From Hormuz to healthcare – the overlooked supply chain risk in pharmaceuticals
17 JUL, 2026
By Invesco
By Mike Kelley, Senior Credit Analys, Invesco
Roughly 99% of active pharmaceutical ingredients (APIs) and their precursors are derived from petrochemical raw materials. India, which supplies half of the generic drugs prescribed in the United States and ranks among the world's leading suppliers, relies on the Strait of Hormuz for around 40% of its crude oil imports – oil that feeds directly into pharmaceutical manufacturing processes. The chemical raw materials used in that process are also frequently collected in Dubai and the United Arab Emirates before being shipped to their final destinations.
Specific vulnerabilities in pharmaceutical supply chains
A prolonged closure of the Strait of Hormuz poses a distinct threat to the pharmaceutical sector, striking at the industry's most fragile points: upstream chemical raw materials (the basic chemical building blocks for active ingredients), tightly qualified supplier networks, and time-sensitive logistics governing the movement of intermediates and finished medicines. Unlike other industries, pharmaceutical substitutions are constrained by Good Manufacturing Practice (GMP) requirements, registration filings, stability data, and quality agreements. These constraints turn what would be a simple sourcing problem elsewhere into a genuine production disruption risk. The fragility is compounded by the concentration of key starting materials (KSMs) and intermediates, along with the complexity of the cross-border routes linking chemical plants to API reactors and, ultimately, to formulation facilities and distributors.
Hormuz: a critical chokepoint
Hormuz remains one of the world's most critical maritime chokepoints, with very limited alternatives should traffic be disrupted. Such disruptions quickly affect the availability and cost of petrochemical derivatives and industrial energy used in chemical processes. Even when production continues, near-closure scenarios force rerouting, adding significant transit time and uncertainty that undermines the tight production scheduling and inventory planning pharma depends on. Rerouting around the Cape of Good Hope, for example, adds roughly 10–14 days to major Asia–Europe shipping routes, alongside sharp increases in war-risk insurance premiums and emergency surcharges. These delays are especially costly for pharma, where longer transit times raise inventory requirements, increase the risk of missing production batch windows, and push more shipments toward expensive expedited freight – costs that generic drug suppliers often cannot absorb without eroding margins.
Upstream supply risks: key starting materials and intermediates
The most serious vulnerabilities emerge at the upstream level – KSMs, solvents, reagents, and intermediates – where these inputs often have only one or two approved suppliers globally, and switching suppliers is a lengthy process. The greatest exposure lies in raw materials and early-stage production, which are far harder to reorganize than late-stage API manufacturing or finished dosage form production. When a chokepoint disruption limits chemical availability or raises delivered costs, the industry cannot easily find alternatives within weeks; it must qualify new sources, validate processes, and update regulatory filings. This turns a logistics disruption into a shortage and backorder risk that can persist for several quarters.
Pharmaceutical logistics: delicate and complex
Pharmaceutical distribution is not simply about shipping packages. Transport of APIs and intermediates is often time-constrained to meet batch production schedules and quality-control release windows. Finished products – including biologics and temperature-sensitive vaccines – require validated routes and careful handling. Longer journeys and congested transshipment points increase the likelihood of temperature excursions and product write-offs, shifting greater risk onto quality systems through deviations, investigations, and potential recall decisions. Under these conditions, logistics costs rise sharply, with higher freight rates, insurance premiums, and surcharges hitting low-margin generic manufacturers and distributors hardest.
Economic and supply chain impacts
Generic drug manufacturers often operate under contracts, tenders, and reimbursement structures where price adjustments lag behind cost changes. As a result, sudden increases in input and transport costs hit EBITDA immediately, tying up cash in larger inventories and longer transit cycles. As liquidity conditions tighten, financially weaker companies may cut production of less profitable products, worsening shortages of older, essential generics. Ongoing work within the European Union on essential medicine supply chain vulnerabilities has highlighted that production concentration, dependence on API sourcing from outside the region, and economic sustainability challenges are the main drivers of shortage risk – all of which are amplified by a chokepoint disruption.
Non-linear outcomes and systemic risks
A further critical factor is the potential for non-linear outcomes once safety stocks are exhausted. In the early stages of a disruption, supply chains can cope by paying higher freight rates, drawing down inventories, and prioritising high-value products. A prolonged disruption, however, can trigger downstream problems, including missed batch production due to a lack of intermediates, delays in quality-control testing, and constrained downstream supply, leading to regional shortages. In such scenarios, the impact becomes both a public health and a credit issue. We are closely monitoring companies for early signs of supply chain delays, which serve as the first indicator of potential problems. Once delays begin to appear, they are likely to increase pressure on corporate cash flow, driven by the need to hold larger inventories and potentially compensate supply chain partners for production delays. Such situations can also reduce revenues and increase expenses; for highly leveraged companies, this could trigger covenant breaches under banking agreements, requiring contract amendments and potentially higher financing costs.
Related articles
Better times ahead? Analysing Germany’s new macroeconomic reformsBy Felipe Villarroel
