The unfulfilled dream of drug reshoring

This month, the Joe Biden administration awarded $14 million to the API Innovation Center, a Saint Louis–based nonprofit that aims to remedy supply chain problems for active pharmaceutical ingredients (APIs). The organization will use the funds to produce APIs used in medications for asthma, anxiety, and diabetes—molecules that have been imported from China and India for years.

The center is hardly the first group to be concerned about overdependence on APIs from these countries. In October 2019, Janet Woodcock, then the director of the US Food and Drug Administration’s Center for Drug Evaluation and Research, warned a House of Representatives subcommittee on health that the number of API facilities in China had more than doubled since 2010.

Months later, when the COVID-19 pandemic put the world under lockdown, the repercussions of reliance on China became evident. When that country halted production and paused shipments, US citizens faced drug shortages. No US manufacturing source exists for more than 80% of APIs in medicines the FDA deems essential for public health, a study by researchers at Washington University in St. Louis said at the time.

In response, the federal government began funding start-ups and groups like the API Innovation Center in an effort to increase domestic production of small-molecule APIs and finished medicines. But industry watchers say the private sector generally isn’t following the government’s lead. While drug companies and contract manufacturers are putting huge sums into US plants for newer treatment modalities such as biologics, peptides, and antibody-drug conjugates (ADCs), traditional small-molecule APIs are getting little investment.

Hui-Yin “Harry” Li, president of Wilmington PharmaTech, a Delaware-based API maker, says some biotechnology and large pharmaceutical firms are attempting to move the drug ingredients they need back to the US, though not many have been successful. “This is largely due to the limited domestic manufacturing capacity,” he says. His company, which already had three facilities in Newark, Delaware, added a pilot plant in 2020 to manufacture highly potent APIs and ADCs. But building such plants in the US remains costly and time consuming, according to Li.

James Bruno, who heads the consulting firm Chemical and Pharmaceutical Solutions, agrees that building facilities in the US would take years. The government’s investments are a start, he says, if only a drop in the bucket.

In perhaps the largest such effort, the federal government handed a $354 million contract in 2020 to the start-up Phlow to manufacture medicines at risk of shortage, including therapies for COVID-19. The company now has two facilities in Petersburg, Virginia, and makes four small molecules, all sold to the government. Some of the synthesis steps use continuous flow manufacturing, a method that Phlow says is more efficient than traditional batch production.

In 2023, Phlow raised $36 million in a private funding round to develop the contract manufacturing side of its business and expand its services to private companies. The firm declines to comment on the status of its new segment.

Continuus Pharmaceuticals, another start-up that uses the continuous flow approach, in 2021 won a $69.3 million contract from the Department of Defense in conjunction with the Department of Health and Human Services. The company originally intended to use the funds to build an API facility in Woburn, Massachusetts, but later canceled the plan.

Brenda Kelly, president of materials technologies at the API maker W. R. Grace, says the pandemic prompted drug companies to reimagine their supply chains but didn’t ignite significant reshoring of production in the US. She adds that the House of Representatives’passage in September of the Biosecure Act—legislation intended to prevent US drug companies that receive federal funding from working with five Chinese services firms—was another reminder of the need for onshore manufacturing.

Kevin Webb, chief operating officer of the API Innovation Center, which wants to help reshore 25% of the US’s small-molecule API needs in the next 5 years, points out that contracts like the one with Phlow are by and for the federal government and don’t do much to stimulate similar private investment.

“We must realize that the government is not the end customer,” Webb says. “Even if the Department of Defense or Medicare and Medicaid sign these long-term contracts with local manufacturers, we still need to make these APIs so that the private sector commercial drugmaker is willing to buy them from a US-based company.”

For a long time, US drug companies have seen no cost advantage in purchasing locally produced APIs because they find cheaper alternatives overseas, Webb adds. In her testimony, Woodcock cited a 2011 FDA report that showed that API manufacturing in India could reduce costs for US and European companies by 30–40%.

John Dillon, president of JLD Pharma Consulting, agrees that the output from facilities set up by new firms like Phlow is a tiny fraction of what is needed to support US demand. He says it could take years and millions of dollars before additional large-scale manufacturing units are operating in the country. “When you set up a new facility, it needs to be validated; then there are regulatory approvals,” he says.

Both Dillon and Bruno say that US drug companies have found ways to mitigate supply chain risks postpandemic but that those solutions don’t necessarily involve reshoring. Bruno says companies are boosting inventories to stay prepared for a crisis.

According to Dillon, US pharmaceutical firms are also turning to India to diversify their supply chains. But even Indian companies that make APIs and generic medicines ultimately rely on China for many of their raw materials. “This is something companies I talk to are constantly grappling with,” he says. “There is a big need to set up more facilities to produce raw materials that are outside of China.”

Meanwhile, multinational API makers say they are seeing signs that their US clients may want to move manufacturing processes closer to home, though they don’t want it enough to spur widespread investment in new small-molecule API facilities.

“My sales team sees more inquiries from US biotech and pharma companies to move manufacturing to the US, but no company has taken action yet. I think some of this may be awaiting what happens geopolitically,” says Eric Neuffer, global head of drug substance sales at Evonik Health Care, which operates a big API plant in Tippecanoe, Indiana. Neuffer adds that Evonik has seen a tripling of multimillion-dollar orders in North America between 2021 and 2024 but that the Tippecanoe site already has enough manufacturing capacity to handle them.

Anil Kane, global head of technical and scientific affairs at Thermo Fisher Scientific, another large API maker, says several clients have expressed the desire postpandemic to have manufacturing facilities closer to their base. Thermo Fisher hasn’t announced investment in US small-molecule manufacturing capacity in recent years.

One recent investor in new capacity is Grace, which made a commitment to small-molecule API production in 2021 when it paid $570 million to acquire Albemarle’s fine chemistry business and its plants in South Haven, Michigan, and Tyrone, Pennsylvania. This year, Grace finished a project at the South Haven site that added 25% more capacity for pharmaceutical chemical production.

Although spending on new US capacity for small-molecule APIs is limited, several splashy investments have been made to manufacture peptides, oligonucleotides, ADCs, and biologics. This year, for example, the Swiss drug services firm CordenPharma announced a giant investment in its peptide manufacturing business, saying it would inject $980 million to expand production at its existing Colorado site and to build a new European facility.

Also this year, Eli Lilly and Company, which makes Mounjaro and Zepbound, peptide-based diabetes and weight-loss drugs, announced a $5.3 billion investment at its manufacturing site in Lebanon, Indiana.

And Veranova announced a $30 million expansion of its API facility in Devens, Massachusetts, in response to growing demand for US-based capacity for ADCs and other potent small molecules.

Dom Hebrault, an associate director at Veranova, says the cost of manufacturing newer modalities such as ADCs in the US is just slightly higher than that of making them in China or India. Moreover, drugs based on the newer modalities have high enough profit margins that where they are produced doesn’t matter as much. “If it takes only slightly more to make something in the US, then why should one look for options in other countries?” Hebrault asks.

But to make the small-molecule drugs that occupy the biggest spot in our medicine chests, dependence on companies and countries across the ocean will continue to be the norm.