Posted: 30 Jul. 2020 8 min. read

On-shoring generic-drug manufacturing could boost agility, quality…and costs

by Laks Pernenkil, principal, Deloitte Consulting LLP, and Oliver Steck, principal, Deloitte & Touche LLP

The COVID-19 pandemic shined a bright spotlight on a supply chain that relies heavily on foreign countries to ensure low costs for generic drugs. While producing more generics domestically would likely help ensure that essential drugs are available where and when they are needed during a public health emergency, such a move could also lead to bigger manufacturing costs and higher prices for consumers.  

In the US, about 90 percent of all prescriptions are filled by generics.1 About 40 percent of over-the-counter and generic prescription drugs in the US are produced in India, and the vast majority of raw materials for those drugs come from China.2, 3 When the pandemic forced China to lock down, many Indian manufacturers were unable to continue production. When countries close borders, they potentially eliminate access to critical drugs and/or raw materials, which could place the US medical supply in jeopardy.  

On May 19, the US Department of Health and Human Services (HHS) announced that it will work with a team of private industry partners—led by Virginia-based Phlow Corp.—to expand US pharmaceutical manufacturing so that it can produce drugs needed during the COVID-19 pandemic and for future public health emergencies. The team will produce the active pharmaceutical ingredients (APIs)—and the chemical compounds for those ingredients—to make critical medicines to help alleviate or prevent drug shortages, according to HHS. While there are thousands of generic drugs, HHS’s announcement primarily addresses critical-care drugs such as antivirals and pain medications. Moreover, the White House is crafting an executive order that would require the US government to source essential medicines only from US companies.4

However, producing medicines in the US isn’t the same as importing them. Relocating production to the US would likely require a different pricing structure. Just 28 percent of APIs are produced in the US.5 The rest are made in Europe, India, China, and other countries.

The cost, quality, and agility tradeoff-triangle

By design, generic drugs are low-cost alternatives to brand-name drugs. We see cost as one segment of a tradeoff triangle in the production of pharmaceuticals. The other segments are agility and quality. Each segment of this triangle affects the other two.

Over the years, generic-drug manufacturers have pulled costs from the system to keep drug prices low for consumers. But the industry has traveled so far down that path that it might be difficult to reverse course. Generic drugs are typically produced in countries where labor costs are low but agility (e.g., having control and access onshore) might be limited. Shipping the ingredients or finished drugs to the US also adds time, which can make it difficult to respond quickly to a public health emergency. Moving more production to the US would likely make the generic-drug sector more agile when responding to public health emergencies.

Moreover, generic-drug manufacturers that operate overseas don’t have the same regulatory oversight as US-based manufacturers. Unannounced inspections, for example, generally aren’t conducted outside of the US. US regulators typically give foreign companies several weeks’ notice before an inspection takes place. This lack of surprise inspections is one less layer of control the agency has over foreign manufacturers.

But moving manufacturing to the US is also likely to drive manufacturing costs, which could make some generic drugs more expensive for consumers. The value to entry for existing manufacturers could lead to price wars.6 Entering this market could be challenging, even for brand-name drug manufacturers, given the focus on low margins and high volume.

However, the repatriation of some generic drugs could attract new entrants that have a different operating model. Case in point: Civica Rx—a hospital consortium that manufacturers some of its own generic drugs—is one example. The non-profit company was launched in 2018 by seven hospital systems and three philanthropic groups to guard against shortages—and price spikes—of common, generic drugs. The founding entities developed Civica to encourage price transparency and to ensure a steady supply of 14 common generic drugs that hospitals use. More than 50 health systems have since joined the group. Individual members are not allowed to purchase the entire supply of any drug because it could cause a shortage for other members. Working with manufacturing partners, Civica maintains an inventory reserve for many of their drugs that are used to treat COVID-19. The organization has also helped to reduce the cost of some “excessively priced” generic medications, according to Civica President and CEO Martin VanTrieste, who spoke at a June 2 Senate Finance Committee hearing. 

Over the past few months, we have been talking with drug manufacturers, wholesalers, group purchasing organizations (GPOs), and distributors to identify the potential implications of increasing the number of US-made generics. In the event of future pandemics, domestically produced generics—as well as drugs produced overseas—could be stockpiled in the US rather than in foreign warehouses. However, it is possible that economic and price equilibrium could dictate a reversal back to where generic industry was before the pandemic. Once international trade fully opens again, price pressure and competition could make the repatriation of generic drugs a difficult model to sustain and the generics industry could be back where it was before the pandemic.

1. US Food &  Drug Administration data on generic drugs, November 21, 2019

2. Americans need generic drugs. But can they trust them? New York Times, May 11, 2019

3. The Coronavirus pandemic is creating a drug supply crisis just when we most need medicine, Time magazine, March 26

4. The White House is prepping an executive order to shift drug production to US, Washington Post, July 8, 2020

5. Safeguarding Pharmaceutical Supply Chains in a Global Economy, US Food & Drug Administration, October 30, 2019

6. It’s time to bring generic drug manufacturing back to the US, STAT, June 2, 2020

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