From The Editor | April 6, 2018

Biopharma Outsourcing Will Overcome Tariff Troubles

Louis Garguilo

By Louis Garguilo, Chief Editor, Outsourced Pharma
Follow Me On Twitter @Louis_Garguilo

Biopharma Outsourcing Will Overcome Tariff Troubles

Why has the biopharma industry insisted on dual (or triple) sourcing of materials? Why does Big Pharma perform outsized due diligence on suppliers — particularly offshore CMOs? Why do we (incessantly) speak of partnerships overtaking transactional contracting? And why do we maintain an intense focus on costs of goods and services?

One reason is so we know we can calmly weather uncertainties such as the current tariff troubles between the U.S. and China.

If indeed U.S.-based biopharma companies will need to take actions, those would mainly be to employ contingency plans already in place, or to adjust which suppliers supply what and how much.

But as you’ll see, little action if any may be necessary. And if it is, it could be well worth the efforts.   

 For Or Against

We can agree or disagree on the trade tactics employed, but on two points we should all be affirmative. The first is as mentioned above, we are prepared as an industry for contingencies.

Second, the overall objective on the part of the U.S. should be to stop the theft of intellectual property by China. If theft is too strong a word for some, coercion will serve just as well.

The Chinese themselves put little effort into arguing the fact of their forcing U.S. and other foreign companies to hand over their intellectual property. How could they? They’ve enshrined it in law. China feels privileged to foreign companies’ IT-knowhow running its software and business algorithms, the engineering in its electronics, and for our industry, it’s been our sophisticated production and manufacturing prowess, and our device technologies.

Here’s how Martin Feldstein, Chairman of the Council of Economic Advisors under President Ronald Reagan, and current professor at Harvard, describes the situation in a Wall Street Journal article yesterday (Thursday, April 5):

“The most important issue is the demand that U.S. companies transfer their technology to Chinese counterparts as a condition of doing business in China. American businesses that want to produce or sell in China are often required to enter into a joint venture with a Chinese firm that then has access to U.S. technology. Chinese companies then use that technology to expand their own production and sales at home and to displace American firms in the rest of the world. The result is a loss of income to the American businesses.”

Again, while we can disagree about tariffs being the correct corrective, let’s not instead point to other areas that have for years proven impotent to remedy the situation, including the World Trade Organization (WTO). Here’s Feldstein on this subject specifically:

“The Chinese government acknowledges that WTO rules forbid making the transfer of technology a condition for access to a nation’s economy. But it argues that the practice is “voluntary” because American firms aren’t forced to do business in China—their other option is to stay out of the country. American companies and officials say it’s a form of extortion because U.S. firms should have access to the Chinese market, as they do to markets in Europe and elsewhere, without losing their intellectual property.

“Although the Chinese practice violates WTO rules, it is difficult to bring a successful technology-transfer case because American companies fear retaliation by Beijing if they complain openly or provide detailed evidence that the U.S. government can use in pursuing such a case. Even so, the U.S. government began an investigation in August 2017, as called for by WTO rules, and concluded last month that China does violate the rule that market access may not be conditioned on technology transfer. The U.S. then imposed tariffs and other penalties.”

Back to biopharma specifically, what could the outcome of all this be? Yes, there is the potential for some increases in the costs of raw materials or intermediates supplied from China to U.S. biopharma companies. Yes, there may be the need to activate (or put in place) plans to utilize or find second or new partners for some materials.

But wouldn’t these be worth the potential of obtaining that ultimate goal: the securing from Chinese companies and its government – and that connection cannot be denied – of your proprietary processes and intellectual property? When a culture feels entitled to foreign IP as a right to do business, can you ever really be secure working there?

Improvements Beget More Of The Same?

Not lost on our biopharma industry is that regarding putative manufacturing restrictions and the like mandated by China on foreign companies, and also areas such as clinical trials and drug product importations, there has in fact been some progress.

Last year the Chinese government issued some regulatory reform to the approval system for drugs and medical devices. According to DLA Piper, a global law firm, this led to a “subsequent flood of CFDA [China Food and Drug Administration] changes and proposed changes to the system, and we should see further regulatory reform in 2018 as the Chinese government continues to encourage domestic innovation in this sector … These developments set the stage for 2018 to be a milestone year for reform in the drug and medical device sector.”

Perhaps reform begets reform. Yet, DLA Piper reminds us the IP issue remains. “One issue to watch in 2018 is regulatory reform on who can hold marketing authorization for drugs and medical devices. Other sector issues to monitor in 2018 include wider acceptance of clinical trial data and strengthened protection of intellectual property.”

Not About China’s Suppliers

It’s important I make clear this is not about China’s suppliers. This discussion should not impugn any CRO, CDMO or CMO there.

Also, it should be stated that not overlooked here is that anything potentially impacting the cost of drug substance and/or products in this hyper-price-sensitive era is very concerning.

And always the main concern: Any disruption or narrowing of reliability in the drug supply chain thus impacting patients.

But with these clarifications in place, the overall theme here remains: The biopharma industry is set up to overcome just such contingencies. In fact – and despite the U.S. again ramping up the rhetoric as I write this – nothing has actually transpired. This observer (of politics and our outsourcing industry), believes little or nothing may in practice transpire, and the consequences to our industry will be minimal if at all.

But any pain actually felt in the outsourcing supply chain may in fact be offset by a far more consequential outcome: the protection of your intellectual property in China.