The unfulfilled dream of drug reshoring

This month, Joe Biden's administration awarded $14 million to the API Innovation Center, a Saint Louis-based nonprofit that aims to address problems in the supply chain for active pharmaceutical ingredients (APIs). The organization will use the funds to produce APIs used in medicines for asthma, anxiety and diabetes – molecules that have been imported from China and India for years.

The Center is hardly the first group to worry about over-reliance on APIs from these countries. In October 2019, Janet Woodcock, then director of the U.S. Food and Drug Administration's Center for Drug Evaluation and Research, warned a House Health subcommittee that the number of API facilities in China had more than doubled since 2010.

Months later, as the COVID-19 pandemic put the world into lockdown, the impact of dependence on China became clear. As the country halted production and halted deliveries, U.S. citizens faced drug shortages. There is no U.S. manufacturing source for more than 80% of the active ingredients in drugs the FDA deems essential to public health, a study by researchers at Washington University in St. Louis said at the time.

In response, the federal government began funding startups and groups such as the API Innovation Center to increase domestic production of small molecule APIs and finished pharmaceuticals. But industry observers say the private sector is generally not following the government's lead. While pharmaceutical companies and contract manufacturers are pouring huge sums into U.S. facilities for newer treatments such as biologics, peptides and antibody-drug conjugates (ADCs), there is little investment in traditional small molecule APIs.

Hui-Yin “Harry” Li, president of Wilmington PharmaTech, a Delaware-based API maker, says some biotech and big pharmaceutical companies are trying to bring needed drug ingredients back to the U.S., although not many have been successful. “This is mainly due to the limited domestic production capacity,” he says. His company, which already had three facilities in Newark, Delaware, added a pilot plant in 2020 to produce high-potency APIs and ADCs. However, Li said building such facilities in the US remains costly and time-consuming.

James Bruno, head of consulting firm Chemical and Pharmaceutical Solutions, agrees that building plants in the U.S. would take years. The government's investments are a start, even if just a drop in the ocean.

In perhaps the largest effort of its kind, the federal government in 2020 awarded the startup Phlow a $354 million contract to produce drugs at risk of shortages, including treatments for COVID-19. The company now has two facilities in Petersburg, Virginia, and produces four small molecules, all of which are sold to the government. Some of the synthesis steps utilize continuous flow manufacturing, a method that Phlow says is more efficient than traditional batch production.

In 2023, Phlow raised $36 million in a private funding round to further develop the contract manufacturing side of its business and expand its services to private companies. The company declines to comment on the status of its new segment.

Continuus Pharmaceuticals, another startup using the continuous flow approach, received a $69.3 million contract in 2021 from the Department of Defense in collaboration with the Department of Health and Human Services. The company originally planned to use the funds to build an API plant in Woburn, Massachusetts, but later scrapped the plan.

Brenda Kelly, president of materials technologies at API maker WR Grace, says the pandemic has caused pharmaceutical companies to rethink their supply chains, but has not led to significant relocation of production to the United States. She adds that the House's passage of the Biosecure Act in September – a law intended to prevent US pharmaceutical companies receiving federal funding from working with five Chinese service companies – was another reminder of the need for onshore manufacturing.

Kevin Webb, chief operating officer of the API Innovation Center, which aims to help meet 25% of U.S. demand for small molecule APIs over the next five years, points out that contracts like the one with Phlow are by and for the federal government They won't do much to encourage similar private investment.

“We have to recognize that the government is not the end customer,” says Webb. “Even if the Department of Defense or Medicare and Medicaid sign these long-term contracts with local manufacturers, we still have to produce these active ingredients in a way that the private drug manufacturer is willing to buy them from a U.S.-based company.”

For a long time, U.S. pharmaceutical companies didn't see a cost advantage in buying locally made active ingredients because they could find cheaper alternatives abroad, Webb adds. In her statement, Woodcock cited a 2011 FDA report that showed API manufacturing in India could reduce costs for U.S. and European companies by 30-40%.

John Dillon, president of JLD Pharma Consulting, agrees that production from plants built by new companies like Phlow is a tiny fraction of what is needed to meet U.S. demand. He says it could take years and millions of dollars to get more large manufacturing plants up and running in the country. “When you set up a new system, it needs to be validated. then there are official approvals,” he says.

Both Dillon and Bruno say that U.S. pharmaceutical companies have found ways to mitigate supply chain risks in the wake of the pandemic, but that those solutions do not necessarily include reshoring. According to Bruno, companies are increasing their inventories to prepare for a crisis.

According to Dillon, US pharmaceutical companies are also turning to India to diversify their supply chains. But even Indian companies that make APIs and generics ultimately rely on China for many of their raw materials. “This is something that companies I talk to deal with all the time,” he says. “There is a great need to set up more facilities to produce raw materials outside China.”

Meanwhile, multinational API makers say they are seeing signs that their U.S. customers are looking to move manufacturing processes closer to home, although they don't want this to spur widespread investment in new small API molecule facilities.

“My sales team is seeing more requests from US biotech and pharmaceutical companies to move production to the US, but no companies have taken action yet. I think part of it may be waiting to see what happens geopolitically,” says Eric Neuffer, global head of drug sales at Evonik Health Care, which operates a large API facility in Tippecanoe, Indiana. Neuffer adds that Evonik has seen a tripling of multimillion-dollar orders in North America between 2021 and 2024, but that the Tippecanoe site already has enough production capacity to handle these orders.

Anil Kane, global head of technical and scientific affairs at Thermo Fisher Scientific, another major API maker, says several customers have expressed a desire to have manufacturing facilities closer to home in the wake of the pandemic. Thermo Fisher has not announced any investments in U.S. small molecule production capacity in recent years.

A current investor in new capacity is Grace, which committed to producing small molecule APIs in 2021 when it spent $570 million to acquire Albemarle's fine chemicals business and its plants in South Haven, Michigan, and Tyrone, Pennsylvania. paid. This year, Grace completed a project at the South Haven site that increased pharmaceutical chemical production capacity by 25%.

Although spending on new U.S. small molecule API capacity is limited, several promising investments have been made in the production of peptides, oligonucleotides, ADCs, and biologics. This year, for example, Swiss drug services company CordenPharma announced a huge investment in its peptide production business, saying it would invest $980 million to expand production at its existing Colorado site and build a new European facility.

Also this year, Eli Lilly and Company, which makes Mounjaro and Zepbound, peptide-based diabetes and weight-loss medications, announced a $5.3 billion investment at its manufacturing site in Lebanon, Indiana.

And Veranova announced a $30 million expansion of its API facility in Devens, Massachusetts, in response to growing demand for capacity for ADCs and other potent small molecules in the United States.

Dom Hebrault, associate director at Veranova, says the cost of manufacturing newer modalities like ADCs in the U.S. is only slightly higher than the cost of manufacturing them in China or India. Additionally, drugs based on newer modalities have such high profit margins that where they are manufactured does not matter as much. “If it costs only slightly more to make something in the U.S., why look for options in other countries?” asks Hebrault.

But to produce the small molecule drugs that take up most of our medicine cabinets, reliance on companies and countries across the ocean will continue to be the norm.