on the books (they love stock reduction), something got lost in translation. Two things specifically.

First, JIT worked for the auto industry because suppliers to the continuous production lines were close to the main assembly plants. There was usually not much that could go wrong between supplier and manufacturer. Second, JIT works better for industries where, if problems do arise, it’s easy to switch to alternative (also probably local) suppliers if one does not deliver.

Neither was necessarily true for many businesses and industries that eagerly took it up. JIT came to be applied regardless of the geographic relationship between site and supplier; production and inventory management was applied to supply chains that were not just national but international. Moreover, it was applied in industries like pharma, where manufacturers couldn’t simply switch to another supplier in case of a delivery failure; suppliers of quality critical components need to undergo lengthy qualification or process revalidations, making swapping suppliers much harder.

Both factors make it much harder to meet customer demand without significant stock inventories to cover delays in sourcing and securing a new supply.

Time’s Up for Pharma JIT

That was graphically illustrated during the Covid crisis.

The crisis facing pharma supply chains was, in fact, two-fold: Massive disruptions to logistics, and especially cross-border supplies, due to restrictions and worker shortages, which were common to all industries; and, more pertinently for pharma specifically, a massive surge in demand – particularly for certain drugs and components and materials needed by vaccine manufacturers, such as syringes, stoppers, vials, hygienic filters and processing equipment, with a knock-on effect for the wider pharma industry.

It was the perfect storm, and while JIT cannot be solely blamed for the shortages seen, given the scale of the crisis, it undoubtedly made it worse in many cases.

Moreover, it’s not a crisis we can confidently predict will not happen again. For a start, supply chain disruptions persisted long after the worst of the pandemic had passed. The war in Ukraine should tell us that it’s never possible to be sure that international supply chains won’t face sudden and significant derailment. And demand can quickly again become volatile: If not a pandemic, then perhaps just a very bad flu season. After all, supply chain problems did not start with the pandemic.

It's not surprising then that even relatively early in the pandemic, some were asking whether JIT was finished. Moreover, at that point, it was assumed it would simply be for industry to decide; that’s unlikely to be entirely true for pharma, where it’s increasingly clear governments intend to have a say in ensuring the supply of critical drugs.

Even without regulatory pressure outside pharma, many businesses are voting with their feet. As the FT has put it, companies are shifting from just-in-time to “just in case” when it comes to managing stock.

Long Live Low Inventories

In manufacturing more broadly, it’s unlikely that JIT has had its day. Instead, for many, it might go back to first principles. A significant consequence of the disruption seen across industries is an increase in onshoring. A recent survey of British manufacturers by industry body Make UK, meanwhile, shows more than a third (35%) planning to switch to home-based rather than international suppliers.

In bringing suppliers in closer proximity to manufacturing sites, some manufacturers will be able to save JIT, which was always a legitimate efficiency drive in the right circumstances.

For many pharma manufacturers, this is unlikely to be a solution, however. For onshoring to really work and maintain supply chain efficiencies, the supply base would need to relocate, along with the main manufacturing. As we’ve discussed before, that may be possible for new in-patent products and high-value materials and components. They already have the margins to support investment in stock, secondary suppliers and other mitigations that ensure high-quality, resilient supply chains. That could likewise support investments to bring supplies and manufacturing together.

The dependence on offshore locations for cheaper components and active pharmaceutical ingredients for generics did not happen by accident, however. The cost-benefit analysis for tight-margin products in most cases still argues for offshoring. While there have been exceptions, a wholesale move to onshore APIs dominated by China and India looks unlikely. Of course, government intervention, through regulation or subsidy, could change that, but we’ve yet to see it.

But if JIT as a production process might have been fatally undermined by the last couple of years, its drivers in terms of cutting costs remain as critical as ever – and particularly for low-margin products. The need for resilience doesn’t displace the need for efficiency. For a sustainable future, pharma manufacturers need both.

The Best of Both Worlds? Supply Chain Resilience and Efficiency

The key will be to improve supply chains’ visibility and manage them with more granularity. It’s notable that the recent US Department of Health and Human Services (HHS) report on building supply chain resiliency for essential medicines talks of onshoring but also emphasises supply chain transparency.

That’s far from being achieved in many supply chains, given their complexity. A McKinsey survey of pharma businesses and other selected industries in 2020 showed nearly half of respondents citing sole sourcing of inputs as a critical vulnerability, while a quarter pointed to a lack of visibility into supplier risks.

Solutions like SCAIR® are critical to overcoming these obstacles and enabling pharma businesses to ensure that they’re holding stock but doing so efficiently – in the right place in the supply chain to most effectively mitigate potential shocks, rather than across the board. It enables manufacturers to identify their critical, single source, long lead time suppliers effectively. They can then hold the appropriate stock to protect them while taking a leaner approach for easily substituted supplies.

This hybrid approach combines just in time and just in case inventory levels at different points in the supply chain. It provides the resilience businesses need to stand up to sudden demand surges or supply chain shocks, when they inevitably arise; and the efficiency to ensure that the business is still around to see them.

Good Business Insurance Exposure Management Means Quantifying Profit at Risk

The pandemic has brought business interruption (BI) risk into sharp focus for companies with complex supply chains as well as their insurers. However, many firms still struggle to accurately quantify which supply points and exposures pose the biggest threats to their profits.

The wave of insolvencies and production shutdowns caused by recent global supply chain disruption has highlighted the importance of knowing where your exposures lie and having agile business continuity plans in place – particularly in complex manufacturing segments whose supply chains contain multiple suppliers and interdependencies. Unfortunately, these plans are often misguided as they are based on the wrong type of information.

Focus on Profit at Risk, Not Gross Spend

When prioritising where to focus risk management efforts within their supply chains, companies often look first at the gross sum they spend with each supplier. However, this ‘risk by spend’ approach paints a distorted picture of the company’s risk profile as the gross cost of a component tells you little about its impact on business continuity.

The figures that really matter are the revenue or gross profit at risk if any given supply point fails. These are the numbers that tell how much money your company stands to lose every day, week or month you are unable to supply your customers because of being without any given component.

These are the numbers that define success and failure as a business – and guide you on where most investment should be spent mitigating risk and putting business continuity plans in place.

At present, SCAIR is the only Enterprise Grade supply chain risk assessment tool that calculates value at risk.

Holistic Risk Assessment

To accurately quantify supply chain exposure, several other factors must also be taken into consideration, such as the risk mitigation actions the company has in place. If a contract is already in place with an alternative supplier, for example, this will have a material impact on mitigating the real-world profit exposure and should be factored into calculations.

So should the projected recovery time of specific facility types, the cost and time of onboarding alternative suppliers or building new facilities if supply points fail. It is vital to extend the assessment to tier two suppliers or beyond to root out interdependencies lurking further up the supply chain.

Testing exposures against multiple scenarios is also key. How would an earthquake in Japan affect production? Are there multiple suppliers located in the same Florida floodplain or Californian wildfire zone? How would a regulatory shutdown, cyber-attack or insolvency of one or more suppliers disrupt your organisation – and at what cost?

Failing to assess risk in this level of detail makes it impossible to accurately quantify business interruption exposures across a highly complex supply chain. As well as exposing companies to potentially devastating – and unexpected – financial shocks, this can also result in misplaced allocation of effort and resources, as well as over- or underinsurance.

For insurers, many of whom have been hit with heavy BI losses from the pandemic, it is prudent to ensure clients accurately quantify their BI exposures from both an underwriting and loss mitigation perspective. Scenario testing across portfolios of insured risks can also play a key role in helping insurers manage their own underwriting exposures, rooting out hidden interdependencies and unwanted risk accumulation within their portfolios.

Armed with this information, insurers can more accurately price risk, meaning clients are charged premiums that fairly represent their risk. Overlaying company non-compliance data across the portfolio can also help insurers in the client due diligence process.

Say Goodbye to Spreadsheets

As well as getting the methodology right, companies also need to be using the right infrastructure for their risk assessments. Most firms – including even large brokers with market-leading business interruption assessment capabilities – still quantify their exposures on spreadsheets. This comes with a variety of risks and limitations. While spreadsheets can be easily adapted to suit the characteristics of any given company or supply chain, they become increasingly unfit for purpose as organisational and supply chain complexity increases.

Spreadsheets are easily broken, vulnerable to human error and lack transparency and flexibility. One of the biggest risks is that risk accumulations can go unnoticed. For example, a supplier may have acquired another and although they may operate under two names, they are in fact the same organisation, with many shared risks. If address and supplier name identification is not automated and verified this is easy to miss.

Spreadsheets also do not integrate easily with third-party datasets, models and overlays and require manual management, making it difficult for the company to view their exposures in real-time or slice and dice data for analysis or visualisation purpose, limiting its agility.

Leading organisations are moving away from spreadsheets for these reasons in favour of tools that enable them to centrally manage, analyse and visualise their evolving supply chains while, crucially, more accurately calculating their exposures.

With supply chains under exceptional pressure, these firms are at a distinct competitive advantage and while the threat to those left behind continues to grow.

SCAIR's supply chain risk assessment and management tools can help organisations identify, track and manage supply chain exposures.