Life Sciences

With globalisation and outsourcing remaining ongoing trends in the life sciences sector, there are ever increasing exposures to contend with in the supply chain, explains Miller’s life sciences expert Andrew Catton.

Pharmaceutical, biotech and medical equipment companies increasingly source raw materials, components, manufacturing processes and services externally. By using suppliers in markets such as Eastern Europe, India, the Far East and increasingly China, they are able to take advantage of lower costs and greater efficiencies. But with supply chains becoming more complex and a growing reliance on “lean” manufacturing processes, there are also increasing risks associated with globalisation. Last year saw numerous examples of supply chain disruption caused by natural catastrophes and political unrest, to name a few.

Falling foul of the regulators

For life sciences firms, regulatory closures are proving a large source of business interruption and product recall, which potentially result in significant losses of profit and reputation. It is unsurprising that this is a major cause of disruption given the increasingly strict regulatory environment life sciences firms are operating in. One of the factors driving the increase in factory closures is outsourcing to developing countries. Within these areas it is more difficult to ensure adherence to the stringent standards set by the US Food and Drug Administration (FDA), UK Medicines and Healthcare products Regulatory Agency (MHRA) and other regulatory bodies. Even where suppliers are regularly audited and maintain high levels of compliance, it is tougher to keep up with regulation in this sector.

For example, for a large organisation like Johnson & Johnson, with 250 companies in over 50 countries and approximately 100 manufacturing plants, managing that risk plays a vital role in the organisation’s success. It has established its own organisation – JJSC – dedicated to supply chain issues and has a new approach to quality and compliance following the McNeil Consumer Healthcare children’s medicines recalls in 2010. The recalls came after a routine inspection at a manufacturing facility in Pennsylvania. The FDA concluded that the manufacturing process was using flawed procedures which could lead to errors. “The McNeil situation has all of us rethinking business continuity planning and how we utilize our plants and partner suppliers,” said Robert Salerno, Vice President, Supply Chain Strategy and Project Management, JJSC.

Often, while there may be no problem with the product itself, simple packaging errors or non-adherence to prescribed manufacturing procedures could be enough to instigate a recall or shut down a plant. Even the suspicion of a violation can cause disruption. Of course there are also plenty of examples of faulty products and components that are withdrawn because they are not up to standard. The US recall of artificial hip implants and European recall of the controversial PIP breast implants are both recent examples in the medical devices sector.

A factory closure may cause inconvenience to large organisations, but with multiple contractors these life sciences giants are more able to weather the storm. It is the middle tier organisations that are arguably at a greater risk of disruptions to their supply chain, which can lead to a substantial loss of profit. In some cases, insurable options are available for regulatory closure, supply chain risk and intangible assets.

The way forward

More often than not, life sciences companies look to take out product recall insurance to indemnify them when things go wrong. Clearly, strong risk management procedures play an important role, including effective supply chain management. Regular visits to suppliers’ sites, dual sourcing, geographic diversification and business continuity management all help life sciences companies better manage their supply chain risk. Insureds are also encouraged to maintain an open and transparent dialogue with their insurers and brokers when it comes to supply chain exposures, explaining the measures they have taken to ensure that compliance is viewed as a priority. Even sensitive information should be shared if it helps insurance partners gain a clearer picture of the insured’s risk profile, as this makes it easier to access broad and cost-effective cover from the insurance market.

Andrew Catton works for Miller