Making The Case For Reshoring Critical Drugs, Where 90% Of Inputs Are In China’s Hands

Nearly everyone agrees the supply chain for critical medicines is broken. Not everyone agrees on how to fix it. This is a huge problem because along the drug-making pyramid, China controls some 90% of the organic and chemical compounds used in making the advanced pharmaceutical inputs (API) that ultimately get turned into injectables and pills Americans use daily. China is even telling India that they don’t want to sell those compounds to them anymore, basically forcing India to source API for its huge generic drugs industry, from Chinese labs.

What to do? Panelists from around the world spoke during a four-hour conference on Friday hosted by the Committee on Security of America’s Medical Product Supply Chain of the three National Academies of Science, Engineering, and Medicine.

Onshoring critical medicine was as much a solution to reinforcing global supply chains as was the old Biden administration mantra of “working with allies”. The only problem with that approach warned Yanzhong Huang, a Senior Fellow for Global Health at the Council on Foreign Relations and a professor at Seton Hall University, is that many of those countries are also likely sourcing API and its precursor compounds from China and India.

“That’d be like rearranging the deck chairs on the Titanic,” he said. Huang took a two-pronged approach to tackling the problem: make critical drugs here through government procurement contracts. And develop a “nuclear deterrent strategy of mutually assured destruction” if China is going to be a major part of the supply chain for pharma.

“Pharmaceutical companies should think also instead of ‘just in time’ manufacturing and consider ‘just in case’ manufacturing now,” he said. “This way you are producing drugs out for several years and adding to the stockpile. You cannot compete with China and India for generic drugs on price so that means the government will have to be the buyer.”

Rosemary Gibson, one of the main headlines at the conference, spoke in her capacity as senior advisor at The Hastings Center. Gibson is also chair of CPA’s Healthcare Committee.

Some argue that making drugs in India and China is just a simple business decision. Of the two, China is the most problematic. It’s not because of cheap labor. India is cheaper. Nor is it due to lackluster regulations, like dirty facilities and just pouring chemicals down a river. India is fairly notorious for breaching FDA rules and has been the recipient of numerous Warning Letters about cleanliness and other sub-par standards.

“In China, it’s the illegal trade practices that make them formidable,” Gibson said. “Cartel formation and predatory pricing have contributed to China’s gain.”

There’s been a 25-year landslide in APIs going to China, according to the European Fine Chemicals Group. Penicillin is often used as an example of the impacts of cartelization in China. The last penicillin plant in the U.S. closed in 2004 as prices collapsed due to China’s chokehold on that market. But now, prices are rising due to the oligopoly that has formed in this segment, namely among China businesses. Even India doesn’t make this drug anymore.

“We wouldn’t have 90% of the world’s food supply in one country or all of the world’s oil, but somehow we have managed to do this with our drugs,” Gibson said. “It is an error of epic proportions.”

People on the call talked about transparency and rules of origin labeling so people knew where their generic drugs were sourced.

Generic drugs are 90% of the medications prescribed in the U.S. Once drugs go off-patent, they become highly commodified and often end up in India, and China. The FDA regulates worldwide API and finished drugs for the U.S. market, no matter where the manufacturer is based. But they do not examine the precursor compounds, nearly all of which are sourced in China.

Some on the call lambasted the idea of a nationalist supply chain model. Highlighting how the U.S. was not exporting vaccines for Covid-19.

But over 70 countries banned exports of medicines, including vaccines, during the pandemic, including India, the U.K. which made the AstraZeneca vaccine, and Italy, the hardest hit by Covid of all the nations in Western Europe.

Gibson mentioned Civica Rx, a consortium of hospitals that have successfully cut out the middle-man in buying drugs. They contract directly with generic drug manufacturers in the U.S., which actually helps reduce prices.

This Week’s Drug Trade: Uppers and Downers

This week, the Biden administration decided against a Trump Executive Order to exempt dozens of countries that are signatories to the Government Procurement Agreement (GPA) of the World Trade Organization. The GPA treats foreign companies like they were American in the case of government purchasing orders. Hong Kong is a member of the GPA, a total backdoor to mainland China pharmaceutical companies who can now bid for U.S. government contracts.

The U.S. Chamber of Commerce argued that U.S. companies are also participants in European government contracts and that if we pulled out, Europe would do the same.

Gibson told Maria Bartiromo on Mornings with Maria on Friday that “A lot special interests…made a lot of money by outsourcing jobs and buying on the cheap from China. They have decimated our global supply chain.”

CPA CEO Michael Stumo said that withdrawing the Trump-era proposal “is not how you Build Back Better. This move further risks U.S. economic and national security by making America even more dependent on foreign nations like China for essential medicines. CPA and our members welcomed President Biden’s ‘Make it in America’ campaign pledge to reshore critical industries and U.S. manufacturing. However, we cannot support moves that do not prioritize American companies and workers over foreign producers.”

Some key Senators agree.

This week saw two critical pieces of legislation reintroduced by Senator Elizabeth Warren (D-MA) that seek to boost domestic pharmaceutical manufacturing.

CPA supports Warren in this regard and believes the Pharmaceutical Supply Chain Defense and Enhancement Act, cosponsored by Senator Tina Smith (D-MN), would reinvigorate U.S. pharmaceutical manufacturing capacity and end the nation’s reliance on foreign countries for critical drugs used by millions of Americans.

But that’s not all. Warren is going after this issue with both barrels.

The U.S. Pharmaceutical Supply Chain Review Act, a second bill reintroduced by Warren and Senator Marco Rubio (R-FL), requires the federal government to conduct a study on the United States’ overreliance on foreign countries and the impact of foreign direct investment on the U.S. pharmaceutical industry.

The FDA already has its list of critical drugs. The problem is that the removal of the GPA exemption means that any government contract to replenish those supplies could just as easily go to a German firm.

“The private sector is already diversifying their supply chains,” said Gibson, noting Civica Rx. “Fix the chronic drug shortages first. If we can handle these shortages it will help us be better prepared for surge capacity, but to do this you need long-term customers. If you don’t have customers, things like tax incentives won’t work for you.”