Reshoring of Generic Drug Global Supply Chain: An Exploratory Economic Analysis

Low generic drug prices in the US and Europe have benefited from offshoring production to low-cost overseas plants in countries with a strong manufacturing base, such as China and India. However, the ongoing quality control and reliability issues with the supply chain have engendered discussions on the merits of “reshoring”. This study examines the potential economic impact of reshoring generic drug production by estimating labor compensation cost and productivity in China-based, India-based, and US/EU-based generic firms. We estimate the magnitude of increase in cost of goods sold if drug production is “reshored” from China/India to the US/EU. We construct a sample of ninety generic drug manufacturers headquartered in China (43), India (32), and the US and Europe (15). All selected firms are publicly traded and have at least one production plant inspected by the US Food and Drug Administration between 2017 and 2019. Nearly 90% of generic drug firms in each region are vertically integrated and manufacture both active pharmaceutical ingredients and final drug formulations for generic drugs. The US/EU-based firms face significantly higher labor compensation costs and experience lower operating profit margins compared to China- and India-based firms. A Cobb-Douglas function is constructed to model production for generic drugs in each region. We employ a fixed effect regression model to obtain parameter estimates for the production function and use the estimated total factor productivity to compare the overall productivity across regions. We do not find evidence that US/EU-based generic drug firms have higher productivity. We project variable costs for generic drug production will rise by at least 35–40% if production is reshoring from China or India to the US/EU. Findings from our analyses highlight an urgent need for more in-depth economic analyses to assess the impact of reshoring on costs and ultimately prices for generic drugs in the US/EU market.