Black swan theory12 April 2021
Covid-19 has ruthlessly exposed pharmaceutical supply chain issues, raising one huge question for companies and governments across Europe and North America: is it time to bring manufacturing back to domestic markets? The US has invested hundreds of millions of dollars into this cause, but it’s not as popular a move as federal decision-makers might have expected. Irenie Forshaw talks to Professor Frank Gupton, CEO of Medicines For All and co-founder of Phlow, and senior vice-president of policy and research at PhRMA Anne Pritchett about the issues at stake, and whether reshoring could increase resilience for the next crisis.
Back in 2017, when Covid-19 had yet to cast its shadow over the world, Professor Frank Gupton was working on a special manufacturing project for DARPA, the research arm of the US Department of Defense. Each day, chemicals were loaded into the front end of a unit the size of a refrigerator, where the active ingredients were synthesised before, like magic, 1,000 pills spilled out of the back.
Gupton and his colleagues were given a list of compounds to make. Among them was hydroxychloroquine, the anti-malaria drug that would controversially go on to hit national and international headlines as a potential treatment for Covid-19.
As the pandemic began to spread, so too did word of the project. “I started getting these letters from Italy saying, ‘Can you help us make this stuff?’” recalls Gupton. “We had all kinds of people reaching out to us wanting to see how they could develop parallel programmes to what we were doing, in their own countries. It’s been a very interesting time.”
Having spent 16 years in the chemical industry, and a further 16 in pharmaceuticals, Gupton was happily retired by 2007. But it wasn’t long before he was recruited by Virginia Commonwealth University (VCU), becoming chair of the department of chemical and life science engineering. Since then, he has witnessed significant offshoring of pharmaceutical manufacturing, largely to countries like China and India, where labour costs are low.
In October last year, the director of the FDA’s Centre for Drug Evaluation and Research, Janet Woodcock, reported that the number of facilities making active pharmaceutical ingredients (APIs) in China has more than doubled in the past ten years. The driving force behind this, says Gupton, is the labour-intensity of batch manufacturing, and the huge amounts of waste generated by pharmaceutical processes that, until recently, China was willing to accept as a cost of business.
Gupton is concerned by the industry’s growing reliance on China, pointing to the country’s entry into the penicillin market. “They were a minor player with regard to manufacturing, but they continued to ratchet down the price on penicillin and, as they did, their percentage of the market share grew,” he explains. “Finally, they got to a point where they controlled about 85% of the entire global penicillin market. And once they did that, guess what? The price started going up.”
According to Gupton, this willingness to reduce costs in order to gain a large market share creates artificially low prices. The situation is made more difficult for pharmaceutical manufacturers in the US and Europe because their Chinese competitors are heavily subsidised by the state. The emphasis on cost over all other concerns has also increased the risk of supply chain disruptions. “Over the past few years, we’ve had anywhere between 200 and 400 drugs in short supply,” Gupton says. “To some extent, it’s been a race to the bottom on price trying to contain the cost of healthcare.”
While there have been discussions about the possibilities of reshoring in recent years, the outbreak of Covid-19 has triggered widespread public awareness of the issue, bringing it to the top of policy agendas. With extreme pressures on healthcare systems across the world, governments are looking for ways to meet soaring internal demands and in-source manufacturing. For Gupton, the already vulnerable supply chain has been pushed to its limit by the virus. “I won’t say it broke,” he says, “but the links are getting really weak now.”
On the other side of the fence is Anne Pritchett, senior vice-president for policy and research at PhRMA, a trade group that represents leading pharmaceutical organisations in the US. She believes one of the major strengths of innovative companies is their globally diverse supply chain. After all, she says, there haven’t been any major disruptions to innovative medicines as a result of Covid-19. While she concedes that there have been some shortages of generic drugs in the US since the start of the pandemic, she is keen to stress this is a result of increased surges in demand in certain localities and not because of supply issues with China.
In fact, she asserts, the federal government has quickly stepped in to address these issues by asking both innovative and generic companies for excess capacity, while the FDA has helped facilitate the move from low to high-volume manufacturing.
For Pritchett, the focus of the debate should be on ensuring resilience by diversifying the supply chain, instead of finding ways to onshore vast swathes of the manufacturing industry. “We shouldn’t pick out any one country and say, ‘Oh, the problem is we’re overly reliant on that country, let’s bring everything back to the US’,” she says. “We don’t think that makes sense. Where you are extremely reliant on any one country, and it poses a public health risk or national security risk, then we should increase the diversity in those supply chains.”
Gupton agrees that going too far the other way and exclusively insourcing materials could come with its own set of problems. But, he believes pharmaceutical companies are starting to think about ways of adapting their supply chains in response to Covid-19.
“What’s interesting is that many of the big generic manufacturers of most of the drugs we consume here in the US are thinking that they can’t rely on China for their starting materials,” he explains. “You have to look at the end-to-end system that’s going to allow you to source the starting materials domestically and make the active ingredients and formulated products if you want a robust supply chain.”
The money awarded to Phlow by the US government.
Proportion of pharmaceuticals that, for an average of five months, Canada faced shortages of between March 2017 and September 2018.
“We shouldn’t pick out any one country and say, ‘Oh, the problem is we’re overly reliant on that country, let’s bring everything back to America’.”
Finding ways to increase access to drugs by transforming the supply chain is at the heart of Gupton’s Medicines for All Institute at VCU. Over the years, he has been awarded four major grants from the Bill and Melinda Gates Foundation to drive down the manufacturing costs of HIV drugs. Having visited Africa and seen the devastation caused by the virus, he is passionate about working on a manufacturing platform that could be reproduced across the continent, increasing its industrial capacity and reducing its reliance on imports and aid to treat HIV.
This work – combined with his contribution to the DARPA project – means Gupton has found himself at the centre of the debate about bringing production capacity back to domestic markets. “When Covid hit, it just accelerated everything,” he says, “but had we not had that initial investment with the Gates Foundation to look at how we can make these drugs more efficiently, we probably wouldn’t be here today talking about this stuff.”
By May 2020, Gupton had founded Phlow – a startup that has been awarded a $354m contract from the Biomedical Advanced Research and Development Authority (BARDA), part of the US Department of Health and Human Services – to manufacture essential drugs in the US that have been in short supply during the pandemic, and to reduce dependence on foreign supply chains.
Gupton hopes that, in time, the entire supply chain will be rethought – from the manufacture of APIs and formulated products, all the way to the patient’s bedside. By tackling inefficiencies in the supply chain, he believes drug manufacturing can be made more cost-effective. However, not everyone shares this philosophy, and Gupton is only too aware of the challenges that lie ahead. “It’s very simple,” he says. “There’s a resistance to change. It’s a human nature thing.”
“We’re kind of like the black swans. Until we do this, nobody will believe it can be done.”
The labour savings that companies headquartered in the US or Europe could make if they outsourced to India.
Pritchett accepts there has been reluctance from parts of the pharmaceutical industry to embrace reshoring, but highlights the myriad factors that make it difficult. To start with, she says, the labour costs for STEM workers in China and India are 30–40% lower than in the US. Leaving these countries would also be logistically difficult as the biopharmaceutical industry in the US has more stringent environmental regulations, which would require the introduction of new systems for increased reporting.
On top of this, the infrastructure isn’t currently in place, and manufacturing facilities are costly and time-consuming to build. “The reality is our companies are developed over decades, thinking about their global supply chain,” she says. “I think there’s a lack of recognition that even if a company wanted to shift everything to the US, it just can’t happen overnight.”
President Donald Trump’s calls to bring manufacturing back to US soil have been met with frustration by Pritchett and her colleagues at PhRMA. “[Peter] Navarro, [the director of trade and manufacturing policy] in the White House, has suggested that it’s a light switch, and if they demand ‘it will happen’, it will happen,” she says. “One of the things that concerns me when they say, ‘we’re going to demand you move everything back to the US’, is that the costs are much higher. So who’s going to pay for that? No one wants higher-cost medicines.”
For the US to remain competitive, Pritchett believes infrastructure investments should be made, and that there are valuable lessons to be learned from other countries that offer favourable incentives. After all, she says, biopharmaceutical companies are businesses and the goal should be making the US as attractive as possible over the longer term. Otherwise, it could be at a distinct competitive disadvantage from other countries.
While she is adamant that it is not feasible to move the entire supply chain back to the US, Pritchett believes the federal government is taking the right approach with its proposals that support manufacturing in the US and incentivise companies to start building the necessary infrastructure. However, she cautions, there needs to be a recognition that there is no one-size-fits-all solution, and reiterates that it is only through ensuring the resilience of the supply chain both at home and abroad that progress can be made.
Unsurprisingly, given the huge investment Phlow received from BARDA, Gupton is encouraged by the support the government is willing to provide. “I think one of the reasons this is going to work is because it’s a public-private partnership between the government and this consortium of groups that want to be able to move in this direction,” he explains. “It’s basically using the Chinese model. The government has made an investment in us to be able to be competitive with them.”
While Pritchett is wary of policies like ‘Buy American’, which mandate that drugs must be produced in the US from US-based starting materials, Gupton is excited about what this type of legislation could mean for the economy, supply chain and employment. Ultimately, he says, the biggest consumer of pharmaceuticals in the US is the government. As a result, they “hold the keys to the kingdom”.For many of the world’s largest pharmaceutical companies, widespread reshoring is unrealistic. Still, calls to explore ways of making the supply chain more resilient can no longer be ignored, and a rebalancing of sorts may be on the horizon. Start-up companies like Phlow are boldly leading the way, buoyed by longoverdue investment. As Gupton looks to the future, he is aware of the obstacles but confident that change is coming. “You’ve heard of the black swan theory,” he says. “We’re kind of like the black swans. Until we do this, nobody will believe it can be done.”