Navigating Pharmaceutical Supply Chain Challenges

What did we learn from the story of the Three Little Pigs, each building houses of different materials in the face of a threat? Though not specifically intended as an education in business, the story does teach that recognizing a threat and planning to avoid or mitigate the negative impacts go a long way. In a global economy, your organization may be negatively impacted by events beyond the walls within which your business operates. Loss avoidance and mitigation are crucial when evaluating your supply chain.

Most life science organizations depend on efficient and uninterrupted supply chains. Manufacturers of pharmaceuticals, biologics, supplements, and devices rely on third-party relationships for component parts, active pharmaceutical ingredients, warehousing, and distribution services. Perhaps your organization depends solely on the manufacturing of your products by a third-party vendor. Research and Development operations rely on third-party relationships to provide crucial supplies such as specialized equipment, cell cultures, and genetically modified organisms.

Assessing the United States Public Health Supply Chain

In February 2022, the U.S. Department of Health and Human Services (HHS) Office published the Public Health Supply Chain and Industrial Base's one-year report. As a result, HHS outlined the actions needed to strengthen the U.S. public health supply chain and mitigate the negative impacts of a disruption. Although the report focused on disruptions from a pandemic, it highlights the industry's critical dependence on the global supply chain. The report explains, “Suppliers and private industry constitute a complex web that makes up part of the public health supply chain. Purchasers do not always know the origins of all goods.”  

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed in 2020 includes increased authority intended to enhance the FDA’s ability to identify, prevent, and mitigate possible shortages of human and animal drugs by, among other things, enhancing FDA’s visibility into the drug and medical product supply chains.  The FDA will take specific actions to mitigate such interruptions, including expedited facility inspections. However, the FDA faces challenges in analyzing the global supply chain.  For example, a Congressional Research Service report published September 1, 2020, acknowledges that the extent to which the United States relies on other countries for medical products is not entirely known due to limitations in data collected by the FDA and trade data.

Why Companies Need a Supply Chain Review

The supply chain for most industries was stressed during the coronavirus pandemic, and that period enforced the importance for an organization to evaluate its dependency on outside vendors. Unfortunately, most companies do not complete routine supply chain reviews. Typically, they approve their suppliers and revisit their list only when needed. Not only does this lack of planning impact a company, but it also seriously impacts patients and the entire healthcare community. Here are some examples:

Supply Chain Interruptions

In 2023, Akorn Pharmaceuticals, a drugmaker responsible for manufacturing over 75 generic drugs, including the sole supplier of some products, closed its doors. The closure affected the global supply chain and left hospitals and patients searching for life saving medications. 

In early 2012, a fire in a Sandoz plant resulted in a shortage of injectable cancer drugs.  To make matters worse, the plant was previously on a reduced production schedule due to GMP (Good Manufacturing Practices) issues, further exacerbating the shortage. This resulted in some Canadian hospitals delaying procedures. 

Medical devices and pharmaceuticals have experienced the effects of the supply chain shortage due to various reasons.  The pandemic, port delays, and record inflation have certainly impacted the industry over the past three years.  Other challenges may include severe weather, transportation strikes, fuel shortages, and recent COVID-19 outbreaks.  With the increase of these unexpected events, the need to establish best practices has become increasingly imperative. 

For more information, see the March 2022 article “Building Resilience into the Nation’s Medical Product Supply Chains” by the National Academies of Sciences, Engineering, and Medicine.

How to Protect Your Company from Unexpected Supply Chain Losses

It is recommended that companies perform an annual evaluation of their supply chain. Critical issues that should be questioned and considered are:

• Are you sourcing from only one vendor with no alternative provider? Having multiple vendors produce the same product or identifying alternative suppliers builds redundancy and minimizes the impact on your business when one vendor cannot meet demands. Maintain an extended Approved Supplier List (ASL) to ensure redundancy for critical components and services. 
• Do you pre-qualify your vendors?  Most accreditations, such as CGMP and GMP, focus on product quality.  It is recommended that you also consider adding to your prequalification checklist the vendor financials, experience, facility vulnerability, maintenance practices, and the ability for the vendor to use an alternative facility.
• Do you have an audit schedule for key suppliers to ensure that degradation of external supply chain issues or internal quality challenges has not developed?
• What type and probability of events could negatively impact each vendor’s ability to operate?   Consider economic, climatic, and social vulnerabilities.  
• Do you maintain copies of prototypes, patterns, dies, and molds?  Is scientific property that is difficult to reproduce, such as cell lines and antibodies, split between facilities?
• Does your contract with suppliers include contractual wording that addresses both the delivery of services and the delineation of responsibility for you to approve change management?
• What is the financial impact of losing each vendor and your organization's time to recover?

In conclusion, having a comprehensive insurance program in place is essential to protect your financial interests when you depend on third-party organizations. The best line of defense is effectively managing your operations supply chain through loss avoidance and mitigation. 

At Berkley Life Sciences, our Risk Management team provides risk evaluations to assist companies in developing customized plans for their needs. For more information about supply chain management, contact our Risk Management Team or visit our website.

Authored by Randy Culver, VP, Property & Casualty Specialist