White House Details Supply Chain Security and Resiliency Plans:
By Daniel A. Kracov, Howard Sklamberg, Phillip V. DeFedele
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White House Details Supply Chain Security and Resiliency Plans: What Pharmaceutical Manufacturers Need to Know
On June 8, 2021, the White House released its report, entitled “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth” (the Report), which consolidates four 100-day supply chain assessments mandated under Executive Order 14017 “America’s Supply Chains” (the EO). These assessments evaluated supply chain vulnerabilities and proposed policy recommendations for four critical products. These four product categories and the agencies that led the individual reviews are: (i) semiconductors and advanced packaging (Department of Commerce); (ii) high-capacity batteries, such as those used in electric vehicles (Department of Energy); (iii) critical minerals and other identified strategic materials, including rare earth elements (Department of Defense); and (iv) pharmaceuticals and active pharmaceutical ingredients (APIs) (Department of Health and Human Services [HHS]). In this Advisory, we focus on HHS’s review of pharmaceuticals and APIs and its recommendations to promote domestic growth, equity, and resilience throughout the pharmaceutical supply chain.
The Recommendations represent a significant departure in approach from the last administration in terms of issues such as international cooperation and partnering with other countries in enhancing supply chain security and resiliency. For further information and background on the EO and these 100-day assessments, please see our prior Advisory.
General Takeaways
A task force convened from more than a dozen departments and agencies prepared the Report after consultation with hundreds of stakeholders, consideration of public comments submitted by industry and experts, and the conduct of analytic research by government experts. The Report states that more secure and resilient supply chains are essential to United States national and economic security and technological leadership.
Although the Report details findings and recommendations specific to each product category, it also sets forth common themes and observations applicable to all critical product sectors.
The Report found that the following contribute to supply chain vulnerabilities across all sectors:
(i) there is insufficient U.S. manufacturing capacity after several decades of decline;
(ii) the current U.S. market structure does not reward firms for investing in quality, sustainability, or long-term productivity and there is a focus on maximizing short-term capital returns resulting in underinvestment in long-term resilience;
(iii) U.S. allies, partners, and competitors have adopted strategic programs to advance domestic competitiveness while U.S. investment in the domestic industrial base has declined;
(iv) key supply chains are geographically concentrated in a select number of nations, such as China and India; and
(v) the U.S. has underinvested in international diplomatic efforts to develop collective approaches to supply chain security.
With respect to this last finding, the Report acknowledges that the U.S. cannot domestically manufacture all necessary product and, therefore, should supplement efforts to expand domestic manufacturing with a focus on international cooperation with respect to supply chain security and resilience.
The Report also makes six overarching recommendations to help strengthen supply chains for the four critical product categories and rebuild the U.S. industrial base and innovation engine more generally. First, the Report recommends rebuilding domestic production and innovation capabilities. This includes enacting a Supply Chain Resilience Program to “monitor, analyze, and forecast supply chain vulnerabilities and partner with industry, labor, and other stakeholders to strengthen resilience” as well as establishing a Defense Production Act (DPA) Action Group to “recommend ways to leverage the authorities of the DPA to strengthen supply chain resilience to the extent permitted by law.”
Other proposed actions under this recommendation include enacting federal legislation to strengthen critical supply chains and rebuild the industrial base, increasing public investments in research and development (R&D) and commercialization of key products, and using current administrative authorities to support producers and innovators including small and medium enterprises and skilled workers. The second recommendation is that the U.S. government should support the development of markets that invest in workers, value sustainability and drive quality by, among other things, establishing domestic standards and incentivizing “high-road” business practices. Third, the Report recommends leveraging the federal government’s role as a purchaser of, and investor in, critical goods by, among other things, using federal procurement, strengthening domestic production requirements in federal grants, and reforming and strengthening federal stockpiles.
The fourth recommendation focuses on strengthening international trade rules and enforcement mechanisms to combat unfair foreign competition. Part of this recommendation includes establishing a U.S. Trade Representative-led strike force to identify unfair foreign trade practices, recommend trade actions to address such practices, and examine how existing and future U.S. trade agreements can help strengthen the U.S. and collective supply chain resilience.
Fifth, the Report recommends that the U.S. government work with allies and partners to decrease vulnerabilities in global supply chains, including expanding multilateral diplomatic engagement and leveraging the U.S. Development Finance Committee to support supply chain resilience. The sixth recommendation is to monitor near-term supply chain disruptions as the economy reopens from the COVID-19 pandemic and identify actions to minimize their impact on workers, consumers, and businesses.
Review of Pharmaceuticals and APIs
HHS’s review of pharmaceuticals and APIs primarily focused on the supply chain for drugs (i.e., small-molecule drugs and therapeutic biological products) and their APIs. This review did not focus on the supply chains for vaccines, cell therapies, blood products, or their APIs. The Report explained that this was due to the distinct features of the supply chains for these products resulting from the nature of such products.
Underlying Principles and Objectives
In framing the findings and recommendations of its review, HHS identified the following as critical features of a robust pharmaceutical chain: (i) the ability to manufacture high-quality products for the U.S. market; (ii) supply chain diversification (e.g., relying on a geographically diverse set of manufacturers); and (iii) supply chain redundancy (e.g., having multiple manufacturers for each product and its precursors). HHS also noted the importance of a “nimble” supply chain structure that is flexible enough to change volumes and products in response to supply and demand.
HHS further explained that there are two priority objectives that should be addressed by solutions intended to improve the reliability of pharmaceutical and API supply chains. The first objective is improving supply chain transparency and incentivizing resilience. In furtherance of this objective, HHS proposes that policies should provide increased transparency regarding the sources and quality of drug manufacturing to distributors and purchasers as well as establish mechanisms to reward supply chain resilience and reductions in the severity of drug shortages. The second objective is increasing the economic sustainability of U.S. and allied drug manufacturing and distribution through policy tools that, among other things, provide predictability in production costs, pricing, and volume, increase flexibility for government and private sector contracting, and evaluate whether the current market for finished drugs supports supply diversification. Notably, in discussing this objective, HHS acknowledges that, despite the need for increased domestic production, the U.S. does not need to produce every drug domestically.
Lastly, HHS sets forth three overarching principles that should guide policy tools to promote more sustainable and resilient pharmaceutical and API supply chains:
First, there should be a rigorous assessment of benefits and costs such that sustainable solutions are economically feasible and do not have unintended consequences across the healthcare system (e.g., increases in healthcare costs).
Second, sustainable solutions should encourage stakeholders to not overly favor or penalize any one group, such that overall policy solutions are balanced in their impacts on different stakeholders. HHS notes that such stakeholders include large and small drug manufacturers, various supply chain intermediaries (e.g., wholesalers, group purchasing organizations, and pharmacy benefit managers), public and private payors, healthcare providers and organizations (e.g., hospitals, pharmacies), patients, and workers throughout the supply chain.
Third, sustainable solutions should support market-based mechanisms that serve public health for drug production and distribution to avoid generating adverse impacts that could undermine their success following implementation.
Strategies and Recommendations
HHS sets forth three pillars for a strategic approach to promote domestic growth, equity, and resilience throughout the pharmaceutical supply chain, each of which contains proposals and specific next steps. HHS acknowledges that many of these proposals will require dedicated funding, which will need to be determined as further details are developed, and will require collaboration with the federal government, the private sector and other non-governmental stakeholders.
First Pillar: Boosting Local Production and Fostering International Cooperation
The first, and most robust, pillar of HHS’s proposed strategy is boosting local production and fostering international cooperation. HHS’s first proposal under this pillar is to use investment and financial incentives to boost production. This includes leveraging the DPA and private-public partnerships (PPPs) to establish a consortium for advanced manufacturing and onshoring of essential medicines production. HHS and its operating divisions would head the consortium, which would consist of federal agencies as well as private sector stakeholders. Responsibilities of the consortium include:
(i) addressing regulatory questions presented by novel technologies and coordinating agency input;
(ii) identifying financial incentives and investment to drive the private sector to develop domestic production capacity;
(iii) “providing sector-based training for American workers”;
(iv) “[d]eveloping a plan of action to incorporate more small and medium-sized firms in R&D to increase domestic technological capacity and capability”;
(v) “[l]imiting environmental impacts of manufacturing on communities located near facilities”; and
(vi) [i]dentifying and mitigating risk from climate change.”
Part of this proposal also involves prioritizing medications essential to be available in sufficient quantities for the U.S. population during a public health, or any other, emergency and mapping supply chains of key essential medications with the private sector.
The Report stresses the need to obtain public input before implementing the proposal.
Near-term next steps for this proposal include:
(i) HHS and the White House hosting a high-level summit on drug supply chain resilience;
(ii) the Biden-Harris Administration assembling a consortium of public health experts in the government, non-profit, and private sector to review the Food and Drug Administration (FDA) Essential Medicines list
and recommend 50–100 drugs that are “most critical to have available at all times for U.S. patients because of their clinical need and lack of therapeutic redundancy” (the “Critical Drug List”), and “determine a potential volume that could be needed, using the surges during COVID-19 pandemic as one metric for that analysis”;
(iii) HHS conducting an “analysis of the Essential Medicines that went into shortage in the past year to determine major drivers, including mapping their supply chains to characterize their redundancy, diversity, and manufacturing quality”; and
(iv) HHS leveraging the DPA process to “determine the financial incentives needed to onshore or nearshore the production capacity needed for the global supply chain.”
Additionally, HHS identified medium-term next steps, such as:
(i) HHS assembling a group of pharmaceutical supply chain experts to “develop a resilience framework that details the characteristics of a high quality, diverse, and redundant supply chain for pharmaceutical products”;
(ii) HHS mapping the supply chains for the Critical Drug List to the resilience framework and identifying those for which onshoring/nearshoring may be advisable;
(iii) HHS determining “if there is a need to increase production or stockpile API for the Critical Drug List, and if so, identify the amounts needed in such a stockpile, the benefit and risk of a virtual stockpile, and the ability to utilize platform technologies to provide surge production in crises”;
(iv) HHS exploring stockpiling strategies to reduce API supply risk, including an analysis of key starting materials (KSMs); and
(v) the U.S. government reviewing “reimbursement models for key essential medicines to determine whether changes to reimbursement models could improve the resilience of key essential medicines without unduly impacting U.S. costs.”
The second proposal under this pillar is to use incentives to create redundancy for sterile injectable production, since HHS specifically noted that these products are often as risk of shortage due to manufacturing disruptions, which often relate to quality issues, such as contamination.
To increase the resilience of these supply chains, HHS proposes that the U.S. government:
(i) continue using the “Biomedical Advanced Research and Development Authority and other incentive-based tools to invest in specialized equipment and updates to mature quality manufacturing processes, including advanced manufacturing techniques, for these products”; (ii) “review reimbursement models to determine updates that may improve supply chain resilience”; and (iii) consider employing procurement guarantees, combined with leveraging acquisition flexibilities, to signal commitment to and demand for products from domestic and small firms.
Near-term next steps for this proposal include HHS: (i) convening a working group to analyze how reimbursement policies contribute to the lack of resilience for sterile injectables as well as chemotherapeutics that have been in shortage in the past five years; and (ii) evaluating whether certain sterile injectables that are identified as being at significant risk of shortage, but are not part of the Critical Drug List, should be the subject of enhanced supply chain resilience work.
The third proposal under this pillar involves investing in R&D by establishing novel platform production technologies as “mainstream” and evaluating and utilizing opportunities to support the development and commercialization of such technologies.
Near-term next steps for this proposal include: (i) in June 2021, the National Institute for Innovation in Manufacturing Biopharmaceuticals using approximately $60 million in funding from the American Rescue Plan to launch a “whole-of-industry effort to develop fully integrated and smaller footprint platforms that will reduce supply chain demands for raw materials, increase domestic biomanufacturing surge capacity, and more broadly improve technological capabilities that can lead to the biomanufacturing of APIs”; and (ii) HHS creating an internal task force with experts from FDA and the Office of the Assistant Secretary for Preparedness and Response “to increase capacity for supporting development, evaluation, and, if possible, implementation of novel manufacturing technologies and processes” and that will “visit existing facilities and form partnerships with domestic manufacturers or universities to study advanced manufacturing technologies and develop a strategy on how to facilitate a wider adoption of novel methods for commercial production of pharmaceuticals and biologics.”
The fourth proposal under this pillar is to create quality transparency through a rating system to incentivize drug manufacturers to invest in achieving quality management maturity. This rating system would be created by HHS and FDA to recognize and reward manufacturers for mature quality systems that “achieve sustainable compliance and focus on continuous improvement, business continuity plans, and early detection of supply chain issues.”
It will evaluate the robustness of a manufacturing facility’s quality management system and could also inform purchasers about a facility’s state of, and commitment to, quality management. HHS notes that the system could also be useful to international regulatory partners to support their own supply chain security and resilience. Next steps for this proposal include: (i) a long-term initiative of developing and establishing a quality rating system for drug and API production in collaboration with business partners and stakeholders; (ii) FDA initiating consultations with stakeholders to develop the framework for rating quality management maturity; and (iii) FDA considering over time whether to establish a new PPP with industry to develop and support utilization of such a rating system.
The fifth proposal under this pillar is to improve information and data collection by leveraging commercial data to improve supply chain resilience and seeking additional authority through which FDA can collect additional data and take action to improve surveillance, oversight, and resilience of the supply chain. This proposal recommends that HHS and FDA encourage stakeholders throughout the supply chain to “increase their use of commercial data to identify and mitigate supply chain risks while the U.S. government stands up a more comprehensive initiative to collect data and to improve surveillance and oversight of drug and API supply chains.” In addition, HHS recommends that, over the longer term, the U.S. government establish an initiative to collect additional supply chain data, including: (i) “[d]rug manufacturing volume information and reporting”; (ii) “[c]omplete registration and listing requirements”; (iii) “[d]istribution data on prescription drugs and certain biological products”; (iv) [r]equiring manufacturers to notify FDA of an increase in demand; and (v) “[r]equiring that the labeling of API and finished product labeling include original manufacturers.”
HHS acknowledges, however, that the collection of such additional data will largely require statutory changes as well as consultation with stakeholders, including industry. Next steps for this proposal include HHS: (i) convening industry and other non-governmental stakeholders to “share insight on commercial data sources and to encourage stakeholders across the supply chain to increase their use of commercial data to improve supply chain resilience”; and (ii) developing and making recommendations to Congress “seeking statutory authorization to increase FDA and HHS ability to collect information and to require that API and finish[ed] drug labels identify original manufacturers.”
Second Pillar: Building Emergency Capacity
The second pillar of HHS’s proposed strategy is building emergency capacity. Under this pillar, HHS proposes that the U.S. create a “virtual stockpile of APIs and other critical materials necessary to produce Essential Medicines, with prioritization of the Critical Drug List and reliance to the extent possible on domestic suppliers, especially small and small disadvantaged businesses.”
This virtual stockpile would consist of contracts with API and drug suppliers to hold surplus product and provide surge manufacturing capacity, as opposed to physically stockpiling APIs and drugs at a central location. It should also include a mechanism to cycle materials back into the market based on product stability and the length of time that the product can be stored safely. Because this stockpiling strategy should include the provision of surge manufacturing capacity, it should help limit the need to stockpile product. Next steps for this proposal include HHS determining the specific API and finished drugs and their amounts that need to be stockpiled, the benefit and risk of a virtual stockpile, and the ability to utilize on-demand manufacturing to provide surge production in emergencies. This analysis will also involve exploring stockpiling strategies to reduce API supply risk, including an analysis of KSMs.
Third Pillar: Promoting International Cooperation and Partnering with Allies
The third pillar of HHS’s strategy is to promote international cooperation and partner with allies to ensure international harmonization for reviewing and responding to supply chain risks. HHS recommends that the U.S. government work through existing international regulatory collaboration and harmonization organizations as well as leverage other “bilateral and multilateral fora and engagements to strengthen drug and API supply chain cooperation.”
HHS further noted that cooperation with allies should focus on “understanding the risks to the global supply chain and collectively developing solutions that reduce identified risks.” In addition, as allies and partners seek to onshore production, HHS recommends that the U.S. and its partners “develop complementary strategies that create an appropriate amount of redundant production without unnecessary duplication across allied nations”, including the “convergence of regulatory standards to allow for changes that promote manufacturing quality to be done expeditiously across all parties.” Next steps for this proposal include engaging with international partners to “map a global supply chain with redundancy and diversity that includes sufficient onshoring, production in geographically accessible locations, and production by allies” for the Critical Drug List.
Conclusion
Pharmaceutical companies and other stakeholders should monitor actions that the U.S. government takes in response to the Report’s findings and recommendations. Several of HHS’s proposals may create financial and market opportunities, such as for companies seeking to produce drugs and APIs domestically or utilize advanced manufacturing technologies. However, depending on how they are framed, other proposals may ultimately have negative consequences for certain manufacturers, and others are contingent on legislative action, which may significantly delay, or prevent, their implementation. Importantly, the Report acknowledges the reality and complexities of current pharmaceutical supply chains and the need for stakeholder input. Accordingly, stakeholders should avail themselves of opportunities to provide input on HHS’s proposals.
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© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
