Navigating insolvency risks: Directors’ duties for pharmaceutical industry professionals

In light of economic volatility, complex supply chains, and compliance demands, company directors must remain vigilant in identifying financial risks that could threaten the viability of their operations.

Sector pressures

The UK pharmaceutical sector is currently navigating a complex landscape marked by both domestic and international challenges. Domestically, the industry is grappling with stringent pricing controls under the Voluntary Pricing, Access and Growth (VPAG) scheme. In 2025, companies are expected to repay approximately £3.4 billion to the NHS, equating to a 22.9% rebate on newer medicines - a significant increase from previous years and the target of 15.3% which had initially been forecast. This financial pressure is contributing to a decline in the availability of innovative treatments within the UK, as firms reassess the viability of launching new products in such a constrained market. Additionally, the NHS's capped growth on branded medicine sales has led to a real-term decline in the value of the UK medicines market, further deterring investment in research and development.

On the international front, given the UK exported £7.2 billion of medical and pharmaceutical products into the US from January  - September 2024, earlier this year the sector faced potential disruption from proposed US tariffs on imported pharmaceuticals. Whilst the threat of these tariffs, from a UK perspective, seems to have been minimised for the time being, the general economic climate globally has been shaken by the announcements from US. Tariffs potentially threaten to disrupt transatlantic supply chains, increase drug prices, and could even lead to medicine shortages. The uncertainty surrounding these trade policies adds another layer of complexity to an already strained industry.

Directors' duties

As most directors will know, they must adhere to the directors' duties set out in the Companies Act 2006. These duties include acting in the company’s best interests, promoting the success of the business, and exercising reasonable care, skill, and diligence.

However, when a company is insolvent or approaches insolvency, the focus of these duties shifts, and directors must also consider the Company's creditors. This duty operates on a "sliding scale," meaning that as the likelihood of insolvency grows, directors must place greater emphasis on creditor interests. Once insolvency becomes inevitable, the interests of shareholders no longer hold any significance. Failing to do so can result in personal liability and other serious consequences. As a result,  directors must take steps to minimise the potential losses to creditors, such as suppliers and staff.

Further, directors may be held personally liable for wrongful trading if they continue to operate the business when they knew, or ought to have known, there was no reasonable prospect of avoiding insolvency.

Potential financial trigger points

Given the above, as the pharmaceutical sector grapples with rising operational costs and evolving compliance standards, financial sustainability remains a key concern.

To assist directors with essential financial management, we set out below a non - exhaustive list of the types of triggers that could lead to financial difficulties:

1- Funding gaps, pricing & reimbursement challenges

• Delayed NHS & public body payments: Cash flow can be affected by late payments from procurement agencies and public health authorities.
• Drug pricing pressures: Government policies and pricing regulations may reduce revenue margins, particularly in the generics space.
• Increased costs under the VPAG Scheme.
• International tariffs & trade barriers: Tariff changes due to shifting global trade dynamics or post-Brexit negotiations can increase the cost of importing raw materials or exporting finished products, disrupting pricing and supply chain strategies.

2 - Rising operational costs

• Energy price volatility: Energy-intensive production processes are vulnerable to sharp increases in energy prices.
• Raw material & component cost inflation: Active pharmaceutical ingredients (APIs) and excipients sourced globally are subject to price hikes and currency fluctuations.

3 - Supply chain disruptions & health crises

• COVID-19 & ongoing global risks: The pandemic exposed vulnerabilities in international supply chains and the need for contingency planning.
• Shortages & delays: Disruptions in sourcing APIs or packaging materials can halt production and impact revenue.

4 - Rising staff costs

• Specialist talent recruitment: Shortages of qualified professionals in scientific, regulatory, and commercial roles increase recruitment and retention costs.
• Reliance on contractors: The use of interim and agency scientific consultants can be financially burdensome.
• Increased employers' national insurance contributions (NICs): Rising NIC rates add to overall staffing expenses.
• Minimum wage increases: The continual rise in the national living wage significantly impacts payroll expenses.

5 - Regulatory compliance & legal costs

• Evolving regulatory requirements: Compliance with MHRA, EMA, and other international bodies' regulatory requirements entails substantial costs in terms of documentation, inspections, and certifications.
• Litigation risks: Legal claims arising from product liability, patent infringement, or contractual disputes can have significant financial and reputational impacts.

6 - Impact of regulatory ratings & inspections

• MHRA or EMA Findings: Negative audit outcomes or inspection failures can lead to production halts, recalls, or reputational damage

7 - Property & equipment costs

• High-cost facilities: GMP-compliant laboratories and cleanroom environments require constant investment and maintenance.
• Lease obligations: Pharmaceutical businesses operating from specialist premises may face high rental costs and long-term lease liabilities.

Practical tips

As set out above, directors should be alive to financial pressures and be able to establish when insolvency is becoming inevitable in order to seek the appropriate advice. In order to do this, directors should take the following action:

• Keep accurate financial records: ensure that the company maintains proper records, including detailed accounts of debts, assets, and liabilities.
• Review corporate governance: ensure governance processes are robust. This includes clear decision-making processes, regular board meetings, and documentation of decisions, especially those related to financial matters.
• Monitor financial health:
   - Regularly review cash flow forecasts, profit-and-loss statements, and balance sheets to determine the solvency of the business.
   - Conduct stress tests to anticipate the impact of potential downturns.

Regular reviews of these financial indicators should also support decisions around whether to reprice certain products, renegotiate supply contracts, or seek funding uplifts through partnerships, grants, or research & development tax credits.

Should your company face financial difficulties, directors should engage insolvency professionals and/ or take legal advice at the earliest sign of distress.

This article provides an overview of key issues surrounding insolvency and directors’ duties for pharmaceutical and life sciences companies. It is important to seek specific legal advice tailored to individual circumstances if financial distress arises.

For more information or advice, please contact Ambuja Bose or Hannah Land in our Restructuring and Insolvency team.