Reshoring a Nation’s API and Pharmaceutical Production

The pharmaceutical industry has embraced a global supply chain model for decades, seeking cost advantages made available by offshore manufacturing of starting materials, intermediates, and active pharmaceutical ingredients (APIs), particularly in Asia. However, a variety of concerns — notably underscored by supply chain disruptions driven by the COVID-19 pandemic — are pushing companies to redraw their global supply chains to resume more domestic manufacturing, aided by new technologies and equipment that can reduce costs.

Offshoring and Reshoring

Over the past few decades, many pharmaceutical companies have moved finished-dose pharmaceutical production and API production overseas. The movement of API production offshore, in particular, has been driven primarily by the opportunities for lower manufacturing costs and access to growing markets, including India and China. However, there is an implicit risk in relying on elaborate global supply chains in which the supply of many essential and critical drugs is dependent on overseas suppliers — this multiplies the risks of disruptions stemming from vulnerable points in the supply chain. The COVID-19 pandemic has elevated awareness about this supply chain issue and fueled a sense of urgency within the industry as well as the government to address the risks including legislation. A wave of new projects has initiated the goal of re-building — or reshoring — API and drug manufacturing. The key to reshoring success will use a combination of new and existing batch-style production facilities and equipment and development and integration of new continuous manufacturing techniques (i.e., flow chemistry) that require all new manufacturing equipment that may not exist yet. In either case, new and refurbished GMP manufacturing space and equipment are very expensive.

Capital-Intensive Business

For many pharmaceutical manufacturers, competitive advantage is the ability to develop new products and then efficiently manufacture and distribute them.¹ As research and development costs for innovative products increased concurrently with a decline in the development of new products suitable for market approval, pressure has increased on manufacturers to reduce costs and to improve efficiency. The mandate to reduce manufacturing costs became very important for products faced with price pressure from other innovative products in the same market, as well as for those products with generic equivalents. The drive to reduce manufacturing costs highlighted the perceived benefits of offshoring pharmaceutical production.

API manufacturing is a very capital-intensive business requiring significant up-front investments in facilities and capital equipment. There are also significant barriers to overcome in the form of environmental regulations (e.g., process waste treatment), as well as the regulatory approvals required for drug manufacturing facilities, processes, and products. Even though moving production to countries like China and India still required investment in facilities and equipment, outsourcing also provided a range of apparent benefits, including lower labor and construction costs, less environmental regulations, and access to rapidly growing markets.¹ 

The pharmaceutical industry has always been a risk-averse industry, slow to change. There has been little incentive to invest significant resources to develop new manufacturing equipment, technology, and processes for mature, low-price products like generic drugs. New technologies not only have to be developed but also must be approved by regulatory agencies. These are all very costly, time-consuming, and risky activities with little to no payoff from the current market. Rather than invest in these technologies and approvals, the industry overwhelmingly adopted the strategy of investment in building new facilities incorporating established processes, equipment, and techniques located in countries with lower costs. This strategy achieved the goal of lowering API manufacturing costs by 30–40% in some cases but created more elaborate supply chains with greater vulnerabilities and risks.²

Recognizing the Risks

In a study dated December 2011, The Bureau of Industry and Security (BIS) of the United States Department of Commerce considered the foreign sourcing of products for the Healthcare and Public Health Sector, one of the 18 sectors deemed to be “Critical Infrastructure and Key Resource” sectors under the National Infrastructure Protection Plan.³ This study found that the United States had a “significant amount” of manufacturing capacity for critical healthcare-related commodities. However, they also found a high degree of foreign sourcing and dependency for critical components, materials, and finished products, with no U.S.-based alternative. The BIS included this in its report: “The API is the most important material in pharmaceutical manufacturing. Dependency on non-U.S. suppliers for APIs can increase risks to supply chain security, potentially exposing companies to supply disruptions, counterfeiting issues, and quality control problems.”³

The BIS assessment asked pharmaceutical manufacturers whether they could increase production by 50% and 100% and how long it would take to achieve those targets. The manufacturers estimated that about 42% of manufacturing could be increased by 50% in three to six months and that 23% of manufacturing would take two years or more to double current capacity (100% increase).³ Pharmaceutical manufacturers were asked to identify the key factors for their limitations for capacity expansion. They cited “product validation, equipment lead-time, and timing of regulatory approval.” 

In October 2019, Dr. Janet Woodcock, Director of the Center for Drug Evaluation and Research (CDER) at the Food and Drug Administration (FDA), part of the Department of Health and Human Services (HHS), testified to the House Committee on Energy and Commerce, Subcommittee on Health, regarding the same issue. Dr. Woodcock testified that the United States had 28% of the manufacturing facilities to make APIs to supply the U.S. market, with the remaining 72% of API manufacturing facilities located overseas. CDER’s data do not indicate how many of those sites in the United States or globally are actually producing products, and if so, how much. The data only show the percentage of available manufacturing sites in the United States versus the rest of the world. The data also show that the number of API manufacturing sites in China for products marketed in the United States has doubled between 2010 and 2019, such that 13% of the sites registered to manufacture API for the U.S. market are currently located in China. Dr. Woodcock testified further that U.S.-based manufacturers could never offset the labor and other cost advantages that China enjoys simply by achieving higher productivity with traditional pharmaceutical manufacturing technology.³ 

A Global Pandemic and New Sense of Urgency

BIS and CDER expressed growing concern over the security and strength of the U.S. supply chain for APIs and pharmaceuticals in their reports. However, the COVID-19 pandemic has focused a new sense of urgency aimed at addressing those risks. Senator Chris Coons of Maryland, an advocate of U.S.-based manufacturing, has said that spending in this area has been low in the past and that there is a need for proactive investment in pandemic response.⁴ The CARES Act, passed in March 2020, contains several provisions related to the development and production of products in response to the COVID-19 global pandemic. One such provision allocates $3.5 billion to the Biomedical Advanced Research and Development Authority (BARDA) to fund the manufacturing and production of vaccines and small molecule APIs.⁵ The funding may be used to construct manufacturing facilities and for the development and demonstration at-scale of innovations in manufacturing platforms.⁵ Many new projects are underway and can be discovered online.⁶ 

According to Dr. Woodcocks’ testimony, advanced manufacturing technology may allow U.S.-based manufacturers to compete with manufacturers in lower-cost foreign countries.³ The primary application of advanced manufacturing technology for APIs would be the implementation of continuous manufacturing versus traditional batch manufacturing. Batch manufacturing for chemicals like APIs traditionally rely on a single reactor in a multistep process, where the product of each step is transferred to the next step. The batch-style process is labor-intensive.⁶ Equipment used for continuous manufacturing, or flow chemistry, is set up to run continuously in a sequence, which can save significant time, money, and space.⁷ Flow chemistry is not without risks. If the process is not tightly controlled, there could be a significant amount of expensive API lost and finished-product rejections. Continuous processes would need to be developed and validated for many existing, mature products, which will require significant time and investment to develop.

Traditional batch manufacturing equipment may allow for faster expansion of manufacturing for existing products by adding additional capacity at existing facilities without requiring the development of new technologies before implementation. A significant factor in the limitations expressed by API and pharmaceutical manufacturers in building or expanding capacity involves equipment lead time. Manufacturers looking to expand a facility or bring an existing facility back online can save significant time by sourcing used equipment from reputable dealers. Used equipment is typically available immediately, which can save several months in lead time compared with procuring new equipment directly from original equipment manufacturers (OEMs). Used equipment can also reduce initial investment costs, with immediate savings in the range of 60–80% of the purchase price. 

The opportunity to significantly reduce capital investment costs while implementing traditional manufacturing equipment and techniques will be a key to success. The development of new manufacturing technologies entails many unknown elements that could cause delays and restarts. Reducing the costs of implementation of a traditional manufacturing facility will provide a clear path and timeline for completion while the development of new technologies continues in parallel. When the time comes, the traditional batch systems can be repurposed for different products or become backups for the new systems. 

The entire supply network for APIs and pharmaceuticals will likely remain complicated for some time. Please note that nothing here is intended to detract from a global network of suppliers as well as a global marketplace. The ideal situation is for a global supply chain that can produce API and drugs in multiple locations around the world. If something happens at one location, others can maintain supply to meet global demand. Additionally, there would be enough global capacity to meet a surge in demand for critical products. This will be a long process regardless of the approach and equipment selected. Once the current crisis subsides, we must maintain focus on supply and infrastructure required for critical API and drug manufacturing. 

References

1. Pore, Mridula, Yu Pu, Lakshman Pernenkil, and Charles L. Cooney. “Offshoring in the Pharmaceutical Industry. In The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Massachusetts Institute of Technology, Department of Chemical Engineering. 2008. 

2. Woodcock, Janet M.D. “Safeguarding Pharmaceutical Supply Chains in a Global Economy.” Testimony before the House Committee on Energy and Commerce, Subcommittee on Health. 30 Oct. 2019. Web. 

3. Reliance on Foreign Sourcing in the Healthcare and Public Health (HPH) Sector: Pharmaceuticals, Medical Devices and Surgical Equipment. Rep. U.S. Department of Commerce Bureau of Industry and Security Office of Technology Evaluation. Dec. 2011. Web. 

4. Clemons, Steve. “Coronavirus Report: The Hill’s Steve Clemons Interviews Sen. Chris Coons.” The Hill. 27 Apr. 2020. Web. 

5. Gallagher, Michael, Elliott Dionisio, Daniel Grossbaum, Eugene Hutchinson, and J. Mark Gidley. “Impact of the Cares Act on the Pharmaceutical and Medical Device Industries.” White & Case LLP. 27 Mar. 2020. Web. 

6. “Pharmaceutical Manufacturing in America.” MedicalCountermeasures.gov. 2019. Web. 

7. Fisher, Laura. “Batch and Flow: United at Last.” Chemistry World. 14 Oct. 2016. Web.