Four Factors to Inform the Future of Pharma Reshoring
During much of 2020, there have been calls to “onshore,” or “reshore” API (Active Pharmaceutical Ingredient) manufacturing to the United States. Supply chain gaps in capacity, both local and global, became more apparent, something that most industry experts and the FDA knew existed on some level. It was a normal fear and security response to see calls for “reshoring.” The ability of the pharma community, the FDA, and other government participants to flex and work quickly to achieve rapid vaccine development and approval in very difficult conditions was impressive and we appear to now be on a timeline for distribution that few would have thought possible at the beginning of 2020.
As initial fear subsides and the vaccine is distributed, the question of how to address improvements to the global and local API supply chain will persist. While there are likely instances for appropriate redundancy and onshoring, the interests of the various stakeholders such as consumers, pharma, regulatory, not-for-profits and government national interests will drive a measured rather than broad brush approach. Fundamentally, the idea of broad reshoring is based on a false premise that you can put that cat back in the bag. Below are four important factors to consider in developing a disciplined approach to the reshoring conversation.
- Data Analytics and Integrity:
At the center of the reshoring debate has been inadequate data around how much API is manufactured in which country and what is the capacity within the global market to produce API. Until improvements in data transparency and quality are markedly improved, we will lack sufficient information to know the problem at an intimate enough level to design solutions. Companies will not disclose, without some compelling reason, from whom they source their material as that may be part of their competitive advantage. Congressional testimony regarding where registered API manufacturing facilities exist was not revealing as it fell short in understanding which facilities actively produce API or what API is produced.
More recently, research indicated that, by dollar value, the majority of API used in the U.S. is manufactured there as well. That jives if you presume high revenue branded drug API is produced in the U.S. and low revenue generic API is produced offshore. However, the research did not shed light on where to improve. Rather, it confirmed what we know; low revenue generic API is mostly produced offshore and is more subject to shortages. While drug shortage information is useful, it lags the cause and is not comprehensive enough to guide an end-to-end view. Expect improvements in data integrity, real time availability and transparency of API manufacturing information as the pharma supply chain improves. This, along with continued, technology enabled, quality control will be demanded by the government and improved transparency will be accelerated by adopting tracking technology methods that are already in process.
2. The Capacity, Redundancy, and Flexibility Equation
In 2014, an assessment of operations of U.S. pharma concluded that manufacturing was in a state of overcapacity. The pharma industry was also criticized for holding finished goods for too long rather than using appropriate approaches to flex up and down rapidly based on need. More recently, as excess capacity was reduced, and contract development and manufacturing organizations (CDMO’s) have enjoyed being capacity committed several years out, the reverse critique has emerged. Calls for redundancy, always available capacity and flexibility built into supply chain planning were heard before the pandemic started but were not at the top of the priority list for most stakeholders. Companies under earnings demands are unlikely to leave capacity unused. The overall judgment of the right balance of capacity and flexibility may have been overdriven by corporate finance but getting that equation correct to balance the needs of all stakeholders will require a combination of public, private and public/private partnership approaches.
3. Digital and Manufacturing Technology Advances
Continued advances in digital technology and manufacturing will enable more connected global pharma development and regulation as well as local manufacturing. This will both broaden the options in improving the global supply chain and narrow the need for reshoring and redundancy. In the area of global manufacturing and regulatory oversight, the pandemic has accelerated the adoption of digital and virtual technologies as it has in other industries. The increased rate of adoption for more innovative companies has enabled them to conduct virtual inspections in places such as Ireland and has allowed CMO’s in Ireland to share quality and supply information with offshore sponsors real time.
The pandemic has also brought attention to the gap in manufacturing capability for vaccines and other biologics such as gene and cell therapies. This gap has drawn the attention of private investment to step into manufacturing in the biologics space where they see substantial opportunity for what are likely to be high margin sales. New, private ventures, such as Resilience which is part of an $800M capital raise, aim to make a capital investment in U.S. biologic manufacturing through re-imagining manufacturing to take advantage of those high margin opportunities. Such an effort will require attention to innovation along the entire value chain such as taking the development of flexible and synthetic material packaging the last mile to solve the problems inherent in using glass vials for the storage of many biologics.
4. Political Interest
We will see governments continue to make loans and non-dilutive investments into drug production that are a matter of national security interest in the case of medical countermeasures and in a limited set of drugs, other therapeutics and medical supplies that are deemed critical to national health. For governments to make smart decisions in this area they will look to the first three factors above to narrow that decision to the critical few. Businesses will not abdicate business judgment to government and in countries such as the U.S., the government, culturally, is not apt to go as deep into the pharmaceutical business as other nations may. Rather, expect a combination of incentives to private business, low interest loans, and additional not-for-profit efforts such as Civica to solve the supply chain issues for certain generic drugs.
While there is certainly ample rhetoric to reshore pharma manufacturing, if it occurs, it will be along narrow better-informed decision lines as the above factors come into play. Generic drugs will continue to be cost effectively produced at acceptable quality levels outside of the U.S. with improvements in source transparency and technology enhanced oversight of quality and availability. There will be some exceptions made for national interest drugs to ensure affordability and availability; drug companies themselves will collaborate together and the government will provide incentives to bring some capacity buffer to the U.S., but in a focused manner. For those therapeutics that are high margin, and where the manufacturing process itself is the product, such as in the case of many biologics, expect more local investment in innovative manufacturing and packaging as research in those areas is brought to market. But with all these manufacturing vectors working in somewhat different directions at the same time, expect any major manufacturing changes in the onshoring and re-shoring area to be both constantly evolving and years in the making.