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Outsourcing

COVID-19 is reshaping the pharmaceutical supply chain

The coronavirus pandemic may mark a rebalancing of where drugs are made as nations recognize a security imperative

by Rick Mullin
April 27, 2020 | APPEARED IN VOLUME 98, ISSUE 16
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Credit: Will Ludwig/C&EN/Shutterstock

 

In retrospect, testimony before a US congressional committee and two departments of the European Commission late last year were 11th-hour warnings of a pending upheaval for the world’s drug supply.

In brief

The COVID-19 pandemic did not seriously impede the production and shipment of pharmaceuticals in the first quarter of 2020, although the months ahead will be critical as chemical deliveries slow down and inventories of backup supplies dwindle. What the pandemic has done is wake up regulators and world leaders to the extent to which China dominates the world’s supply of active pharmaceutical ingredients and their chemical raw materials. An ongoing industry effort in the US and Europe to rebalance the pharmaceutical chemical supply chain is likely to be energized by government initiatives to ensure domestic production of drugs.

Janet Woodcock, director of the US Food and Drug Administration’s Center for Drug Evaluation and Research, told a House of Representatives subcommittee on health in October that the number of facilities in China supplying active pharmaceutical ingredients (APIs) had more than doubled since 2010 to 13% of all those serving the US market. In December, a delegation of the European Fine Chemicals Group (EFCG), an association representing API manufacturers, informed EC commissioners about measures needed to support the repatriation of pharmaceutical chemical production from China back to Europe.

Both Woodcock and the EFCG delegates spoke of the need to safeguard the world’s supply of medicines from the vulnerabilities inherent in relying on any one region for a significant proportion of essential raw materials and APIs.

Then, in the waning days of December, the world learned that a novel and deadly coronavirus had appeared in the Chinese city of Wuhan. In February, many chemical plants across China were ordered closed for a 1-week extension of the New Year holiday, after which quarantines impeded the return to work. By the end of that month, a significant break in the pharmaceutical supply chain appeared imminent as the virus and COVID-19, the disease it causes, spread across the Northern Hemisphere.

Far flung

Plants that are registered with the US to supply active pharmaceutical ingredients can be found all over the world.

Source: US Food and Drug Administration, August 2019.

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Yet, as of April, the chain remains largely functional and intact. Chinese suppliers are back in operation, and US and European API producers continue to operate without serious impediment. Manufacturers generally keep emergency stocks of ingredients on hand, and most claim they are not yet threatened by a slowdown in deliveries of raw materials.

Roger Laforce, a Switzerland-based industry consultant, credits Western producers with making strides in recent years to secure themselves against volatility in supply from Asia, China in particular. “The coronavirus accelerates this, I think, and will have a long-term effect on how supply chain management will be run,” Laforce says.

But there is no doubt that China will continue to control a large swath of the global pharmaceutical supply chain for years to come, posing a formidable risk. And industry watchers warn that the full impact of the COVID-19 pandemic won’t be known for months.

Raising awareness

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Credit: Flamma
Gianmarco Negrisoli, corporate development manager of the Italian firm Flamma, at the company's Dalian, China, plant in November

A pandemic should have taken no one by surprise. Scientific and government bodies, not to mention science fiction writers and filmmakers, have been raising the alarm for years. Nor should anyone be surprised to learn that pharmaceutical chemical manufacturing—and the production of finished-dose generic drugs—has steadily moved to China and India as Western drug companies and contract development and manufacturing organizations (CDMOs) sought to cut costs and wash their hands of the highly polluting chemicals used to make drugs.

Woodcock told the House subcommittee in October that, by the FDA’s count, the US remains home to the most API manufacturing plants worldwide, with the European Union a close second. But each accounts for just over a quarter of the world’s FDA-registered facilities. China and India combined account for 31%.

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But a factory count is a poor gauge of actual production volume, according to Woodcock. “We cannot determine with any precision the volume of API that China is actually producing, or the volume of APIs manufactured in China that is entering the U.S. market, either directly or indirectly by incorporation into finished dosages manufactured in China or other parts of the world,” she said.

Precision is even harder when it comes to counting raw materials for drugs, but industry watchers agree that the volume coming from Asia has skyrocketed. The EFCG estimates that upward of 80% of chemicals used to make drugs sold in Europe now originate from China and India. The group has been keeping a close eye on the ramifications of such a heavy reliance since 2017, when an environmental crackdown by the Chinese government led to a wave of plant closures.

As concern mounted in recent years over the possible quality trade-off of low-cost Asian supply, most Western companies steered clear of the worst actors. But there is still a high level of anxiety, according to Luis Gomes, senior vice president of operations at the Portuguese API maker Hovione. Gomes, who chairs the Pharmaceutical Activities Committee of the EFCG, was among the company representatives at the EC hearing in Brussels in December.

“As API suppliers, we are a little bit in the middle,” Gomes says. “We see what is happening with our customers who are generic or branded drug manufacturers, but we also see what is happening at the earliest stage of the supply chain.” China’s dominance in pharmaceutical raw materials and the shift of production of key generic drugs to India, which now supplies 40% of generics to the world market, are front-burner issues for EFCG members, he says.

The problem is that lawmakers and the public have exhibited a shocking lack of awareness of the risks, Gomes says. “If for some reason all the energy used in the United States, say, was produced in China, the American people wouldn’t allow it,” he says. “People need to understand that we need to have certain internal capabilities with public medical supply as well.”

We need to look at medication on an equivalent level of strategic importance as weapons.
Andrew Badrot, CEO, C2 Pharma

That awareness is quickly emerging. In the US, White House economic adviser Peter Navarro proposed a “Buy American” executive order last month. Meanwhile, the Protecting Our Pharmaceutical Supply Chain from China Act, introduced by Senator Tom Cotton (R-AR) and Representative Mike Gallagher (R-WI), calls for a cessation of purchases of APIs and finished drugs from China by 2022.

Among the more temperate proposals, the Strengthening America’s Supply Chain and National Security Act, a bipartisan bill spearheaded by Senator Marco Rubio (R-FL) and introduced in March, would require drug companies to provide the FDA with more information on their API supply. And the Coronavirus Aid, Relief, and Economic Security Act, the broad relief package signed by President Donald J. Trump in March, aims in part to coordinate industry and government efforts to mitigate drug and medical device supply shortages.

Andrew Badrot, CEO of C2 Pharma, a Luxembourg-based API supplier that outsources manufacturing, sees the US government’s coronavirus response as a turning point in efforts to realign the pharmaceutical supply chain. “In the context of what is happening between the United States and China and Europe, I think nobody has any doubt about China’s ability today to bring the world to its knees should they stop supply of medical devices or raw materials or intermediates for the pharmaceutical industry,” he says.

The Trump administration’s penchant for trade wars has shifted the prospect of China weaponizing the drug supply chain from the far fetched to the worrisome, Badrot argues. This year’s initial quarantine in China, he adds, illustrated another way that supply can be cut off. COVID-19 delivered a wake-up call that Badrot says will affect supply chains more than China’s move to close noncompliant manufacturing will.

“We need to look at medication on an equivalent level of strategic importance as weapons,” Badrot says. Domestic control of the supply chain is essential, he adds.

Help wanted

“Janet Woodcock has her finger on the pulse,” says John DiLoreto, executive director of the Bulk Pharmaceuticals Task Force (BPTF), an organization of US API producers. But the FDA has come a long way since 2011, he says, when the agency, the generic-drug industry, and API makers began negotiations on the Generic Drug User Fee Act, a law designed to speed delivery of generic drugs and reduce costs for producers.

“One of the first questions they asked us was ‘How many manufacturers of pharmaceuticals are there?’ ” DiLoreto recalls. The BPTF has worked with the FDA to establish a database of drug manufacturing facilities and to assist the agency in better understanding how the supply chain works.

The group is also communicating to the FDA the importance of the earlier links in the pharmaceutical supply chain. “There are a lot of raw materials that aren’t available from the US; they are only available from China,” DiLoreto says. “It makes it difficult to suggest that bringing all the API manufacturing back to the US and Europe solves the problem. It doesn’t if we can’t control the whole supply chain.”

Giuliano Perfetti, director of sales, marketing, and business development at Fabbrica Italiana Sintetici, an Italian CDMO, headed a task force that developed the document the EFCG presented in Brussels. It calls for fast-track approval for alternate suppliers of regulated drug starting materials and the establishment of a Europe-wide database, like the FDA’s, on supply chain issues such as shortages of key materials. It also seeks a 5-to-10-year investment plan to support the development of clean, or green, chemistry technologies to help reestablish production of basic pharmaceutical chemicals in Europe.

“We do not pretend to have a unique explanation to the potential shortage of medicine,” Perfetti says. “But every day we are facing consequences of unavailability of starting materials from not only China but the Eastern part of the world.” This issue was brought in sharp focus with the closure of plants—and even entire industrial parks—in China’s 2017 environmental crackdown, he says.

Industry executives acknowledge the irony that the very companies that spent the past 20 years outsourcing the supply of chemicals and APIs to China are now asking for support to bring it back. But they dismiss the criticism, responding that capitalist industries have to compete globally on price. Their request for support, they say, aims to establish a more level, competitive playing field.

“We have to deal with the reality that pricing plays an important role in the availability of drugs, primarily if they are generic,” the BPTF’s DiLoreto says. “We have to find a way to provide additional incentives for manufacturing to come back to the US. Whatever those financial incentives are, the government will have to start taking it seriously.”

The pandemic

When the coronavirus pandemic struck, the stress on the drug supply chain was not as bad as some people had feared. Indeed, the challenges companies faced were often local rather than related to supplies from distant shores.

“I’ve given it a lot of thought, and I actually think it might be quite a robust supply chain,” Guy Villax, CEO of Hovione, told C&EN in late March. “We have had this crisis in China for at least 7 weeks. Whole provinces were shut down. And of course we’ve had difficulties and had to be creative, but I haven’t seen a showstopper.”

Hovione managed well through March, Villax said, because of the rapid response at its plant in Macao, which implemented safety measures and found local apartments for workers who live in mainland China so they could continue to work after a 14-day quarantine period. The company’s manufacturing operations in Portugal and Ireland and its technology center in New Jersey were likewise resilient, he said.

Other API makers report similar experiences in Europe and the US. Flamma is an Italian API maker based near Bergamo, the COVID-19 epicenter in Europe. The firm also has a plant in Dalian, China, where the response to the epidemic in February provided a model for operations in Italy, says Gianmarco Negrisoli, corporate development manager for the family-owned company.

Like other facilities in China, the Dalian plant was closed by the government for several days in early February, but it has operated since then. Flamma decided to shut its Italian plant for 1 week in March, “mostly to give people a break and spend time with their family,” Negrisoli says.

Operations in Italy were otherwise unimpeded, but activity is slowing down, Negrisoli acknowledges. Transport companies are allowed to serve essential industries, but the problem has been finding people, such as truck drivers, willing to work. “People are scared, thinking, ‘Why would I expose my child or family to this?’ ”

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Flamma had to dial back some manufacturing last month. “For sure we stopped minoxidil before the shutdown,” Negrisoli says. “It’s difficult to ask people to come to work and risk their life for a hair-growth product. But all the lifesaving drugs stayed in production, especially the ones in development.” As of the first week of April, the company is back to 90% of regular production as employees became confident about returning to work.

“I don’t say luck is the right word, but we have a fairly robust supply chain,” says Christian Dowdeswell, head of commercial development for small molecules at Lonza, the world’s largest CDMO, which operates plants in Europe, the US, and China. “We tend to plan quite a long way in advance.”

Lonza manufactures a wide range of basic raw materials at its mother ship plant in Visp, Switzerland, Dowdeswell notes. The firm has also been integrating its supply chains with those of its key customers in an effort that began 3 years ago, when the company started dialing back supply from Asia, prompted by rising quality concerns.

CordenPharma, a German CDMO that operates a network of plants in the US and Europe, is also managing well, according to CEO Michael Quirmbach. “We have a few disruptions in the supply chain, but not so severe. We have probably seen a little bit more, especially this week,” he told C&EN in early April.

CordenPharma, Quirmbach said, manufactures some of its own raw materials and precursor chemicals and procures some from its German sister company WeylChem—both are owned by the same investment firm, International Chemical Investors Group. “But for large-scale API, we are dependent on supply from China. Also from India,” Quirmbach acknowledged.

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Credit: CordenPharma
CordenPharma, like most contract development and manufacturing organizations, has kept up its pace so far this year, with only a few disruptions.

Far East operations

For some API producers, the plants they rely on in China are their own. Lonza and the Swiss firm Siegfried are among the companies that have built sizable plants in China under a dual strategy of establishing low-cost production and serving the Chinese market.

“The plant in China has a cost differential, but it’s not the key driver for our customers,” Lonza’s Dowdeswell says. “It is a part of our network.”

Increasingly, the Chinese plants of companies like Lonza are supplying Chinese biotech companies that are developing their own drugs. “We clearly have expertise and experience in taking drugs to market versus many of the local CDMOs that would offer the same services,” Dowdeswell says. “We are also looking to the fact that China is the fastest-growing location for clinical trials.”

Marianne Späne, executive vice president of business development at Siegfried, cites a similar strategy behind Siegfried’s establishment of Chinese operations. Like Lonza, she says, Siegfried offers China as a low-cost option in its network of six API facilities, which are otherwise in Switzerland, Germany, France, and the US. The company is also registering APIs it makes in China, with plans to offer them on the Chinese market.

Western firms must compete with well-established Chinese CDMOs that do all their manufacturing in China. Hit by the initial and most severe quarantines and shutdowns of the pandemic, these firms nevertheless have kept pace with their peers in the US and Europe.

China-based Porton Pharma Solutions, which has plants in Chongqing and Nantong, powered through early February, CEO Oliver Ju says. “We were one of the lucky companies that didn’t shut down manufacturing operations in the Spring Festival,” he says, referring to the Lunar New Year. “We were very busy. But our R&D center shut down.”

I’ve given it a lot of thought, and I actually think it might be quite a robust supply chain.
Guy Villax, CEO, Hovione

Ju says Porton’s supply chain is now at risk because of its reliance on raw materials, including catalysts and reagents used in R&D, from Europe. “We are seeing delays for some materials from overseas, mainly Europe and India,” he says. “And also there are logistic delays. In air shipments, the capacity has decreased, and the price has increased by three times. We need a much longer lead time for sourcing some raw materials.”

Ju recognizes that the coronavirus outbreak may spur governments around the world to secure domestic pharmaceutical supplies. “We are working on establishing a Western manufacturing site to mitigate this risk and become a more global company,” he says. Porton acquired J-Star Research, a US contract research firm, in 2017 and is on the lookout for a manufacturing site to buy in Europe, Ju says.

Elut Hsu, president of Asymchem, another Chinese CDMO, says her firm weathered the shutdowns and quarantines of early February well. “As of late February, early March, we are at full capacity,” she says.

Hsu downplays the idea that the coronavirus outbreak in China could create havoc in the global pharmaceutical supply chain. The Chinese manufacturers least able to survive shutdowns and quarantines were already eliminated during the government’s environmental enforcement campaign, she says.

In fact, Hsu sees any Western effort to cut China out of the supply chain as naive. “If everyone has a good supply chain in place, regardless of COVID-19 or hurricanes or wars,” she says, “you should be fine without having these xenophobic regulations coming in.”

Not all restrictive regulations emanate from the US. Early in March, India’s Ministry of Commerce and Industry announced the country would cease export of key drugs and APIs, including hydroxychloroquine and acetaminophen, to guard against possible shortages in India. Many restrictions were quickly lifted or rolled back.

At the same time, India depends on China for 70% of the ingredients and APIs it turns into generic pharmaceutical products, according to a report from the consulting firm KPMG, and the government last month committed $1.3 billion to promote the manufacture of drug ingredients domestically. The program calls for establishing three drug-making industrial parks, expedited approval for capacity expansions and new manufacturing sites, and investment incentives to boost output of APIs and key starting materials.

Hikal, a CDMO based in Mumbai, India, has had difficulty obtaining raw materials from China in the past 3 years, primarily because of the wave of plant closures there, according to Manoj Mehrotra, president of Hikal’s pharmaceutical business. “Supply problems from China again resurfaced during the coronavirus crisis in February and March this year,” he adds.

Mehrotra says Hikal has taken steps to “derisk” its supply chain, setting up alternate supply domestically and in Europe for products purchased from China. Hikal is also building a network of manufacturing partners for which it develops production processes.

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Credit: Hikal
Among safety measures implemented during the COVID-19 pandemic, Mumbai, India–based Hikal provides bus transportation for workers from their homes to the plant.

War footing

Western CDMOs say near-term stewardship of the pharmaceutical supply chain is likely to require them to repurpose production lines to manufacture drugs and raw materials critical to fighting the new coronavirus. Several firms already set aside assets to churn out hand sanitizer, which they distribute for free to local communities. But conversion of assets to produce more complex products will require not only spare capacity but also engineering, design, and registration resources.

“We are already looking into this,” CordenPharma’s Quirmbach says. “There is increasing demand for certain lipids. And we are also looking at hydroxychloroquine because we used to manufacture it at our Bergamo site. But that was 10 to 15 years ago, and all of these things take some time to restart.”

Lonza is likewise looking into launching emergency production. “We are in the middle of those discussions,” says Dowdeswell about antivirals now in high demand. “We have capacity available, but do we have the right capacity at the right time for what is needed? We have to ask ourselves on a case-by-case basis.”

Siegfried, too, is interested in making capacity available, but plants are currently well booked, Späne says. “It’s not as easy as saying, ‘Something is coming short term? Oh, super, we have empty capacity,’ ” she says. “It’s a little more complex.”

Extra capacity is, however, being wrangled. Wavelength Pharmaceuticals, the former API division of the generic-drug company Perrigo, says it is tripling or quadrupling production of midazolam, cisatracurium, and rocuronium, generics that are used in respiratory critical care. Demand for these products has skyrocketed, the firm says.

“We entered the crisis in a pretty good position,” says Ilan Avni, Wavelength’s vice president of business development and marketing, noting that the company has worked in recent years to secure double or triple sourcing for raw materials and to produce more of them in-house. The company says it obtained the extra capacity largely through efficiency improvements at its plant in Beersheba, Israel.

While the pandemic is unlikely to abruptly shift pharmaceutical chemical supply lines, executives agree that COVID-19 marks a fulcrum in public understanding of supply risks and will fuel efforts to establish local supplies of chemicals and APIs as a matter of national security.

“I don’t expect manufacturing to move back to the United States,” says James Bruno, president of the consulting firm Chemical and Pharmaceutical Solutions. Capitalism will continue to guide strategy, with cost, taxes, and regulatory considerations driving sourcing decisions, he says.

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But more subtle sourcing shifts already underway will continue, Bruno says, including changes in demand. Start-up pharmaceutical companies are trending toward Western API suppliers, for example. “They won’t be going to China, because venture capital won’t support them,” he says. “It’s not just supply line. It’s money line.”

Hovione’s Gomes says the EFCG had a receptive audience at the December meeting in Brussels—EC commissioners were already worried about drug shortages that they learned about from major pharmaceutical companies. With the spread of the coronavirus, commissioners have hosted regular conference calls with the EFCG and other industry organizations, Gomes says.

Some short-term changes are already being made: the EC and the European Medicines Agency on April 10 loosened rules for approving alternative sources of reagents, starting materials, intermediates, and APIs essential to dealing directly with the COVID-19 pandemic.

And on April 21, the EU's health and food safety commissioner, Stella Kyriakides, raised supply chain vulnerabilities exposed by the COVID-19 pandemic at a meeting with the EU conference of presidents. “The current situation has exposed some structural weaknesses in the EU’s medicines supply chain and a high dependence on non-EU countries for active pharmaceutical ingredients,” Kyriakides said. She recommended that supply chain issues be addressed in an EU pharmaceutical strategy expected to be launched by the end of the year.

Gomes says regulators also understand better that enhancing national security will require long-term measures, including the funding of breakthroughs in green chemistry that will favor Western suppliers.

Flamma’s Negrisoli cautions that efforts had better not be too long term, given the competitive nature of bolstering national security. “My fear is that the Chinese are getting smarter and faster than us,” he says, “and that they will get to the greener chemistry before we do.”

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