The growing benefits to reshoring pharma operations

Aug. 17, 2020
The need to explore the diversification of U.S. pharmaceutical supply chains and the feasibility of relocation has never been higher.

In September 2017, Hurricane Maria hit Puerto Rico, causing more than 3,000 fatalities and millions of dollars in damage. Several pharmaceutical companies with manufacturing and distribution operations on the island were hit hard, including Pfizer, Amgen and Bristol-Myers Squibb. The hurricane highlighted several vulnerabilities and risks to the U.S. pharmaceutical supply chain — similar vulnerabilities that we are now seeing again with COVID-19.

Chief among these issues is bringing pharmaceutical manufacturing onshore. America’s dependency on China and India for active pharmaceutical ingredients (APIs) has increased dramatically since the early 2000s — over 80 percent of pharmaceutical ingredients currently come from these two countries. 

And we are seeing increasing pressure from lawmakers to bring manufacturing plants back onshore. In this year alone, almost ten pieces of legislation pushing for onshore manufacturing have been introduced to Congress. The CARES ACT, which Congress recently passed in response to the pandemic, calls for an analysis of manufacturers’ supply chain resiliencies. Improving the flexibility of the supply chain and understanding the factors that have driven U.S. pharmaceutical organizations to offshore their manufacturing operations is of essence to understand the impact of relocation. These changes will require companies to respond quickly, but the question remains:  Will pharmaceutical companies be ready to respond at a moment’s notice to these legislative shifts? 

The current offshoring environment

Pharmaceutical companies are attracted to non-domestic suppliers’ advantages, including low manufacturing costs of intermediate chemical goods, low investment costs, shorter lead times and access to an international, well-educated, low cost work force. Some countries offer tax incentives and credits to U.S.-based companies to move manufacturing facilities to their country. Such is the case in Ireland, which holds the highest dollar amount of pharmaceutical import sources in Europe.

In addition, offshoring operations increases access to raw materials at a competitive price. Most commercial API supply is provided by an internal manufacturing site using contracted — often non-domestic — suppliers for their advanced intermediates or starting materials. As of August 2019, only 28 percent of the pharmaceutical plants that manufacture APIs for the U.S. market were based onshore. The remaining 72 percent were based outside the U.S., with China and India alone representing 31 percent of the APIs supplied to the U.S.

While there are many benefits to outsourcing, the use of foreign-sourced materials does create vulnerabilities to the U.S. drug supply. Natural disasters (e.g. Hurricane Maria), international trade friction (e.g. China vs. U.S.), or global pandemics (e.g. COVID-19) are just a few examples of the threats. The most recent example is U.S. dependence on China for antibiotics during the pandemic such as azithromycin, ciprofloxacin, and piperacillin/tazobactam, and anti-malarial drugs being explored as potential therapies. The demand for these products has resulted in several organizations reporting drug shortages to the FDA.

The current U.S. reliance on foreign manufacturing of prescription drugs is a risk to key regulatory bodies, pharmaceutical companies and ultimately, patients. Current drug demands, pricing, quality concerns and potential supply chain disruption constrains patients’ access to drugs. The need to explore the diversification of U.S. pharmaceutical supply chains and the feasibility of relocation has never been higher, so we need to address the key advantages and disadvantages to re-positioning the current supply chain of pharmaceutical products compared to the status quo.

Three perspectives in investigating supply chain relocation

The impact of these external factors presents the U.S. with opportunities and risks. The Association for Accessible Medicines (AAM) published a report in April 2020 in which it sets out the steps the U.S. government could take to provide its citizens with a continuous supply of critical pharmaceuticals. Let’s look at these options through the lens of three distinct stakeholders:

The FDA: The first stakeholder is the FDA which — in addition to other product oversight — is responsible for controlling and supervising pharmaceutical products in the U.S. Through the lens of this governmental institution, it is estimated that supply chain relocation could lead to an increase of $200 billion in GDP, creating a clear advantage. While this estimated growth in GDP will positively impact the U.S. government and its citizens, it might also impact the U.S.’ relationship with the World Trade Organization (WTO) and discourage foreign organizations from trading with the U.S. if they can find alternative solutions.

The industry: From the industry’s perspective, many companies relocated their manufacturing plants to Europe and Asia and these countries welcomed them by offering attractive tax rates. An advantage for these companies may be that the U.S. government will offer similar attractive rates. It is estimated that the U.S. government may be willing to offer a tax deduction of up to 9 percent of an organization’s income attributable to manufacturing. In contrast, it can take up to two years to transfer a single product to a new site (such as process transfer, filing, etc.). Additionally, the U.S. labor and current tax regulation will decrease the company’s bottom line figure.

Opportunity Zones represent another reshoring possibility — one where economically distressed communities may be the new destination for such manufacturing sites. Pharmaceutical companies can construct new green field facilities and benefit from lower labor costs and possible capital gain tax incentives.

And while reshoring will certainly be on the rise, much has already been invested to attract pharmaceutical companies to build their manufacturing sites on international soil. The increasing global footprint of pharmaceutical companies has made scaling innovation and specialization critical as a single pharmaceutical company now has numerous suppliers located around the world. These companies will now have to rethink these strategies and their product portfolios. 

The consumer: Lastly, we will take the perspective of the end consumer or patient. A clear advantage to the patient — which we are seeing in the current public health crisis — is increased security in access to drugs as drug shortages can be managed close to home. Safety benefits are also likely to increase as local FDA inspections are executed more regularly. While the access to drugs is a clear and important advantage to U.S. citizens, there will likely be an increase in additional cost allocation to the patient, health care provider or health insurance companies. Ultimately, this may impact premiums for citizens, employers and individual co-pays.

Next steps

Given the risks and disruptions that pharmaceutical companies have experienced in the past and now, during this health crisis, the decision to redesign supply chains takes on a new level of urgency for executive teams. Rather than evaluating this in siloes, organization’s leadership should seek advice from their experts to evaluate their end-to-end supply chain plan holistically and include their strategic, operational and financial leaders to optimize its resiliency.

Firstly, organizations should evaluate their dependency on raw materials and its origin. The dependency has increased over time and organizations should assess if this is their only option. Then, they must analyze the options to diversify the access to supply by relocating facilities. This analysis will highlight new scenarios (and new dependencies), exposing new ways to change the end-to-end supply chain process.

After a conducting this analysis, organizations should consider conducting a tax analysis of relocation initiatives. This way, organizations can stay one step ahead of any regulatory changes that may come as a result of the CARES Act and other proposed bills and pivot as a result.

With likely new public health crises coming, one thing is certain — a global supply chain review is required, and historical progress should not be used as a measure for future success.

Top image courtesy of Sergio Souza via

About the Author

Lisa Walkush | National Managing Principal; Yvette Jansen