Economic nationalism affects pharmaceuticals
Economic nationalism has experienced a resurgence in the U.S., with Republicans lambasting domestic companies that have outsourced their manufacturing to other countries. In January of this year, President Trump extended this critique to pharmaceutical companies, which in his view are “disastrous…they supply our drugs, but they don’t make them here” . While the current political climate is uncertain, the administration could pursue a number of measures to encourage domestic pharmaceutical manufacturing, such as high import tariffs on pharmaceutical products or a border adjustment tax.
Domestic manufacturing: a challenge and an opportunity
Manufacturing a therapeutic drug begins with production of the active pharmaceutical ingredient (API), i.e. the molecule that has a direct therapeutic effect, and requires additional formulation and packaging, such as the capsule of a pill or the syringe containing insulin. 80% of APIs are produced overseas and 40% of therapeutics are manufactured overseas in their entirety . Indeed, pharmaceutical products imported to the U.S. had an estimated market value of $86bn in 2015 .
Overseas manufacturing allows pharmaceutical companies to produce drugs at a much lower COGS than domestic manufacturing, given lower labor costs and more favorable tax policies . For this reason, most pharmaceutical companies’ manufacturing facilities are located outside of the U.S. This reflects a significant CapEx investment, which would be difficult to move back to U.S. territory quickly and affordably . Thus, any pressure to manufacture domestically would require a tremendous shift in pharmaceutical companies’ supply chains.
However, for the group of domestic companies that specialize in manufacturing drugs for other organizations, known as contract manufacturing organizations (CMOs), this could pose a multibillion-dollar new business opportunity. These companies could capitalize on the inability of pharmaceutical companies to cheaply and quickly transition to U.S. manufacturing by contracting to produce their products.
Thus, if new regulations or political pressures encourage a shift to domestic pharmaceutical production, contract manufacturing organizations could realize a significant opportunity. However, not all CMOs will benefit equally, as many have limited excess capacity . Let us examine the example of one CMO that has been preparing to capitalize on increased domestic manufacturing demand: Patheon, a North Carolina-based subsidiary of Thermo Fisher Scientific.
Patheon poised to benefit
Patheon has been taking steps to position themselves to benefit from pressure to manufacture pharmaceuticals domestically. The company recently acquired several manufacturing plants in North and South Carolina, providing excess capacity that could support new domestic production projects as demand for domestic production grows. Most critically, one recent acquisition in South Carolina includes API manufacturing capability. Since the vast majority of APIs are imported to the U.S. and there is limited domestic production capacity, Patheon should be positioned to earn business and scale quickly. Moreover, many of their raw material inputs, such as drug capsules and vials, are sourced domestically, so they will have an advantage in providing a fully domestic supply chain .
Additionally, Patheon was acquired by Thermo Fisher, a large life sciences product development company, in mid-2017, which creates a promising platform for future growth to take advantage of increasing demand . By going forward with their planned integration of Patheon’s manufacturing capabilities with Thermo Fisher’s early-stage bioproduction capabilities, the combined company will be able to provide an end-to-end manufacturing offering, from early science to commercial-scale production, positioning them well to compete for domestic business.
The path ahead for Patheon
To take full advantage of the opportunity, Patheon should continue building to support future growth in demand driven by a nationalist push for domestic manufacturing. First, Patheon should ensure it is able to provide an economical supply chain solution where all components are domestically sourced. If there were to be a shift towards tariffs on imported components, Patheon would then be better positioned to provide a lower-cost, domestically-produced solution. Second, Patheon should more actively seek to articulate the benefits of domestic production to potential customers, to ensure early customers and gain customer trust as the domestic manufacturing renaissance begins. Finally, Patheon should seek ways to generate medium-term cost reductions in the domestic production process, such as investing in automation to reduce labor costs. That way, even if regulations are ultimately not imposed on internationally manufactured pharmaceuticals, Patheon will still be able to effectively sell its domestic production capacity.
Even with these moves, challenges still remain for Patheon and other companies seeking to take advantage of this opportunity. Does Patheon have sufficient capacity to scale up to meet demand? How would demand vary across different types of pharmaceutical products (e.g., chemically-synthesized small molecules vs. larger proteins), and how does expected demand match up to Patheon’s capacity? And there remains perhaps the ultimate question: will any restrictions on international pharmaceutical manufacturing actually materialize, or will they simply remain a nationalist rallying cry?
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