Pill pack.

Fortifying the US Pharmaceutical Supply Chain

By Laura Karas

The COVID-19 pandemic triggered supply chain disruption across the globe. The United States, in particular, is susceptible to interruptions in the supply chain for pharmaceutical drugs because many of the raw materials, active pharmaceutical ingredients, and manufacturing processes needed to produce domestically marketed prescription drugs have been outsourced beyond U.S. borders.

Is it time to bring some of these processes back to our shores? This post will demystify the pharmaceutical supply chain and explore some key considerations as we head toward 2021.

Let’s begin with terminology. Most people are familiar with the concept of the “active ingredient” from over-the-counter (OTC) drugs. (Take a look at the Drug Facts Label of any OTC product for a listing of the product’s active ingredient and purpose, per FDA labeling requirements.) The active ingredient confers the “direct effect” of the drug in the “diagnosis, cure, mitigation, treatment, or prevention of disease.”

The “active pharmaceutical ingredient,” or API, a less commonly known term, refers to the substance or mixture that becomes the active ingredient. API is itself manufactured, typically by a company other than the pharmaceutical company that markets and sells the final drug product. Production of API by an API supplier may require steps such as chemical synthesis, fermentation, crystallization, drying, milling, and purification. The final drug product, sometimes referred to as a “finished dosage form,” may contain active and inactive ingredients.

In October 2019, Dr. Janet Woodcock, Director of the Center for Drug Evaluation and Research at the FDA, testified before the House Committee on Energy and Commerce regarding the pharmaceutical supply chain. In her testimony, Dr. Woodcock noted that 72% of the manufacturing facilities that produce APIs for the U.S. pharmaceutical drug market are located abroad. The European Union, India, and China house the bulk of API manufacturing facilities, with 26%, 18%, and 13% of API manufacturing facilities, respectively.

Dr. Woodcock noted, however, that the FDA lacks data on the volume of API produced by these facilities, so a snapshot based on the percentage of facilities may underestimate the predominance of non-U.S. sources of API.

As Woodcock explained, lower wages, lower-cost fuel sources, and fewer environmental regulations abroad tend to drive API production overseas.

The United States is unlikely to compete head-to-head with other nations in terms of API manufacturing costs due to higher American wages and the regulatory overlay. But, the United States can compete where it has a comparative advantage: technological development, safety, and regulatory compliance. U.S.-based facilities for API production offer easier inspection to ensure that Current Good Manufacturing Practices, or CGMPs, are being met. (CGMPs refer to FDA-enforced regulations for manufacturing processes and facilities that help ensure drugs meet quality standards.) Financial incentives such as a tax credits for use of U.S.-based API suppliers can encourage pharmaceutical companies to rely more heavily on U.S.-based facilities, where quality control can be more readily evaluated and monitored.

News sources suggest, however, that pharmaceutical companies are not in favor of relocating API manufacturing to the United States — at least not rapidly or in large scale — due to the high attendant costs. To be sure, transitioning more API manufacturing domestically will be a slow and expensive process, but one that might come with major payoffs should another global crisis strike unexpectedly.

In a recent proposal, the Association for Accessible Medicines (AAM), the trade association for the U.S. generic drug industry, suggested several incentives to promote stability in the U.S. pharmaceutical supply chain.

First, longer-term contracts that guarantee price and volume, and that avoid positioning a single company as the sole supplier of particular drug market, can help bolster U.S. manufacturing and avoid supply shocks. Second, federal grants to relocate manufacturing facilities back to the United States can help insulate manufacturers from the added cost burden of “made-in-America” drugs. With respect to drugs in shortage, the AAM recommends providing a five-year 50% tax credit to makers of HHS-designated “high-priority medicines” and considering as non-taxable income grants for U.S. pharmaceutical drug production.

The COVID-19 pandemic has brought to light U.S. dependency on China, in particular. With respect to pharmaceuticals, production of acetaminophen, the blood-thinner heparin, and many antibiotics rely on production facilities and API from China. Reducing dependency on any single nation must be a federal priority, but it can be accomplished only with industry stakeholder buy-in. A diversity of API suppliers, back-up sources of supply, and a solid domestic base of API production can help avoid dangerous supply shortages.

One thing is certain: the supply chain is not capable of quick fixes. The investment required to build and maintain manufacturing facilities is far from trivial, which means that investment plans should be developed in advance of — rather than in reaction to — disruptive threats, with an eye toward long-term gains.

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Laura Karas

Dr. Laura Karas is a student at Harvard Law School and a Petrie-Flom Student Fellow for the 2020-21 academic year.

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