4 minute read 30 Jul 2021
Old large pipe tunnel by the coast

How procurement executives can help reshore US pharma manufacturing

Authors
Derron Stark

EY-Parthenon Managing Director, Strategy and Transactions, Ernst & Young LLP

Driven to leverage science to help people lead healthier lives. Supply chain strategist. Husband and father. Passionate about soccer and cooking cuisine with international flavor.

Michael Botos

EY Americas Health Sciences & Wellness Strategy Leader

Business strategist. Entrepreneurial and transformational leader. Innovator, collaborator, connector. Helping others see new opportunities and have the courage to pursue them.

4 minute read 30 Jul 2021

With the push to onshore production, life sciences execs may need to examine supply chain processes to drive future value.

In brief

  • The push to reshore life sciences production means executives need to rethink procurement processes and sourcing strategies.
  • Biden’s tax plan and legislative incentives could trigger changes in supply chains.
  • Life sciences executives can take a multi-pronged, structured approach change operations set up over decades.

The life sciences global supply chain has evolved over the last three decades as much of the US domestic production of pharmaceuticals, medical devices and equipment transitioned overseas in favor of lower labor and overhead costs. But with a push now to move production back to the US, life sciences companies may need to rethink their procurement processes and sourcing strategies to enable their reshoring efforts and compete for the future.

According to the FDA, 88% of active pharmaceutical ingredient (API) manufacturing has shifted offshore over the past decade alone. In the last year, though, the COVID-19 pandemic has highlighted several weak links in the current global supply chain and heightened concerns about national security and public safety from both sides of the political spectrum.

Legislative incentives and penalties may further drive the need to pursue onshore supply. For example, in his March 2021 American Jobs Plan, President Biden called on Congress to invest $300 billion to retool and revitalize American manufacturers.

This includes:

  • $50 billion to strengthen manufacturing supply chains for critical goods
  • $30 billion over four years to protect Americans from future pandemics, including shoring up our nation’s Strategic National Stockpile (SNS) and onshoring APIs
  • $52 billion in domestic manufacturer investments to promote innovation, adaptation and scale to win the industries of the future, including life sciences.

Further, President Biden’s April 2021 Made in America Tax Plan proposes a number of tax policy changes that could trigger changes to the supply chain. The proposed changes include a global minimum tax and potential dis-allowance of tax deductions for payments to foreign entities that are not taxed at the minimum tax rate.

The initial Health and Human Services response to the executive order is the proposed formation of a public-private consortium for advanced manufacturing and onshoring of domestic essential medicines production, as well as a commitment to invest ~$60 million from the Defense Production Act to develop novel platform technologies to increase domestic manufacturing capacity for API.

Reversing operations established over decades can require a coordinated, structured and multi-pronged approach, including a holistic assessment of the company’s strategy and portfolio, supply chain and manufacturing, and tax, trade and policy considerations as illustrated in steps 1–3 in Figure 1. Based on the outcome of the assessment, life sciences executives can take actions to revamp their procurement process.

Seven step approach to addressing impact of reshoring policies

Reshoring challenges

Reshoring is likely to come with large costs and take several years as companies upgrade existing facilities or build new ones.

Developing a high-level road map can underscore the investments required in building or upgrading capacity. Per Figure 2, the cost of building a new biopharmaceutical facility can top $2b and take five years to construct, not including up to 18 months to secure the necessary regulatory approvals.

Estimated high cost and time upgrading facilities

How procurement can play a critical role in enabling reshoring

If the assessment results in the decision to reshore while avoiding capital investments by seeking domestic and regional partnerships, procurement can play a critical role in establishing the necessary supply chain resiliency, as well as making sure of the sustainability of the benefits from reshoring by identifying the right partners, establishing relationships and securing contracts.  

Strategic partnerships

An alternate approach to constructing new or upgrading existing facilities while potentially accelerating implementation of reshoring is for life science companies to better leverage contract manufacturing organizations (CMOs). Several leading CMOs have each invested or announced plans to invest $10m–$90m in expanding some of their US manufacturing facilities. Others have more than doubled their US manufacturing capacity within the past three years. 

To establish an optimal pool of strategic partners, procurement will not only need to assess CMOs’ capabilities, capacities and manufacturing footprint, but also evaluate how new technologies can best be utilized to enhance manufacturing efficiencies. Procurement may be critical in not just negotiating supply contracts but also in licensing contracts with new technology vendors that could potentially accelerate onshoring efforts and help reduce costs.

Using a purchasing consortium to facilitate reshoring

Establishing a procurement-related consortium that links life science companies with key ecosystem partners, such as CMOs, contracting packaging organizations (CPOs) and third-party logistics providers could further help drive sourcing and manufacturing efficiencies. A consortium consists of two or more independent organizations that join to collaboratively increase buying power and leverage economies of scale on materials, services and solutions offered by vendors. It can be set up by a third-party manager that aggregates volume across members or be established directly by a life sciences company as the sponsor before being pitched to other potential members. Based on EY experience and public sources, the top benefits of consortiums are risk sharing, accelerated learning and cost savings. In the medical industry, 75% of all medical and surgical supply dollars and 82% of pharmaceutical supply expenditures are already negotiated through influential purchasing consortiums.

Consortiums across a broad array of industries and applications have proven to be a very successful model for attaining procurement efficiencies and improving security of supply.

Adopt contract manufacturing agreements to incentivize SNS contractual obligations

The pandemic highlighted the need to build up the strategic national stockpile of essential medicines, sparking a bi-partisan push to make sure the SNS is well stocked for future emergencies. 

Given CMO margin pressures coupled with uncertainty of essential medicine volume requirements, CMOs may deprioritize capacity. Due to the criticality of SNS essential medicines, robust and differentiating contract manufacturing agreements can further incentivize, enhance partnerships and reduce risk with CMOs. Procurement plays an essential role in thoughtfully setting up these CMO contracts to meet domestic manufacturing requirements and secure proper fulfillment to satisfy SNS obligations (Figure 3).

Contract manufacturing agreements for SNS domestic CMO manufacturing

Reshoring recommendations

With the high costs and time associated with setting up existing and new manufacturing facilities, procurement can play a more integral role in solidifying reshoring efforts. By forming strategic partnerships, leveraging purchasing consortiums and establishing robust contract manufacturing agreements, life sciences companies can be better equipped to minimize risks of national security and optimize supply chain resiliency and costs.

Bevon Francis, Senior Director, EY-Parthenon contributed to this article.

This article originally appeared in Pharma Manufacturing.

Summary

Life sciences executives face a push to reverse the supply chain offshoring that has developed over decades. A structured, multi-pronged approach can help them revamp their procurement and sourcing.

About this article

Authors
Derron Stark

EY-Parthenon Managing Director, Strategy and Transactions, Ernst & Young LLP

Driven to leverage science to help people lead healthier lives. Supply chain strategist. Husband and father. Passionate about soccer and cooking cuisine with international flavor.

Michael Botos

EY Americas Health Sciences & Wellness Strategy Leader

Business strategist. Entrepreneurial and transformational leader. Innovator, collaborator, connector. Helping others see new opportunities and have the courage to pursue them.