The Report is the result of President Biden’s February 24 “Executive Order on America’s Supply Chains” (the “Order”), which directed federal departments and agencies to conduct a review of supply chain risks in four critical product areas,[1] including pharmaceuticals and active pharmaceutical ingredients (“APIs”).  The Report and its recommendations further the Biden administration’s broader goal of rebuilding the U.S. industrial base, reducing reliance on foreign competitors, and bolstering national and economic security.The U.S. Department of Health and Human Services (“HHS”) led the review of the supply chain for pharmaceuticals and APIs, which focused primarily on drugs, in particular small-molecule drugs and therapeutic biological products.  The Report makes a number of recommendations discussed herein that have the potential to impact pharmaceutical companies’ business plans and generate significant opportunities, though many such recommendations are long-term and will require dedicated funding so the actual impact of the Report’s suggestions remains to be seen.

Pharmaceutical Supply Chain Vulnerabilities

Informed by the vulnerabilities that the COVID-19 pandemic has highlighted, the Report underscores a number of fundamental risks to the stability and resilience of the U.S. pharmaceutical supply chain:

  • The U.S. supply chain is overly dependent on foreign supplies of pharmaceutical products and APIs, particularly from China and India.
  • Due to various economic pressures, contracting practices, foreign anticompetitive actions, and low margins, generic manufacturers, which produce 90 percent of drugs prescribed in the United States, have relocated production overseas.
  • Low geographic diversity of manufacturers, as well as consolidation in the production of APIs and finished dosage forms overseas, place the U.S. supply chain at risk of disruption due to geopolitics, natural disasters, or other events.
  • Limited redundant capacity in manufacturing creates similar risks, as the median number of drug manufacturers per a unique drug or dosage form is between two and three.
  • The pharmaceutical industry faces obstacles in responding to disruptions and surges in demand, due to factors like high costs in expanding manufacturing capacity, the need for regulatory approvals, and just-in-time inventory management practices.
  • The prescription drug market offers few incentives for manufacturers to invest in upgrading equipment and manufacturing technologies or improving quality management.
  • The Food and Drug Administration (“FDA”) lacks sufficient insight into the supply chain to monitor and identify risks.

Key Recommendations and Takeaways

To respond to these vulnerabilities, the Report proposes a whole-of-government and -industry effort, with a focus on improving supply chain transparency, incentivizing resilience and reductions in drug shortages, and increasing the economic sustainability of U.S. drug manufacturing.

The Report organizes its recommendations into three overarching categories.

First, HHS outlines a number of initiatives to boost domestic production capacity.  HHS’s strategy recognizes, however, that the United States cannot produce every drug at home.  Of particular note to pharmaceutical manufacturers:

  • The Biden administration plans to establish a consortium for advanced manufacturing and onshoring of domestic essential medicines production, leveraging Defense Production Act (“DPA”) authority and existing public-private partnerships. Among other functions, the consortium of government and private sector stakeholders will help identify financial incentives and investments to promote the development of domestic production capacity, evaluate the merits of a successor financing program to the DPA Loan Program, and address regulatory questions.  As a first step, the consortium will identify 50 to 100 critical drugs from the Essential Medicines List to be the focus of its onshoring efforts.
  • The Report details various programs to promote research and development in innovative manufacturing processes and production technologies, especially in advanced manufacturing. HHS plans to make an initial commitment of $60 million from the American Rescue Plan’s DPA appropriation to develop novel platform technologies to increase the domestic manufacturing capacity for APIs.
  • HHS proposes targeted actions to create redundancy in the production of sterile injectables, which the Report found are particularly susceptible to shortage. To reduce the likelihood of shortage due to low margins, the government will review reimbursement models to determine whether changes can be made to increase profit margins from federal payers.  The Report also suggests using procurement guarantees to address manufacturers’ need for consistent demand to justify investment in new production.
  • To incentivize improvements in quality management, HHS and FDA propose creating a rating system for evaluating a manufacturing facility’s quality management maturity. The rating system could be used to inform purchasers and would reward manufacturers that focus on continuous improvement, business continuity plans, and early detection of supply chain issues.
  • The Report recommends that FDA and HHS encourage stakeholders to increase their use of commercial data to identify and mitigate supply chain risks, and urges Congress to expand FDA’s authority to collect supply chain data.  Proposals include requiring manufacturers to notify FDA of increases in demand and requiring manufacturers label finished products with original manufacturer information.

Second, HHS proposes building emergency capacity, centered on a virtual stockpile of materials necessary for producing the Essential Medicines.  In lieu of a physical stockpile, a virtual stockpile would consist of contracts with API and drug suppliers to hold the surplus, along with support for surge manufacturing capacity.

Finally, HHS’s strategy calls for international cooperation with allies to develop supply chain resilience.  Among other initiatives, the Report recommends that the U.S. and its partners develop complementary onshoring strategies and minimize unnecessary duplication, as well as build a centralized cross-country API supplier database.

In connection with the Report, the Biden administration also announced several initiatives implicating all four critical products highlighted in the Report, including a proposal for a Supply Chain Resilience Program under the Department of Commerce with $50 billion in funding to make investments in strengthening supply chains.

The recommendations detailed in the Report are ambitious and potentially transformative, but their impact on the pharmaceutical industry will depend on their design and implementation.  Many of the recommendations are long-term initiatives, and (as the Report notes) will require dedicated funding.  Some proposals, such as improving data collection, will also require statutory changes.

As these proposals take shape, they may lead to new business opportunities, regulatory obligations, or supply chain management strategies for pharmaceutical companies.  The Report correctly emphasizes engaging with industry stakeholders in developing initiatives.  Along with keeping close eye on opportunities for collaboration, for additional insight on implementation, industry members should look towards HHS’s one-year review of the public health and biological preparedness industrial base that the Order mandates, along with HHS’s work on the Pandemic Supply Chain Resilience Strategy, which the Report mentions should be completed this month.

 

[1] In addition to pharmaceuticals and active pharmaceutical ingredients (APIs), the Report also discusses semiconductor manufacturing and advanced packaging, and large capacity batteries, critical minerals and materials.

Special thanks to Nicole Ng for her excellent assistance with this Inside Government Contracts post.

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Photo of Jennifer Plitsch Jennifer Plitsch

Jennifer Plitsch leads the firm’s Government Contracts Practice Group, where she works with clients on a broad range of issues arising from both defense and civilian contracts including contract proposal, performance, and compliance questions as well as litigation, transactional, and legislative issues.

She…

Jennifer Plitsch leads the firm’s Government Contracts Practice Group, where she works with clients on a broad range of issues arising from both defense and civilian contracts including contract proposal, performance, and compliance questions as well as litigation, transactional, and legislative issues.

She has particular expertise in advising clients on intellectual property and data rights issues under the Federal Acquisition Regulations (FAR) and obligations imposed by the Bayh-Dole Act, including march-in and substantial domestic manufacturing. Jen also has significant experience in negotiation and compliance under non-traditional government agreements including Other Transaction Authority agreements (OTAs), Cooperative Research and Development Agreements (CRADAs), Cooperative Agreements, Grants, and Small Business Innovation Research agreements.

For over 20 years, Jen’s practice has focused on advising clients in the pharmaceutical, biologics and medical device industry on all aspects of both commercial and non-commercial agreements with various government agencies including:

  • the Department of Veterans Affairs (VA);
  • the Department of Health and Human Services (HHS), including the Biomedical Advanced Research and Development Authority (BARDA), the National Institutes of Health (NIH), and the Centers for Disease Control (CDC);
  • the Department of Defense (DoD), including the Defense Threat Reduction Agency (DTRA), the Defense Advanced Research Projects Agency (DARPA), and the Joint Program Executive Office for Chemical Biological Defense (JPEO-CBRN); and
    the U.S. Agency for International Development (USAID).

She regularly advises on the development, production, and supply to the government of vaccines and other medical countermeasures addressing threats such as COVID-19, Ebola, Zika, MERS-CoV, Smallpox, seasonal and pandemic influenza, tropical diseases, botulinum toxin, nerve agents, and radiation events. In addition, for commercial drugs, biologics, and medical devices, Jen advises on Federal Supply Schedule contracts, including the complex pricing requirements imposed on products under the Veterans Health Care Act, as well as on the obligations imposed by participation in the 340B Drug Pricing program.

Jen also has significant experience in domestic sourcing compliance under the Buy American Act (BAA) and the Trade Agreements Act (TAA), including regulatory analysis and comments, certifications, investigations, and disclosures (including under the Acetris decision and Biden Administration Executive Orders). She also advises on prevailing wage requirements, including those imposed through the Davis-Bacon Act and the Service Contract Labor Standards.

Photo of Sarah Schuler Sarah Schuler

Sarah Schuler is an associate in the firm’s Washington, DC office. She is a member of the Government Contracts Practice Group, advising clients across a broad range of government contracting issues. She also maintains an active pro bono practice.