The first recorded case of Covid-19 in the United States was reported on January 20, 2020—a person who traveled from Wuhan, China, to Washington State. As the virus spread across the country, global supply chains that are usually invisible suddenly became highly visible. News headlines tracked a surge in demand for personal protective gear for frontline health care workers. At the same time, however, factories had shuttered or were operating at a fraction of capacity, causing shortages and panic.
China’s role in supplying masks, gowns, gloves, and testing kits for the United States and other countries became evident. But the media were strangely silent about China as the top global producer of components to make generic drugs, which represent 90 percent of medicines prescribed in the United States.
Days before Congress shut down, the Senate Committee on Small Business and Entrepreneurship held a hearing on Covid-19. Testimony revealed the extent of U.S. dependence on China for medicines as the country was facing a surge in hospitalizations. China produces 90 percent of the core components for the generics needed to treat people hospitalized with Covid-19. The sedative propofol (which is administered to people on ventilators), antibiotics including azithromycin and vancomycin for secondary bacterial infections, and anti-inflammatories such as hydrocortisone are among the generic medicines in America’s intensive care units that are made with China-sourced materials.
Beyond medicines used to treat Covid-19 and related illnesses, China controls the global supply of raw materials and chemicals, called key starting materials (KSMs), for thousands of generics sold in retail pharmacies and big box stores. Take the case of the antibiotic azithromycin. Ground-zero Wuhan is a global manufacturing hub for the key ingredient in the antibiotic. When the city shut down, production did too.
In the aftermath of Covid-19, supply chains for products used by millions of Americans have been disrupted. Shortages of semiconductors, critical minerals, batteries, household refrigerators, and much more ripple through the economy and drive rising prices. As government and industry reassess global supply chains, actions to strengthen U.S. manufacturing are being debated in Washington and corporate board rooms.
Antibiotics and other life-saving medicines should rank high on the priority list for domestic production. The U.S. supply chain for essential generic drugs is at high risk of catastrophic failure. Mitigation measures are needed now if we are to be prepared for the next pandemic.
Sole Sourcing Medicine Components:
Perfectly Designed for Catastrophic Failure
Management guru W. Edwards Deming, who inspired generations of quality improvement leaders in business, understood that every system is perfectly designed to achieve the results it gets. The sole sourcing of components to manufacture life-and-death medicines is perfectly designed to result in shortages and depletion of supply. As long as this state of affairs continues, preparedness is not possible for the next pandemic, natural disaster, or geopolitical disruption.
Yet no one would know the fragility of the generic drug supply by listening to the Food and Drug Administration (FDA). In February 2020, the agency announced the first drug shortage caused by the pandemic. It reported that the active ingredient was made in China but did not disclose the name of the medicine, presumably to avoid hoarding. No other Covid-19-related shortages were reported by the agency. But they were happening at the worst possible moment.
The Strategic National Stockpile was weeks away from depletion of sedatives for people on ventilators. Behind the scenes, during the surge of Covid-19 cases in New York City, hospitals competed against each other for vital medicines. For many essential generic drugs, including antibiotics, distributors told doctors and hospitals that many were “on allocation,” a euphemism for rationing.
Drug shortages are not new and have occurred for two decades. Doctors say privately that children and adults have died because of the unavailability of basic generic drugs—and that’s in normal times. With more hand-wringing than action, government and industry have failed to fix a long-standing but solvable problem.
A Johns Hopkins professor testified at the Senate hearing in March 2020 about prestigious hospitals, which provide the most clinically advanced treatments in the world, bartering for drugs long before the pandemic:
the FDA says there’s about 100 drugs (in shortage). In places like Johns Hopkins, we know there are 250 to 300 drugs that are on shortage. We sort of borrow from the University of Pennsylvania and then pay it back to the Mayo Clinic and do all sorts of bartering. But this is not a new thing. It’s just going to get worse with the travel bans because so many of the drugs are manufactured overseas.
As the pandemic swept over the country, the generic medicine supply was neither resilient nor prepared for a major disease outbreak.
China’s Threat to Withhold Medicines Exposes a Chasm in Public Health Security
As Covid-19 hospitalizations surged, China threatened to withhold medicines from the United States, exploiting a vulnerability it knows very well. Its state-run news outlet reported:
If China retaliates against the United States at this time, in addition to announcing a travel ban on the United States, it will also announce strategic control over medical products and ban exports to the United States. If China announces that its drugs are for domestic use and bans exports, the United States will fall into the hell of a new coronavirus epidemic.
Five months earlier, the FDA downplayed, if not misled, Congress and the public about U.S. dependence on China for basic medicines at a hearing of the House Energy and Commerce Health Subcommittee entitled “Safeguarding Pharmaceutical Supply Chains in a Global Economy.” The agency reported the country-of-origin of manufacturing plants that produce active pharmaceutical ingredients (APIs), the components in medicines that render therapeutic value. Only 13 percent of facilities making APIs are in China while 28 percent are in the United States, said Dr. Janet Woodcock, then director of the FDA’s Center for Drug Evaluation and Research, which suggests that American dependence on China is not a big deal.
But APIs don’t fall from the sky, and the FDA didn’t mention China’s near monopoly on global production of the raw materials and chemicals to make them. In my testimony before the same committee, I reported on this strategic vulnerability. For example, China has enormous antibiotic fermentation plants near the border of Mongolia that produce raw material for doxycycline, an antibiotic for Lyme disease and anthrax exposure. A Chinese firm is also the sole source of active ingredients to make essential generic chemotherapies for adult and childhood cancers. Likewise, an explosion at a factory in China caused a global shortage, including in the United States, of piperacillin tazobactam, an antibiotic for pneumonia and other bacterial infections.
China’s monopoly position in pharmaceuticals mirrors its dominance in rare earth elements, which are used to make hybrid vehicles, wind turbines, smartphones, military equipment, and other high-tech products. Imagine a federal agency testifying before Congress on safeguarding high-tech supply chains in a global economy and not mentioning that rare earth supplies are dominated by an adversary. The FDA did this for products whose uninterrupted supply can mean the difference between life and death.
Pandemic Preparedness: Yesterday and Today
Once upon a time, the United States was fully prepared for an infectious disease outbreak. An emergency plan from Oak Ridge National Laboratory, a federal entity that conducts basic and applied research, detailed the manufacturers and location of all antibiotic fermentation plants in the continental United States, Mexico, and Puerto Rico. In this once-classified document, the names of plant managers and their phone numbers were included. The volume of antibiotic production at each facility was reported by class of antibiotics: penicillins, tetracyclines, and cephalosporins.
The preparedness plan contained highly detailed instructions to assist state and local officials who would be called upon to direct the resumption of antibiotic production in the event of an attack on the homeland. Plant managers were to be contacted to determine the functionality of their facility. Instructions were included on how to rebuild and repair a facility if it was damaged during an attack. Alternate emergency production sites with fermentation capacity were identified. Their plant managers would be informed of impending conversion to antibiotic production. If alternate sites had to be used, a team of skilled personnel would be deployed to perform the conversion.
This is emergency preparedness. The country was self-sufficient in production and had a plan. No adversary would threaten to withhold antibiotics.
Today, however, if a government report was written on antibiotics and pandemic preparedness, it would be blank. There is no production. There is no plan.
The United States has virtually no capacity to produce generic antibiotics for ear infections in children, bronchitis, pneumonia, sexually transmitted diseases, anthrax exposure, sepsis, and many other conditions. China dominates the global supply of raw materials to make them. With no production capacity, America’s vulnerability also extends beyond antibiotics to include thousands of generic medicines.
Why do antibiotics matter in a viral pandemic? During the 1918 influenza pandemic when antibiotics didn’t exist, many of the 675,000 Americans who died perished because of bacterial pneumonia after having the flu. Without access to antibiotics, the next pandemic could have devastating consequences.
Remarkably, as think tanks and other organizations host meetings on pandemic preparedness, this U.S. vulnerability is absent from their agendas. Meanwhile, the federal government, industry, and other institutions are trying to map the global supply chain for essential medicines which started going global more than thirty years ago. With hundreds of thousands of producers and suppliers, and a lack of transparency, the efforts are Herculean.
China, on the other hand, already knows the global supply chain. After all, it is implementing a successful multi-decade strategy to disrupt, dominate, and eventually displace U.S. and other producers around the world to achieve its stated aim to become the pharmacy to the world.
Eight Myths of the Status Quo
Special interests in Washington who created the status quo, and benefit financially from it, shape and control the narrative on pandemic preparedness. Myths are widespread and rarely countered with facts. Here are eight myths, and the facts.
Myth 1: the United States doesn’t need domestic production of essential generic drugs; we can just stockpile them. A common narrative promoted in Washington policy circles is that the United States doesn’t need to make essential medicines. We can simply stockpile them. This proposal is no different from saying that the United States doesn’t need to produce defense materiel—we can simply source it from other countries and stockpile it in case of an emergency.
No country would pursue this suicidal path. Yet a senior public official in the federal government mentioned this approach to managing the medicine supply. What happens when the stockpile is depleted in the middle of a pandemic, however? There is no plan. In reality, it is not possible to fully restock U.S. medical supplies without domestic production.
Myth 2: we can rely on allies when hospitals, pharmacies, and the national stockpile are bare. During the height of Covid-19, countries hoarded medicines and medical supplies and blocked exports. In January and February 2020, reports point to China vacuuming up PPE from around the world. American companies manufacturing Covid-19-related products in China were not allowed to export them to customers in the United States and other countries.
Also, in March and April 2020, the United Kingdom banned exports of eighty essential medicines used in intensive care units. India banned the export of twenty-six APIs and finished drugs. The European Union limited exports of medical supplies to countries outside the bloc, including PPE and ventilators. And France requisitioned all stocks and production of face masks. In times of scarcity, globalization fails and protectionism wins. Allies are obligated to provide for their own populations.
Myth 3: domestic manufacturing will disrupt global supply chains. Opponents of domestic manufacturing of essential generic drugs assert that U.S. domestic production will destabilize global supply chains. On March 24, 2020, the U.S. generic drug industry circulated a draft letter to the White House saying U.S. production of generics would “destabilize the (medicine) supply chain.” (Coincidentally, two days later, Chinese President Xi Jinping used a similar talking point during a virtual G20 meeting, saying global supply chains need to “remain stable.”)
In fact, the supply chain was already in shambles before the virus reached U.S. shores, plagued with persistent shortages and substandard quality. Sole sourcing supplies in a single country, whatever country it may be, is inherently destabilizing and a risk to U.S. and global public health.
Myth 4: China is cheaper solely because of lower labor costs and weaker environmental regulations. The common perception repeated in federal government reports and the media is that China is cheaper because of its lower labor costs and weaker environmental regulations.
While the labor cost differential is real and the cost of complying with environmental and safety regulations is lower, China is cheaper because of government subsidies, price-fixing, cartels, currency manipulation, and other illegal trade practices. American companies are not competing with Chinese businesses. They are competing with the Chinese government.
Bristol Myers Squibb operated the last U.S. penicillin fermentation plant in Syracuse, New York. In 2004, the company announced that it was closing the facility, which once produced 70 percent of the world’s supply of raw material for penicillin production. The New York Times reported the story but didn’t say why production was shutting down. As first reported in China Rx, data from European industry revealed that the Chinese government had invested heavily in antibiotic fermentation plants. In the early 2000s, Chinese companies formed a cartel and dumped penicillin ingredients on the global market at below-market prices beginning in 2004, the same year the New York plant closure was announced.
U.S. companies could not compete with China’s illegal trade practices and government subsidies. China’s cartel also forced the closure of penicillin fermentation plants in India. Four years later, after China gained a choke hold on global supply, the cartel increased prices dramatically.
This is China’s playbook: drive U.S. and other manufacturers out of business by selling below manufacturing cost for several years, and raising prices when its domestic companies achieve global dominance. This is why the United States no longer manufactures antibiotics, aspirin, and thousands of other prescription and over-the-counter products, their active ingredients, and starting materials.
Myth 5: supporting domestic manufacturing of essential medicines is imprudent “economic nationalism” in America, while China engages in no such activity. Imagine for a moment that 90 percent of the U.S. oil supply was sourced from a single country thousands of miles away. Also imagine that most of the country’s breadbasket was filled with imported food sourced from the same country on the other side of the globe.
Fortunately, the United States considers energy and food commodities as strategic assets. The federal government and private industry track and forecast global and domestic supply and demand. Agriculture is subsidized, albeit imperfectly, to encourage domestic production and prevent food shortages. Regrettably, the U.S. has no similar provisions to secure an unfettered supply of essential medicines necessary to sustain human life in the best of times and during a pandemic.
In August 2020, President Donald Trump signed an executive order that directed federal departments, including the Departments of Defense, Veterans Affairs, and Health and Human Services, to prioritize purchase of U.S.-produced essential generics. The aim was to simulate domestic production for public health and national security. The vehement opposition from the pharmaceutical lobby was remarkable. All of a sudden, pharma became deeply concerned about the potential price increases for generic drugs resulting from a shift to domestic manufacturing. Coming from an industry that has hardly been concerned about the rising prices of its branded drugs and the financial burden on sick and vulnerable Americans, the irony is rich indeed.
Might this be a case of “the lady doth protest too much,” with the protestors betraying their own complicity? Consider this: a former senior executive of a prominent U.S.-headquartered multinational pharmaceutical company said privately last year that he observed his company halting U.S. production of antibiotics and other generics. It gave away the know-how for its generic portfolio to China in return for access to a market of 1.3 billion people for its higher-margin brand‑name products.
U.S. companies have fueled the rise of China’s economy while weakening the U.S. industrial base. But they block modest initiatives for U.S. domestic production for pandemic preparedness and portray prudent policy as economic nationalism, as if the latter were an inherently bad or unusual thing.
In a July 2020 speech, then U.S. Attorney General William Barr spoke about the pressure the Chinese government places on U.S. business executives:
more and more PRC officials and their proxies [are] reaching out to corporate leaders and inveighing them to favor actions favorable to the Chinese Communist Party. Their pitch is generally the same: the businessperson has economic interests in China and there is the suggestion that things will go better or worse for them, depending on their response to PRC’s request, privately pressuring and courting American corporate leaders. . . .
Myth 6: America’s medicine supply is safe. One of the FDA’s mandates is to ensure that medicines sold in the United States are safe and made according to U.S. standards. Its employees conduct on-site inspections of manufacturing plants in the United States and around the world. In February 2020, the FDA announced that inspections would not be conducted, in order to protect its employees. For more than a year, virtually no inspections took place. In effect, unregulated generics and other products are being sold and distributed in the United States. Recently, a small number of inspections have resumed, but this is a long-standing problem with deep roots.
In 2021, a prominent physician reported a patient whose blood pressure spiked to a life-threatening level while taking a generic blood pressure medicine made in China. After the patient returned to the retail pharmacy to switch to a different manufacturer, the patient’s blood pressure returned to normal. Also in 2021, a medical journal reported a poorly made, imported generic used to help people recover from heart and lung transplants. Test results from a Boston biotechnology company found that the medicine didn’t dissolve properly in the body and posed life-threatening risks.
Before the pandemic, the number of substandard medicines flooding the country had grown significantly. In one of the largest recalls in history, millions of Americans learned in July 2018 that their generic blood pressure medicines may have contained cancer-causing genotoxic impurities. The carcinogen, NDMA, is a chemical in rocket fuel and had been present in the medicines for at least four years before the FDA found out. A Chinese company’s product had the highest levels of carcinogen of all products recalled, more than two hundred times the acceptable limit, per pill. The FDA’s inspection of the manufacturing facility found that employees knew the product did not meet FDA standards but sold it anyway.
Continuing the downward slide in public protection, a January 2021 Government Accountability Office (GAO) report encouraged the FDA to consider conducting inspections of manufacturing facilities by video conference. The GAO’s recommendation is akin to recommending the National Transportation Safety Board investigate airplane crashes by Zoom. Tele-inspections cannot be used to assure the safety of America’s medicines. Perhaps not surprisingly, the idea for remote factory inspections came from pharmaceutical industry representatives, who told the GAO that foreign regulators are conducting remote inspections and this approach could address FDA challenges in conducting them.
For many years before the pandemic, the FDA has had difficulty conducting inspections in China. The Chinese government refused to provide visas to FDA inspectors. More recently, Chinese officials reportedly forced American diplomats to undergo Covid-19 testing with humiliating anal swabs. China has demonstrated a talent for creating a hostile environment, deterring dedicated people from wanting to go there. This stance encourages weak inspections that will justifiably cause doctors and the public to lose trust in medicines.
Twenty years ago, the current degradation in the quality of generic medicines was unthinkable. A physician at a prestigious hospital recently observed, “We’re becoming like a developing country with our medicines.”
Myth 7: generics will cost more if they are made in the United States. To understand the pricing of generic drugs, it is necessary to understand the behind-the-scenes price manipulation that commonly occurs. A pharmaceutical executive who has built and operated manufacturing plants reported what happened when he went to refill his ninety-day supply of a generic blood pressure medicine. A retail pharmacy charged $157.50. He had made the medicine and knew the manufacturer would be paid $1. Who gets the other $156.50?
Middlemen—group purchasing organizations (GPOs), wholesalers, distributors, and pharmacy benefit managers (PBMs)—hammer down on the price they pay to generic manufacturers so they can make more money. They maintain a persistent presence on Capitol Hill and control the narrative that the status quo is working just fine. Conscientious manufacturers in the United States and other countries are driven out of business. Substandard and potentially lethal products are produced at the lowest possible cost. In a stunning trend, middlemen are buying products from companies that have received FDA warning letters that document serious problems in their manufacturing. It is a race to the bottom, and the bottom is falling.
Myth 8: drug shortages are too complex to fix. Pandemic preparedness is possible. Nonprofit Civica Rx was started in 2018 by large hospital systems to fix drug shortages. Its members include 1,400 hospitals as well as Kaiser Permanente. Civica Rx pays manufacturers for medicines at a fair, sustainable, and transparent price, not a race-to‑the-bottom price. The country of origin is on the label. Long-term contracts with manufacturers enable them to invest in their facilities and assure an uninterrupted supply of quality medicines. Within three years, Civica Rx provided member hospitals with nearly sixty generic medicines. They had no shortages of these medicines during the pandemic, and Civica Rx conducts its own on-site inspections of its manufacturers.
New, resilient supply chains are possible. As drug shortages and poor quality worsen, more institutions will be compelled to use their procurement dollars to purchase quality medicines at a fair price.
A Worsening Problem
Three years ago, the generic drug trade association, the Association for Accessible Medicines, reported that 8.5 percent of generic drugs sold in the United States were made in China. Some experts say the figure is higher. These are the finished pills, not the active pharmaceutical ingredients or key starting materials.
Generic drugs made by Chinese domestic companies and sold in the United States include antidepressants, blood pressure medicines, birth control pills, cancer treatment chemotherapy for children and adults, medicines for Alzheimer’s, diabetes, epilepsy, Parkinson’s, and much more. The first generic drug made in China by a domestic company was an HIV medicine approved by the FDA for use in the United States in 2007. In less than a decade, Chinese companies have successfully penetrated the U.S. generic market. Looking ahead, the Financial Times reports that China is rapidly expanding its market share.
If past performance is predictive, ten years from now Chinese firms will have gained at least 20 percent of the generic market. Eventually, they will be the dominant supplier of generic drugs prescribed and dispensed in the United States. Sole sourcing of medicines will escalate from components to finished products.
The United States is losing control over the supply of its medicines. As it loses control over supply, it also loses control over safety and price. Market competition will be nonexistent.
Pandemic preparedness requires a minimum level of U.S. manufacturing capability for end-to-end domestic production. So far, of the trillions of dollars of federal spending for Covid-19, virtually none of it has been appropriated to strengthen domestic production. Moreover, last year, the Biomedical Advanced Research and Development Authority (barda), an agency under the Assistant Secretary of Preparedness and Response (ASPR) in the Department of Health and Human Services, issued a request for proposals to manufacture thirty-seven essential medicine products for the Strategic National Stockpile. No contracts were awarded. The funding was reportedly directed to other purposes.
Preparing for the Next Pandemic
Looking ahead, the first step to fixing the medicine supply for pandemic preparedness is to direct the Department of Defense, Veterans Health Administration, and the Strategic National Stockpile to prioritize purchases of essential generic medicines from domestic producers of active ingredients and finished drugs. Long-term contracts with trustworthy companies will enable them to invest in resilient capacity. The FDA’s essential medicines list, released in October 2020, offers a starting point from which to strengthen pandemic preparedness.
Adopting advanced manufacturing techniques is another important step. Federal investment in advanced manufacturing for commercial-scale domestic production of generics would yield cost savings of up to 30 to 40 percent compared to traditional batch manufacturing. With real‑time quality control, the risk of substandard medicines is dramatically reduced, as well. Unfortunately, domestic generic producers currently have no incentive to invest in cost-saving technology because of severe pricing pressure. Public-private partnerships for capital investments tied to production and delivery of medicines would attract agile, innovative companies.
Finally, federal support for capital investment in domestic antibiotic manufacturing would strengthen preparedness for an infectious disease outbreak. Bipartisan legislation has been introduced in the Senate to provide funding for reshoring production and stockpiling antibiotics to strengthen public health and national security.
These mitigation measures can begin to fix a broken medicine supply. The risks of doing nothing are profound. The benefits of taking action will sustain the lives of many.