A National Defense Strategy for Generic Drugs
In 1998, Bill Clinton read a book called The Cobra Event, a dramatic novel about a mad scientist developing a virus for acts of bioterrorism. Clinton was so affected by the book that he launched the Strategic National Stockpile, a collection of supplies and medical countermeasures to be deployed on behalf of civilians in the event of a bioterrorism attack. This story verges on apocryphal—different sources tell different versions. But it seems that the era was ripe for concerns over bioterrorism, and soon Clinton’s attorney general, Janet Reno, was telling a Senate hearing that the United States might begin stockpiling medical countermeasures. While the United States has periodically utilized the Strategic National Stockpile since implementation, no splashy book anticipated the larger threat that developed over subsequent decades: the offshoring of America’s critical pharmaceutical manufacturing base to a geopolitical rival.
An uncountable number of supply chains lead back to China. No governmental or private sector organization, from the Department of Defense (DoD) to health systems, is certain how many and which of its drugs come from China. And there is no guarantee that China will continue to supply the pharmaceuticals on which the United States has become so dependent.
This is especially true for generic drugs, which comprise 90 percent of prescriptions in the United States. Generics are critical for consumers as well as for national readiness: most of the drugs on the Food and Drug Administration’s (FDA) essential medicines list are generics, and nearly half of the antibiotics on the list have no domestic manufacturers for their active ingredients. The Administration for Strategic Preparedness and Response (ASPR) estimates that 90–95 percent of generic sterile injectable drugs used for critical care in the United States originate from materials in China and India.
By offshoring the majority of medications, including key antibiotics and cardiovascular drugs, U.S. policy has unintentionally created a major national security risk for civilians and servicemembers alike. As the United States and China increasingly define the other as an adversary, the creation of a resilient and transparent drug supply chain can no longer be an afterthought.
Much as the Strategic National Stockpile grew out of a worst-case scenario in the counterterrorism era, policymakers and regulators must reflect on the current worst-case scenario and act accordingly. If the United States and China were to enter a hot conflict, China could shut off the supply to a wide swath of critical medicines, making it impossible for American hospitals to continue functioning as normal. The DoD, which purchases its medications on the open market, would be unable to treat common conditions in its servicemembers, including such basic treatment as preventing infection.
A History of Growing Dependence
Generic drugs, those outside of the patent exclusivity period, are manufactured by companies that have received FDA approval to manufacture drugs that are chemically and biologically identical to the original brand‑name drug. These drugs are essentially commodity products, composed of an active pharmaceutical ingredient (API), the chemical that functions within the body, and additional material, like gelatin or starch, that contains and stabilizes the chemical in pill form. (The manufacturing process is more complicated with drugs like insulin or other specialty medications, which may require biological processes like cell engineering.)
The FDA, regarded as the strictest of the pharmaceutical regulators around the globe, requires drugs intended for Americans to be unadulterated, produced in a clean environment, and manufactured to preapproved specifications. The FDA has a remarkable safety record, and Americans have come to trust that medications, regardless of type or country of manufacture, will be both available and safe.
A closer look reveals that this isn’t always the case, however. As pharmacists well know, drug shortages have been common in recent years, with the FDA recording more than one hundred drugs in shortage every year since 2007. The actual number of shortages, as experienced by hospitals, may be even higher.
Before Covid, experts like Dr. Janet Woodcock, former Director of the Center for Drug Evaluation and Research (CDER) at the FDA, had been warning that supply chains were perilously fragmented, with chains stretching from API manufacturers in China to plants in India to U.S. shelves. But the shortages themselves were often caused by singular events, like a natural disaster or an individual plant closure. Hurricane Maria, for example, forced the closure of multiple Baxter International plants that produced saline solution in Puerto Rico, causing persistent saline shortages.
In comparison, Covid (and China’s Zero-Covid policy response) caused reverberating shortages of a broad swath of drugs, some of which persist even four years later. Covid laid bare the degree of U.S. dependence on overseas pharmaceutical manufacturing.
For several decades, pharmaceutical manufacturers have responded to policy choices and financial pressures by offshoring their facilities. This arguably began in the early 1970s, when the Clean Air and Water Acts brought scrutiny to pharmaceutical plants’ emissions and wastewater treatment, making offshoring more financially appealing.
The 1984 passage of the Hatch-Waxman Act dramatically accelerated offshoring. The legislation streamlined the process for drug manufacturers to get FDA approval of generic drugs. By demonstrating that their medications were chemically the same as the existing brand-name, and that their medication performed the same in a human body, drug manufacturers could more easily get approval after the market exclusivity period for the brand-name drug expired. But it also started a race to the bottom on price that drove manufacturers offshore.
The first generic drug applicant that applies in accordance with FDA’s regulations receives a 180-day exclusivity period, far shorter than the exclusivity period for a brand-name drug, which can last years. Once multiple generics in competition join the market, the price drops by 20–80 percent (depending on number of competitors, time on the market, and pricing of the generics). This price drop means that generic medications, although a benefit to the American public, generally have slimmer profit margins than brand-name drugs. And while manufacturers of brand-name drugs have an incentive to keep quality (and therefore drug performance in vivo) high, manufacturers of generic drugs have an incentive to drive manufacturing costs as low as possible to maintain profitability, even if quality suffers.
Generic drugs are, by nature, interchangeable—consumers have no brand loyalty, and pharmacists may substitute one generic for another. Manufacturers may manufacture dozens of drugs, with APIs sourced from dozens of facilities around the world, already a logistically difficult proposition. The margins are narrow and depend more on quantity than quality.
With post–Cold War globalization in the 1990s and early 2000s, manufacturers found a far cheaper market in which to produce. China’s industrial policy prioritized manufacturing over clean air or water concerns. The country’s lower labor costs further reduced the cost of manufacturing. But most importantly, China and India pursued aggressive pricing and trade policies intended to drive more manufacturing to their shores.
China, in particular, has subsidized API production, providing tax incentives to manufacturers and supporting the development of the large, expensive factories necessary for API manufacture. As with other products, the country also aggressively priced its pharmaceuticals, engaging in a “dumping” strategy: flooding the market with cheap, government-subsidized product until competitors were forced to close, then raising the price.
These policies worked as intended. By 2005, the FDA had more facilities to inspect overseas than within the United States, according to Katherine Eban’s Bottle of Lies (2019). The balance of power shifted. In 2000, European nations and the United States were listed as API providers in a combined total of 64 percent of the filings submitted by generic drugmakers to the FDA, and India and China were listed in 24 percent. By 2021, the proportions had flipped, with Europe and the United States listed in a combined 11 percent of filings, and India and China providing a combined 85 percent.
While dramatic, these numbers do not show the whole picture. The truth is that no one in the United States can pinpoint where a specific API originated. As Dr. Woodcock, then director of the Center for Drug Evaluation and Research at the FDA, testified before a House Subcommittee on Health in 2019, the FDA has no idea what percentage of APIs are manufactured abroad.
While manufacturers do report facilities that they may source APIs from, they are not required to report to the FDA what they are actually producing at which facility, how much they are producing, and how much they are dependent on APIs coming out of that facility. The list of sites on file with the FDA also does not include sites further down the supply chain—for example, if an API facility itself sources ingredients from further down the supply chain.
In fact, although India is often cited as a major source of generic medications and APIs for the United States, India is actually quite reliant on China. Papers published by Indian scientists in the last few years have suggested that India imports almost 70 percent of its APIs from China. In 2021, a paper published in the journal Economies outlined steps for India to become more self-sufficient, noting that India has also fallen prey to China’s dumping strategies, especially for drugs that rely on fermentation, a broad category that includes many antibiotics, including key drugs like penicillin. The paper states that India has “almost 100% dependence on Chinese imports” for fermentation-based drugs.
India is also not necessarily a reliable source for the United States when it comes to pharmaceuticals. The Biden administration has sought out partnerships with Indian manufacturers to reduce reliance on China. But in 2021, when India’s Covid cases began rising, the government decided to halt exports of the Astra-Zeneca vaccine that Indian factories had been producing. The Wire, an Indian news and opinion site, captured the moment in a headline: “A pandemic came calling—and India was no longer the world’s pharmacy.”
Quality Concerns
With many generic facilities overseas and manufacturers incentivized to produce as cheaply as possible, quality can become an issue. In 2008, children receiving dialysis in the United States began experiencing dramatic allergic reactions. Medical professionals and the Centers for Disease Control traced the source to Baxter, a brand-name company, which began recalling its heparin, an anticoagulant, from circulation. Crude heparin was supplied to Baxter from a Chinese plant called Changzhou SPL—which the FDA had failed to inspect, confusing it with another plant with a similar name. When the FDA did inspect Changzhou SPL, it found serious contamination. Making the inspection process even more complicated, the plant itself had sourced the crude heparin from other manufacturers further down the supply chain.
Investigators eventually traced the allergic reaction to a synthetic contaminant that mimicked heparin and had likely been added somewhere along the supply chain to increase the bulk of the product, as Eban detailed in Bottle of Lies. In the end, nearly six hundred adverse events in the United States were linked to the contaminated heparin, and ninety-four patients died.
During the pandemic, the rate of inspections plummeted, especially for facilities located abroad and in countries with strict Covid policies, like China. By 2022, the number of inspections remained dramatically low. In 2019, the FDA inspected 37 percent of eligible foreign manufacturing plants. In 2022, that number was 6 percent. The GAO found that 82 percent of the FDA’s planned 2022 inspections were of foreign plants that had either never been inspected or hadn’t been inspected in at least five years, a number that grew dramatically from 2020.
And while the FDA surprise-inspects U.S. pharmaceutical facilities, visits to foreign sites are highly regulated and are rarely a surprise. This essentially leaves the facilities to police themselves. In an interview with Senate staff on the Committee on Homeland Security and Governmental Affairs, Dr. Stephen Schondelmeyer of the University of Minnesota compared the FDA’s increasing reliance on self-reporting to the Federal Aviation Administration’s approach in recent years, calling it “the Boeing Effect.”
Indeed, drug quality issues have plagued generic drugs in the United States for decades, with particulates discovered in the spinal injectable drug baclofen in 2015, a carcinogen discovered in the heart drug valsartan in 2018, and bacteria in generic eye drops in 2023. As Eban recounts in her book, in 1996, overwhelmed by the beginnings of the deluge of foreign drugs, the FDA’s Forensic Chemistry Center concluded in a memo, “we have literally no control over bulk drugs [APIs] that enter the U.S. . . . These drugs can reach anyone, including the President.”
In an FDA analysis of drugs that were in shortage from 2013 to 2017, the agency found that supply disruptions due to quality issues were responsible for the shortage in 62 percent of cases. These quality issues are not exclusive to facilities overseas; American and European drug plants have also been cited by the FDA for failure to maintain good manufacturing practices. But because of geography and diplomatic relations issues, it’s easier for the FDA to visit drug companies in America and Europe. A higher frequency of visits means that these companies have more of an incentive to adhere to the proper manufacturing practices, and that any deviation is more likely to be caught sooner.
Other stakeholders in the drug supply chain have limited incentive or ability to monitor quality. The vast majority of health systems in the United States purchase drugs through group purchasing organizations (GPOs), entities that are designed to lower price by purchasing supplies in bulk. In reality, GPOs add their own complications to an already fractured supply chain, restricting health systems from shopping around on price or quality. While the FTC is currently investigating the role of GPOs (and related entities, pharmacy benefit managers) in generic drug shortages, GPO representatives deny that their business practices affect shortages.
Meanwhile, health systems, many of which operate on thin margins, have no incentive to stockpile drugs to ensure a steady supply. They, like the manufacturers themselves, tend to operate with the just-in-time strategy, ordering just what they need.
Defense Implications
In 2019, a bipartisan group of senators wrote to then Defense Secretary Mark Esper, expressing concern about DoD’s reliance on China. As they put it, “overreliance on Chinese API exports raises the possibility that China could terminate or raise the cost of prescription drugs millions of Americans, including servicemembers, rely on every day in the event of escalating geopolitical tensions. This national security threat cannot be overstated.”
In fact, while the DoD reports having contingency plans in place for disruption of medications for military operations, it uses a just-in-time ordering strategy on the commercial market for routine operations. In interviews with staff on the Senate Committee on Homeland Security and Governmental Affairs, DoD also admitted lacking “authoritative data” on the sources of drugs it procures from the private sector. The Defense Logistics Agency reported being unable to determine if any of the drugs it purchases originate solely in China or India—except for three drugs, which rely solely on API manufacturers in China.
The National Defense Authorization Act for fiscal year 2023 required DoD to assess its pharmaceutical supply chain vulnerabilities, which DoD partially released in a report in November 2023. DoD determined that 54 percent of its supply chain is considered “either high or very high risk”; these dependencies are either unknown or involve sourcing from non–Trade Agreements Act compliant suppliers (DoD defines noncompliant as sourcing finished pharmaceuticals or API from a non-TAA compliant country—as described below, the legal definition is complicated and has affected VA sourcing).
A National Defense Strategy for Generics
Four years after Covid, it seems that the relevant government agencies have agreed on the need for more tracking and on the threat posed by dependence on China. But a coherent strategy for these agencies is lacking. The FDA is stuck trying to map APIs and a database of sites from PDFs submitted by manufacturers, congressional testimonies continue to call halfheartedly for advanced manufacturing, and supply chains continue to be fragmented. Going forward, the United States needs a three-pronged national defense strategy for generic drugs:
(1) Data collection. The data collection process, in an era of massive computing ability and AI, is far behind the times. Much as Janet Woodcock overhauled the FDA’s microfiche system when she joined in the 1990s, the FDA needs to implement drug application forms outside of the standard PDF. Including API information should be mandated. Through the cares Act, the FDA can require manufacturers to report their reliance on individual factories for API, but the agency has yet to provide the guidance for manufacturers to do so. This should be a priority.
To be useful, the data should include: where API manufacturers are located, the types and volume of APIs that those manufacturers are producing, and the reliance of final drug product manufacturers on each facility. Manufacturers should be required to report anticipated shortages as soon as they become aware of the possibility; the FDA cannot currently require manufacturers to share information about potential issues that might lead to shortages. Another legislative option could be requiring GPOs to report when they’re unable to meet a health system’s full order request, often a leading indicator of a shortage. With this information, the FDA could build a dynamic map of facilities producing drugs for U.S. customers around the globe and track potential shortages or quality concerns, similar to how the CDC relies on a network of local scientists and individuals to report potential disease networks.
Perhaps most importantly from a national defense perspective, the DoD must have more visibility into the pharmaceuticals it is purchasing for active military personnel, veterans, and their families. The DoD has enormous purchasing power in the market and a strategic need for a reliable supply of antibiotics and medical countermeasures; the agency should be leveraging that to demand more transparency into the supply chains of the drugs it purchases. Legislation requiring manufacturers to include the origination of the API and the country of manufacture on the packaging is another option, one that the DoD internally recommended in 2021.
A simple “Buy American” initiative in this case is not enough. A 2020 decision by the U.S. Court of Appeals for the Federal Circuit in Acetris Health, LLC, v. United States ruled that the VA, which is subject to a Buy American provision under the Trade Agreements Act of 1979, is unable to deny contracts with generics manufacturers based on country of origin of the API. In other words, the court ruled that as long as the final product is manufactured within the United States, that satisfies the TAA. Without additional guidance, despite its purchasing power, the VA has no recourse to direct API sourcing away from China.
(2) Reshoring. All the data collection in the world wouldn’t have prevented the drug shortages caused by Covid, because there wasn’t enough capacity in the United States or allied countries to make up the difference. Pharmaceutical factories take years to plan and build, and as a potential conflict with China seems increasingly possible in the coming years, it is vital that the United States begins to incentivize reshoring.
Longer-term contracting from federal purchasers, including DoD, Medicare, and Medicaid, could incentivize reshoring or supply chain redundancy from manufacturers. A health system consortium, Civica Rx, has already demonstrated that there is some willingness among health systems to pay slightly more for a reliable, transparent supply of medication.
Nevertheless, reshoring factory capacity is a daunting prospect—as medication costs continue to rise, it seems counterintuitive to ask consumers and payors to spend more on their cheapest generic drugs. But having some ability to manufacture within the United States may prove crucial in the coming years. Subsidizing factory development for particularly important API or finished drug product, or for those drugs that are currently sole-sourced from China, might be a viable intermediary step.
In 2021, Jackson Healthcare bought a failing antibiotics plant in Tennessee, hoping to use it to manufacture amoxicillin, commonly used to treat children’s ear infections. Because finished drug product and API from China are so cheap, however, the plant is a money-losing enterprise. Its long-term survival strategy relies on guaranteed government contracts that have yet to fully materialize. Novel forms of government contracting to assure domestic supply at reasonable (if not quite rock-bottom) prices might also be a strategy worth pursuing.
(3) Advanced manufacturing. Advanced manufacturing in pharmaceuticals refers to technologies to develop drugs faster, more efficiently, or in a smaller space than the traditional manufacturing processes used in the vast majority of pharmaceutical plants.
One of the more promising advanced manufacturing strategies is continuous manufacturing, where machines produce the medication continuously, rather than in batches, which is how the majority of medications are currently manufactured. In theory, continuous manufacturing allows large quantities of pharmaceuticals to be produced in days, rather than months, without compromising safety measures. A very small study published in partnership with the FDA in 2022 found that continuous manufacturing may even have benefits in reducing the time to FDA approval for a drug.
Advanced manufacturing could get even more futuristic, with some proponents calling for mobile units with the ability to 3-D print certain drugs onsite. It’s not hard to imagine the utility, especially in a military context.
Yet advanced manufacturing strategies have suffered from limited implementation to date. Especially in the low-margin world of generic drug manufacturing, there is no incentive for a company to independently pilot new machinery and worker processes with no financial upside. Creating a financial incentive, perhaps even allowing short-term exclusive manufacturing for some drugs if produced using advanced processes, is necessary for advanced manufacturing to actually happen.
The DoD could be a leader on this front, using its purchasing power to incentivize novel drug manufacturing methods that may be useful in certain military settings. For example, mobile units of 3-D drug printers could be deployed if there’s a risk of biological attack.
Other agencies have invested in trying to incentivize advanced manufacturing. CDER, barda, and darpa have an initiative called Pharmacy on Demand, focused on mobile manufacturing platforms for essential drugs. As part of the initiative, a company called On Demand Pharmaceuticals opened a new facility in Maryland in early 2022. At least one health system, North Mississippi Health Services, recently announced a pilot program with On Demand to produce drugs on an as‑needed basis during shortages. ASPR also recently launched the Industrial Base Expansion Connect Initiative, making it easier for companies with innovative supply chain solutions to partner with ASPR.
After decades of offshoring and the shortages of Covid, U.S. pharmaceutical supply chains are fragile and opaque. Pharmaceutical manufacturers are largely reliant on India, which is in turn reliant on China—a status quo that agencies like the FDA and DoD have deemed unsustainable. But efforts to address these challenges seem to be lacking urgency even as the U.S. relationship with China continues to deteriorate.
As global competition heats up, the United States must pursue a national defense strategy for pharmaceuticals: gathering vital data on the extent of our reliance, incentivizing the reshoring of critical ingredients and drugs, and investing in advanced manufacturing to develop the next generation of pharmaceutical plants.