Globalization has long been seen as a cornerstone of growth for the big pharma industry, enabling companies to expand their reach, lower production costs, and access new markets. However, as the world shifts towards more protectionist policies, with countries incentivizing domestic production, the biopharmaceutical sector faces new challenges that directly impact its Return on Assets (ROA) and overall efficiency. This analysis explores how global economic shifts and geopolitical tensions influence biopharma’s operational efficiency, pricing strategies, and future growth, drawing parallels to the broader macroeconomic landscape.

Global Shifts in Trade and Production: Impact on ROA

The big pharma industry has historically leveraged global supply chains to enhance asset productivity. By outsourcing manufacturing to countries with lower labor costs, such as China and India, companies improved their ROA by reducing capital expenditures on local production infrastructure. However, the geopolitical landscape is changing dramatically. The United States, for instance, is leading a push for reshoring vital industries, including pharmaceuticals, as seen with initiatives like the CHIPS Act and the Inflation Reduction Act (IRA) 1 2. The U.S. government’s recent moves to reduce dependency on foreign supply chains have prompted other nations to follow suit, from Japan’s subsidies for domestic production to India’s focus on self-reliance in pharmaceuticals.

These global shifts disrupt biopharma’s ability to reduce costs through offshore production. Reshoring efforts will likely increase capital investments in local infrastructure, squeezing ROA figures as companies adjust to higher operational costs. While such initiatives may stabilize supply chains by reducing reliance on foreign sources, they create inefficiencies that were once mitigated by globalization. This tension is already manifesting in financial strain within the industry, as exemplified by declining IPO rates and increased biotech layoffs 1.

The Big Pharma Patent Cliff and Its Amplification of Global Pressures

One of the critical challenges the big pharma industry faces in this new economic environment is the looming “patent cliff,” which will see numerous blockbuster drugs lose patent protection by 2026. This loss, estimated to impact over $200 billion in annual revenue, leaves companies scrambling to develop innovative products or acquire promising assets through mergers and acquisitions (M&A) 3, 4. Traditionally, globalization allowed large pharmaceutical firms to mitigate these revenue gaps by acquiring innovative smaller firms worldwide. However, with the rise of protectionism, particularly in key markets like the U.S. and Europe, accessing international innovations through acquisitions may become more challenging. Increased scrutiny over foreign acquisitions and tougher regulatory environments are likely to limit the ability of large firms to fill their pipelines as quickly as in the past.

Moreover, smaller biotech firms struggle to access capital as global markets tighten. The funding crunch that began in 2022 has seen many biotechs with less than one year’s worth of cash. This liquidity issue is exacerbated by protectionist policies that inhibit global capital flows, further straining these companies’ ability to innovate and grow. As capital markets dry up, smaller firms have fewer opportunities for partnerships or acquisitions, limiting the innovation pipeline for big pharma 5.

Efficiency and Pricing in a Global Context

The broader macroeconomic environment is creating significant pricing pressures in the big pharma industry. Global inflation, coupled with disruptions in supply chains, has increased the costs of raw materials, such as Active Pharmaceutical Ingredients (APIs) and packaging materials, as well as labor and transportation expenses. These factors are driving up production costs, which are likely to be passed on to consumers through higher drug prices 6 7 8. As inflation impacts manufacturing and distribution, big pharma companies may face increasing scrutiny from regulators, particularly as governments aim to control drug prices through new policies like the Inflation Reduction Act 9 8.

Additionally, the industry’s focus on operational efficiency, previously enhanced by global supply chains, is now threatened by the localization trend. The shift towards local production will create inefficiencies in regions like Europe and the U.S., where labor and production costs are significantly higher than in traditional offshore locations. These inefficiencies could negatively affect pricing strategies as companies try to balance increased costs with maintaining market competitiveness 1.

How Big Pharma is Reacting to Globalization’s Retreat

In response to global pressures such as protectionism and supply chain disruptions, biopharmaceutical companies increasingly shift toward regionalized supply chains and domestic R&D investments to enhance operational resilience. These moves aim to reduce reliance on global networks but often require significant upfront capital, impacting big pharma financials. While M&A activity is expected to rebound slightly in 2024, ongoing macroeconomic challenges and regulatory pressures will likely constrain the pace and scale of deal-making  10 11 12.

The biopharma industry will likely need to continue adapting to this more fragmented global market. Operational efficiency will hinge on firms’ ability to integrate localized production with global innovation, which will require significant investments in domestic capabilities without sacrificing the innovation pipelines that have traditionally been driven by international collaboration.

Future Outlook: Global Pressures and Biopharma’s Response

As the global landscape shifts, biopharma must adapt to both worst-case and best-case scenarios of economic change.

In the worst-case scenario, heightened protectionism and economic fragmentation could severely disrupt global supply chains, driving up production costs and reducing efficiency. Biopharma would likely respond by significantly investing in local production, which, while costly, would secure essential drug manufacturing closer to home. This would come at the expense of operational efficiency and could lead to higher drug prices globally 5, 2. The innovation pipeline would also be strained as smaller biotechs face more significant capital constraints due to limited global investment. Larger companies, in turn, would have fewer acquisition targets, forcing them to rely more on in-house R&D and cutting non-core operations to manage costs.

In the best-case scenario, biopharma firms could mitigate these challenges through regional collaborations that maintain efficient production without entirely severing global ties. Public-private partnerships might emerge, with governments incentivizing local R&D and manufacturing for critical drugs. Biopharma would continue to pursue strategic M&A and alliances, leveraging regional expertise to innovate while minimizing the impact of global disruptions. In this scenario, the industry could achieve a balance between local production and global innovation, allowing for more stable drug pricing and a resilient supply chain.

Whether faced with economic fragmentation or regional cooperation, biopharma’s ability to adapt through investment, strategic partnerships, and advanced technologies will determine its success in navigating the changing global landscape.

Conclusion

Globalization’s retreat is reshaping the biopharma industry in profound ways. Rising protectionism, geopolitical tensions, and regulatory constraints erode the once-lucrative advantages of global supply chains and international M&A activity. As companies grapple with these challenges, the industry’s overall ROA will likely suffer in the short term, driven by higher capital expenditures and pricing inefficiencies. Biopharma firms must innovate their products and operational strategies to thrive in this new environment, balancing global collaboration with local resilience. The road ahead is uncertain, but those who can navigate the complexities of this evolving landscape will emerge more robust and competitive.

References

  1. https://www.biopharmadive.com/news/biotech-layoffs-2023-pharma-workforce-jpm-outlook/703939/ ↩︎
  2. https://www.pharmexec.com/view/navigating-the-financial-meltdown-for-biopharma ↩︎
  3. https://www.ey.com/en_us/newsroom/2023/06/beyond-borders-2023-biotech-is-facing-a-complex-path-forward-says-ey-report ↩︎
  4. https://www.genengnews.com/topics/bioprocessing/as-patent-cliff-looms-for-biopharma-giants-smaller-biotechs-face-cash-crunch/ ↩︎
  5. https://www.biopharmadive.com/news/biotech-pharma-trends-outlook-2024/704572/ ↩︎
  6. https://pharmasource.global/content/guides/category-guide/supply-chain-disruption-biopharma-costs-sep-oct-2024-update/ ↩︎
  7. https://www.pharmafocuseurope.com/articles/impact-of-inflation-on-drug-pricing ↩︎
  8. https://clarkstonconsulting.com/insights/inflations-impact-on-the-pharmaceutical-industry/ ↩︎
  9. https://www.pharmaceutical-technology.com/features/inflation-drives-pharma-manufacturing-focus-on-sustainability/ ↩︎
  10. https://www.biopharma-reporter.com/Article/2022/07/08/building-resilience-into-biotech-supply-chains ↩︎
  11. https://www.mckinsey.com/industries/life-sciences/our-insights/four-ways-pharma-companies-can-make-their-supply-chains-more-resilient ↩︎
  12. https://www.thescxchange.com/articles/6616-regionalized-supply-chains-the-key-to-resilience ↩︎
Moe Alsumidaie
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Moe Alsumidaie is Chief Editor of The Clinical Trial Vanguard. Moe holds decades of experience in the clinical trials industry. Moe also serves as Head of Research at CliniBiz and Chief Data Scientist at Annex Clinical Corporation.