Pharma and Globalization

Brit Ryle

Posted January 18, 2023

The nightly news shows a quick clip of empty shelf space behind the pharmacist. There’s supposed to be amoxicillin on the shelf, but there isn’t any. 

How is it possible that in America, parents can be challenged to find treatment for their kids suffering from strep throat or an ear infection?

When my kids were young, a typical year meant 4 trips to the pediatrician to get a prescription for the “goopy gloppy” – our pet name for the thick pink liquid that knocks out the ear or throat infection in a couple days. 

I can’t imagine going to the drugstore and being unable to get the treatment to ease my kids’ suffering. 

They say the current shortage of amoxicillin – along with a bunch of other drugs, like ibuprofen and acetaminophen and local anesthetics like lidocaine – is the result of higher than average demand. To which I say: OK. 

But there’s no quick fix because 80% of antibiotics and their ingredients come from China and India – a problem that is definitely not OK. 

Once again, the U.S. is left wanting because of supply chain issues. The mad rush to leverage labor costs by sending low-margin manufacturing overseas in the two decades around the turn of the century has come back to bite. In the case of pharmaceuticals, the U.S. currently produces only around 10% of the ingredients and drugs we need. 

It’s Not
Wrong, Exactly…

I know, the whole globalization thing gets politicized to the extreme. And needlessly, if you ask me. There was never some giant plot to undermine the American middle class and consolidate power of the wealthy… 

The simple fact is: globalization made sense. Moving manufacturing to low wage countries boosted profitability, funded innovation and also opened up new end markets – both of which contributed mightily to U.S. GDP doubling to $23 trillion over the last 25 years. (Don’t forget – GDP stands for goods and services produced here in the U.S.)

And even if you simply own index funds in your retirement account, you’ve benefited from the international market share that companies like Apple, Starbucks and General Motors now command. 

The real flaw with globalization – the assumption that companies and the government got wrong – was that our new economic partners really wanted to be partners at all. Call it the neocon dream if you want, U.S. companies and policymakers really believed that economic prosperity, a better standard of living, could have the whole world sitting around the campfire singing kumba-ya. 

Eh, it just hasn’t worked out that way. The globalization experiment is shutting down.

And really, I think the U.S. should get a gold star for trying to play well with others. And we shouldn’t feel bad for taking our ball and going home now that many of our playmates have turned out to be jerks. 

Where Do We Go from Here

Now about that pharmaceutical shortage… 

The question is twofold: one, will pharmaceutical companies be willing to make the investment to reroute supply chains and manufacturing so they can be more immune to policies from countries who don’t really care if the U.S. suffers disruptions (and may secretly enjoy it), and two, will the U.S. government incentivize this investment with tax breaks and/or the heavy hand of trade restrictions?

I’d say the answer is absolutely yes. And we can look to the semiconductor situation as a guide. 

The COVID pandemic exposed the fundamental problem of having critical supply chains extended all over the globe. In terms of importance to the U.S. way of life, semiconductors come in right after food and energy. 

And the U.S. government has acted decisively to ensure that America keeps its competitive advantage. China has been cut off from access to advanced semiconductors designed mostly by U.S. companies. The Chips and Science Act passed in July that provides $50 billion in incentives for new and expanded semiconductor manufacturing facilities in the U.S. has already generated over $200 billion in investment. That number will grow.

It is inevitable that the U.S. government and drug companies will team up to bring pharmaceutical supply chains and manufacturing back to the U.S.

I don’t know that any particular companies will be the big winners in this scenario. But Puerto Rico would benefit. 

A 2021 report titled Reinvigorating Puerto Rico’s Pharmaceutical Industry: A U.S. Security Imperative says: Currently, twelve of the world’s top twenty pharmaceutical companies and seven out of the top ten medical device companies have operations in Puerto Rico. Puerto Rico has 49 FDA-approved pharmaceutical plants to produce both medical devices and pharmaceuticals…

And in the bigger picture, the return of supply chains and manufacturing to the U.S. (a trend I call the Second American Industrialization) is the most powerful investment theme we’ve had in years. And it’s just getting started…

That’s it for me today, take care and I’ll talk to you on Friday.

Briton Ryle
Pro Trader Today