When a patient fills a prescription at a pharmacy close to home, the transaction is the last part of a tightly controlled supply chain that starts on the other side of the world. In recent months, a crucial part of that chain has been strained. The Iran-backed Houthi militia group continues to rain down missiles on container ships traversing the Red Sea, disrupting or diverting the movement of goods that in peaceful times go through what is one of the world’s busiest shipping lanes. Some of those products are medicines.
The pharmaceutical products that move through the Red Sea are mainly generic drugs manufactured in India, said Jeremy Tancredi, partner and supply chain leader at consultancy West Monroe. Brand name pharmaceuticals are either produced in the U.S. or closer to the U.S., or they are moved by air freight. While air freight is more expensive, the higher margin associated with brand name medicines means a drugmaker can absorb the extra cost, added Pankit Bhalodia, West Monroe’s managing director, healthcare & life sciences.
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“There’s enough buffer built in that they can lock in the price for the year and not have significant impact on the margin,” Bhalodia said.
Dr. Reddy’s Laboratories is one of the pharmaceutical industry’s largest manufacturers of generic and biosimilar drugs, and the Hyderabad, India-based company says it moves most of its goods by sea. Dr. Reddy’s is exploring other ways to ship them, including air freight, CEO Erez Israeli said in a January conference call to discuss financial results for the nine months ended Dec. 31, 2023. Another way the company is managing the Red Sea situation is by increasing its inventory in the U.S., close to its customers.
Baxter International noted in its annual report that one of the impacts of attacks on ships in the Red Sea is the unavailability of certain raw materials and component parts. For drugmakers, raw material includes active pharmaceutical ingredients, or APIs. Even when companies manufacture drugs in the U.S., the API often comes from overseas. New Jersey-based generic and biosimilar company Amneal Pharmaceuticals manufactures most of its products at facilities in New York, New Jersey, and India. The company said attacks in the Red Sea have an effect on its supply chain now as well as its ability to plan for the future.
“For example, we source some of our APIs from the Middle East and the armed conflicts that have escalated in the area since October 2023 could threaten our ability to obtain these important inputs,” Amneal said in its annual report. “Also, recent attacks by the Houthi movement, which controls parts of Yemen, on merchant ships in the Red Sea has resulted in a significant increase in our shipping costs.”
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APIs that are temperature sensitive or extremely expensive travel by air freight rather than ocean shipping, Bhalodia said. It’s not easy to relocate any part of drug production, he added. Establishing a new manufacturing site is an investment of both time and money. After a new site is constructed, it still needs to be inspected and approved by the FDA. The entire process can take up to three years. Tancredi added that the cost of labor is a major consideration in deciding where a company manufactures product. While manufacturing in Europe or Central America would avoid shipping disruptions in the Middle East, the cost of labor in those markets is higher.
“The short answer is there’s not good spot to do it for the same costs,” Tancredi said.
Air freight is not economical for certain items, such as large medical devices or components of medical devices, said Julie Abrams, associate director of programs and response for Healthcare Ready, a nonprofit organization that helps entities in the public and private sectors facilitate planning and response to supply chain threats. But she said one lesson from Covid-19 continues to be applicable to supply chains today: maintain redundancy and diversification in the sourcing of key materials. Abrams does not see the shipping disruptions leading to drug shortages. Shortages existed prior to the current global shipping issues in Panama and the Red Sea.
“As of right now, I would say we’ve got a good amount of resiliency, since the threats in this scenario were detected early,” Abrams said. “A lot of work and a lot of thought have gone into making sure we don’t have shortages.”
Companies have learned to use multiple suppliers and manufacturers, and those companies have redundancies as well, Abrams said. The “just in time” supply chain management strategy has shifted to “just in case.” Tancredi said Covid-19 forced a lot of companies to reevaluate how much inventory they keep. Having multiple sources of supply helped in 2021, when the Ever Given container ship crashed into a bank in the Suez Canal, temporarily blocking shipping through the waterway, he said. While some shipping companies have opted to move goods via the longer route around the Cape of Good Hope, the Panama Canal is not an economical alternative because that route can have an even longer transit time, depending on a shipment’s origin and destination, Tancredi said.
The Panama Canal has had shipping challenges since last summer due to a lack of rain that has water levels there at historic lows. Panama’s rainy season starts in May, which could alleviate the shipping disruptions, Abrams said. Shipping goods around South America to get around the Panama Canal, or around the Cape of Good Hope to avoid the Red Sea, takes more time and more fuel, Abrams said. It could also push insurance costs higher.
Bhalodia said it’s still hard to tell whether the Red Sea shipping disruptions will be temporary or if it’s the new normal. As for impact on drug prices, transportation is just one of several considerations in the setting of a product’s price, he said. For example, if demand for a particular type of drug can be met by other players in the market, that drug won’t see much price fluctuation. But if the shipping disruptions do become the new normal, the extra expense borne by drug manufacturers will reach patients.
“Yes, the prices [of generics] are lower, but the margins are still decent,” Bhalodia said. “Companies in the short term might not be passing it on, but eventually they will pass it on.”
Photo: Camille Delbos/Art In All of Us/Corbis, via Getty Images
