As I’ve ranted about before, the biotech industry is not the most capitalistic line of work. Frustratingly common are companies that claim to be mission-driven or purpose-driven rather than being profit-driven. As a result, this harmful rhetoric trickles down to the front-line staff, many of whom have grandiose visions of saving the world or making a difference rather than making a profit. There exists a play that is so glaringly obvious, it’s honestly kind of maddening that nobody has attempted it. I’m of course referring to in-sourcing.
For those that slept through history class in high school; the steel companies of the Captain of Industry era would commonly buy into coal companies, as coal was a much-needed natural resource for the production of steel. Thus, these business titans cut out a pesky middleman and enhanced the wealth of their companies. Sadly, a bunch of buzzkill politicians decided that following fiduciary responsibility to shareholders was a bad thing and decided to pass some dumb laws in a gross overreach of their moral authority.
Fast forward to the modern-day; more and more biotech companies are looking to transition away from the use of stainless-steel vessels in their manufacturing process and move towards single-use technologies (SUT’s). These SUT’s are made of plastic that is designed to withstand extreme pH conditions without leeching into the product. However, SUT components are not cheap, with a single throw-away bioreactor costing tens of thousands of dollars. An entire sub-industry has sprung up consisting of suppliers that are looking to sell mostly these one-time-use consumable products. These consumables quickly add up to be a major recurring expense for any company in the biotech manufacturing space. Of course, these suppliers have overhead that they need to cover, as well as fiduciary obligations to their shareholders as well. Therefore, there is a steep premium paid for these parts.
However, this is where in-sourcing can save the day! If a large commercial pharmaceutical company were to build a plastics factory, they could in-source a lot (or preferably, all) of their plastics needs and skip the premium that their old suppliers were charging. Furthermore, this could have the added effect on cutting down on lead times as well, as long lead times can-and often do– throw a monkey wrench into production plans. Given that plastic components used in the manufacturing products require documentation regarding their origin, material of construction and other technical components to be readily available for FDA inspection, a drug company in-sourcing plastics production can significantly cut down it’s supplier risk; after all, there can be no supplier risk if there is no supplier, right? Anyone who doubts the efficacy of this strategy can talk to Elon.
Biopharma also currently relies on just a handful of large chemical manufacturers to supply the necessary raw material chemicals. Undoubtedly, these raw chemical providers are padding their prices. Oh well, it doesn’t really matter; the drug company will just pass the cost onto the consumer, so it isn’t our problem is assuredly being thrown around inside the conference rooms of these chemical companies. Yet again, in-sourcing can swoop in and save the shareholders. A drug company can buy some mineral mines and start up some chemical synthesizing plants in order to meet the demand of their commercial drug manufacturing processes. Thus, the drug company can savagely reduce operating expenses by cutting out the middleman, all without having to lay off a single employee.
Glass is yet another area in which drug companies can embrace in-sourcing, as glassware products are a mainstay in many quality control and research laboratories. A glass furnace being acquired by a drug company can strengthen regulatory compliance and stabilize supply chains. Besides, who the hell trusts the Chinese Communist Party anyways?
“Well Dan, what you’ve recommended is, like, totally illegal. So, ha, take that!” a misguided reader of mine will protest. Well, not quite. Assuming that Drunk Uncle Sam even brings an antitrust case against a company at all (looking at you, telecom providers! I see you darting your eyes around them room, shifting in your seats, hoping the teacher doesn’t call on you…), these cases can take years to progress through the overburdened court system with no guarantees of success. By the time a verdict is doled out, the investments might have already yielded a handsome return. Besides, seeing how Drunk Uncle Sam frequently does nothing when companies buy out direct competitors (I see you, airline companies, sweating buckets hoping the teacher doesn’t call on you), I see no reason not to proceed. Given that banking, insurance, automotive, software, and defense companies have all consolidated to the point of stifling competition over the years while the federal lackeys have done nothing to stop this, why would the government goons start selectively giving a shit now? Truthfully, the best defense would be clever marketing; nothing against lawyers, but a clever marketing team could create a narrative strong enough to win the fight by ensuring that it never takes place to begin with.
Honestly, the real 200 IQ move would be to onshore all of these activities to the United States; very few federal employees would want to put American employees out of a job after all. Besides, the suppliers of the industry aren’t exactly fending off a ton of competitors, so it’s not like a drug company would be putting a smaller one under. Instead, it would merely be taking a few dollars away from Thermo Fisher. Now, allow me to play the world’s smallest violin for Thermo.
One possible risk mitigation strategy would be to intentionally not in-source one aspect of the company, merely to keep Drunk Uncle Sam at bay. This could even be a temporary measure while the unsung heroes work their magic. This of course, assumes that the activity is even illegal in the first place, and considering that Microsoft handedly won its antitrust case in the 90’s and Google is currently alive and well, I’m not too worried. With all of that said, a drug company starting its own series of mineral mines/plastics plants/glass furnaces doesn’t prevent their former suppliers from selling to new customers, nor would it prevent new companies from entering the industry. Therefore, Drunk Uncle Sam’s aversion to that specific minutiae could be avoided entirely.
“Dan, this is all kind of icky. Wait, why are you salivating every time the topic of profits comes up? Seriously, what’s with that malevolent glint in your eye?” the same bleeding heart will drone on about. Sorry, this is a business. Gasp! Yes, those that don’t like talking or thinking about profits can fight over some bullshit academia job or send your resume to the local DMV. As I spoke about in a previous article, we applaud CEO’s that use soft and flowery language instead of candor for some nonsense reason.
I can’t wait to become a CEO…
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