Medicine & Healthcare

The medicines and medical equipment that underpin health care around the globe rely on some of the world’s most integrated and complex supply chains, many of which run through the Strait of Hormuz. Middle East-derived petrochemicals, including naphtha, methanol, and solvents are used in drug precursors known as Active Pharmaceutical Ingredients (APIs). Over 50 percent of U.S. generic prescriptions and major API sources originate from India, whose domestic chemical feedstocks are highly vulnerable to Gulf trade routes.

Because parts of the industry operate on very thin margins, even modestly higher transport, energy, and input costs can result in production cuts or delays for critical drugs and medical products. COVID-era lessons learned have improved resilience, and many U.S. manufacturers and medical institutions now hold up to six months of inventory. But the risk is growing that shipping disruptions and elevated manufacturing costs will translate into higher drug prices and delayed care. Under a prolonged disruption scenario, hospitals and providers could be forced to triage care, with delays in diagnoses and treatment as inventories are depleted and replenishment cycles break down. 

Generic medicines, which make up over 90 percent of U.S. prescriptions, are especially vulnerable to disruption. India is a major manufacturing and distribution hub for global generic drugs, supplying 20 percent of generic medicines worldwide. India also exports many of the APIs for advanced drugs manufactured in the United States and Europe. India’s pharmaceutical industry, in turn, imports 70 to 80 percent of its raw materials from China — creating a tightly strung global supply chain that stretches between Asia, the Gulf, and drug manufacturers, patients, and hospitals in Europe and the United States.

As higher energy costs and reduced petrochemical flows constrain China’s industrial production, including for drug inputs, the costs and delays are passed on to Indian generics and API manufacturers already operating on airtight margins, which are taking a further hit from higher freight and aviation costs. The result will be higher prescription drug prices, but even more worrisome is the potential that cost pressures will lead manufacturers to cut production, or drug companies to discontinue medications that are no longer economically feasible to produce. The disruptions hitting India and the Gulf as major distribution hubs for the global pharmaceutical industry thus create an environment for significant drug and medical supply shortages if normal supply flows do not resume.

Disruptions are also impacting a wide range of other medical goods. Naphtha, a petroleum byproduct, is utilized in sterilization processes for products such as syringes and tubing and used to manufacture plastics used in hospital gowns and medical gloves. Japan imports naphtha from the Gulf and is almost 100-percent dependent on Southeast Asia for lower-cost medical products. Citing concerns over the disruptions, the Japanese health ministry reported that some 5,500 businesses had requested support in securing medical supplies and announced the release of 50 million medical gloves from a national stockpile in May. 

The health sector accounts for over 30 percent of global helium demand, chiefly for cooling MRI machines. Damage to Qatar’s production facilities in March has removed one-third of global helium supply; major helium distributors have invoked force majeure and initially restricted supply to some customers by 50 percent. The immediate fallout for hospitals has been contained, as suppliers are able to ration available stock and allocate it towards essential medical and defense uses. If shortages worsen, however, hospitals will be forced to compete for dwindling supplies – including with semiconductor manufacturers in Taiwan, Korea, and elsewhere. Those industries can absorb significantly higher prices. Bidding wars have already driven helium prices 40 to 100 percent higher since March. The risks grow of extended MRI wait times and delayed diagnoses for cancer and neurological diagnoses the longer the conflict continues to snarl supply chains and delay repairs to production infrastructure across the region.