Covid-19 Fuels Debate over API Production Locations

• Widespread concern over import dependency
• Covid-19 impact on global manufacturing and trade
• Response to disruptions
• Balancing safety and cost

Widespread concern over import dependency

Germany's Federal Minister of Health, Jens Spahn, announced his intent in March to initiate consultations with EU partners about the possibility to relocate the production of certain active pharmaceutical ingredients (APIs) back to Germany.

He is not the only one worried about pharma supply chains: Earlier this year, the Bavarian Minister of Health, Melanie Huml, advocated the need for a European effort to ensure "that European social and environmental standards are complied with in pharmaceutical production." 

Another prominent health politician and professor of health economics and epidemiology, Karl Lauterbach, has proposed prioritizing discount contracts with suppliers that manufacture their pharmaceuticals in Europe. Five of the 16 German federal states have publicly voiced their support for initiatives along these lines. What is behind the common wish of German politicians to rely more on their country's proven capabilities in drug manufacturing?

Covid-19 impact on global manufacturing and trade

The effect of the Covid-19 pandemic on global supply chains provided new fuel for the debate about international trade with drugs, particularly with respect to generics. Large quantities of these medicines – the patents for which have expired – are imported from Asia.

Around 60 percent of APIs worldwide are manufactured in India or China. India alone accounts for 18 percent of global generic drug manufacturing, most of which is exported. China is also not only a major manufacturing location itself, but produces 70 percent of the APIs for India's generics industry. This situation makes these two countries major players in the global market for generic medicines.

According to WHO estimates, China accounts for 20 percent of global API manufacturing. Its production capacities were hit hard by the strict measures put in place by authorities to stop the infection, resulting in a decrease in manufacturing output.

Response to disruptions

As the virus spread globally, India temporarily placed an export curb on 26 drugs and APIs – which account for 10 percent of the country's pharmaceutical exports – in order to avoid domestic shortages. Similarly, the UK banned the parallel export of 82 drugs in order to prevent re-routing of drug supply to countries with higher prices for pharmaceutical products.

Concerns about the security of drug supply in Europe are not new. However, the sharp increase in shortage risk for essential drugs such as antibiotics and narcotics for surgery has reinvigorated the discussion about possible measures. In Germany, six new cases were added to the drug supply shortage database in 2020 (as of April 7, 2020). A survey of German pharmacists indicates that 90 percent of them experienced supply issues in the previous three months. 

Balancing safety and cost

Germany's Federal Association of Pharmaceutical Manufacturers (BAH) has said in a statement that "[one] should think about incentives to strengthen the European Union as a location for the pharmaceutical industry and bring the production of APIs and pharmaceuticals back to the European Union." 

A big step in this direction was taken by the German government in June: The economic stimulus package, which comprises a bundle of measures totaling EUR 130 billion, also includes a budget of EUR 1 billion dedicated to the promotion of domestic production of pharmaceuticals, APIs, vaccines and medical PPE.

Discussions about the security of pharma supply in Germany often involve the topic of discount contracts that designate pharma companies as the sole providers of a drug in exchange for a discount. These were introduced in 2003 to make the procurement of pharmaceuticals more predictable for suppliers and less costly for health insurance companies. A side effect of this instrument has been the reduction of potential suppliers for drugs in the lower price segment. This has made supply chains more vulnerable to disturbances – such as the Covid-19 pandemic – because the number of alternate procurement options was significantly decreased.

The urge to contain healthcare system costs has increased import dependency levels. Drug production in India, for example, is estimated to be 50 percent cheaper than in Europe according to a 2016 study. Initiatives to encourage an expansion of generic manufacturing in Europe must accordingly reconcile the need for robust supply chains with the requirement for healthcare cost containment - a task which can only be accomplished by keeping the dynamics of the pharmaceutical industry in mind.