Will Trade Wars Force Pharma Companies to Restructure Their Supply Chains?

A DCAT Benchmarking study will examine the levels of concern and supply-chain implications of a deteriorating trade environment.

The global trade environment is deteriorating, putting supply chains at serious risk. While the bio/pharma industry has largely not been targeted with tariffs or other trade barriers in recent trade actions, the industry potentially has substantial risk because of its broad global network of manufacturing sites and suppliers. To analyze these issues, the Drug, Chemical & Associated Technologies Association (DCAT) is launching a study, Managing Bio/Pharma Supply Chains in an Uncertain Global Trade Environment, for DCAT members that will explore whether bio/pharma companies and their suppliers believe trade wars are a large threat, and what they are doing to confront the real and potential risks to their supply chains.

Bio/pharma depends on global trade

The extent of the bio/pharma industry’s exposure is illustrated by data compiled by the US government and the European Union:

  • According to the US Food and Drug Administration (FDA), the US imported $93 billion of human and animal drugs (including small-and large-molecule drugs substances and drug products) in 2017 and exported $53 billion (FDA, FDA at A Glance, August 2018).
  • The four biggest sources of imports (by dollar value) were Ireland, Germany, Switzerland and Israel; India was fifth (International Trade Administration, 2016 Top Markets Report ).
  • The FDA also notes that nearly 80% of active pharmaceutical ingredient (API) suppliers to the US are located outside of the US. (FDA, FDA at A Glance, August 2018).
  • According to EuroStat, countries in the European Union (EU) exported EUR 170 billion ($189 billion) in pharmaceutical and medicinal products (again including drug substances and drug products) in 2018 while importing EUR 80 billion ($89 billion). The US accounted for 34% of EU exports and 37% of EU imports. China accounts for just 5% of imports and 6% of exports to/from the EU (EuroStat, International Trade in Medicinal and Pharmaceutical Products, 2019).
 Jim Miller 2015 Headshot

Jim Miller
Content Advisor and Consultant, DCAT, and
former President, PharmSource, 
a GlobalData company

The data are noteworthy, in part, because India and China do not represent a large share of trade activity by value, reflecting the fact that they are primary sources of generic APIs and drug products. Generics represent a small portion of the total value of bio/pharma industry activity in the US and EU but a high share of actual physical product. For this reason, the large role of India and China as suppliers (often sole suppliers) of key medicines and the quality compliance issues among some manufacturers in those countries, have been widely publicized and increasingly scrutinized. Further, as has been demonstrated by the US tariff threats against European auto manufacturers, European suppliers are not immune to potential adverse trade developments.

Pharma products are covered under the World Trade Organization (WTO) Agreement on Trade in Pharmaceutical Products, under which no tariffs are to be charged on pharmaceutical imports and exports. However, according to the US International Trade Commission (USITC), since that agreement became effective in 1995, pharmaceutical imports to the US rose from $8.6 billion in 1996 to over $113 billion in 2016, the bulk of it in formulated drug product. That increased dependence on imported products could be a trigger for US trade sanctions involving pharmaceuticals, and a weakened WTO could be hard pressed to respond.

Even if pharma ingredients and finished products are not targeted immediately, the increasingly hostile trade environment could drive companies to restructure supply chains to avoid trade-related supply disruptions. Such trade disruptions could impact availability of products and threaten to add costs in the form of tariffs, larger safety stocks, reduced economies of scale, and higher input costs (including labor rates). Ultimately, they could force companies to decentralize manufacturing and create more complex manufacturing and supply networks, with more sites in more countries. And all of this would be on top of quality and regulatory compliance concerns that are already affecting sourcing decisions.

DCAT Benchmarking study to address trade

DCAT’s Benchmarking study, Managing Bio/Pharma Supply Chains in an Uncertain Global Trade Environment, which was launched this month (September 2019) to DCAT members, will survey DCAT members on their awareness of trade risks, the significance they place on them, and their best practices for managing them. The results of the study will be released in early 2020.

The key areas of focus of the study will include:

  1. Awareness: how explicitly do companies address trade risks in their business plans and operations?
  2. Risk exposure: which potential developments and events are companies most concerned about as risks to their supply chains?
  3. Monitoring and responsibility: what mechanisms and tools do companies use to identify, monitor and respond to trade risks?
  4. Mitigation strategies: how are companies reflecting trade risks in their strategic plans, e.g., second sourcing, supplier selection, inventory management, facility location, contract terms.

The Benchmarking study was developed by the DCAT Research & Benchmarking Task Force, composed of representatives from DCAT member companies, and is administered by an external research firm.

In September 2019, an online survey invitation link was sent to the DCAT member company delegate or a designated alternate. As the quality of benchmarking data depends on survey participation, be sure your company participates. To learn who received the survey invitation at your company, contact Erin Sanders, Senior Communications and Technology Specialist, DCAT, at esanders@dcat.org or +1-609-208-1888 ext. 7001.

The DCAT Benchmarking study, Managing Bio/Pharma Supply Chains in an Uncertain Global Trade Environment , will be released in early 2020 and will be presented as part of a special program at DCAT Week 2020, which is March 23–26, 2020 in New York.

About DCAT Benchmarking

DCAT Benchmarking is a DCAT member service that delivers in-depth studies examining the crucial issues impacting the pharmaceutical manufacturing value chain. It is a valuable way to learn of best practices and key metrics for companies engaged in bio/pharmaceutical development and manufacturing. Using objective research methods, DCAT Benchmarking studies provide targeted insight for companies engaged in pharmaceutical development and manufacturing in key functional areas, including sourcing, procurement, supply management, and project management.

Recent DCAT Benchmarking studies include Examining Current and Future Alignment of the Pharma Customer–Supplier Relationship (2018); Value-Based Metrics (2017); and Value Creation in Pharmaceutical Procurement (2016).

For further information, link here

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