Reshoring Pharma Jobs

December 14, 2012

SpiralChemjobber asks the intriguing question of whether U.S. pharma jobs lost to offshoring will ever be brought back. Recent actions by certain large companies have hinted at manufacturing capacity being brought back to the United States, a process sometimes called "reshoring". High-profile examples include General Electric and Apple. However, Chemjobber remains skeptical:

I think this is business and the media chasing "hot trends", as opposed to looking at the long-term picture. [I've made a ten-year dinner bet with an old high school classmate about the share of US manufacturing as a percentage of US GDP. He says it's going to be higher in 2022 than in 2012; I say it's going to be lower.]

Further down, Chemjobber asks:

... we all saw pharmaceutical manufacturing go overseas in the last 20 years, shortly followed by a lot of basic medicinal chemistry R&D. I suspect that some specialty chemical manufacturing will indeed see increases over the next ten years ... Is there any evidence that medicinal chemistry R&D is "reshoring"?

It's a simple enough question - will the trend toward pharma outsourcing and offshoring ever reverse itself or are we now living through the first stages of the new normal?

Predicting the Future is Hard

Ten years is a long time. In 2002 the outlines of a looming pharma patent cliff were starting to take shape. Still, I know of few inside or outside the industry who were suggesting this posed significant risk to the then-booming pharma industry and jobs picture.

Quite the contrary, pharma companies (including my former employer) were hiring at a furious clip, expanding labs and opening new sites, and making plenty of money - quite the opposite of the rest of the economy at the time. It was a great time to be working in the industry. There was little open concern about what might or might not happen ten years down the road.

Production Costs Are Only Part of the Story

A recent article on tech blog Asymco suggests that factors unrelated to production costs might be worth consideringg in reshoring discussions. The article deals with two cases from the computer industry, Dell and Apple, in which outsourcing produced rather unintended and unfortunate results.

Dell began outsourcing parts of its production process to Asus, starting with basic circuit boards, then progressing to more value added components and eventually, management of the entire supply chain.

In 2005, Asus started selling its own computers. By pursuing a seemingly rational business strategy, Dell created its own worst nightmare - a lean, mean competitor modeled after itself, capable of penetrating emerging markets at will. And this competitor no longer needed its benefactor.

Apple's situation is less clear-cut, but similar. By 2011, Samsung was making the iPhone memory components and the A5 processor (link). At the same time, Samsung had started production of its own Android-based phones.

Although most of the reporting around Apple and Samsung has focused on patent cases, the Asymco article argues something else lies behind Apple's newfound interest in domestic manufacturing.

That something is the growing realization that by outsourcing core capabilities like manufacturing, Apple is in fact creating a new breed of competitors it will eventually need to face as equals.

The analogy to pharma isn't perfect, but may be worth considering.

A Working Hypothesis for How Pharma Jobs Return to the US

For the sake of argument, let's say that in ten years time we're all talking about the Amazing U.S. Pharma Recovery. The devastation of the last five years is nothing but a distant memory. Old timers talk about how bad this period was, pulling out tattered issues of C&EN to prove it. None of the newly-minted chemistry degree holders can believe it was ever that bad - nor do they care much anyway.

How would we have gotten there?

The trigger probably wouldn't have much to do with production costs, although a low cost barrier to reshoring pharma jobs may play a small role.

Taking the line of thinking in the Asymco article, together with a page from Disruptive Innovation analysis, we can piece together a possible outline.

At some point decision-makers at a few large pharmas begin to notice a disturbing new trend. Contract Research Organizations (CROs) based in China and India have begun to develop, gain approval, and market their own drugs in the developing world. A few have even started to do the same thing in the U.S. and Europe, directly competing with many current customers.

Slowly it becomes clear that the outsourcing and offshoring craze has bred a new wave of nimble, fierce competitors. But the disturbing part is how these competitors are also key service providers.

Faced with this existential threat, there would be little choice but to re-absorb as much pharma R&D and production capacity as possible - and do it fast. Favorable cost differentials would accelerate reshoring, but wouldn't be a driver for it.

To be clear: this would have nothing to do with the often-bandied specter of CROs "stealing" intellectual property from the companies hiring them. Instead, the benefit gained by CROs would derive quite legally from practical insights into the business processes of large U.S. drug companies, and real-world experience with regulatory systems and how to navigate them.

Conclusions

Whether or not the scenario outlined here ultimately plays out is anybody's guess. Any number of things could happen between now and 2022 to shift the likelihood either way. The whole idea may be fundamentally flawed in the first place. Maybe we really are witnessing the beginning of the end of the domestic pharmaceutical industry as we know it.

One thing is certain: the tensions between CROs and their customers are just as real as the tensions we're seeing between Apple and Samsung. The only question is what this will lead to.