For decades, pharmaceutical manufacturing operated within a global system designed around scale, technical capability, regulatory alignment and cost efficiency. However, drug-pricing reforms, tariffs, geopolitical tensions and supply-chain disruption are placing this model under increasing pressure.

To strengthen resilience, companies must reduce supply risk without losing the cost advantages of global manufacturing. Selective investment across locations that combine efficiency with capability, infrastructure and long-term reliability offers an alternative to wholesale reshoring.

In this blog, Mike Martin, President and CEO of ISPE, explores how pricing and policy are reshaping pharmaceutical investment decisions, using Puerto Rico as a case study of the conditions needed to build and sustain a competitive, resilient manufacturing ecosystem.

Pricing and policy are reshaping the system

The U.S. remains central to the global pharmaceutical economy, generating over half of global pharmaceutical sales in 2024.1 Brand-name medicines also command significantly higher prices in the U.S. than in other comparable markets, helping make it a major source of industry returns.2 As a result, U.S. market economics influences investment decisions across the global pharmaceutical industry.

The economics underpinning that position are now being reshaped by Medicare price negotiation, inflation caps, moves towards Most-Favoured-Nation (MFN) pricing, pharmacy benefit management reform and faster biosimilar approval. These changes can influence which therapies receive investment, where products are launched first and how companies approach market access and regulatory strategy.

Manufacturing decisions require a longer view

Manufacturing investment cannot respond immediately to every policy change. Developing active pharmaceutical ingredient manufacturing capability or fill-finish facilities can take years, therefore investment decisions are made with a long-term perspective.

These timelines mean locations cannot be assessed on cost alone. Companies also need skilled people, industry-aligned education, reliable infrastructure and the ability to execute complex projects. They must have confidence that the operating environment will remain predictable and that government and industry can work in partnership.

Incentives can encourage investment, but they are only one part of the wider system needed to sustain it.

Case study: Puerto Rico’s pharmaceutical manufacturing ecosystem

Puerto Rico's experience illustrates how manufacturing competitiveness can erode when industry economics and policy priorities become misaligned. Supported by infrastructure, talent, technical capability, and trust, the island transformed from a largely agricultural, relatively low-income economy into one of the world’s most important pharmaceutical manufacturing hubs, becoming a critical supplier to the U.S. healthcare system.

For companies making investment decisions today, its experience shows that competitiveness depends not only on cost or incentives, but on the wider ecosystem in which manufacturing operates.

Building an ecosystem

Puerto Rico’s growth was supported by four connected elements: incentives, infrastructure, talent, and trust.

The Section 936 tax framework encouraged pharmaceutical companies to invest in Puerto Rico and allowed capital to remain there to support further growth. However, the incentive was effective because it formed part of a wider industrial ecosystem.

Investment in power, water, ports, and large industrial parks provided the infrastructure needed to support manufacturing at scale. Puerto Rico also had a strong industry-aligned education system, a skilled bilingual workforce and intentionally developed technical capability. Alongside this, policy stability helped build trust between government and industry.

Together, these factors helped establish Puerto Rico as a major pharmaceutical manufacturing hub and a critical supplier to the U.S. healthcare system.

Why Puerto Rico’s competitive advantage weakened

After reaching its peak as a pharmaceutical manufacturing hub, Puerto Rico began to lose some of the conditions that had made it such an attractive investment destination.

A major turning point was the expiry of the Section 936 tax framework in 1996, which removed one of the incentives that had encouraged companies to invest and retain capital on the island. At the same time, the pharmaceutical industry was experiencing major patent expiries, merger and acquisition activity, and a shift from small-molecule manufacturing towards biologics.

These developments weakened the wider system that had made Puerto Rico’s manufacturing capabilities competitive. Over time, its competitive position gradually eroded as other locations offered more attractive or predictable options.

The foundations of the ecosystem remained

Although its competitive position weakened, Puerto Rico retained its skilled workforce, university education system and established manufacturing capability. Its pharmaceutical manufacturing base also demonstrated resilience through Hurricane Maria, continuing to meet supply requirements despite significant disruption.

More recent investments suggest that confidence is returning to a location where the underlying capability never disappeared.

The wider lesson for pharmaceutical manufacturing

Pharmaceutical manufacturing competitiveness is not created through incentives or cost advantages alone. Incentives can attract capital, but sustained growth depends on infrastructure, talent, technical capability, and trust working together.

Recent CPHI insights indicate the growth in more selective “right-shoring” strategies. Rather than choosing between low-cost offshore manufacturing and complete reshoring, companies are combining offshore capacity with nearshoring, local-for-local production and dual sourcing, particularly for APIs and higher-risk products. This allows them to retain cost efficiencies while reducing concentration risk, logistics exposure, and vulnerability to disruption.

For manufacturers making location decisions today, the priority is therefore to assess the full value of an ecosystem, not simply its immediate cost base. The strongest networks will balance efficiency with adaptability, resilience and confidence in long-term execution.

To learn more about how geopolitical pressures, changing outsourcing models and supply-chain resilience are shaping pharmaceutical manufacturing strategy, read the full 2026 Outsourcing Outlook Update: Navigating Global Innovation.