Re-Shoring of Generic Drug Global Supply Chain: An Exploratory Economic Analysis

Low generic drug prices in the US 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 of generic drugs have engendered discussions on the merits of “re-shoring”. This study examines the potential economic impact of re-shoring generic drug production from China and India back to US/EU. We use a convenience sample of ninety publicly traded generic drug manufacturers headquartered in China (43), India (32), and the US and Europe (15). All firms have at least one production plant inspected by the US Food and Drug Administration between 2017 and 2019. Nearly 90% 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. We estimate a Cobb-Douglas production function of generic drugs for each region, using the real value of cost of goods sold (COGS) and the real value of total capital stock as input factors, and the real value of sales as output. We employ a fixed effect regression model for each region. We find that output is more responsive to change in COGS among China- and India-based firms, but less responsive in US/EU-based firms, while the output response to capital stock is greater in the latter. We use the same production function to estimate total factor productivity (TFP), a measure of overall production efficiency. The 95% confidence intervals for estimated TFP in each region overlap, suggesting TFP is not statistically significantly different across regions. We project the COGS for generic drugs will rise by at least 35-40% if production is reshored from China or India. Findings from our analyses highlight an urgent need for more in-depth economic analyses on how reshoring may increase costs and ultimately prices for generic drugs in the US/EU.