4 Key Considerations For Onshoring Inbound Medtech Supply Chains

By Jim Welch and John Babitt, EY

The disruption caused by the pandemic has challenged supply chains globally, across industries and sectors. Even pre-COVID-19, there was a push to make the U.S. less dependent on medical technologies (medtech), active pharmaceutical ingredients, and drugs manufactured overseas. But re-shoring life sciences manufacturing capacities will have a material impact across the full range of the enterprise, requiring capital intensive investment in new or retooled facilities and the domino effect on tax, pricing, and compliance.

At present, many medtech supply chains operate in an asset‐heavy business model. They typically hold a significant amount of redundant inventory, from orthopedic spare parts to unutilized loose instruments. If the industry can better translate demand signal into supply chain reality and build greater flexibility, the industry could significantly downsize its redundant inventory.

In this piece, we outline key considerations for medtech leaders in this effort, including timing, costs of re-shoring, tax implications, risk mitigation, and strategic pivots.

1. Regulatory Trends

The COVID‐19 crisis intensified regulatory involvement in the medtech industry, with lawmakers discussing the potential need for onshoring to bolster resilience.  The FDA’s 2022 budget request included funds for a new Resilient Supply Chain and Shortages Prevention Program intended to allow the agency to track device supply and anticipate and preclude shortages. The program builds on the 2020 CARES Act’s extension of FDA authority into medtech supply chain security, as well as funding that was part of the American Rescue Plan Act. FDA Acting Commissioner Janet Woodcock has written that “the pandemic has exposed great weaknesses in the medical device supply chain,” with the agency intending in future to apply “state-of-the-art supply chain intelligence” to increase surveillance and transparency of medtech’s supply networks.

The U.S. struggled to meet PPE demand during the early stages of the pandemic due to its heavy reliance on overseas production, and the federal government deployed the Defense Production Act (DPA) to build domestic capacity. We anticipate that medtech will continue to see DPA awards as the federal government aims to transform the Strategic National Stockpile from a static warehouse to a distributed system resident in the commercial segment backed up by U.S. surge production.

2. Timing And Costs Of Re-Shoring

Re-shoring can take several years, as companies need to reconfigure manufacturing supply networks and then generate the testing and data to receive government clearance.  Our teams have estimated costs of up to $100 million to update existing finished goods manufacturing sites, while the cost to build new facilities with advanced manufacturing capabilities could reach $1 billion per site. Even if the manufacturing is moved onshore, many of upstream raw materials come from overseas, creating potential barriers to supply chain security.  

Steps that would help make re-shoring financially viable for companies include tax incentives and subsidies to offset higher fixed and variable costs; volume guarantees to support asset utilization; price commitments to support revenue in line with costs; and strategic partnerships with contract manufacturing organizations to leverage their scale, expertise, and infrastructure.

3. Tax Considerations

Onshoring could trigger a host of intertwined tax implications, as medtechs may have developed complex tax-optimized supply chains that involve foreign principal operating companies. 

Among the considerations are the potential increases in a company’s tax rates if manufacturing profits are taxed at the full U.S. tax rate and potential tax exit costs for migration of manufacturing activities.

Tax provisions that may need to be considered are the interplay of:

• Subpart F, global intangible low-taxed income (GILTI) and local country tax consequences related to exit, including tax incentive clawbacks
• Impact of potential exit taxes on a company’s foreign tax credit (FTC) position
• Potential benefit of foreign-derived intangible income (FDII) deduction for products manufactured in the U.S. and exported abroad
• Impact to transfer pricing paradigms of allocating profits across the value chain

Tax executives in medtech organizations should be aware of these issues and work closely with supply chain and commercial teams to effectively assess the tax implications of these massive reconfigurations.

4. Risk And Resiliency

There are several risks that need to be considered when re-shoring the supply chain, including the fact that not all raw materials are available in the U.S. While formulated products are typically manufactured in a geographic region near the end market, it is not uncommon for bulk products and even some fully finished and packaged products to be manufactured in other countries and imported to the U.S. Some packaging and labeling raw materials, such as rubber stoppers, plastic vials, and paper labels are manufactured outside the U.S.

Medtech leaders must carefully assess all inbound components for manufacturing production to understand the risks of potential delays for items that cannot be onshored. Further, ongoing congestion at ports worldwide, coupled with trade disputes and cascading shipping delays, places pressure on any inbound raw materials to the U.S.

What’s Next For Medtech Supply Chains?

In terms of the long game for medtech manufacturing, we expect the global supply chain is likely to face an overhaul over the next several years. Executives should closely examine their manufacturing playbook, asking themselves the following questions: What is our U.S. domestic manufacturing “revenue at risk” and competitive “exposure” across the product portfolio in the next five to 10 years? What new business model growth opportunities do we have to leverage our existing domestic manufacturing and distribution footprint? Have we mapped our global supply chain risk factors for products on the HHS-identified list of Essential Medicines and Medical Countermeasures (MCMs)? What new capabilities, processes, technologies, or assets are required? And should we build, buy, or partner, and at what cost and timing?

COVID-19 shined a light on the fragility of the global medtech supply chain. Leading organizations should rethink their approach to onshoring manufacturing, not only to build resiliency but also to bolster the industry’s commitment to delivering uninterrupted patient care, no matter the ongoing challenges.

About The Authors:

Jim Welch is the EY global medtech leader, where he leads the demand side of EY strategy, operations, risk, and compliance business for healthcare providers, payers, pharmaceutical, medical technology, and clinical research organizations. He also co-authors the annual Medtech Pulse of the Industry report. He has a Bachelor of Science in business from Miami University, Oxford, OH.

John Babitt is a partner at EY with almost 30 years of experience, all in the life science, medtech, and healthcare industries. He advises clients on various projects, including M&A, supply chain, IT, financial/accounting, and tax considerations and frequently speaks at Medtech Strategist, AdvaMed, and BIO. He holds an MBA from the University of Miami.

The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization