The pharmaceutical sector is facing a product recall wave suggesting that there is a supply chain risk the industry needs to address, not least because the insurance market is finding the exposure difficult to underwrite.
An impurity called NDMA (N-nitrosodimethylamine), a likely human carcinogen, has been found in heartburn, blood pressure as well as diabetes medication.
Drug makers and global public health regulators are taking steps (opens a new window) to remove supplies of over-the counter heartburn medication Zantac (Ranitidine) in the US, Canada and Europe. This comes after the recall of generic blood pressure pills originated in China and India.
Furthermore, the US Food and Drug Administration (FDA) and other healthcare regulators have started investigating (opens a new window) whether diabetes drug metformin had contaminations of NDMA after Singapore’s Health Sciences Authority (HSA) recalled three out of the 46 metformin products tested.
Product recalls of this magnitude have serious consequences for the companies affected, including revenue losses, regulatory fines, decreased patient confidence and reputation as well as potential lawsuits.
The NDMA contamination may have formed through a chemical reaction during the manufacturing process, but there is also evidence that it may have been caused by cross-contamination because third-party processing machines have not been cleaned adequately between customers. Regulators have voiced their concern over the fact that many of the active ingredients are sourced in Asia, limiting their oversight power.
Independently of what has caused the NDMA contamination, the pharma industry may need to increase control over the supply chain in order to address this problem and rebuild trust with clients, regulators as well as showing risk mitigation of this exposure to insurers.
Insurers consider contamination through active ingredients a systemic risk in the pharma industry as pharmaceuticals are often manufactured and/or packaged by third parties. Risks can be covered by recall insurance policies but the aggregation exposure is also a constant source of concern for underwriters.
This should worry the pharma sector after the NDMA contamination wave. While many big players self-insure for example through a captive, this may become increasingly expensive if the problem is not solved. Meanwhile, as part of the solution, these large manufacturers are currently pushing risks down the supply chain by adding severe contractual obligations when outsourcing services.
It is supposed give the brand owners a better grip on third party suppliers while reducing their own liability, but it is also adding significant risks to small and medium-sized companies, which need to be assessed, quantified and potentially mitigated. When these contractors seek recall insurance cover to protect against associated risks they may need to prove that they are insulated from NDMA type supply risk problems. If this proves to be challenging, they might not find appropriate cover for a reasonable price. To reduce this risk and make it appealing to the insurance industry, the sector may need to take an alternative approach.
A potential solution could be a re-organisation of the supply chain including moving third-party sourcing, production and/or packaging in-house. Many of the contaminated active pharmaceutical ingredients (APIs) in the NDMA contamination case were produced overseas, taking advantage of the lower labour and resources’ cost for example in China and India. Tightening control over the supply chain with clear liability attribution may convince insurers to take on the residual risk more easily.
The US pet food industry is showing the way. As a reaction to a number of product recalls after pets became sick following the consumption of food with ingredients sourced in Asia, some companies decided to move the supply chain back to the US to reduce the risk of contamination. This was done despite the fact that sourcing and manufacturing in Asia is significantly cheaper than in the US.
The pharma sector may have built an industry focused on cost which made the products affordable to a wider clientele, but when trust of regulators, clients and insurers is at risk, it may be the right time to rethink this strategy.
