United States

Amid pressure to reshore life science supply chains, challenges abound

INSIGHT ARTICLE  | 

The subject of reshoring supply chains to the United States is common on the campaign trail as presidential candidates discuss their plans for drug pricing or preserving American jobs. But the pandemic has also brought increased attention to the issue: as supply chains have become more complex and enmeshed with international commerce and geopolitics, some companies are taking a closer look at reshoring these supply chains to ensure continued access to goods.

In the life sciences space, reliable supply chains are especially crucial for access to medications and supplies, including supplies researchers need as they work toward a COVID-19 vaccine. While U.S. institutions continue to be powerhouses in developing innovative, safe and effective drugs and medical devices, much of the raw materials and active pharmaceutical ingredients for this work still come from overseas due to the lower costs and looser regulations found elsewhere. About 80% of API manufacturers are located outside the United States, according to figures from the FDA, and 70% of biologics and 35% of medical devices are imported. This leaves U.S. supply chains vulnerable to a number of outside factors.

Within the life sciences ecosystem, there is growing concern that reshoring efforts would increase costs, put upward pressure on drug prices as margins shrink and create a concentration risk for life-saving medications should a domestic crisis occur. This is contrary to the argument that the United States is exposed to national health and security risks because the majority of its APIs and generics are produced internationally. Given that manufacturers and distributors across all industries seek to diversify supply chains to create competition, control costs and diversify risk, the prospect of reshoring life science supply chains does create a new set of risks and opportunities for American businesses.

As an example, an executive order President Trump issued on Aug. 6 places a greater emphasis on federal agencies purchasing "essential medicines" from domestic sources. This will likely have the short-term effect of increasing product costs as companies face domestic competition for a limited number of suppliers. In the mid-term, this will lead to higher operating and capital expenditure costs as drug makers shift manufacturing facilities between multiple locations. According to Pharma Manufacturing, construction costs can range from $30–$100 million for a small molecule facility and $200–$500 million for a large-scale biopharmaceutical plant. 

While the trade group Pharmaceutical Research and Manufacturers of America (PhRMA) supports efforts to foster more domestic manufacturing, “proposals to drive all manufacturing of pharmaceuticals to the United States underestimate the significant time, resources and other feasibility challenges and complexities involved,” the organization said in a written statement. Biopharmaceutical manufacturers, it added, “begin setting up the supply chain for a given medicine years before that medicine is available to patients.”

Trump’s Aug. 6 executive order adds more roadblocks for companies working to find treatments and a vaccine for COVID-19, PhRMA CEO Stephen J. Ubl said in a statement.

“The ‘Buy American’ executive order could disrupt the global pharmaceutical supply chain, jeopardizing our ability to respond to the current crisis and potentially leading to major long-term supply chain disruptions, including shortages,” he said. “Rather than government mandates, we should look for policies that enable more domestic manufacturing without putting the stability of pharmaceutical supply chains at risk.”

It’s not just life sciences companies that are considering reshoring anew. Results released in early February from a Bank of America survey of analysts who cover 3,000 companies found that “companies in more than 80% of 12 global sectors…in each of North America, Europe and Asia-Pacific (ex-China) have implemented or announced plans to shift at least a portion of their supply chains from current locations.” Tariffs and national security were the top reasons for such changes, according to the research. The survey also found that “companies in about half of all global sectors in North America declared intent to reshore.” Although this survey was conducted before the pandemic took hold in the United States, we believe the pandemic has accelerated some of these reshoring priorities.

At the macro level, we categorize companies’ current incentive to reshore supply chains into four categories:

  1. Avoiding geopolitical uncertainty. The U.S.-China tariff war and frequent fits and starts among a number of trade agreements have created an uncertainty that companies want to avoid. While these factors may result in varying degrees of harm or benefit to U.S. enterprises in the near and long term, the impact on planning and perceived volatility to supply chains is crucial to consider.
  2. National security. There has been a decades-long movement to offshore North American manufacturing in search of lower costs and fewer regulations. Now, in the midst of a global pandemic with an uncertain future for international trade and mobility, it is natural to consider reshoring or nearshoring as a viable option. For the life sciences ecosystem, potential factors that may lead a company to consider reshoring include the U.S. FDA halting inspections of foreign facilities and global disruption of clinical trials.
  3. Economic, regulatory and tax considerations. Prior to the current pandemic-induced recession, the United States experienced a historically long period of economic expansion. Domestic businesses also benefited in recent years from falling energy prices, enhanced efficiency from automation and a generally more competitive corporate tax environment. At the same time, both the cost of labor and threats to intellectual property protections have been increasing internationally. Actions such as the Defense Production Act and a number of executive orders from President Trump are pushing life sciences companies and their consumers to seriously consider increasing activity in the United States.
  4. Reputational risk. A final consideration is reputational risk to an organization if its specific supply chains attract negative attention from media or regulators. This is an especially significant concern if a company’s products are perceived as extremely expensive, or if the federal government is the company’s main customer for a given drug product.

If Congress codifies recent executive orders and other sourcing restrictions, the life sciences industry could be looking at large-scale reshoring of supply chains over the coming years. However, the capital requirements and regulatory process to stand up full-scale production and obtain FDA approval would likely take years to accomplish, likely leading to higher costs for the consumer.

In our opinion, the reshoring of at least a portion a company's supply chain should be considered with tax planning, tariff management, legal and regulatory compliance and diversifying risk in mind. The decision should not be made due to fear, but rather to support the stability of the business and its employees.

We suggest stress-testing your supply chain to determine what a disruption would look like, how long quality and operations could be sustained if disrupted, and what the actual or opportunity costs of such a disruption would be. Some helpful RSM resources and insights include:

It is critical to establish a well-mapped and monitored supply chain in order to respond quickly in times of crisis, whether it be a global pandemic or a natural disaster. Looking at key performance indicators in relation to the actual cost or cost savings of reshoring will produce significantly more favorable results.

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