By Derron Stark and Jay Welsh
The COVID-19 pandemic exposed the dependence on global supply chains, as well as the limited domestic manufacturing capacity in the U.S. for critical medicines and medical devices. Recurring drug and medical device shortages and quality issues related to offshoring also have encouraged U.S. commercial customers to purchase from domestic manufacturers. The government policy response has been an intense focus on building up domestic manufacturing capabilities.
Recent executive orders from the Biden administration, as well as proposed or pending legislation, have focused on boosting supply chain resilience to address national security, public health, and safety concerns, both now and for the future.
For biopharma execs engaging with CDMOs, rethinking domestic manufacturing goes beyond supply chain evaluation. Leaders should address three main areas to holistically assess their global operating model.
Holistically Assess Strategy And Portfolios
Biopharmas and their CDMOs should take a holistic view of the potential redirection of drug purchasing by government and commercial customers to domestic manufacturers, to understand how it impacts their revenue and margin. Biopharma executives should consider asking: 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 our current investment road map and capital allocation strategy? And 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 should be considered, including strategies around the industry’s shift toward large molecules, biologics, sterile injectable, and potential opportunities to accelerate and include domestic manufacturing as an enabler. Other considerations include changes in federal and state government purchasing requirements, competitive domestic manufacturing capabilities, and market share growth opportunities by product.
Executives should also examine existing product-level manufacturing and supply chain cost trade-offs, product portfolio strategy, launch plans and financial forecasts, and manufacturing capacity and partnerships with CDMOs, as well as alignment to growth strategy, capability road map, and M&A opportunities.
Analyzing Supply Chain And Manufacturing Operations
Trying to reshape a supply chain that took decades to build will be a complicated and expensive process. The economic costs of reshoring active pharmaceutical ingredients and finished product manufacturing are likely to be significant; reshaping the strategic architecture of the global supply chain also can create increased operating expenses in the future. When trying to redesign the global supply chain and examining CDMOs, biopharma executives should consider asking: 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? And how can we transform at speed and still build value-led sustainability?
Biopharmas should analyze supply chain operations and costs and be prepared for structural shifts. Leaders should have a clear understanding of the complexity of the global value chain, the impact to current trade flows and fulfillment capabilities, and what new technologies and processes may be required to facilitate domestic manufacturing. Additionally, executives should map out necessary capital investments and the timeline to upgrade or build new facilities, plan exit strategies from existing supply sources and potential disruptions, and explore incentives from federal or state governments and price/volume support to achieve scale economies.
Tax, Trade, And Policy Considerations
Many biopharmas have leveraged their internal manufacturing capabilities and CDMOs to develop complex tax-efficient supply chains that encompass a global operating footprint. While it is not yet clear what will become law, proposed international tax law changes should be evaluated against the impact on a company’s existing and future operating model. Tax executives in biopharma companies should ask: Is the current legal entity structure and intellectual property (IP) ownership impacted by potential legislative changes? How would a change in manufacturing location and/or manufacturing outsourcing alter the company’s tax position or tax controversy risk? Are there any potential tax costs associated with exiting current manufacturing locations? Are there any incentive programs that should be evaluated?
Areas of consideration include U.S. tax deferral position if using CDMOs, transfer pricing model sustainability, and impact to value drivers; impact to existing incentive regimes and potential clawbacks; location- and activity-based federal programs; and competitive state and local discretionary funding.
Current geopolitical and economic trends may favor a move to domestic manufacturing, but these considerations must be weighed against any financial costs, transition risks, and effect on future manufacturing flexibility. Biopharma executives should use this opportunity to holistically examine their global operating model, including their CDMOs, beyond supply chain considerations. Consider the following preparatory measures to respond better to further government policy development and the potential redirection of drug purchasing to domestic manufacturers:
- Assess feasibility across your portfolio and the opportunity for enhancing domestic manufacturing.
- Evaluate the 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.
By broadening the focus and examining relationships with CDMOs, biopharma companies can work to achieve competitive positioning and protect revenue at risk.
About the Authors:
Derron Stark is a partner at EY-Parthenon, where he advises clients on building supply chain resiliency.
Jay Welsh is a partner at EY, where he leads the Life Sciences Supply Chain practice and serves as the Americas lead for the cross-industry Manufacturing practice.
The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization.