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- How can strong supply agreements lower my risk exposure?
- Why should I pay attention to Excuse of Performance provisions?
- How can I protect my supply chain when working with CDMOs?
- How can I mitigate the impact of tariffs on my M&A?
Organizations in the healthcare and life sciences sector are facing new trade winds and tariffs that further complicate their supply chains. This places additional pressure on a typical life sciences supply chain timeline, which includes stages like R&D, clinical trials, manufacturing, distribution, and post-market surveillance. The entire process can take several years, with different timelines for each stage. Key aspects of the supply chain timeline in life sciences include regulatory approvals, quality control, and the need for timely delivery and storage of sensitive products.
Tariffs greatly increase the cost of manufacturing and transporting goods across borders, causing companies to take a close look at whether their supply chains are optimized.
Kerry Contini, Partner, Washington DC
Ensuring continuity in the face of potential disruption is paramount – but what steps can companies take today to shore up their supply chains from clinical and operational stages through to commercialization?
In this article, the first of four in a series on supply chains, we explore four key questions for decision-makers in the sector.
How can strong supply agreements lower my risk exposure?
Supply agreements are more than procurement tools — they’re essential instruments for managing risk across the product lifecycle.
Whether you’re sourcing clinical trial materials or commercializing an approved product, the right agreement can significantly reduce your exposure to operational, financial, and legal risks.
Daniel Garcia, Counsel, Houston
Agreements come in several forms, including clinical supply agreements, commercial supply agreements, and distribution or logistics agreements. Each type must be tailored to the product’s stage, regulatory context, and market dynamics.
Ensure the structure and flow of key provisions in supply agreements provide clear parameters for your organization’s liability. These should include details on recitals, definitions, scope of services, standards of performance, remedies for non-conforming batches, forecasting and purchase orders.
Additionally, setting detailed terms around IP and confidentiality, regulatory obligations and core risk allocation provisions can prevent or minimize the risk and penalties arising as a by-product of tariff changes in your supply chain. Terms could include representations and warranties, indemnification, limitation of liability, and carveouts. Building in timebound flexibility around terms and termination can also give companies options to exit and/or alter an agreement.
Why should I pay attention to Excuse of Performance Provisions?
In today’s environment of shifting trade policies and global uncertainty, it is more important than ever to clearly define when and how a party may be excused from performance under a supply agreement. The applicable legal framework will depend on both the governing law and the structure of the contract, and may involve a combination of contractual provisions and legal doctrines.
One of the most common contractual tools is the force majeure clause, which allows a party to suspend or terminate performance due to extraordinary events beyond its control. However, enforceability depends heavily on the clause’s specificity — what events are covered, whether the event is truly beyond the affected party’s control and not due to its fault, whether it materially impairs performance, and what notice and mitigation obligations apply.
Force Majeure clauses can play a pivotal role as they offer companies more options to strategically manage the outsized impact of tariffs. “They allow courts to interpret parties' intentions and cover events beyond “act of God” or “act of nature” to encompass provisions that allow for a broader interpretation of all events beyond parties' control. This offers flexibility and agility to companies,” says Garcia.
Beyond force majeure, other legal doctrines may also apply depending on the circumstances. Under common law, performance may be excused if it becomes objectively impossible. To avoid ambiguity and reduce the likelihood of disputes, Garcia shares that “contracts should clearly define excusable events and specify detailed procedures for notice, mitigation, negotiation, suspension, and resumption of performance.”
How can I protect my supply chain when working with CDMOs?
When working with Contract Development and Manufacturing Organizations (CDMOs) throughout clinical, operational and commercial phases, it is imperative to include essential services such as manufacturing, testing, and regulatory compliance. Tariffs and trade winds lead to fluctuations in price, availability of resources and timelines, so effective management of CDMO agreements is essential to support healthcare and life sciences supply chains efficiently.
Protecting your supply chain when working with a CDMO means understanding your product, your leverage, and your risks — and translating that understanding into a comprehensive, forward-looking agreement. The contract should not only document what happens when things go right, but also safeguard your supply chain when they don’t.
Anticipating and managing common pushbacks from CDMOs and suppliers — particularly around liability, performance obligations, and risk allocation — and seeking practical strategies for responding effectively is key. Garcia notes that “companies should also consider the nature of their product, its development stage (clinical vs. commercial), and how the value of the contract can influence negotiation dynamics and leverage.”
Key steps include:
- Having a clear understanding of the relationship’s context around the type of agreement, what products are involved, what services are outsourced etc.
- Drafting an agreement that anticipates real-world risks, accounts for likely CDMO pushback, and aligns with operational needs.
- Including enforceable and accountable strategies, including performance standards, remedies, purchase orders, invoice disputes, non-conforming batches, clear exit rights, transition support, tech transfer obligations, and post-termination protections to ensure continuity of supply.
- Accounting for key risk allocation provisions like representations, warranties, indemnities, insurance, liability limits, and carveouts.
- Controlling third-party dependencies by requiring transparency around subcontractors and suppliers, and establish your rights if third-party issues disrupt performance.
- Engaging in robust negotiations or cost-sharing agreements to reduce procurement costs.
How can I mitigate the impact of tariffs on my M&A prospects?
Diversifying supply chain manufacturing locations can help to secure your business’s footing across multiple regions, reducing dependence on one market and signalling value to potential acquirers. In particular, moving production to countries with lower tariffs and costs increases profitability.
Market expansion through M&A provides access to a larger customer base and growth opportunities. However, other options include selling assets in certain jurisdictions to reduce exposure while releasing liquidity to invest in other supply chain shifts.
Businesses can meet strategic aims by acquiring or merging with entities in regions less affected by tariffs. SMEs also use M&A to reposition in better environments, showing the broad impact of tariffs.
Hong Zhang, Head of PE, FenXun Senior Partner, Shanghai
However, M&A challenges are still prevalent in this environment. “Tariff proposals are influencing M&A activity because people are taking longer to do due diligence — buyers are more cautious. Additionally, more regulatory diligence is required and deal timelines are getting longer,” says Michal Berkner, Partner, London.
Mitigation strategies include:
- Assess transfer pricing and customs valuation, including transaction value methodologies such as first sale.
- Use of preferential tariff programs, inbound customs procedures and Free Trade Agreements.
- Import and export volumes in the US and elsewhere, broken down by products and current tariff rates.
Conclusion
The cost and complexity of relocating established testing, clinical, manufacturing and distribution operations can be prohibitive. “Rather than reacting to every headline, businesses should prioritize developments that impact their operations, build flexibility into agreements, and ensure business continuity despite policy changes," says Anne Petterd, Partner, Sydney.
Strategic decision-making considers both costs and feasibility across the intertwined nature of supply chain operability. "Companies must decide when to act. With higher stakes due to increased tariffs, decisive action can determine long-term impacts," says Contini.
Ultimately, the price of indecision could be the costliest.
Hong Zhang, Head of PE, FenXun Senior Partner, Shanghai, has contributed to this article.
*Baker McKenzie FenXun (FTZ) Joint Operation Office is a joint operation between Baker & McKenzie LLP, an Illinois limited liability.