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- Should I reshore or nearshore?
- Can I mitigate supply chain disputes resulting from tariffs?
- How can I adapt to shifting regulation?
- What impact do custom duties, transfer pricing and tax considerations have on my business?
Amid fluctuating tariffs and complex trade policies, healthcare and life sciences (HLS) companies face mounting operational and legal challenges within their global supply chains. Organizations are taking steps to retool their supply chains in response to threats against stability, but change introduces myriad knock-on implications.
Supply chains must be viewed as an ecosystem. As companies navigate where and how to make changes to their supply chains in response to tariffs, they must protect the pipeline and supply while bearing the pressures of rising costs and legal risks.
Kerry Contini, Partner, Washington DC
In the second article of the series, we explore four key questions for HLS businesses considering new supply chain strategies.
Should I reshore or nearshore?
Nearshoring or reshoring brings business operations closer to home, offering enhanced control over supply chains and greater risk mitigation. But before jumping into real estate purchases, companies must consider contingent factors that will have a material bearing on business operations such as tax incentives, employment law(s) and ease of working with existing and/or new utility providers, suppliers, or manufacturers.
Additionally, government infrastructure and regulatory conditions may also make some locations more appealing than others. Accordingly, shifting demands for real estate in prime markets, particularly in strategic and/or flexible jurisdictions, could also drive costs up.
Beyond paying attention to disruptions to existing processes, Anastasia Herasimovich, Partner, Chicago, notes that “Risks relating to the disruption of existing processes, higher sunken operational costs and additional exposure to geopolitical and natural challenges should also be considered when investing in alternative real estate to mitigate tariff impacts.”
Can I mitigate supply chain disputes resulting from tariffs?
Well-structured supply chain agreements can reduce disputes risks, by clearly defining expectations across key areas.
- Core business terms: Ensure clarity on scope of services, pricing, minimum purchase volumes, and payment terms — set the commercial foundation which helps avoid disputes over baseline obligations and financial exposure.
- Operational terms: Align terms that govern how the agreement functions day-to-day, such as product specifications, forecasting mechanics, raw material sourcing, change control, and capacity reservation with the product’s development stage and complexity. Aligning these terms with the product's development stage and complexity ensures the agreement reflects real-world execution risks.
- Risk allocation provisions: Clearly determine who bears which risks when things go wrong. This includes performance standards, risk of loss, remedies for non-conforming products, warranties, indemnification, insurance, and termination rights.
- Excuse of performance clauses: Be specific with clauses — such as force majeure, impossibility, or change in law — and impose notice and mitigation obligations. Define how long performance can be suspected before termination rights are tiggered.
In addition to the importance of excuse of performance clauses, Daniel Garcia, Counsel, Houston, notes, “Structural and miscellaneous terms — like governing law, dispute resolution, assignment, and amendment procedures — can significantly affect your ability to adapt during periods of disruption or legal uncertainty.”
Attention to detail in CDMO contracts can also make a difference in risk management. A strong agreement should start with clear core terms. Garcia advises: “Align early on scope of services, pricing, volumes and timelines—these are the foundation of the deal. Every other provision should be built around, align with, and reinforce these shared expectations.”
Crucially, allocating risk thoughtfully involves calibrating to parties’ roles and the operational realities of any agreement. This involves addressing standards of performance and remedies for failure, risk of loss, non-conformance, failure to supply, representations and warranties, indemnification, insurance, and limitations (and exclusions) of liability.
Celeste Ang, Principal, Singapore, reflects on the knock-on impact of tariffs on disputes risk. “Complex supply chains, which are not uncommon in the HLS industry, now must take the additional burden of managing regulatory and location-specific compliance resulting from tariff and trade changes. These challenges must be addressed from the perspective of diversification of sourcing, testing, manufacturing, storage and licensing across multiple jurisdictions. Companies should stay ahead of the risk curve by conducting robust regulatory and compliance risks assessments and audits including of vendors and partners, and map out contingency plans and strategies,” says Ang.
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How can I adapt to shifting regulation?
Supply chain shifts, from clinical to operational stages, bring additional complexity to regulatory compliance. Changing sourcing, testing, manufacturing or marketing authorization sites makes compliance considerations more technical, particularly when cross-border operations are involved.
Shifts in manufacturing sites due to tariffs or trade practices affect Good Practice (GxP) compliance, which despite global harmonization, may still vary between jurisdictions to greater or lesser extent. Els Janssens, Counsel, Brussels, notes that “Companies should also account for longer facility readiness timelines and inspection waiting times due to increased demand and capacity constraints.”
Measures such as the EU Omnibus package, aimed at simplifying certain EU rules and enhancing competitiveness could help temper the impact of trade tariffs and customs on HLS supply chains. However, the EU Omnibus can also compound the impacts of tariffs and customs and raise risk profiles as a result of regulatory uncertainty and weakened supply chain due diligence. Increasingly strict compliance demands and the need for greater supply chain transparency are driving operational changes and raising costs for companies.
National security concerns are now being integrated into FDA approval processes for drugs and oversight of clinical trials. This marks a shift from the FDA’s historical focus on safety and efficacy, to include new criteria such as domestic manufacturing as a national security priority.
Xin Tao, Partner, Washington DC
Despite new policies, including pricing reforms and national security provisions, which may introduce ambiguity, Tao notes that the industry is adjusting without major disruption. “Companies view changes more as challenges to be managed than as barriers that would fundamentally impede innovation or cross-border collaboration and deal-making,” says Tao.
For biotech and pharma companies, stricter regulations and increased tariffs can impact research and development (R&D) investments and increase the time and cost of bringing new drugs to market. Henrique Frizzo*, Partner, Trench Rossi Watanabe, Brazil, notes that "Stricter EU reforms through the EU Pharmaceutical Package, and US tariffs on APIs, are inflating compliance burdens, disrupting transatlantic supply chains, and delaying trial approvals -demanding agile regulatory strategies."
For medical device companies, new compliance requirements and tariffs can affect the import and export of medical devices, influencing market access and pricing. Non-compliance and/or disputes can lead to product recalls, legal penalties and damage to reputation.
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What impact do custom duties, transfer pricing and tax considerations have on my business?
With higher tariffs, pharmaceutical and medical devices will now face import duties in the US and other countries imposing retaliatory measures. Companies may shift these costs to end-users, but this requires specific attention to commercial agreements and can impact marketability, and therefore profitability.
Tariffs raise costs that may affect transfer pricing and Arm’s Length Principle compliance. Companies must decide which entity should absorb these costs to maintain tax deductibility and align with group transfer pricing policies.
Reviewing the use of transfer pricing for intercompany sales and considering alternative customs valuation methods can also help mitigate the impact of tariffs.
Julia Skubis Weber, Partner, Dallas
Additionally, companies should also ensure they mitigate any potential issues with double taxation and pay attention to possible different interpretations of cost allocation. Double taxation issues may also increase the risk of tax disputes, and companies should have robust Mutual Agreement Procedures (MAPs) in place.
Get integrated supply chain advice across your healthcare and life sciences business
Retooling supply chains can bring unforeseen consequences. To stay ahead of knock-on impacts, organizations must break down siloes between functions and engage integrated legal, tax, and operational expertise early in their supply chain decisions.
From clinical and operational stages to commercialization, our team of integrated specialists around the globe are well-placed to advice on contractual, regulatory, risk management, and transactional elements of your supply chain in the face of trade winds and geopolitical uncertainty.
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*Trench Rossi Watanabe (Brazil) and Baker McKenzie have executed a strategic cooperation agreement to consult on foreign law.