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.

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.

Closer to home there's the news that 2023's severe storms in the UK created a £575mn bill for home insurers.

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.

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 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.

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.

Technology Will Transform US Pharma Supply Chains: and Data and Analytics are Central to a Government Drive for Resilience

There seems little doubt that regulation is coming for the pharma industry’s supply chain. As previously discussed, the Department of Health and Human Services (HHS) Essential Medicines Supply Chain and Manufacturing Resilience Assessment published on May 23 stems from one of the early acts of the Biden-Harris administration. Indeed, the writing has been on the wall from the moment Covid struck and limited supplies of essential drugs globally – even if that was sometimes more of a product of soaring demand than disrupted supply.

In fact, the seeds of a broader, more interventionalist approach to critical supply chains predate even that. In the early weeks of Trump’s presidency, the US was already looking at a more protectionist future, with the head of the President’s National Trade Council outlining its intention to repatriate international supply chains.

“It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” the Financial Times reported him as saying.

“We need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.”

Given the shock to supply chains from Covid, it would be surprising if moves towards reshoring were not seeing a renewed sense of urgency – particularly of what it has determined are “critical goods, products, and services”, as Biden’s Executive Order 14017 puts it. That’s all the more so when 87 per cent of API facilities for the generic drugs (which represent 90 per cent of US prescriptions) are overseas.

Supply Chain Challenges

But if the HHS report is part of a longer-term move toward a more prescriptive approach to supply chain resiliency, that doesn’t mean it’s nothing new. What it gives us is significant on what the US government sees as the key challenges and potential solutions to the resiliency of the pharma supply chains. It’s worth taking these in turn.

In terms of the challenges, it identifies at least six:

What’s noticeable about this list – and explicit elsewhere in the report – is that while some issues may be for the government, much is going to be down to the private sector. Most obviously, regulatory matters and perhaps STEM education might be primarily down to legislators (although even here, there will be a role for business). For much of the rest, businesses have a significant role to play – and, as we’ve said, are increasingly likely to have regulatory obligations.

Supply Chain Risk Assesment Tools Boost Visibilty

That’s perhaps particularly true of the first solution strategy the report puts forward: increased supply chain coordination, security and transparency. 

The benefits of this are apparent. As it states, “Improving supply chain visibility will offer a greater ability to anticipate, prioritize, and respond to critical issues, demands, and potential disruptions.”

It says this can be achieved in several ways. One is “Expanding [the] use of data, analytics, and predictive tools to mitigate and manage risk.”

It goes on to suggest several strategies to pursue, with, again, a mix of public and private sector efforts involved. These include improving data sharing and standardisation, strengthening public-private collaboration and coordination and establishing a more comprehensive “centralised control tower platform”, including developing a national critical drug tracking, monitoring and alert system. It also emphasises the importance of physical and cyber security throughout the supply chain.

Quite a number of these plans – particularly those involving the public sector will take time. Strikingly, though, some are readily achievable in the near term. It will probably take time to create the shared data infrastructure for government agencies and supply chain stakeholders that the report suggests.

However, the private sector can already start to gather that data and – at least for their own business, use data analytics to identify the key risks and vulnerabilities in their supply chains.

Solutions like SCAIR® already exist to map, monitor, and analyse critical supply points and relationships. This can help create more resilient supply chains and better business decisions around mitigation and contingency plans.

The HSS report makes it clear this is the direction of travel in efforts to boost pharma supply chain resilience. The winners, as the US and other countries reshape their critical supply chains, will be those that start on the journey now.

Sharing Insights on Supply Chain Risk: Intersys at BCI World 2021 Virtual Conference

What has the pandemic taught us about our supply chains? It's a question that was top of the agenda at the recently held BCI World 2021 Virtual Conference - one of the largest Business Continuity and Resilience events in the world. It was also the perfect platform for Intersys Risk Director Catherine Geyman to share her more than two decades' worth of expertise in supply chain risk management.

Catherine led a workshop on The Appetite for Risk in the Life Sciences Industry. The interactive session shed light on pressing issues such as the cause of recent drug shortages during the pandemic as well as generic trends to have influenced supply chain vulnerability over the last two decades. There were deeper insights (driven by SCAIR®) into what steps organisations can take to strengthen supply chains, and what lessons other industries can learn from the rather complex nature of life sciences supply chains. Catherine Geyman, Director Intersys Risk Ltd said:

The workshop provided an opportunity to share the impact of the pandemic on life sciences supply chains, and also to reflect on some of the pre-existing drug shortage issues such as the pricing pressures on generic drugs. It was also a chance to contemplate on the fact that the life sciences industry really is one of extremes. At one end of the spectrum there are the new biologics, treatments that target small patient groups with rare diseases and are unfortunately unaffordable to the individual. On the other side of the spectrum you have the older, generic (but none the less critical) drugs that are priced so low that not enough manufacturers are encouraged to make them, meaning that any problem in the supply chain only gets amplified and impacts the patient."

We hope that such discussions and debates will go some way towards shaping priorities for the future.

More than Covid: Lessons for Supply Chain Resilience from 2020

Hard Truths from a Pandemic

Pharma and others in the life sciences shouldn’t let the lessons learned from the crisis go to waste. As we emerge on the other side, now is the time for a strategic review of supply chain vulnerabilities. Intersys Risk Director Catherine Geyman, takes stock of the situation. 

 It’s been an unprecedented year for life sciences. The pressure on both supply and demand as a result of the pandemic was unparalleled in modern times.

As Peter Ballard, Chair of the British Generic Manufacturers Association (BGMA) put it in the organisation’s review: “At the peak of the first wave in the UK, the pandemic derailed all sense of normality. It thrust healthcare and its supply chains into the forefront of public consciousness as the NHS staff struggled to keep pace with patient demand with the resultant knock-on effect to the medical supply chain.”

It was the perfect storm: huge increases in demand which could not have been planned for by the pre-covid supply base; and massive disruption to supply chains as a result of staff absences and government constraints.

In the UK, generic medicines make up more than three-quarters of all prescribed drugs. According to the BGMA, which represents UK-based generics manufacturers and suppliers, demand for some drugs was five to ten times higher than usual. At the same time, an export ban on active pharmaceutical ingredients (APIs) from India – accounting for about half of APIs used by British generic medicines – came in, in March. BGMA members reported a 24% reduction in supply from the country. Companies also saw a decline of over a fifth in finished products from India.

And it wasn’t just the UK, of course. We’ve looked at shortages in the US earlier in the year. There, our analysis showed that, with a few exceptions, shortages were mainly demand-driven, as the virus saw a clamour to get hold of certain anti-virals, anaesthetics and sedatives. Companies reporting new drug shortages in the US rose from 19 in January to 71 by April. Nor was it just a life sciences issues, even if the industry was hard hit. As the Harvard Business Review recently noted, “The supply shock that started in China in February and the demand shock that followed as the global economy shut down exposed vulnerabilities in the production strategies and supply chains of firms just about everywhere.”

With vaccines developed, this might be the beginning of the end for Covid. For those in pharma and the broader life sciences, though, it should just be the beginning of a strategic review of  the impacts on their supply chains and what we can do differently in future to minimise disruption.

To quote the BGMA again: “COVID-19 has presented unprecedented challenges, but it would be unforgivable not to learn from those and apply that experience to the future.”

It’s in this spirit that I recently held a webinar on Understanding Risk in Pharmaceutical Supply Chains.


Learning the lessons?

Painkiller tablets and 'out of stock' message


As that webinar underlines, there are two reasons why we need to take this opportunity to look back before going forward. First, because it might be unwise even now to think the challenges the virus presents are at an end. The vaccine roll out will take time in the UK and elsewhere;  the Pfizer supply chains themselves are already facing disruptions due to out of specification raw materials. Many still fear a third wave of the virus after Christmas. In other words, there are still plenty of opportunities to surprise and disrupt supply chains.

Even if we have managed to put this crisis behind us, the pandemic has shown what is possible. It could happen again. Businesses must prepare for the next crisis, not the last one.

It doesn’t take a worldwide catastrophe to cause supply chain disruptions, however. Well before this spring, drug shortages were again making themselves felt.

Unsurprisingly, there are several reasons for shortages. In some cases, it is other significant events; it’s worth remembering that before Covid the critical concern for the UK was Brexit, something of which we may shortly be reminded (particularly since buffer stocks put in place for Brexit have been used during the pandemic). US supply lines, meanwhile, have been repeatedly hit in recent years by hurricane activity in the likes of Puerto Rico.

But in addition to these significant disruptions to supply, there are a whole host of other, lower-impact, higher frequency events and risks that, if not managed, can escalate over time and eventually cause supply interruptions. They include failures to meet on-time, in-full (OTIF) targets as a result of delivery delays or batches not released; process variability, quality deviations or unreliable manufacturing or API plants; lower profile supply chain disruptions – the result of critical material shortages, facility damage or transit failures; and, finally, product shortages as a result of recalls or other regulatory intervention.

The majority of these events normally do not reach public scrutiny as they are usually handled and mitigated by having safety stock in place. If problems persist, however, that reserve can be eroded and eventually exhausted, resulting in drug shortages.

The critical point is that Covid did not always cause the weaknesses we’ve seen in supply chains. It often just revealed them.


Long-term fragility

To understand why, and how drug shortages have re-emerged to challenge the industry, it’s necessary to recognise the long-term trends that have increased companies’ exposure to supply chain disruptions. Three related themes are essential.

The first is the accountant’s drive to make supply chains more efficient that has seen businesses cut back on stock and redeploy backup facilities to productive use. Mergers and acquisitions resulting from the same push for efficiency, meanwhile, have reduced the number of suppliers for crucial APIs, eliminating redundancy in the supply chain. This a relatively simple point: By reducing both the range of alternative providers and internal production capability and stock levels, we’ve inevitably reduced the resilience of supply.

The second is again the result of the determination to cut costs: Outsourcing to countries with lower labour costs, which has focussed industry dependencies on fewer API or contract manufacturers. As noted above, this has resulted in businesses heavily dependent on India, and to a lesser extent China for APIs. Disruption in the event of an export ban or similar block on supplies will almost inevitably be felt downstream. Indeed, this issue rapidly came to the fore right from the start of the pandemic.

The industry’s decision to shift API production to Asia has also increased drug supplies’ reliance on jurisdictions with less mature regulatory systems and, hence, potentially lower standards. There is no escaping that the regulatory track record of China and India is demonstrably inferior to that of the UK, Europe or the US.

In the image below, the colour coding shows the frequency of OAIs (Official Action Indicated notices) issued to facilities by the FDA as a percentage of the number of inspections conducted. In the US and Europe, the likelihood of an OAI was usually below five or six per cent (green and light green). In China and India, the rate was more than eight per cent (red).

Source: research by Intersys Ltd as part of the ReMediES project.

FDA inspection map

That’s a particular issue because while manufacturing of APIs has moved to jurisdictions with arguably lower standards, regulatory requirements have, if anything, moved the other way.

In practice, this can result in disruptions to the supply chain in one of two ways. First, where a compliance failure occurs, the OAI often results in prolonged plant shutdowns for remediation. Second, remediations that result in major changes or new suppliers will take time to be approved by the regulators.

It’s an irony that the regulatory measures in place to protect patients, can count against the patient if something goes wrong in the supply chain and extensive regulatory re-approval is required for the solution to put it right. This is far from being a theoretical risk. An FDA report in 2019 showed that of 163 drugs that went into shortage from 2013 – 2017, 62% followed supply disruption associated with manufacturing or product quality problems. Moreover, there is an interplay between regulatory risks and the other vulnerabilities from long-term trends touched on above. As a result, certain types of drugs are particularly vulnerable to supply chain interruptions.

This is confirmed by both the FDA report and  a study led by Intersys with the Institute for Manufacturing at the University of Cambridge, part of a cross-industry collaboration project called ReMediES, which revealed that 69% of product shortages in 2018 followed OAIs issued to the company reporting the shortage. Both studies showed that the drugs most likely to be in shortage were generic injectables, which require rigorous manufacturing processes but do not provide much profit margin as a result of competition. (A BMGA study of 40 originator products to come off patent since 2014, shows sale prices fell by an average of 89%.) Older drugs with a median time since first approval of almost 35 years are also more to be in shortage.

Price competition for older generics makes investment in robust quality management systems difficult. Moreover, in the event of an interruption that causes the drug to become scarce, low prices and regulatory hurdles discourage new market entrants from correcting the situation.


Seeing is believing

There’s one final factor that explains the rising disruption to supply chains, and it’s an important one: The increasingly global nature of life sciences businesses and the complexity of their supply chains has decreased visibility and oversight of them. The result is that both the underlying vulnerabilities and interruptions to supply chains are more difficult to detect and address.

As my presentation outlined, the life sciences supply chain takes in a broad range of other industries. These also vary considerably, depending on whether we consider biologics, traditional pharmaceuticals or medical devices. These bring a range of second-tier suppliers and contract manufacturers into consideration. As a result, life sciences businesses can find themselves exposed to a range of risks to livestock, chemicals or engineered components businesses.

Trying to predict the full range of possible events that could impact these suppliers is arguably impossible. What businesses can do, however, is to identify the most critical suppliers, and determine the value at risk for the critical dependencies of key products.

Understanding where these vulnerabilities lie enables the business to focus on these so that impacts on them are identified and responded to more quickly. Quantifying the value at risk, meanwhile, allows proper evaluation of risk mitigation options through a cost-benefit analysis.

Crucially, neither require you to anticipate what event might cause the disruption – only the vulnerabilities and value at risk. That’s important because it’s what the last year has really shown us: That we need to be ready for anything.

For more on these issues and particularly how SCAIR can help with identifying mapping, quantifying and addressing critical exposures, watch the webinar for free here.


Catherine Geyman, Director, Intersys Risk Ltd

Head shot of Catherine Geyman, Director, Intersys Risk Ltd

Coronavirus Drug Shortages Highlight Pharma Supply Chain Dependency on China and India

Covid-19 threatens to cripple medicine supply lines bringing China, India dependency into sharp relief

Should pharma be panicking over the Coronavirus and Drug Shortages? Intersys Risk Director Catherine Geyman evaluates the tough choices facing pharma.

Chinese flag with lot of medical pills

The epidemic has raised criticisms of the dependence on overseas supplies for our medicines, in particular active pharmaceutical ingredients (APIs) and generics in the pharma industry. The Economist’s recent piece, for instance, suggested that prior to Covid-19, there was widespread complacency.

“Until about the third week of January, only a few pharmaceutical executives, drug-safety inspectors and dogged China hawks cared that a large share of the world’s supply of antibiotics depends on a handful of Chinese factories,” its article opened, before continuing in similar vein.

Nor is it just industry outsiders. This week, the chairman of India’s Pharmaceuticals Export Promotion Council of India (Pharmexcil) said Europe was panicking following its government’s decision to restrict exports of 26 APIs (mainly to protect domestic supplies): “[W]e control almost 26% of the European formulations in the generic space. So they are panicking,” said Dinesh Dua.

This is unfair, however – at least as far as the pharma industry goes (and for quite a few others). It is not just a “few” executives who have been concerned about the reliance on China and India for APIs. Many European and US pharma supply chain managers have worried about it for years.

Governments, too, have noted the reliance on China with concern. Last year, a hearing of the U.S.-China Economic And Security Review Commission in Congress considered this very issue. Senator James M. Talent provided a concise summary: “According to the Food and Drug Administration, 13.4 percent of U.S. drugs and biologic imports are from China, as well as 39.3 percent of medical device imports, making China one of America's top sources for medical products. These numbers understate significantly the true sourcing of health products in China because China is also the primary supplier of precursors for pharmaceutical companies in other countries such as India which, in turn, are major suppliers of finished product to the United States.”

Strikingly, the hearing also heard that the US considers this a national security issue.

“The growing reliance of the U.S. on foreign sources for critical defence related material is an issue that must be addressed at the national level,” Christopher Priest, Chief of Staff for the Defence Health Agency Operations Directorate, which oversees the medical needs of the US Army, Navy, and Air Force, told the hearing.

Ultimately only time will reveal the true impact of Covid-19 on global pharmaceutical supply. Most well managed biopharma companies will hold significant stocks (months) of API to ensure their patients are protected from this type of unpredictable event. However, there is also a large number of low cost generic drugs that simply do not have the margin to support significant stock holdings, and many companies producing the same generic drug may be dependent on a single source of API in India or China. The global drugs market was already in a precarious position with drug shortages, so this is simply going to exacerbate that situation.

Quantifying the value of stock in terms of continuity of supply and identifying critical supply dependencies are key drivers of interest in tools like SCAIR®. Companies are increasingly urged by their stakeholders to understand and map their dependencies and exposures, precisely because they have been concerned about how vulnerable they are to a disruption.

Probabilities and pandemics

Blood sample with respiratory coronavirus positive

SCAIR®’s approach is to focus on impact rather than probability to ensure the company has taken measures to protect itself against major supply chain interruptions, regardless of their source. It is a more manageable challenge than quantifying likelihoods or assessing probabilities, which is a difficult task.

This is not just because it is hard to predict outcomes (after all, who really knows how far and fast Coronavirus will spread and the impact it will have?). It is also because we often don't understand probabilities and misinterpret risk terminology.

In a recent discussion of Covid-19 and risk perception on Radio 4’s World at One, Cambridge professor and chair of the Winton Centre for Risk and Evidence Communication, David Spiegelhalter made the point that most people don’t understand the term “reasonable worst case scenario”. That is despite it being a key phrase used in contingency planning activities for the Coronavirus and much else. It’s often taken as meaning a likely outcome, rather than as what it is: a catastrophic but credible scenario. A similar misunderstanding could often be detected in reporting around the Yellowhammer Brexit contingency planning.

As one critic of the resulting “hysteria” put it at the time: “It is not a prediction but a worst case scenario, helping the government in its planning to mitigate the risks.”

Even if we understand the terms, though, our brains are not well suited to evaluating probabilities, as another academic on the Radio 4 discussion pointed out. The “probability neglect bias” makes us less focussed on probabilities and more on outcomes, explained Dr Barbara Fasolo from the LSE: it’s the reason we panic over unlikely disasters and also why we bother playing the lottery.

In controlled experiments this bias leads to seemingly irrational behaviour. For example, people do not differentiate between a one percent probability of getting a non-lethal but painful electric shock, and a 99 per cent probability. In fact, they are willing to pay the same amount of money to avoid either set of odds. In real life, as with the Coronavirus, though, the probabilities themselves are massively unclear, which only makes rational judgements harder.

Consequently, impact quantification for scenarios rather than probability assessment is usually more helpful. You can spend an awful lot of time and money trying to work out the likelihood of each  major interruption scenario, but that is usually wasted. It is much better to spend resource planning for and remediating the sources of risk that can do the most damage to your supply chains.

Hobson’s choice

Pharmaceutical industry worker operates tablet blister and cartoning packaging machine at factory

However, once the assessment is done, there remains the challenge of the lack of attractive alternatives.

As stated, the dependence on China is not a new concern for pharma. Coronavirus has just brought it into relief. Recently, we’ve had concerns around the potential impact of the US China trade war, for example. More longstanding are concerns about quality – and that applies more so, if anything, to India. An analysis last summer showed that, of the 75 warning letters sent by the US FDA to pharma manufacturers for violating safety or quality standards in the 20 months to August 2019, half were to companies in China or India. For non-compliance notices from the European Medicines Agency, meanwhile, the proportion was almost two thirds (64%).

So why haven’t US and European pharma businesses addressed the risk?

For two related reasons: first, because change is difficult and expensive. Once a company has tuned its process to and validated its use of a certain type of API from a particular source, it is costly to replace and revalidate the source. There is therefore an in built bias to stay with current suppliers.

Second, while change is costly, APIs and generics are cheap. As we’ve noted before, there’s little incentive for new players to enter the market – and certainly not in Western countries where labour is relatively expensive and overheads are high. Moreover, as The Economist piece correctly states, the rest of the world will have lost a lot of its expertise in making APIs, and it’s difficult to start back up. We go back to what the FDA has called a “broken marketplace”, with prices not rising despite shortages and production typically not increasing enough to restore supply to pre-shortage levels.

Pharma has long noted the risks of reliance on Chinese sources, but a cost-risk-benefit analysis has so far always come down in favour of the status quo – because it’s cheap.

One exception to this is Sanofi who recently announced the creation of a France-based offshoot that will produce APIs.  We’ll have to wait and see if other businesses will follow suit.

 No upside in Covid-19

So, will Coronavirus force pharma to rearrange their supply chains? We shouldn’t bet on it – at least in the short term.

In the long term, the rise of the Chinese middle class and increase in wages means that the future of cheap production in the country is uncertain. And, when it finally looks like it is no longer economical, it may well be that pharma businesses learn from the past and don’t simply look for the next cheap production base.

In the meantime, though, businesses face significant costs and disruption of changing suppliers – and massive uncertainty over how the pandemic will develop and the potential disruption involved. It’s hard to justify the move.

Of course, in a sense this is a similar dilemma to that facing governments around the world as they determine what and how far to go in combatting the spread of the virus. Do too much, and if they succeed they will be said to have over-reacted; too little and they’ll be blamed for the consequences as the virus spreads. It’s a no-win situation. But governments have relatively unlimited resources, and risk only their popularity, which may recover by the next time their public heads to the polls. Pharma businesses don’t have that luxury – a rash move could cost them their competitiveness and ultimately profits.

For the time being then, most will choose to sit tight and wait to see if change is forced upon them. But that doesn’t mean they can’t be ready.

With tools like SCAIR® managers can map their supply chain dependencies and exposures. Soon with functionality we’re adding they’ll even be able to overlay custom events (such pandemic hotspots) to further quantify impacts and scenarios. With this they can see dependencies, loss estimates, vulnerabilities, and the ultimate financial impact of events, so they can be ready to act if the time comes.

If you want to be prepared for the worst, let alone avoid it, it pays to know what the worst might look like.

Catherine Geyman, Director, Intersys Risk Ltd

Head shot of Catherine Geyman, Director, Intersys Risk Ltd




The Real Reasons for UK Drug Shortages

What is Causing the Current Drug Shortages in the UK?

A recent BBC  Radio File on 4 programme highlighted the worsening drug shortage problem in the UK . In this blog post, Intersys Risk Director Catherine Geyman further analyses the various complex issues that are driving this healthcare crisis. 

“Patients have died in hospitals because of these shortages.” That was the stark message from BBC Radio 4’s investigation of UK drug shortages for File on 4 on Tuesday.

The programme is well worth a listen. It powerfully gave us a human face to the problems these shortages cause in the form of Michelle, who has trouble getting epileptic drugs to control her seizures; or the mother relying on an out-of-date, and therefore unreliable, adrenaline injector for her son.

It also does a good job of exploring some of the reasons. These include the restrictions on pharmacists – unable on their own initiative to even prescribe two 250ml dose pills of the same medicine where 500ml pills are unavailable. One striking nugget: The Serious Shortage Protocols, which I examined on this blog in July and which empower pharmacists to make this kind of substitution,  have so far been introduced for only one drug – antidepressant Fluoxetine.

As the programme made clear, though, the reasons for shortages are complex, and there’s no quick fix. The central issue was particularly well captured in one part of the report: “One issue that is mentioned by pretty much everyone you speak to in the industry is globalization; making drugs and distributing them is now a huge, worldwide business. The longer the supply chain is stretched, the more fragile it becomes.”

It is the many and varied problems with the supply chain that are usually behind these shortages. I’ve looked at this before in relation to HRT medicines and adrenaline injectors – both shortages that featured in the programme. It’s manufacturing problems that are often to blame here, and indeed, according to the European Healthcare Distribution Association are responsible for 60% of medicine shortages.

Current drug shortages, but long-term issues

Female Research Scientist Uses Micro Pipein Innovative Pharmaceutical Laboratory with Modern Medical Equipment.

There are, though, perhaps two issues that we would take with  this analysis. The first is that none of this is really new. It’s been clear for a while that medicine shortages are back in a big way, and most of these causes have been well explored already.

That, though, is possibly unfair; it's always good to raise awareness of these issues – and not just with the general public. One of the new developments reported by the programme was that the UK’s Healthcare Distribution Association is sending a leaflet explaining the complexity of the supply chain to all 16,000 of the country’s pharmacists. That suggests a lack of awareness even among those directly involved.

A more fundamental problem is that globalisation and complex supply chains – which are both longstanding – don’t sufficiently explain the number and extent of shortages we’re seeing now. Sourcing active ingredients from China and India is nothing new, after all. We could blame Brexit, of course, but the evidence for that being a significant contributor to even current drug shortages is weak.

One possible cause that could be further explored is the current high levels of mergers and acquisitions in the industry. As we’ve seen before, poor due diligence when it comes to takeovers can result in years of problems. More simply, this consolidation inevitably reduces the supply base – indeed in some cases M&A is specifically designed to reduce competition, decreasing the number of drugs available for particular conditions and increasing dependency on those that remain. That inevitably reduces the resilience of the supply chain.

It’s not all about cost

Outline of pharmaceutical logistician activating icons for predictive analytics, materials handling and transportation. IT concept for supply chain management and pharma business logistics.

Even here, though, the issue is more complex than it might seem. In some cases, it’s true that supply of drugs for some conditions is down to just one or two producers. Inline with the programme’s perspective, that consolidation is the result of drives to cut costs, but that is only half the story.

First, the manufacture of complex drugs can be difficult and expensive, and the low cost of generics fails to incentivise more players to enter these markets. But, more crucially, that cost never rises. The FDA’s recent paper on Drug shortages suggested evidence of a “broken marketplace” – where a shortage of supply does not result in the price increases predicted by basic economic principles.

And this may have something to do with another point: The extensive regulation of the industry. Regulators have strict codes of practice in place and these vary according to the market that businesses are selling to. That means manufacturing certain drugs requires significant expertise and knowledge of relevant local regulation. This in turn means a long lead time to set up and get approval for new manufacturing assets to alleviate the issue – with no guarantee for those doing so, that the shortages will persist long enough for them to profit.

There’s a myriad of other issues, too, of course, but these should amply illustrate two points. First, that there’s no easy solution and this problem will be with us for some time. And, second, that all manufacturers and others can really do for now is use the tools available to really interrogate their supply chains and achieve a clear view of their resilience and the likely areas of weakness.

Catherine Geyman, Director, Intersys Risk Ltd.

Head shot of Catherine Geyman, Director, Intersys Risk Ltd