A conversation with EY life sciences leaders Jim Welch and Jay Welsh
As the crisis in Ukraine continues, healthcare organizations are facing unprecedented challenges related to manufacturing, access, and supply chain. Naturally, employee safety and patient access to critical medications and supplies are the top priorities for organizations working in or with Ukraine. Beyond that, there is a risk of long-term disruption in global supply chains, such as the increase in the cost of raw materials and logistics. Medical technology companies, especially, are facing headwinds due to rising freight and shipping costs.
To further explore supply chain implications of the conflict, Pharma Commerce sat down with multinational professional services firm EY, whose life sciences and medtech divisions are advising global companies both with connections to and operations within Ukraine. In this conversation, EY’s Global Medtech leader, Jim Welch, and EY Americas Life Sciences Supply Chain Leader, Jay Welsh, outline the industry’s priorities in getting critical medicines and materials to at-risk patients and employees, and discuss the long-term implications of the war for the supply chain landscape.
What are the most pressing concerns about the healthcare supply chain in Ukraine, and how are your clients reacting to the situation there?
Jim Welch: The impact of a humanitarian crisis of this size and scale covers a host of different dimensions. But, very simply, getting key medicines, key devices, and key equipment to a population that is incredibly at risk and at the same time completely displaced is very challenging. We’ve seen a whole host of companies working with humanitarian aid organizations, such as UNICEF, the World Health Organization, and the Red Cross, just trying to figure out how to get medicines and devices into Ukraine. Then, once they are in country, it’s a question of how to get them to the population, or the population that remains. At the same time, the companies in our sector are obviously focused on taking care of their own people in the region, ensuring their safety and security, as well as attending to the commercial aspects of the situation.
It’s not just a matter of focusing on Ukraine, but also the countries around it, given the number of refugees that are moving into and across these areas. It’s about supporting the whole region, the whole ecosystem from a healthcare perspective. We’re seeing companies and their distributors who cover the last mile in regions like this doing the best they can, strengthening operations in some of the surrounding countries.
Jay Welsh: We’re seeing the impact of some of the conflict-related trauma and worsening conditions around both non-communicable and infectious diseases. There’s certainly a risk of infectious diseases that is starting to emerge or spread, and then there is the ongoing impact of COVID. As of early 2022, I think just 35% of the Ukrainian population was vaccinated.
Clients are trying to make sure that not only COVID vaccines are available, but all the other types of vaccines that people need. There is also an ongoing balancing act when it comes to the Russian side of the equation. The West is boycotting Russian firms and imposing financial sanctions on Russia, but there is still the need to make essential medicines available to people who need them in Russia. It’s a unique situation.
What has been EY’s role in supporting its clients in the face of the conflict?
Jim Welch: It’s a pretty wide range of things. When our clients are faced with business crises of any sort, we facilitate temporary and permanent responses that help with managing their employee base, moving supply chains around, and reconfiguring some of the logistics around these efforts. During this conflict, we’ve done quite a bit of work from a cybersecurity perspective, and more generally in areas of risk management that stem not only from what’s happening in Ukraine, but also following the sanctions imposed on Russia. Companies are either adjusting or winding down their operations in Russia.
Jay Welsh: There are lots of discussions and questions around the supply chain implications, as you would expect. What do companies need to think about with respect to their supply network, their supply strategies? What changes do they need to make to domestic production? The pandemic, of course, has significant implications in terms of the need for more domestic production. Another area for us is helping clients think about the risk and resiliency of their supply chains and manufacturing operations; a lot of companies are asking for help with business responses, things like disinvestment, operational closures, the displacement of employees, and the supply chain implications of airspace being closed and ports being impacted, as well as the rising the cost of oil and gas.
How much has your prior experience of preparing for disasters, and particularly the experience of the COVID pandemic, helped in responding to the events in Ukraine?
Jay Welsh: It has definitely helped. If you talk to companies about supply chain risk and resiliency and the types of plans that they have in place, companies have been thinking about these things now for two years. Before the pandemic, some of these geopolitical issues would have been way down on the list of priorities that companies were worried about. The pandemic has brought a whole new perspective on what they need to be thinking about, what kind of action plans they have, and what modeling they need to do.
The situation in Ukraine has built on the strategies that companies were implementing during the pandemic. COVID got people thinking about how they would react to a whole host of potential conflicts and issues around the world, and companies are now putting these scenarios into their modeling.
How do you see Russia’s isolation impacting the global pharma and healthcare industry landscape as the war continues?
Jim Welch: Between Russia and Ukraine, the global sales from pharma and medtech is less than 3%, so from that perspective, it is not incredibly detrimental for companies worldwide. The challenges are around being able to fly things over the airspace, for example. There is the increased cost of doing that, and there is the macro-economic inflation that is associated with the war.
Looking specifically at Russia, there are questions now around patent and IP protection for drugs and those types of products in that market. If Russia decides it is not going to recognize patents from unfriendly countries, where many of the major companies are based, we have to look at the impact of products going immediately generic in Russia and what that really means for the global markets. Russia will have to increase its manufacturing, so that will have an impact.
Also, there are certain raw materials from Russia, from natural gas to precious metals, that are used especially in the device side in the manufacturing process. We have to look at obtaining alternatives to those materials and at the impact of that economically. In surgical and orthopedic devices and implants, we have aluminum, titanium, nickel, iron, and gas—all those are key components. If the supply base of those materials is severely impacted, which it will be, that in itself creates a challenge in an environment that is already supply-constrained from the pandemic.
Jay Welsh: As Jim says, Russia and Ukraine together are relatively small in terms of the pharma and medtech markets. But the area was growing; companies were thinking about expanding there. So, the conflict has put a major dent in those plans. It’s going to be important now for companies to model scenarios around what could happen as the conflict escalates. One of the biggest concerns is, how will this spread to other countries? Russia may enact counter-policy measures to any company or country that they view as unfriendly.
Within Russia, there are a number of things that will happen in regard to the pharma industry and supply chain. There will be opportunities there for smaller domestic pharmas and [active pharmaceutical ingredient] API sellers to produce more products internally. There’s a serious chance that international patents will not be honored, echoing Jim’s point, and so there will be more generic pharma manufacturing in Russia. And we will need to ask how this situation will impact surrounding countries, particularly allies of Russia like Belarus, Armenia, or Kazakhstan.
Concerning supply chain exposure, I think with respect to the situation in Ukraine and also the pandemic, there has been a bigger impact on medical devices than on pharma because of the types of things that are sourced for medtech. Pharma has certainly not been immune though, and as the situation continues, it will get worse as far as obtaining raw materials go. Things like plastics for trays, syringes, pill bottles, etc., will potentially increase in cost and be limited in supply, as well as materials that go into packaging.
If the conflict can be resolved sooner rather than later, do you see things ever getting “back to normal,” as it were?
Jim Welch: I don’t think so because of the huge displacement of people. How you deliver medicine and care in those countries surrounding Ukraine is going to be very different. At this point in time, companies are planning for changes in their operating models and their supply chains to account for that. Beyond that, I think it will create a shift in how most large life sciences companies organize themselves in the region commercially and from a supply base perspective. As we said, there isn’t a ton of manufacturing going on in Ukraine and Russia, but there is in the surrounding area, and it’s definitely going to create some changes.
Jay Welsh: Certainly, the longer the conflict goes on, the more opportunity there will be within Russia to manufacture generics and start to fill the gap that’s coming from the boycotts of the country. If the war ends relatively soon, there will be less of that and we will perhaps see the return of some western pharmaceuticals back into the market. But whether the war ends tomorrow or way out in the future, supply chain executives are now asking, “What is my risk tolerance for going back into a region where something like this could happen again?” Ultimately, the landscape has been altered and will be for a long time.