A Bilateral Approach to Address Vulnerability in the Pharmaceutical Supply Chain

Commentary by Andrew I. Rudman

Published November 18, 2024

Following the Covid-19 pandemic, the Biden administration and Congress have paid significant attention to issues of supply chain resilience and supply chain diversification in strategic sectors, especially semiconductors and critical minerals, and in response to concerns about U.S. dependence on China. In light of emerging public health challenges such as Mpox, dengue, and Chagas (among others) and continued tensions regarding the U.S.-China economic relationship, a diverse and dependable supply chain for active pharmaceutical ingredients (APIs) and finished medications is equally crucial. Reliance on a single supplier for the vast majority of its critical inputs and components would be considered a serious risk for an individual company, yet this is the position the United States finds itself in the case of generic drugs. Overreliance on just a few suppliers-and in some cases, just one-poses a significant risk for a company. For access to pharmaceuticals, this is a critical national security issue.

To illustrate, generic drugs comprise over 90 percent of the U.S. market (by volume) and 47 percent of those medications are imported from India. India depends on China for almost two-thirds of the APIs required to produce those medications. India also depends on China for up to 90 percent of certain medications and has implemented its own production-linked incentive scheme in response.

Disruptions to pharmaceutical supply chains are not limited to or caused solely by geopolitical tensions. The U.S. Pharmacopeia notes that almost two-thirds of the API Drug Master Files filed in 2021 were from India. (Drug Master Files are submissions to FDA "used to provide confidential, detailed information about facilities, processes, or articles used in the manufacturing, processing, packaging, and storing of human drug products.") Of perhaps even greater concern are the large concentrations of production of some medications in a single facility, a particular concern for oncology medications. In some cases, a single facility may not only be the dominant producer of a given medication but also of preferred alternatives. Such concentration creates risk in the event the facility is denied authorization following inspection by a regulatory body such as the U.S. Food and Drug Administration (FDA). For example, Lupin, an Indian generics manufacturer, suspended shipments to the United States in 2022 in response to the FDA's issuance of a warning letter following an inspection earlier in the same year. India's own regulator has closed 36 percent of the domestic plants it has inspected since late 2022; corrective action was required before the plants could reopen. While ensuring safety is of paramount importance, the violations that underlie these closures may put patient lives at risk.

In addition, production can be interrupted by natural disasters such as hurricanes. In October 2024, for example, a North Carolina facility responsible for the manufacture of IV fluids was closed temporarily due to flooding caused by Hurricane Helene. Similar interruptions have been caused by hurricanes in the past in the southeastern United States and the increasing intensity of such storms suggests that future disruptions are likely.

Biden Administration and Congressional Responses

In July 2021, the Biden administration issued its National Strategy for a Resilient Public Health Supply Chain, which includes as one of its objectives to "Build and sustain a strong domestic industrial base for [medical counter-measures] that is complemented by strategic near- and allied-shoring."

Most recently, the United States, Canada, and Mexico issued the North American Preparedness for Animal and Human Pandemics Initiative (NAPAHPI) to update the 2012 North American Plan for Animal and Pandemic Influenza (NAPAPI). The new initiative establishes a senior coordinating body and the North American Health Security Working Group to work on, inter alia, medical supply chains.

Congress, too, has been seized with the need to diversify the U.S. pharmaceutical supply chain and encouraged increased production in the United States and by allies and trade partners.

The BIOSECURE Act, passed by the House and awaiting Senate action, prohibits firms that receive funds from the U.S. government from working with five named Chinese "companies of concern," as of January 1, 2032. The long lead time for full implementation of this act demonstrates the degree to which U.S. firms have integrated their operations with Chinese firms, especially contract research organizations (CROs). Some analysts have expressed concern that even though the act will drive pharmaceutical production out of China, Congress may not have fully taken into account the impact of the act on U.S. pharmaceutical firms' operations.

Beyond congressional action aimed specifically at Chinese firms, an amendment to the FY 2025 National Defense Authorization Act, includes language requiring the Department of Defense to procure generic drugs produced domestically or from a free trade partner country or instrumentality. Additionally, the Medical Supply Chain Resiliency Act calls for the establishment of trusted trade partners to diversify sourcing for medical devices and pharmaceuticals.

Mexico: Opportunities and Challenges

While Congress wisely recommends greater collaboration with the United States' existing trade agreement partners, not all are viable partners for pharmaceutical production. One country stands out above many: Mexico, which has already seen a significant inflow of capital through nearshoring, including $36 billion in foreign direct investment in 2023, and announced commitments in the first five months of 2024 of an additional $39 billion. The country should be among the top contenders to supplement Asian production.

Mexico has a vibrant pharmaceutical manufacturing sector comprised of both domestic and foreign-owned firms with the necessary know-how and excess capacity to support U.S. demand without creating shortages for its own citizens. The 40+ members of AMELAF (a trade association of Mexican-owned firms) currently produce biosimilars and generic medicines not only in Mexico but also in Puerto Rico. Mexican manufacturers, including U.S. and European-owned firms, have long exported products to the rest of Latin America as well. Furthermore, Indian firms in a range of sectors, including pharmaceuticals, have expressed interest in additional investment in Mexico, according to recent reporting.

Increased production of medicines in Mexico by existing firms (Mexican or foreign-owned) and potentially new nearshoring entrants could be supported by several specific policy initiatives to address concerns and impediments, most of which are well-known to the current administration led by recently inaugurated president Claudia Sheinbaum.

First, and perhaps most important, would be for the respective patent offices-the U.S. Patent and Trademark Office and the Mexican Institute for Industrial Policy, as well as regulatory agencies such as the FDA and the Federal Commission for the Protection Against Sanitary Risk (COFEPRIS)-to work toward greater convergence, leading eventually to mutual recognition of decisions. Strong intellectual property provisions, such as those included in the USMCA, will encourage, not deter, additional investment by providing investors with greater certainty.

Regulatory convergence will simplify the drug and manufacturing approval process and thus expedite patient access to new treatments. Under the USMCA's Good Regulatory Practices chapter, signatories are obliged to demonstrate data and a scientific rationale for proposed regulations and to provide an opportunity for public comment. The signatories must also publish annually a list of regulations they expect to adopt or propose to adopt. This ensures that firms producing regulated products have time to prepare to comply with regulations based on sound science. While each country has the right, if not the obligation, to develop regulations to ensure the safety of its citizens, greater convergence of regulatory frameworks will expedite regulatory approvals since applicants would likely be able to submit identical or near identical dossiers. The certainty that meeting COFEPRIS's standards would position a firm for approval by the FDA would also provide further impetus to expand production.

Similarly, were COFEPRIS to more regularly accept FDA approvals for medications and devices per the 2020 equivalence agreement, which permits the agency to accept authorizations for drugs and devices from several regulatory agencies with internationally recognized high standards, Mexican patients could potentially have more rapid access to new treatment options and COFEPRIS could dedicate scarce resources to the review of products not already authorized in the United States.

Improving the regulatory climate would facilitate the growth of Mexico's domestic industry which, as noted above, has the capacity and technical know-how to expand into the U.S. market (more about that below). However, to be able to attract additional investment in pharmaceuticals will require the Sheinbaum administration to address two concerns which, in point of fact, are relevant for other types of manufacturing and nearshoring endeavors as well.

First is Mexico's chronic need for water. The lack of adequate maintenance and investment in infrastructure has created significant shortages that have been and will continue to be exacerbated by climate change across the country. Poor maintenance means that roughly 40 percent of the water that flows through the Mexico City water system, for example, is lost before it reaches an end user. Many industrial processes, such as semiconductor and pharmaceutical manufacturing or lithium extraction, are highly water intensive. Furthermore, three-quarters of Mexico's water is dedicated to agricultural production for domestic consumption and export. The Sheinbaum administration has identified access to water for human consumption as a priority and promises to promote the modernization of irrigation for agriculture, treatment of water for industry and irrigation, and improved water management. Additionally, Sheinbaum imagines a state-directed industrial development plan with specific sector investments planned for specific industrial development corridors, pharmaceuticals, and medical devices, the U.S.-Mexico border region, and the area around the new (and underutilized) Mexico City airport. Water in these areas is already limited so management of competing priorities will require considerable skill.

Second will be the implementation of Mexico's newly adopted judicial reform. The election of judges and magistrates at all levels is controversial and unprecedented, and many in the private sector in Mexico and abroad have expressed concerns about the qualifications and independence of the judges who will be elected beginning in 2025. Not only is the process itself concerning, but more broadly it calls into question the state of Mexico's rule of law-an important aspect of company decisions to invest in a foreign market.

Policy Challenges in the United States

Production of APIs and finished products moved to China and India at least partly due to lower costs and weaker regulatory oversight. Moving this production back may require additional private sector investment to modernize and expand existing facilities or to build new ones. Doing so will be costly and time consuming, requiring firms to make significant commitments of capital and time. Guaranteed purchase contracts, issued by public sector entities such as the Veteran's Administration or the Department of Defense would further incentivize private sector investment. FDA's drug shortages database would be a logical starting point to identify potential candidates for such contracts.

The BIOSECURE Act, as noted above, does not enter into force until 2032-tacit recognition that the dependence on China for manufacturing and clinical trial work conducted by contract research organizations (CROs) will not easily be replaced. U.S. and Chinese firms are already exploring options and making changes to their operations; however, it is far too soon to determine the full impact of the act.

For the United States, the greatest policy challenge may relate to pricing. U.S. prescription drug expenditures totaled $370 billion in 2019 with spending through the Department of Health and Human Services (Medicaid and Medicare Parts B and D) accounting for 41 percent of the total. By 2023, total expenditures had reached $435 billion, according to the IQVIA Institute. Because generics are generally inexpensive, manufacturing margins are small. As noted above, generic drugs account for roughly 90 percent of total prescriptions but only about 17.5 percent of the cost. Further, the U.S. Pharmacopeia finds that older generics with lower prices have a higher risk of shortages. At the same time, production in the United States (or Mexico) will almost certainly be more expensive than current production in India and China for a host of reasons, including labor costs and the complexity surrounding regulatory and environmental reviews required for construction or expansion of chemical facilities. Congress and the next administration will need to assess the willingness of public and private payors (e.g., Medicare/Medicaid, Veterans Administration, Pharmacy Benefit Managers, and insurance companies) and patients to pay more in return for a more secure pharmaceutical supply chain.

Conclusion

The demand for medicine will continue to grow as Americans live longer. This is especially true with respect to chronic diseases which are increasingly treatable with access to proper medication. However, the Covid-19 pandemic demonstrated the inherent risk of overreliance on a single country or factory for the production of these key products of at least as much significance to Americans' daily lives as semiconductors. The United States, in partnership with Mexico (and perhaps Canada), the United States' largest trading partners, has an opportunity to learn the lessons of the Covid-19 pandemic and position itself to better respond to the next one. Collaborating with Mexico to encourage appropriate public policy will help to reduce dependence, enhance safety, and create economic opportunities in both countries.

Andrew I. Rudman is a senior associate (non-resident) with the Americas Program at the Center for Strategic and International Studies in Washington, D.C.

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