In our recently released Reshoring Index, we took a fresh look at the tipping point theory which historically focused on labor and logistics costs to determine whether offshoring of production was a good decision.1 By adding strategic risk factors, e.g. whether an industry could be deemed critical to U.S. national security, we expanded the number of variables that should be considered in the overall decision. When we expanded the equation, eight industries emerged as most likely to reshore, including soaps and cleansers, automotive parts and telecommunication equipment.  

Reshoring Pharmaceutical and Medical Device Supply Chains: A New Tipping Point?

In our benchmark exercise, the pharmaceutical industry required public sector intervention to justify its reshoring. We cited concerns over access to specialized labor, sensitivity to environmental standards and proximity to raw materials as key impediments to reshoring in this industry. Dr. Amesh Adalja, Senior Scholar at the Johns Hopkins University Center for Health Security, echoed our concerns, stating that “overall manufacturing of medical supplies and ingredients domestically can ‘run up the bill’…to five times as high as manufacturing in the typical foreign location associated with drug manufacturing, such as India and China.”2

This summer the U.S. administration intervened in the pharmaceutical market with two executive orders (EO) promoting the domestic development and manufacturing of essential medicines, medical countermeasures and critical inputs in the associated supply chain. In August 2020, President Trump signed EO #13944 which intervened in the market in several ways–imposing a “Buy American” requirement on U.S. agencies for the purchase of pharmaceuticals, reducing regulatory impediments to the siting of new development and production facilities in the U.S. and increasing regulatory oversight of e-commerce platforms and overseas production facilities.3 The EO also requires the Secretary of Health and Human Services, in consultation with various other federal agencies, to report to the President on vulnerabilities in the supply chain and recommendations regarding the development of advanced manufacturing techniques.  

In addition, EO #13944 contains two mutually reinforcing “sticks” that will likely impose additional challenges on pharmaceutical and medical device companies sourcing from overseas. The first requires the Secretary of Health and Human Services, working through the FDA Commissioner, to “negotiate with countries to increase site inspections and increase the number of unannounced inspections of regulated facilities manufacturing Essential Medicines, Medical Countermeasures, and Critical Inputs.”4 While such international negotiations will take time, and may not always be successful, a follow-on clause gives this guidance more teeth. Specifically, the EO authorizes the FDA to deny “imports of Essential Medicines, Medical Countermeasures, and Critical Inputs if the facilities in which they are produced refuse or unreasonably delay an inspection.”5 Although the EO does not specify what constitutes an unreasonable delay, it is easy to imagine that some overseas suppliers may balk at opening their facilities to additional, likely burdensome inspections at the behest of a foreign government. This could expose importing companies to supply-side disruptions if their products are subsequently denied entry into the U.S. 

Earlier this summer, the President signed EO #13922 extending financial incentives to a broader industrial base that is required to respond to COVID-19.6 This EO authorizes the newly created U.S. International Development Finance Corporation (DFC) to adopt regulations to extend loans under Title III of the Defense Production Act (DPA). Section 302 of the DPA permits loans to private enterprises to “create, maintain, protect, expand, or restore domestic industrial base capabilities supporting the national response and recovery to the COVID-19 outbreak or the resiliency of any relevant domestic supply chains.”7 Pursuant to the DFC application, eligible uses include hard/physical assets such as machinery and equipment as well as soft/implementation costs such as legal and consulting services. 

If your company is thinking about reshoring operations that are critical to the U.S. industrial response to the pandemic, you should consider applying for a DFC loan. Loans are limited to 80% of total project costs and the proceeds may be used for: 1) acquisition, development, ownership or operation of facilities or equipment; 2) working capital; or 3) other costs associated with an approved project, e.g. legal and professional fees. The interest rate is determined on a project-by-project basis and the maximum maturity is 25 years.  

The DFC loan program is time-limited for another 20 months and is immediately available for online applications. Compared to most federal programs, the loan application is relatively short, 17 pages in length, and with the assistance of a professional, is not too burdensome. At Duff & Phelps, our professionals can manage your online application. We have multiple services that are a one-stop resource supporting your team through an integrated service:  

The Future of Manufacturing: Reshoring and the Global Supply Chain

  • Business plan review and refinement
  • Network and process design for manufacturing, procurement, distribution and logistics to support business strategy
  • Footprint and capacity assessment to optimize product flows from supply base to end customer, based on cost and strategic inputs
  • Financial modelling and sensitivity analysis
  • Total cost analytics
  • Capital structure development to identify financial sources and uses
  • Collateral valuations and credit enhancement procurement
  • Cost of capital estimates and market comparisons
  • Solvency opinions
  • Market and feasibility studies
  • State and local incentive negotiations
  • Economic impact studies
  • Site selection based on latest trends, cost comparative analysis, labor availability and other critical location factors
  • Supply chain risk management including identification, assessment, mitigation and monitoring of financial, geopolitical, hazard, legal/regulatory, operational and reputational risks to ensure the flow of products, information and cash across the supply chain


Sources
1.“The Future of Manufacturing: Reshoring and the Global Supply Chain” found at: https://www.duffandphelps.com/insights/publications/manufacturing-reshoring
2.Kenneth Yood, Melissa Gertler and Dhara Waghala, National Law Review, “President Trump’s Executive Order Mandating the Purchase of U.S. Drugs Evokes Criticism” (August 19, 2020) found at: https://www.natlawreview.com/article/president-trump-s-executive-order-mandating-purchase-us-drugs-evokes-criticism.
3.Presidential Executive Order13944, ““Combating Public Health Emergencies and Strengthening National Security by Ensuring Essential Medicines, Medical Countermeasures, and Critical Inputs are Made in the United States, “Federal Register, Vol. 85, No. 158 at 49929 (August 14, 2020).
4.Id at Section 3.b.iii.
5.Id at Section 3.b.iv.
6.Presidential Executive Order 13922, “Delegating Authority Under the Defense Production Act to the Chief Executive Officer of the United States International Development Finance Corporation to Respond to the COVID-19 Outbreak”, Federal Register, Vol. 85, No. 97 at 30583 (May 19, 2020).
7.Id at Section 2.c.

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