The impact of the Iran-US conflict on the pharma and life sciences sector

Supply chain vulnerabilities

The closure of the Strait of Hormuz risks causing significant disruption to the global supply chains including for pharma supplies.

The conflict has led to:

Export restrictions: Economic sanctions imposed by the US have disrupted trade routes and limited the ability of companies to source critical materials from Iran or via the Strait of Hormuz.
Transportation challenges: With shipping routes heavily impacted, there are increasing delays and logistical costs for companies relying on goods from or passing through the Middle East.
Contractual liabilities: Failure to deliver goods on time due to them being stuck in the Strait of Hormuz or having to be re-directed via other trading routes will result in some businesses incurring liabilities to their customers and being opened up to claims for breach of contract.
Higher energy costs: This could be due to the amount of energy required to refrigerate medicines, manufacture products in sterile conditions or keep a hospital or other healthcare institution running.
Concern about future disruption to patient care: Whilst we are thankfully some way off seeing a direct impact on patient care, concern about stocks of medicines and treatments is likely to rise the longer the conflict continues without coming to a complete end.
Long-term uncertainty: This crisis is just the latest of a number of geopolitical incidents that appear to be increasing in frequency and global impact. Many countries and businesses are in a state of high alert, wondering when the next incident is going to happen and how it is going to impact them. This makes it very difficult for anyone to plan ahead and discourages any form of long term investment or commercial arrangements.

Mitigating supply chain risks: commercial strategies & practical steps

The Iran-US conflict is the latest tension in an ever-uncertain world. These scenarios present significant challenges. UK pharma and life sciences businesses can consider taking some of the measures set out below to mitigate the risks posed by these challenges.

Diversify suppliers: Seek alternative suppliers outside of high-risk regions to reduce dependency on APIs and raw materials coming from one particular country or region. Dual sourcing can provide additional security.
Fuel cost management: Rising fuel prices impact transportation costs. Long-term fuel contracts or bulk purchasing agreements can help stabilise expenses.
Regional hubs: Establishing regional distribution centres closer to target markets can reduce reliance on unstable transportation routes and minimise delays.

That being said, it is not quick or easy for a business to suddenly change the structure of its supply chains. Those sorts of measures cannot deliver results overnight and will often mean (in the short-term at least) an increase in costs. At present, most businesses are hoping a lasting political solution can be reached to the current conflict - however, the ongoing nature of these sorts of conflicts means that businesses feel that they have no choice but to begin considering this sort of long term planning.

Mitigating supply chain risks: legal and contractual measures

In addition to the above, there are also some legal and contractual measures that businesses can take, as well as operational.

Force majeure clauses

Strengthen contracts within your supply chain by including force majeure provisions that excuse a failure to perform contractual obligations due to events beyond your reasonable control. When drafting your force majeure clause:

Consider how much of an exhaustive list you are going to include in terms of the types of events that can constitute a "force majeure event". That may differ depending on whether you are the purchaser or supplier.
Watch out for when the force majeure clause applies - is it when the other party is "prevented from" or just "delayed" or "hindered" in performing its contractual obligations?
Remember that economic hardship or increased costs are not usually enough (in and of themselves) to constitute a "force majeure event".

Frustration

If your contract does not have a force majeure clause, you can try and rely on the English common law concept of "frustration" to get you out of a contract which has been affected by an event beyond the parties' control. However, the contract has to be virtually impossible to perform in order for a party to rely on frustration, so this should only be considered as a case of last resort. That is why a force majeure clause is so useful in dealing with unforeseen situations.

Risk allocation

Clearly define liability for delays, increased costs, or non-performance to protect your business from disputes.

Performance guarantees

Negotiate terms with key members of your supply chain such as distributors and suppliers to ensure consistent service levels, even during challenging circumstances.

Other practical steps that can be taken

Invest in technology

Implement advanced logistics platforms to improve visibility and efficiency across the supply chain. Real-time tracking can help identify and address bottlenecks quickly.

Scenario planning

Regular risk assessments and contingency planning can prepare companies for potential disruptions, such as sudden sanctions or shipping delays.

Strengthen distributor relationships

Collaborate closely with distributors in the affected region to build trust and improve communication during times of uncertainty.

Conclusion: building resilience in uncertain times

The Iran-US conflict highlights the importance of strategic planning and adaptability for UK pharma and life sciences companies. In the absence of political solutions to these conflicts, there are few significant "quick fixes" organisations can take to alleviate the losses they may be currently suffering.

However, by beginning to diversify suppliers, strengthen contracts, and leverage technology, businesses can look to mitigate their current supply chain vulnerabilities so that they can try to navigate future global crises and other unforeseeable events more effectively.

The Association of the British Pharmaceutical Industry (ABPI) has recently commissioned a report, which seeks to "provide a comprehensive overview of medicine supply chain resilience in the UK", and discusses the issues raised in this article in more detail. If you would like to read more about the report, please click here.

If you have any thoughts on how companies can guard against the impact of this conflict or would like help in doing so, please contact Paul Gershlick, Head of our Pharmaceutical and Life Sciences team.