Drugmakers shift more production outside USA
- - November 25th 2011
By Jim Hopkins, USA TODAY SAN FRANCISCO — MedImmune, scouting sites for a $75 million flu vaccine factory, considered the USA. Instead, the Maryland drugmaker chose Britain. It already had a factory near Liverpool, acquired in 2002. Plus, compared with the USA, wages are lower there — big draws for a risky $1 billion drug launch. San Francisco biotech VaxGen is building a drug factory in South Korea. VaxGen More U.S. drug firms are shifting manufacturing out of the country in search of lower costs and government sweeteners. South Korea, Singapore and Taiwan have joined Ireland and other nations courting drug giants and the new generation of biotechs. But critics, citing the sudden loss of half the USA's flu vaccine when British regulators yanked Chiron's Liverpool factory license, say offshoring puts too much foreign control over vital drug supplies. That could be devastating in a flu pandemic if foreign governments seized U.S.-bound vaccines. "I don't think you want to outsource the public health," says Sen. Evan Bayh, D-Ind. He and other senators, emboldened by the vaccine crisis, are pushing anew for federal tax subsidies to entice more producers to locate inside the USA. With Wyeth's exit last spring, the USA has one conventional flu vaccine maker inside the country: French company Aventis Pasteur's factory in Swiftwater, Pa. The threat to vaccine imports posed by foreign governments is hardly new. In a congressional hearing eight months ago, Rep. Tom Davis, R-Va., asked Chiron if British regulators could force the company to supply Britain first in a flu pandemic. CEO Howard Pien told the committee only that he had "no knowledge" regulators would do that. Davis, whose committee is now investigating Chiron, isn't the only one worried. MedImmune's research chief, Jim Young, says a foreign country could "embargo vaccine for use within its borders." The shift overseas also strains the Food and Drug Administration's ability to police the global network of drug factories, says Eric Topol, chief academic officer at the Cleveland Clinic medical center. "They have a hard enough time getting their arms around everything in the U.S.," he says. The FDA inspects vaccine factories every two years. Chiron has seven in England, Italy, Germany, Sweden and India. That's in addition to more than 100 drug factories of all kinds the FDA inspects worldwide. The FDA says it's unlikely Chiron's vaccine contamination problems would have been any different if its factory was in the USA. But the vaccine debacle shows the USA must guard its "rights and privileges" as a vaccine importer, says acting Commissioner Lester Crawford. "We intend to pursue that," he said at a news conference last week. Production relocating Figures tracking drugmaking's shift overseas are scarce. But examples abound in regulatory filings and interviews with industry experts. VaxGen, a biotech near San Francisco, is building a $120 million factory in South Korea. Pfizer opened a $410 million epilepsy drug factory in Singapore last summer. Nearly 38% of Johnson & Johnson's factory space is now in Europe, up from 23% a decade ago. Luring them overseas: •Lower taxes. Foreign governments slashed business taxes to attract the industry's higher-paying jobs and clean factories. Drug companies make a profit of as much as 30 cents on a pill sold for $1. The tax savings abroad are big bucks when multiplied by millions of pills sold annually, says Charley Beever, head of the pharmaceutical practice at consultant Booz Allen Hamilton. Ireland targeted the U.S. drug industry in the 1980s, when its jobless rate soared to 20%. It cut corporate income taxes for manufacturing and service companies to 12.5%, vs. 35% in the USA. "You can see why it's attractive," says Joe Hackett, a spokesman for Ireland's embassy in the USA. How attractive? Ireland has lured business from 12 of the world's biggest drugmakers, including U.S. giants Lilly, Pfizer and Wyeth. Pfizer, the No. 1 pharmaceutical, makes most of its cholesterol fighter Lipitor, the world's top-selling drug, in Ireland. Its Irish operation is part of a Pfizer network straddling 86 plants in 13 nations, from Belgium to Singapore to the USA. Wyeth is pumping $1 billion into a factory in Ireland's Grange Castle to make infant vaccines, antibiotics and an arthritis treatment. The plant, expected to open next year, will have 1,200 workers. Singapore, which ramped up its drugmaker hunt in the 1990s, taxes corporate profits at 20%. Since 1994, that's drawn more than $1.6 billion in factory investments from Schering-Plough, Merck, Wyeth and Pfizer. "It's really taken off," says Jonathan Kua at the Singapore Economic Development Board in Silicon Valley. Closer to the USA, Puerto Rico has long been a haven for pharmaceuticals. The U.S. territory taxes corporate profits for manufacturers at just 7% — sweet enough to grab nearly 40 companies and 30,000 jobs in the past 20 years. Bayh's bill, which stalled in the Senate this year, would blunt these foreign tax advantages. Companies would earn a tax credit equal to 20% of a U.S. factory's construction cost. The credit would be good for five years. •Cheaper labor. Drugmakers, like electronics and other manufacturers, are tempted by lower-cost workers overseas. MedImmune employees at its Liverpool factory earn less than comparable workers in the USA, "even though it's a unionized force," says Young, research chief at the Gaithersburg, Md., company. Its new factory, which will make FluMist, the nasal flu vaccine spray, is being tested. MedImmune hopes to seek a factory license next year. MedImmune's factory is near Chiron's. Wages in Singapore are about 60% of those in the USA, Kua says. The island, with 4 million residents, has 7,500 biomedical workers. It aims to double that by 2014. In Taiwan, ScinoPharm says its nearly 400 workers have "Western know-how and quality with Asian cost benefits." ScinoPharm, a contractor for companies outsourcing drugmaking, says its workers don't take coffee breaks. They sleep in the factory when projects are running around the clock. •Government giveaways. More Asian public officials, trying to muscle aside the USA and Europe, are throwing deals at U.S. drugmakers and biotechs, such as VaxGen. In South Korea, the city of Incheon sold VaxGen and its partners 23 acres at a discount to attract their factory. VaxGen's South Korean partners raised $84 million of the $120 million for construction — money VaxGen couldn't get in the USA. The factory, to open in 2006, likely will be used to produce other companies' drugs. GLOBAL DRUG GIANTS Annual revenue Market share Operations outside USA Pfizer $30.2 billion 13.3% In 12 nations, including Belgium, China, Germany, Ireland, Japan, Singapore. Johnson & Johnson $15.9 billion 7.0% 86 factories in Europe, Africa, Asia and elsewhere. Merck $14.8 billion 6.5% In Australia, Canada, Japan, Singapore, South Africa. Bristol-Myers Squibb $9.7 billion 4.3% In 19 nations, including Europe and the Middle East. Amgen $8.6 billion 3.8% In 15 European nations, Japan, Australia, New Zealand. 1 2004 projections. Sources: The companies, IMS Health Biotechs are a big target because many experts say they will drive tech and health care's futures. "Governments really are trying to understand how the biotech community can be attracted," says Sandra Fox, president of market research firm HighTech Business Decisions. South Korea is luring more biotechs because of its advances in embryonic stem-cell research, an area of keen interest to biotech scientists. Its government imposes fewer restrictions than the United States on stem cell work paid with public money. Plus, South Korea this year became the first to clone a human embryo for stem cells. Governments are making direct financial investments, too. Taiwan owns 25% of ScinoPharm. "Clearly, the Taiwanese government is interested," says Byron Miller, chief operating officer of Genix Therapeutics. Genix, a biotech start-up in Wheeling, Ill., is chasing an anti-impotence drug. It outsourced manufacturing to ScinoPharm for the testing phase. ScinoPharm is also investing in the drug's development. On the home front Bayh says boosting the number of vaccine factories inside the United States is key to national defense. "That's an inherent government function, whether it's weapons of mass destruction in the hands of terrorists or protecting us from a global pandemic," he says. The pandemic Bayh and public health experts worry most about: avian flu. The highly lethal disease killed 29 of 40 people in Southeast Asia in the last year. Aventis and Chiron are testing vaccines. Last month, Aventis got a federal government contract to produce 2 million doses at its Swiftwater factory by the end of the year. A broader avian flu outbreak could kick off a pandemic. Unlike other nations, the USA doesn't have sufficient domestic capacity to swiftly make the 550 million doses needed to give two shots to each American, MedImmune's Young says. Flu vaccines must be made fresh annually and can't be stored for use in future flu seasons. Bayh says some corporate globalization is inevitable. "But when it comes to the nation's security and our public health, that's something that we need to ensure ourselves," he says.