How to Mitigate Supply Chain Disruption

Every time I read a headline like the one I saw yesterday on the FiercePharma website, “FDA bans products from another Chineses API maker,” I cringe.  This is not the first time I have written about these type losses and it won’t be the last as I believe supply chain risk is at or near very top of the risks life science companies face.  These articles remind me how vulnerable life science companies are to supply chain risk.  If you are sole sourced company and your API was coming from this plant or any other plant that was shut down by the FDA or was damaged in a fire it would cripple your business.  Most likely your stock price would be crushed, people would be fired, and confidence in your company would be destroyed among other things.

There is no good that can come out of a situation like this, but there are ways to salvage this situation.  First, a company can be dual-sourced.  This is typically the best solution but it takes time and money so it is not always feasible.  The second solution, admittedly not as good as dual sourcing, would be to insure the risk.

One way to insure it is through Contingent or Dependent Business Income (CBI).  This coverage can be found in your property policy and should not be confused with Business Income, the intent of both are similar but they are not the same.  I have seen new clients believe the terms are interchangeable or that their business income covers financial losses as a result of claim at a third party location but that is not the case.  CBI covers financial loss you incur because of a covered peril (think fire, wind, lightning, etc.) at a third party location.  Insurance companies are cautious to provide this coverage because these locations are not controlled by the insured.  Many insurers require these third party locations to be listed on the policy.  That can cause problems depending on where these sites are located.  For instance, locations outside the US might not be covered or certain perils such as wind could be excluded if your manufacturer is in Florida to name just a few red flags.  If structured properly, and I emphasize if, this can be a viable solution for physical losses to third party manufacturers and suppliers.

The issue described in the article was not a disruption due to a physical loss but was instead a regulatory issue.  Non-Damage Business Income (NDBI) basically provides coverage when a manufacturer suffers either a regulatory or voluntary shutdown.  If the FDA shuts down your main manufacturer or supplier and you suffer a business income loss you could find coverage under an NDBI policy.  These are typically stand-alone policies and are not cheap, but when you have one product and are sole-sourced it makes sense to explore.  I often see CBI not covered adequately but that pales into comparison in to how rarely I see regulatory business income covered at all.

Business Income is an issue I harp on over and over again because it is such a big risk for life science companies.  Unlike a product liability claim that can take years to litigate, a business income loss will impact cash flow almost immediately and as we all know, cash it the life blood of any company.  Through the use of risk management and properly structuring your insurance program we can greatly reduce this risk.

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