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High Labor Costs May Drive Biologics Manufacturing Offshore

Most consumer goods are manufactured in developing countries where labor rates are relatively low. These lower labor rates provide a cost of goods advantage even though labor represents ~5% for a smart phone and ~10-15% for an automobile. What is the implication for global biopharmaceutical manufacturing where labor contributes ~20-50% to the cost of goods?

The lure of low cost labor may change the global footprint of biopharmaceutical manufacturing, given the high contribution of labor to COGS. Currently this footprint is heavily focused in the developed world – US, Europe, Japan and South Korea. We are seeing expansion in places like China by domestic companies such as Innovent and multinationals like Boehringer Ingleheim, which is building capacity in China. For the time being, unlike consumer electronics, drugs made in low cost regions are consumed in low cost regions and not exported to high cost regions.

Concerns surrounding human safety and product quality are contributing factors to the labor intense nature of biopharmaceutical manufacturing. Interestingly, these same concerns have played a role in constraining the footprint of biologics manufacturing to a limited number of countries where the regulatory and quality environments are suitable. The difficulty of working in regions without suitable quality and regulatory environments, along with difficulties with IP protection and finding suitable staff, place additional indirect costs on manufacturing.

These indirect costs should be considered alongside the trend of rising wages in low cost regions. If the indirect costs mentioned above fall as quality, labor and regulatory environments improve, while at the same time wages rise, it is likely to impede a large shift of biologics manufacturing out of the developed world. However, given experience with other industries where labor is not as large a portion of the cost, there is, and will be, a large driving force to do more biologics manufacturing in low cost regions.For information on BPTC’s COGS modeling services, go to our COGS modeling page.

 

Blog article by: Terence Davidovits

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