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Drug Supply Chain Impact Due to COVID-19

The global outbreak of the Coronavirus Disease (COVID-19) and its impact both socially and economically across the world’s continents has been the dominating headline since January 2020. The pandemic has caused wide-spread fears and uncertainty in every fabric of society and information about how to contain and mitigate the virus’ spread will continue to be fluid for some time. The negative economic impact is recently starting to come into focus as equity markets reach bear market territory (i.e. 20% or more decline from recent highs), industries lower revenue and income projections, and supply chain networks show disruptions and constraints. In short, the pandemic is both a demand and supply shock to the economy, interrupting both supply chains and consumer confidence.  A critical talking point that deserves more attention, action, and collaboration among governments and the private and public sectors is the potential impact the pandemic could have on the drug supply chain impact due to COVID-19, specifically for common, critical prescription (branded and generic) and over-the-counter drug products that treat an array of medical conditions.

For decades, the supply chains of drug materials and finished products have exponentially expanded as drug manufacturers explored different avenues to squeeze costs out of their supply chains. Expiring patents, low R&D productivity, healthcare pricing pressures from governments, and the repetitive drive to improve profit margins led drug manufacturers to shed their manufacturing assets and outsource this and other ancillary functions to third party providers in low cost producing countries such as China and India.  The largest component of this outsourcing has been on materials used to manufacture a final drug product, specifically the Active Pharmaceutical Ingredients (API). These are the chemical building blocks that produce the pharmacological activity that helps treat, prevent, or cure a disease. The country that benefited greatly from this industry outsourcing was China.

In a 2019 paper by the National Bureau of Economic Research, 90% of manufacturing facilities that make the active pharmaceutical ingredients for major branded drugs and generics are located outside the United States while 60% of manufacturing facilities for finished products reside outside the United States, mostly in India.  As one looks deeper into the active pharmaceutical ingredient global supply chain,  it’s been reported that 80% of the materials used in generic medications, in which 90% of all distributed drugs are classified as, are manufactured in China. These include, but not limited to, the ingredients for ibuprofen, acetaminophen, acarbose, HIV medications, penicillin, and other antibiotics.

With a myopic strategic approach to a critical link in their supply chains, drug manufacturers run a high risk of experiencing supply disruptions if major societal or economic events shock a vulnerable system that so many customers and patients rely on for the prevention or treatment of medical conditions.  COVID-19 is one of those events that has the potential to critically disrupt the global supply of life saving drugs to the United States.

COVID-19 can first be traced back to China in late Q4 2019. Since this time, the disease has exploded in China to over 80,000 confirmed cases. To prevent the disease from spreading within its borders, China implemented a massive containment initiative that crippled factories that supply materials and products to a large array of industries, including the life sciences. As the containment initiative dissipates and factories come back online, the supply of APIs and finished drug products will resume; however, there is no definitive timeframe when their manufacturing network will be fully operational or whether they will ever match existing capacity levels prior to the pandemic. This scenario is likely to occur for a sustained period and could create a drug supply chain impact due to COVID-19 that may lead to drug shortages in the United States.

Even if China is able to contain the spread of the virus and get their manufacturing facilities back to full capacity, the virus’ impact on other nations, especially India, can have severe impacts on the United States’ drug supply. India is the largest producer of generic drugs to the US market; therefore, any major shock to their operational network for a sustained period will have devasting effects to the United States’ supply of drugs.  As of this reporting, India has only 82 reported cases and are making efforts to contain and mitigate the spread within its borders.

Presently, there has only been a single drug that has been added to the FDA’s Drug Shortage Database that was due to COVID-19. The manufacturer of the drug alerted the FDA in early March 2020 with the agency stating that there is no risk to patients since an alternative drug is available. Since January 2020, the agency has collaborated with 180 drug manufacturers to discuss the potential disruption of the drug supply. Twenty drugs have been identified that have a high potential of drug supply chain impact due to COVID-19 since only a single source supply chain is in place, with the manufacturing facility residing in China.

The pandemic was not the catalyst that brought the attention of the vulnerabilities of the drug supply chain to the attention of the United States government and public advocacy groups. In late 2019, the FDA, Congress, and the Pentagon have raised warnings about the risks to the global supply chain for pharmaceuticals due to the dominate position China and India hold on key materials and manufacturing capacity. Other than a pandemic, the risks to the supply chain for the US are on two additional fronts.

The first risk is directly related to the quality, safety, and efficacy of drugs being synthesized at Chinese and India manufacturing facilities.  In 2018, out of the 75 warning letters issued to drug manufacturers globally by the FDA, 37 or nearly 50% were against firms in both India and China. The European Medical Agency (EMA) posted 22 compliance notices with 14 or 64% going to those two countries. The number of import blacklists from China into the US jumped from five in 2014 to 22 in 2018. As presented in the statistics, Chinese firms simply do not follow standard manufacturing practices and both the FDA, EMA, and other large global health agencies do not do enough inspections of manufacturer’s facilities due to insufficient staff. In 2018, the FDA reported that they have only 22 staff members in China to inspect 700 facilities that supply the US.

The second risk to supply network is related to the United States national security.  Due to rising tensions with China on both trade and military fronts, China could start applying pressure on the United States by brandishing extensive leverage over their control of the supply chain.  Chinese firms could manipulate the costs by either raising prices or limiting the supply. The worst-case scenario would be if China just stopped shipping product altogether. It has been reported that if China stopped shipping product to the United States immediately, hospitals and clinics would cease to function within months, maybe days. This scenario played out recently not by China but by India, the largest generic drug manufacturing country. Due to the pandemic, India recently announced that it would limit the export of two dozen drug or drug ingredients to ensure their country had enough supply.

With sustained and intermittent headwinds highlighting the extreme vulnerabilities and interdependences of the United States’ drug supply chain, collaborative action between the private and public sectors to remediate the aforementioned risks is crucial to ensure continuous supply of drugs for our domestic population.

There are three main drivers to the recurring theme of drug shortages in the United States:

  1. Lack of Incentive for Drug Manufactures to produce profitable drugs due to intense pricing competition and high investment, there is no motivation for a company to continue to invest resources into commercializing a drug
  2. Market does not recognize and reward manufacturers for mature Quality Management Systems.  For a drug that they purchase, payers have no information that links a drug’s quality to the quality management system of the drug manufacturer; therefore, a manufacturer is not incentivized to invest in capacity, facilities, and other resources to supply low cost drugs. A drug manufacturer with a subpar quality and compliance management system would be paid the same price for the drug as one with a more robust one. This is the catalyst that leads to quality problems that trigger supply shortages.
  3. Logistical and Regulatory challenges make it difficult for the Market to respond to disruption. Supply chains are increasing in complexity and length and stringent regulatory thresholds make it extremely difficult for a new manufacture to supply products in shortage relatively quickly. Fully operational supply chains for drugs can take anywhere from 9-24 months to come online and start distribution.

FDA’s Drug Shortage Task Force, created in 2018 by the urging of Congress, has proposed three recommendations to address and hopefully resolve drug shortage issues. These recommendations are strategic in nature and require drug manufacturers to proactively address the fundamental, underlying reasons that caused their supply networks over-time to be complex and vulnerable. This is the antithesis of consistently implementing reactive solutions, such as increasing safety stock levels of materials and finished products. These are inferior planning actions that mask the driving elements of an inflexible supply chain, placing dynamic, short-term pressures on internal and external stakeholders and an industry’s balance sheet.

  • Shared Understanding of Drug Shortage Impact:
    • Private or public sector quantification of the comprehensive harms of drug shortages both clinically and financially
    • Better characterization of drug shortage’s frequency, duration, and intensity
    • Greater studies on current contracting prices by Group Purchasing Organizations (GPO) to support development of contracts designed to promote or incentivize manufacturers
  • Create a Rating System to Incentivize Drug Manufacturers to achieve QMS Maturity:
    • Introduce transparency in the market and provide pricing incentives for manufacturers to improve their QMS and gain a competitive advantage
  • Promote Sustainable Private Sector Contracts:
    • Greater understanding of GPO’s contracting prices and transparency of a manufacturer’s QMS would enable payers, purchasers, and GPOs to consider new contracting approaches that enable reliable supply of drugs.

COVID-19 will not be the world’s last pandemic. Even though they occur infrequently, the best defense against them is planning and preparing to ensure an effective response. These actions are not only for health officials and health care professionals but also for private industry, specifically the life sciences industry. This pandemic should be an advisory on the importance of proactively identifying, mitigating, eliminating, and controlling risks within the drug supply chain. Both the private and public sectors need to act as a unifying cohort to uncover incentives that will drive action to ensure a secure, sustainable supply chain that deliver affordable, high quality drugs and will not place domestic populations at risk.

To learn more about Clarkston Consulting’s advisory services and research on the pharmaceutical industry or the Drug Supply Chain Impact due to COVID-19, please contact us here.

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Tags: COVID-19, Quality and Compliance Technology, Quality Operations
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