As tariffs affect the pharma industry, business strategies must evolve

The trade conflict with China seems to escalate, although it can change with a tweet. The first of two rounds of tariffs on billions of dollars’ worth of Chinese goods is now in effect, even as the final positioning or even talk of deals and delays are in flux. These tariffs have implications for pharmaceutical companies’ supply chain planning for active pharmaceutical ingredients (APIs), the components of drugs that produce their therapeutic effects.

Tariffs on APIs imported from China pose risks for pharmaceutical companies, both for generic and name-brand products. According to IHS Markit, in 2017, the U.S. imported $3.9 billion worth of generic ingredients from China. Further, an estimated 80% of all APIs come from abroad, mainly China and India.

Due to the fact that the Food and Drug Administration generally defines a drug’s country of origin as the final stop in the manufacturing process, companies can claim origins of a product in the U.S. even if they contain APIs from China, meaning that name brands are just as subject to the threat of tariffs. Compromising API importation will have financial impact on pharmaceutical companies and the patients they serve and could limit access to treatments because of potential slowdowns in production caused by limited API availability.

Pharmaceutical companies rely on safe and trusted supply chains. These fragile systems are built on positive and transparent relationships with trade partners over many years, and they require a significant investment in time, skills, and resources. Codes of conduct and quality that must be met may involve multiple on-site expert inspections.

Deep and trusting relationships tend to diminish disruptions in supply chains because they enable collaboration in ways that provide superior visibility. Fluctuating tariffs could strain these relationships, and it can take years to find alternative suppliers or secure access to ingredients that are in limited supply. The net result is damaging and can include significant financial losses due to poorer sales and production; strains relationships with hospitals and pharmacies, whose ability to care for patients is compromised; devalues brand perception; and, most importantly, potentially compromises treatment outcomes, which could jeopardize patient lives. Patients are subsequently faced with potential medication shortages, or are at a greater risk of potentially taking counterfeit or contaminated drugs — a danger the FDA is actively working against through the Drug Supply Chain Security Act.

The U.S. pharmaceutical global supply chain is renowned to be one of the world’s most secure, but it has much to lose from souring trade relationships. The unpredictability could lead to unnecessary complexity and volatility in supply and demand, and become even further complicated by ongoing trade disputes at the government level.

Uncertainties caused by tariffs force companies to make difficult decisions about strategic supply-chain planning. One option is to stockpile essential ingredients and risk wasting products and money if the decision was based on inaccurate information. Alternatively, companies can wait for better tariffs and prices and risk enduring price increases and/or product availability. Neither scenario is optimal for positive patient outcomes or business efficiency.

Pharmaceutical companies have traditionally planned supply chains on monthly or even quarterly bases. Doing so, however, allows more lead time for tariff changes that could compromise operations and cause disruptions. As volatility increases in this ecosystem, business planning must evolve to become continuous, integrated, and agile in order to support collaboration, data exchange, and transparency between companies and their overseas suppliers. The emerging end-to-end, patient-centric supply chain model is valuable, but it must have the capability to immediately sense and respond to both tariffs and challenges regarding supply and demand when they occur, while simultaneously and without exception ensuring the quality, safety, and availability of products delivered to patients.

Even in times of turbulence, the pharmaceutical industry must work toward orchestrating global transparency and standardization of regulations, processes, inventories, and data exchange to guarantee the availability and safety of legitimate medications. They must also be agile enough to manage the impact of tariff changes. While the network of partners across the global supply chain cannot prevent tariffs, they can equip themselves with real-time end-to-end insights, analytics, and visibility to upstream and downstream operations to proactively address any disruption.

With limited data exchange among fragmented processes, supply chain disruptions ensue, impacting decisions and leading to unreliable product supply forecasts. To avoid this volatility, companies should adopt continuous integrated planning across supply and demand processes as a new standard.

In addition to the volatility of global product supply and demand, a growing demand for medicines in China has created opportunities for U.S. pharmaceutical companies to sell their own products there, especially those already manufactured in Asia — although these opportunities are already threatened by China’s local production of cheaper pharmaceuticals. Besides immediate demand opportunities, Asia also offers an opportunity to invest and explore innovation and production opportunities. However, any potential disruption of trade relations and knowledge exchange caused by tariff conflicts is likely to hinder these evolving business innovation discovery opportunities.

Tariffs will affect the price of goods needed to create high-quality pharmaceutical products, as will fluctuations in exchange rates. These, together with other supply-chain events such as natural disasters, will challenge the capability of pharmaceutical companies to consistently and reliably deliver quality medicines to patients. Industry thrivers and survivors will be the ones that modernize their integrated business planning infrastructures, analytics, and process capabilities to proactively manage risk and avoid interrupting patients’ access to safe and affordable medications.

Roddy Martin is the chief digital strategist for TraceLink, an integrated digital supply network for the life sciences supply chain.