Senior Vice President for International Policy
January 31, 2023
Representatives of the U.S. and the 13 other nations taking part in negotiations for the Indo-Pacific Economic Framework (IPEF) will meet in New Delhi on February 8-11. Supply chain resilience is one of the key issues on the agenda.
The meetings are a good opportunity to discuss biopharmaceutical supply chains, not least because India is a major player in the industry. The officials’ first goal should be to better understand these supply chains, and they should proceed on that basis to identify critical dependencies that collaborative efforts may help mitigate. It’s also worth discussing which policy tools can help achieve these goals—and which probably aren’t fit for purpose.
About half of the innovative biopharmaceutical products Americans consume are manufactured domestically, and most of the rest comes from countries that are close allies. The same is true of the active pharmaceutical ingredients (API) used to produce those medicines.
According to a report by the research firm Avalere, 53% of the API used to manufacture innovative biopharmaceuticals consumed in the United States is produced domestically, and most the remainder (nearly 40%) is produced in Europe, Japan, and Singapore.
In other words, the API used to manufacture innovative pharmaceutical products consumed in the United States is overwhelmingly sourced domestically or “friendshored” from trusted partners.
The innovative biopharma sector has proven resilient. The FDA has approved more than 20,000 drug products for marketing in the United States. But just over 100 were in short supply before the pandemic, according to FDA tracking, and that figure hardly budged in the Covid-19 pandemic.
The resilience of the U.S. biopharma supply chain derives from its geographic diversity, and this strong public health industrial base provided a firm foundation for the industry’s development of vaccines of great efficacy at record speed.
For generic pharmaceuticals, which represent more than 90% of all medicines consumed in the United States, the market realities are somewhat different. Here, concern has focused on reliance on a single source of API (China) for many products.
For generics and the API used to make them, the challenge is identifying policy fixes that will help and not hurt. The Biden administration in 2021 rightly rejected an initiative it inherited that would have withdrawn many medicines from coverage under the WTO Government Procurement Agreement. The ostensible aim of that proposal was to impose domestic preferences.
However, the administration withdrew the measure when it rightly perceived it would fail to incentivize onshoring manufacturing — of finished products or of API — because federal government purchases represent such a small share (approximately 3%) of the pharmaceuticals consumed in the United States.
The Association for Accessible Medicines (AAM), which represents manufacturers of generic drugs, issued A Blueprint for Enhancing the Security of the U.S. Pharmaceutical Supply Chain in 2020. It found that long-term, guaranteed price contracts would be required to incentivize domestic production of API for generics in a cost competitive fashion. To date, no such arrangement has been introduced.
Other recent research has been intriguing: According to research from Washington University’s Olin Business School in St. Louis, “currently idle U.S. generic drug manufacturing capacity could keep the nation’s drug supply chain ‘secure, robust and resilient.’” The report indicates that aggregate excess capacity at U.S. generic pharmaceutical manufacturing sites is nearly 50%.
If policymakers in the U.S. are serious about diversifying sources of API for generics, then tapping this underutilized capacity would be a relatively cost-effective way to ramp up domestic API production. Long-term contracts would be required to give industry the assurance needed to take on the higher costs involved relative to some offshore locations.
The United States should work with trusted partners on these issues, and IPEF may be a good mechanism under which to do so. Notably, the Indian government has also expressed concern about excessive reliance on Chinese API. Reportedly, it is committing resources to support major investments in domestic Indian API manufacturing. Closer U.S.-India cooperation on this front would be mutually beneficial.
India, as the biggest global manufacturer of generics, is an ideal venue to host these discussions. As officials consider the IPEF negotiations and biopharma supply chains, the first step is to understand these complex dynamics. Dedicating time and effort to doing so is essential. Understanding which policy tools will help governments achieve their goals—and which won’t—is also critical.