Change is coming to the life sciences industry. Price pressure, new market entrants, the emergence of personalized medicine, and even climate change are adding complexity to traditional manufacturing processes and supply chain operations.
In this hoganlovells.com interview, Dr. Tanja Eisenblätter, co-head of our international litigation practice and dedicated life sciences industry litigator, and Arne Thiermann, partner and contracts-focused regulatory lawyer, discuss how supply chain operations are evolving in the life sciences industry. Based out of our Hamburg, Germany, office, they work as a team, advising life sciences clients on issues involving complex contracts, litigation, and the supply chain.
Do you expect to see an increase in litigation and arbitration related to supply chain disruption in the life sciences sector?
Eisenblätter: When advising life sciences companies, we have seen that they usually settle their matters rather than sue their contractual partners. It is not an aggressive industry. They have good relationships with their partners and choose them carefully, in particular based on quality considerations. So litigation hardly exists in the sector throughout Germany, the European Union (EU), or anywhere else. In comparison, what I see with our energy clients is that they regularly sue, but at the same time enter into new contracts with the contractual partners they are currently suing.
What we expect for the future in the life sciences industry is completely different. We expect to see more litigation because so many different new players are entering the life sciences area from sectors such as technology.
Thiermann: We see many cases in the life sciences industry where a conflict or dispute arose over a batch of a product because it didn’t conform to the specifications. But only one out of 10 of those cases go into a litigious level. Even if we as lawyers said, this case has merit and you could go to court — and also the damages are worth it — in the past many clients didn’t. As Tanja said, the life sciences industry looks more for quality than for price when it collaborates with each other.
However, we see increasing price pressure on pharmaceutical and medical device companies, for example from the government payers or health insurers, to reduce their prices, which obviously impacts their margin. If your margin is affected, you need to get more efficient. So we see that clients talk about prices more rigidly with their suppliers. However, where the focus is on price, quality might suffer, which can create potential for more disputes.
So if companies are pressured to choose suppliers based on cost rather than quality, litigation could increase?
Thiermann: We observe a slight internal shift of responsibilities at our clients. There have been life sciences clients in the past that decided to go to a certain supplier only for quality reasons, but now procurement functions are taking over. The procurement guys want to see lower prices and they put pressure on the supplier, and we think this trend will increase. However, if you’re choosing a certain supplier just because of price, then there could be a problem with quality. So either their existing suppliers have to reduce costs with the risk that quality may be affected, or the life sciences clients go to new suppliers that don’t have the same level of quality.
Eisenblätter: Yes. One could say that price pressure has become greater on the life sciences companies and may cause them to act more like a company from another industry. From a scientific standpoint, they always wanted the best quality. But this might not be the same any longer — they have to put more focus on price.
What other things can cause supply chain disruption?
Eisenblätter: In the past, supply chain disruptions were in particular caused by natural disasters. For example, we had a life sciences client whose plant located in Central America was damaged by a tornado. Nowadays climate change may contribute to disruption. So natural disasters are still a factor. Then on the other hand, new risks have appeared on the horizon, in particular deriving from a greater impact of digital functions. Cybercrime is an issue as well.
What cyber risks can impact the digital supply chain in the life sciences industry?
Eisenblätter: We see that the digital supply chain can be disrupted, and this can happen everywhere in the world. And you have different risks coming in with regard to cybersecurity. With personalized medicine, you also have patient data, and once you start personalizing it, this might impose a threat where data is being mixed up or the wrong algorithm is used.
Thiermann: There are many industries where the supply chain is complex. However, it is particularly complex in the life sciences industry because you have so many players who need to work together.
The whole supply chain will also become more vulnerable because of digitization. The digital supply chain will bring exchange of data among all levels of manufacture, distribution, and even use by patients. The whole supply chain will be based on the flow of data from patients to the back end of production. Where this data flow is affected, disrupted, or hacked, it creates issues.
Eisenblätter: And of course high stakes are at risk. Sometimes, if a product is becoming scarce, this may be life threatening for patients. This is important to understand.
How could the advent of autonomous decision making impact digital supply chains?
Thiermann: For instance, machines or software might take autonomous decisions with respect to the release of a product. Today, a real person looks at a set of information and decides whether or not to release that batch for the next processing step and finally for release to the market. In the future, artificial intelligence (AI) or other software might take decisions on its own based on various data from the whole manufacturing process and from different sources. For instance, a pharma company could require that the equipment of different manufacturers communicate with each other and the pharma company’s software systems.
So if something goes wrong in the future, the question might be: was it the fault of the manufacturer if AI took an autonomous decision? Who was responsible for such software and its decision? Or should life sciences clients go after the software provider or the manufacturer of the software? So the digital supply chain will bring more complex layers.
Is Brexit a factor in supply chain disruption?
Eisenblätter: Brexit might pose another threat, because if we are going to have a hard Brexit, you may not be able to use certain components coming from the UK. So Brexit might also lead to supply chain disruption. We hope this does not happen, but it’s unpredictable what the future might bring.