A starting roadmap to reshoring pharma

June 14, 2021
How life sciences executives can rethink domestic drug production as part of a broader plan to reshape their global operating model

Life sciences companies are facing several forces that require them to rethink the global operating model they have built up over decades and prepare for more domestic manufacturing and supply. This shift comes with a changing demand footprint and customer touch points at the same time that geopolitical and economic trends may favor domestic production and diverse sourcing approaches.

Even prior to the pandemic, there was a push to reshape how life sciences companies operate. This was due to the shift toward large molecules, biologics, sterile injectables and an ecosystem-based business model. The pandemic has intensified government policy focus on domestic manufacturing capabilities, exposing dependence on global supply chains and limited domestic manufacturing capacity for critical medicines and medical devices.

Recurring drug and medical device shortages and quality issues related to offshoring have also encouraged U.S. commercial customers to de-risk their supply chains by including domestic manufacturers. In addition, the proposed American Jobs Plan and accompanying Made in America tax plan, executive orders from the Biden administration and bipartisan legislation have focused on boosting domestic manufacturing capabilities to address national security, public health and safety concerns.

For life sciences companies, rethinking domestic manufacturing is not just a supply chain evaluation. Rather it should be a holistic assessment of the critical elements in the life sciences global operating model with a full checklist of areas that need to be addressed.

1. Strategy and portfolio

It is important for life sciences companies to take a holistic view of the potential redirect of drug purchasing by government and commercial customers to domestic manufacturers and how it impacts their revenue and margin. Life sciences executives should consider asking these key questions:

  • What product-level revenue and margin are “at risk” to competitors with domestic manufacturing capabilities?
  • What new sets of risks and opportunities are created with the prospect of domestic manufacturing capabilities?
  • How will a reshoring or nearshoring effort affect the company’s current investment road map and capital allocation strategy?
  • How does the company prioritize investments in new assets, capabilities, processes and technologies to achieve its operating model strategy — (build vs. buy vs. partner)?

Numerous factors need to be considered to fully answer these questions, including strategies around the industry’s shift toward large molecules, biologics and sterile injectables, and potential opportunities to accelerate and include domestic manufacturing as an enabler.

Other considerations include:

  • The Biden administration’s January 25 Buy American executive order prioritized domestic manufacturing, including potentially for the purchase of products on the U.S. Department of Health and Human Services (HHS)/U.S. Food and Drug Administration (FDA) lists of essential medicines and medical devices for the Strategic National Stockpile (SNS)
  • Other changes in federal and state government purchasing requirements
  • Competitive domestic manufacturing capabilities and market share growth opportunities by product
  • Existing product-level manufacturing and supply chain cost trade-offs
  • Product portfolio strategy, launch plans and financial forecasts
  • Manufacturing capacity and partnerships with contract manufacturing organizations (CMOs)/contract development and manufacturing organizations (CDMOs)
  • Alignment to growth strategy, capability road map and merger and acquisition (M&A) opportunities

2. Supply chain and manufacturing

Trying to reshape what took decades to accomplish will require careful examination of the global supply chain. The economic costs of reshoring active pharmaceutical ingredient and finished product manufacturing are likely to be significant. Reshaping the strategic architecture of the global supply chain can also create margin risk. When trying to redesign the global supply chain, life sciences executives should consider asking the following:

  • How can we minimize the cost impact from exiting current supply sources and potential disruptions?
  • What other risks do we need to consider and mitigate?
  • How can we transform at speed and still build value-led sustainability?

Life sciences companies will have to analyze supply chain operations and costs to be prepared for structural shifts.

The key areas to understand are:

  • Complexity of the global value chain
  • Impact to current trade flows and fulfillment capabilities
  • New technologies and processes required to facilitate domestic manufacturing
  • Capital investment and timeline to upgrade or build new facilities
  • Exit strategy from existing supply sources and potential disruptions
  • Incentives from federal/state government and price/volume support to achieve scale economies

3. Tax, trade and policy considerations

Many life sciences companies have developed complex tax-efficient supply chains that encompass a global operating footprint. While it is not yet clear what will become law, proposed Made in America tax incentive changes may need to be evaluated against the impact on a company’s existing tax structure, exit costs and U.S. tax exposure. Tax executives in life sciences companies should consider asking these key questions:

  • How is the current legal entity structure and intellectual property (IP) ownership impacted by potential tax changes and incentives for enhancing domestic manufacturing?
  • What tax incentives can we take advantage of and what penalties can we avoid?

Areas of consideration include:

  • Impact of round-tripping provision on existing supply chain structure and IP ownership
  • Subpart F, global intangible low-taxed income (GITLI), Base Erosion and Anti-Abuse Tax (BEAT) and foreign derived intangible income (FDII) considerations
  • Transfer pricing model sustainability
  • Impact to existing incentive regimes and potential clawbacks
  • Location- and activity-based federal programs
  • Competitive state and local discretionary funding
  • Statutory “by-right” tax benefits

Key takeaways

Life sciences executives can take the following preparatory measures to respond better to further government policy development and potential redirect in drug purchasing to domestic manufacturers:

  • Assess feasibility across portfolio and opportunity for enhancing domestic manufacturing.
  • Evaluate complexities and capabilities required to support domestic manufacturing imperatives.
  • Understand the value of “revenue at risk” and margin impacts.
  • Benchmark anticipated incentive offers.
  • Create optionality based on possible scenarios.
  • Identify potential tax implications and exit costs.
About the Author

Derron Stark | Principal, Strategy and Transactions, EY