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What’s Driving Pharmaceutical Firms’ Operations Siting Decisions?

In the modern era, siting decisions for pharmaceutical production operations have been primarily driven by factors such as limiting tax exposure, access to talent, and surety of supply chains. However, an additional decision consideration appears to be taking the lead for some companies: ease of technology transfer through proximity to their dug development and research base.

Directory 2017
Technology Transfer
As example, consider the decision of Japan’s Takeda Pharmaceuticals to locate its first U.S. manufacturing operations in Brooklyn Park, Minnesota, after years of producing drugs all over the world. In 2008, Takeda acquired Cambridge, Massachusetts-based Millennium Pharmaceuticals, which developed the biologic drug, Entyvio. Takeda recognized the potential in the colitis and Crohn’s disease drug that was developed by Millennium in Cambridge and also saw the opportunity to produce its first in-house biologic.

Seizing this opportunity, the company originally sought to locate its first foray into biologics production in the northeastern U.S., but over the course of its site selection process, Takeda became aware of an idle pharmaceutical manufacturing operation in Brooklyn Park. Believing the proximity to its research base in Cambridge was still reasonable, and given the quality of the facility as a multi-product operation with access to local biotechnology production experience, Takeda announced its decision to locate in Brooklyn Park in 2016. The operation will eventually employ 150 people.

As another example, in August of this year, it was announced that Novartis would be expanding its monoclonal antibody production operations in Huningue, France, with the investment of $100 million. The investment includes a 70 percent increase in production capacity at the existing site with new bioreactor capacity and purification lines representing the majority of the investment. Huningue sits on the border of France and Switzerland and is in close proximity to Novartis’ headquarters and research operations in Basel, Switzerland. Large-scale production operations are often located in either a tax-advantaged location or, for drugs that will carry less tax burdens, in locations with strong pharmaceutical production bases.

This was not Novartis’ first recent announcement that it was investing in production close to home. In 2012, the company announced that it was replacing an existing manufacturing building in Stein, Switzerland, with a new, modern CHF 500 million production operation. The new operation will produce solid dosage form products for global markets. The Stein site is located about 50 kilometers from the company’s headquarters in Basel. The new operation is expected to be in full operation by the end of this year.

This trend in the location of announced investments can be characterized as a case of “everything old is new again.” Pharmaceutical production has historically been closely aligned to where the drug was discovered and the company was founded. Pfizer grew up around its original anti-parasitic drug production operations in Brooklyn, New York, and is still headquartered in Manhattan. Bayer is headquartered in Leverkusen, Germany, near its first production operations in the Rhine Valley near Elberfeld, Germany. More recent companies such as Amgen, founded in the 1980s, retain production operations near their first drug discovery laboratories in Southern California.

Lowering the Tax Burden
Shortly after the formation of many drug companies during the industrial revolution in the mid to late-1800s, drug companies began to expand their production operations to serve additional markets and to take advantage of additional cost savings. This trend particularly gained momentum in the mid-1900s following World War II as prescription pharmaceutical drug discoveries multiplied, a global middle-class was taking root, and the world settled into relative stability. The shift from small-molecule drug manufacturing to large-molecule biologics has required investment in new production facilities and has also represented an opportunity for companies to optimize the facilities’ location based upon tax considerations.

As pharmaceutical companies became global business entities and as profits increased, an important element of any site selection effort became mitigation of tax liability. For instance, Switzerland has long been recognized as a tax advantaged location and, because of this, the Swiss pharmaceutical conglomerates held a strategic advantage versus their competitors based in other markets.

As a result of the quest to reduce the tax burden, in the late 1960s and 1970s the world saw the growth of pharmaceutical production clusters in places such as Puerto Rico, Ireland, and, eventually, Singapore — all of which had their own advantageous tax structures and access to talent pools to produce drug products. Many U.S.-based firms led the way in investing in these offshore markets as a hedge against the comparatively high U.S. tax burden for corporations. This is one of the key reasons blockbuster drugs (drugs generating more than $1 billion in annual global sales) such as Viagra were manufactured at a facility in Limerick, Ireland. This trend saw its apex in the 2000s with the onset of the global recession in 2008.

The Drug Life Cycle Chain
Where a pharmaceutical operation is located is also very dependent upon what exactly that facility does and where it sits within the drug life cycle chain. Drugs are first discovered and researched often in a university setting or in the laboratories of private companies. Drug candidates showing merit are then developed at small-scale production facilities, which are often located in either proximity to the research laboratory or to where larger scale production will eventually take place. One of the winners in this global competition for investments in pharmaceutical operations is one of the usual suspects in Ireland.

Large-scale production operations are often located in either a tax-advantaged location or, for drugs that will carry less tax burdens, in locations with strong pharmaceutical production bases. Large-scale production can be coupled with fill/finish locations where drugs are put into their final dose form (e.g. droppers, vials, syringes, ampules, tablets, etc.) or these operations can be located independently, depending upon the company’s preference.

Where drug production operations are located can also depend upon what type of drug is being produced. Vaccines are often considered a matter of national security and many countries require that the production of the most common vaccines be located within their borders. Generic drugs are not normally battling for the hearts and minds of consumers but rather for space on a pharmacy’s shelf; therefore, cost of production is a major consideration. It is for this reason, coupled with the strong emphasis on science education, that India is a major player in the global production of generic drugs. Over-the-counter medicines are also very dependent upon the cost of production with profits made on volume. As a result, India and China produce much of the world’s supply of active pharmaceutical ingredients for use in products such as acetaminophen or aspirin.

The Challenges
The trend of locating production operations in tax-advantaged locations has held particularly true for biologic drug production facilities and remains valid today. The shift from small-molecule drug manufacturing to large-molecule biologics has required investment in new production facilities and has also represented an opportunity for companies to optimize the facilities’ location based upon tax considerations.

Nonetheless, this strategy of locating drug production in tax-advantaged nations is not wholly without its challenges. Ireland, with a population of 4.5 million, is smaller in population size than the Atlanta metropolitan area and already home to multiple large-scale drug production facilities prompting questions about how many of these operations the country can sustain. Singapore, with roughly the same population as Ireland, faces this same challenge coupled with a land mass 1 percent of the size and a twelve-hour time zone difference from New York. With a population of eight million, Switzerland is roughly double the size of Ireland and Singapore, and aside from corporate tax levies, is one of the most expensive places in the world to live, particularly for expats. Puerto Rico’s status as a tax advantaged location ended with the repeal of Section 936 of the U.S. tax code in 2006, which had allowed Puerto Rico plants to send all profits to their U.S. parents without federal tax burdens. As a result, many pharmaceutical operations have exited the island and new investments in Puerto Rico have decreased to a crawl.

Recent Developments
With the emergence of blockbuster drugs and biologics in the late 1980s, investments in new pharmaceutical production operations blossomed through the 1990s and early 2000s. This trend began to ebb in the mid-2000s due to a lack of new drug candidates, expiration of existing patents on blockbusters, changes in production technologies, and a global excess in production capacity. The global recession of the late 2000s put an even tighter lock on investments in pharmaceutical manufacturing operations. As the world has slowly emerged from this recession, investments in production capacity are again taking place, but not at nearly the pace seen previously.

One of the winners in this global competition for investments in pharmaceutical operations is one of the usual suspects in Ireland. Pfizer announced a $30 million laboratory expansion in Ringaskiddy, Ireland, in 2014 and announced last year that it was hiring 130 people at operations in Dublin and Cork. Also in 2014, AbbVie announced the investment of €85 million in an expansion of its Sligo, Ireland, site. Amgen purchased the former Pfizer production facility in Dún Laoghaire, Ireland, and has invested $300 million in it since 2010. Regeneron announced a $310 million investment in its Limerick operations, including the creation of 200 jobs in October 2015.

This is not to say that the United States has not seen some major announcements itself. In addition to the Takeda project referenced earlier, in early 2016, Novo Nordisk announced a massive $2 billion investment in a diabetes medicine production facility at its Clayton, North Carolina, manufacturing site. The operation will produce active pharmaceutical ingredients for a range of the Danish company’s insulin products.
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