Is COVID-19 the catalyst for Western pharma markets to revert to domestic API production?

The ongoing pandemic has fuelled debate about whether Western pharmaceutical supply chains and API sourcing are too dependent on lower-cost Asian suppliers such as China. Do the US and Europe need to bring manufacturing back home?

COVID-19 has rekindled debate about pharmaceutical supply chains and prompted renewed calls for drug companies to source more active pharmaceutical ingredients (APIs) from the US and Europe.

China is a major API, raw materials and intermediates supplier, and according to US Food and Drug Administration (FDA), 13% of the plants supplying APIs for US drugs are in China [1].

Likewise, many European pharmaceutical companies rely on China for APIs. Also, according to the European Commission, EU ingredient makers source "most" raw materials from China [2].

India – which is also a major supplier of drugs and APIs to the US and Europe - also sources the majority of its APIs and raw materials from China [3].

So, when the COVID-19 pandemic began in China last December it prompted concerns about the impact on drug supplies, given the country’s prominent market share in API supply. A survey by Kemiex showed 85% of ingredient industry professionals expected supply chain disruption [4].

In February the US FDA said the “outbreak will likely impact the medical product supply chain, including potential disruptions to supply or shortages of critical medical products” [5].

These concerns intensified when the Indian government temporarily restricted the export of certain APIs in March [6].

The European Commission has asserted its view that dependency on imports of APIs and chemical raw materials will put increasingly at risk the supply of certain essential medicines and threaten the EU’s strategic autonomy: “The recent outbreak of COVID-19 shows that a disruption of supply from India and China in the pharmaceutical value chain could present a major health security issue.”

The issue has to a certain extent become politicised, particularly in the US, where some politicians are keen to amplify China’s role in the coronavirus pandemic.

In March, Republican Senator Tom Cotton and Congressman Mike Gallagher introduced a bill entitled ‘Protecting our Pharmaceutical Supply Chain from China Act’ which they said would end US dependence on China for pharmaceutical manufacturing.

The bill’s key restrictions – which would not be applied until 2022 – include tracking APIs through an FDA registry, prohibiting pharmaceutical purchases from China or products with APIs manufactured in China and creating supply chain transparency by instituting a country of origin label of all imported drugs.

In short, COVID-19 has fuelled the debate as to the merits of domestic versus global pharmaceutical manufacturing and distribution.

Disruption?

At this stage, disruption to the pharmaceutical industry caused by COVID-19 appears to be minimal in the US and Europe.

According to the FDA, only one drug is in short supply in the US due to coronavirus-related issues at an API plant [7]. In addition, FDA Commissioner Stephen Hahn told Fox: "We don’t have any evidence that there’s a drug in short supply because of anyone blocking the active pharmaceutical ingredients coming to us (from China).” [8]

The European Medicines Agency has also downplayed any speculation about bottlenecks, recently announcing it has received “no reports of drug shortages or supply disruptions” [9].

Whether global API and raw materials supply chains can be maintained as the pandemic continues is unclear but Chinese manufacturing at least appears to be returning to normal. According to state owned media, most of the country’s API manufacturing facilities shut down in response to the pandemic have since reopened [10].

Industry view

Even if COVID-19 does not disrupt supply chains, the pandemic should still be a catalyst for change, say groups already concerned about pharma's reliance on Asia-made APIs.

Recently, the European Fine Chemicals Group (EFCG) and the Society of Chemical Manufacturers & Affiliates’ (SOCMA’s) Bulk Pharmaceuticals Task Force (BPTF) called for urgent actions to alleviate API shortages resulting from the pandemic [11].

The groups suggested a fast-track approval system for alternative Registered Starting Materials (RSMs) would help pharma firms maintain supplies during future pandemics and allow them to reduce reliance on Asian suppliers.

Maggie Saykali, director of specialty chemicals at Cefic, the EFCG’s parent organisation, insists this call for action and for increasing domestic manufacturing is not politically motivated.

“The issue is not about reducing our reliance on China specifically, it has more to do with reinforcing an essential value chain, about being able to supply European patients’ needs in time and in full, guaranteeing their right to have access to vital medicines when they most need it,” she says.

“It is also about keeping Europe’s competitiveness and upholding our high quality standards, reinforcing our technical know-how on pharmaceutical synthesis and keeping our chemical processes performant and innovative.”

She adds that especially in the current crisis, the vulnerability of supply chains based on supply from only one geographic region is proven, therefore mitigating risk by not relying on a sole supply source is “pure economic common sense.”

Providing the US perspective, Paul Hirsh, Senior Vice President, Industry Development and Strategic Partnerships, SOCMA says growing the US manufacturing base for APIs has come to the forefront for many in the industry as planning for the remaining part of 2020 and beyond begins to take shape.

“Expanding API manufacturing in the US is critical to supporting the nation’s response to COVID-19, but also to ensure availability of much needed and life-saving pharmaceuticals for domestic drug products,” he says.

Cost concerns

Encouraging drug firms to source APIs from the US and Europe will require a sea-change in industry thinking.

International companies in the pharmaceutical sector started buying APIs from Asia simply because low production costs meant they were cheaper than those made in the US and Europe. According to a 2009 World Bank study, low wages and energy prices allowed Asian API market suppliers to beat Western rivals on cost [12].

But while the cost of procuring APIs is still an important factor, it is no longer the dominant consideration, particularly when assessing the impact on drug prices, says Saykali.

“This model is no longer viable and we now have the opportunity to bring back production to Europe, leveraging on new state-of-the-art and environmentally-friendly processes,” she says. “Moreover, for most medicinal products, the cost of the API only accounts for less than 10% of the final drug product before taxes.

“The cost impact on the final medicinal product of sourcing APIs from Europe should be acceptable for customers as a counterpart to security of supply and the protection of the environment, both of which often have a positive economic impact.”

SOCMA’s Paul Hirsh says that while supply chains over the last 20 years have become more global and complex, API manufacturers are increasingly relying on supply chain risk mapping to ensure reliable sources of raw and intermediate substances to meet demand.

“This includes geographic diversification of suppliers to ensure availability of much needed and life-saving pharmaceuticals,” he adds.

Expanding capacity

Saykali believes increasing US and European API production will involve improving existing facilities and building new capacity.

“It is important to leverage on existing facilities in Europe and the know-how of European manufacturers,” she says. “We would need for some facilities to be modernised and their global competitiveness improved.

“If these conditions are present, it would definitely be possible to relocate key value chain links back to Europe and maintain and develop highly performing European industrial assets.”

API manufacturers face multifaceted challenges when manufacturing new drug substances as well as increasing supplies of existing drug substances in the US, according to SOCMA’s Hirsh.

“Key infrastructure and regulatory areas need to be addressed so that domestic manufacturing can expand including a review of current regulatory regimes impacting manufacturing processes and drug approvals, cost and availability of raw materials, and commercial viability,” he says.

He describes the long lead time to qualify and get FDA approval for new suppliers as “the largest hurdle in improving the supply chain,” adding that this can be com-plicated by the amount of material required to qualify a new supplier compared to the annual demand for the API.

“Often, qualifying a new raw material supplier means investing into inventory for an extended period while the change goes through the regulatory approval process,” he explains. “The diversification of suppliers by geographical regions is also sup-porting this action. More than ever, it is becoming attractive to have a domestic and foreign supplier to balance cost and security of supply.”

Blue sky thinking

Beyond the COVID-19 pandemic, there are other supply chain security benefits of local API sourcing, according to Saykali.

“Throughout the last year, and well before the current COVID-19 crisis, EFCG relentlessly alerted the European authorities about the recently developed weaknesses and vulnerabilities of the current model of the pharmaceutical supply chain.”

Saykali cited China’s recent “Blue Sky” policy as an example. The policy - which aims to reduce pollution - resulted in the closure of several raw materials and intermediate producers [13].

“Such actions have the potential to disrupt the timely sourcing and production of essential pharmaceutical ingredients. Since then, the COVID-19 crisis has unfortunately further highlighted that the current model is not sustainable in the long run.”

There are also potential environmental benefits of more API production in Europe, according to Saykali.

“We are convinced it is high time that we make use of the available innovative technologies we have developed to bring back to Europe and upgrade processes that were outsourced due to their negative environmental impact. We have the opportunity and the means to implement a responsible and sustainable value chain model for our industry.”

Balance

Whatever long term impact COVID-19 has on global API supply chains, Asian suppliers, and those in China in particular, are still going to play a major role.

Saykali says her organisation believes critical supply chains should be as short as possible and as far as European companies are concerned, based in Europe. She says innovative technologies should be used wherever possible to ensure a European-based supply chain is both viable and competitive in the long run.

However, she does provide a caveat.

“It is neither realistic nor does it make economic sense to pretend that sourcing raw materials and intermediates from other world regions will totally stop,” she says. “We just need to come to a more balanced situation, with a strong European industrial base which will allow us to better cooperate with other world regions without being totally dependent on them.”

References

[1] https://www.fda.gov/news-events/congressional-testimony/safeguarding-pharmaceutical-supply-chains-global-economy-10302019

[2] https://ec.europa.eu/health/sites/health/files/files/committee/ev_20200312_795_en.pdf

[3] https://www.bloomberg.com/news/articles/2020-03-22/india-to-spend-1-3-billion-to-boost-pharmaceutical-production

[4] https://kemiex.com/news/exclusive-coronavirus-supply-chain-impact-apis-vitamins-aminoacids-additives

[5] https://www.fda.gov/news-events/press-announcements/fdas-actions-response-2019-novel-coronavirus-home-and-abroad

[6] https://dgft.gov.in/sites/default/files/Noti%2050_0.pdf

[7] https://www.fda.gov/news-events/press-announcements/coronavirus-COVID-19-supply-chain-update

[8] https://www.foxnews.com/media/fda-commissioner-hahn-we-have-been-working-with-vaccine-manufacturers-for-weeks

[9] https://www.ema.europa.eu/en/news/addressing-potential-impact-novel-coronavirus-disease-COVID-19-medicines-supply-eu

[10] http://www.xinhuanet.com/english/2020-03/04/c_138840896.htm

[11] https://efcg.cefic.org/wp-content/uploads/2020/02/2019-02-11-EFCG_BPTF-joint-PR-shortages.pdf

[12] http://documents.worldbank.org/curated/en/848191468149087035/pdf/530750WP0APIEx10Box345594B01PUBLIC1.pdf

[13] https://www.icis.com/explore/resources/news/2018/07/10/10239565/chinas-final-blue-sky-plan-could-boost-costs-production-curbs/