Published by The Lawfare Institute
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On Aug. 25, President Biden signed the monumental $52.7 billion CHIPS and Science Act into law. The legislation is aimed to address the semiconductor manufacturing bottleneck in East Asia, namely the near-monopoly held on the industry by the Taiwan Semiconductor Manufacturing Company (TSMC). As Washington scrambles for solutions to this supply chain challenge, history is quietly repeating itself in the drug industry. Though the industry is currently not as concentrated as semiconductor production is today, drug manufacturers will likely consolidate due to an increasing demand for newer drugs, which will likely incentivize drugmakers to outsource manufacturing capacity. In a decade’s time, the TSMC equivalent of drugs is poised to also be located in East Asia, which will likely have significant implications for the resiliency of America’s drug supply chain and economic growth.
The Drug Ecosystem
Drugmakers are generally divided into two categories based on the drug produced: pharmaceuticals, or those that manufacture small molecule drugs such as aspirin, and biopharmaceuticals, or those that produce biologics (also known as large molecule drugs) such as Humira. Small molecule drugs are chemically derived (and usually what people ingest in pill form) while biologics are derived from living materials such as cells. Small molecule drugs compose roughly 60 percent of the global drug market and have existed longer than biologics, which first entered the market in the 1980s. With promising efficacy and safety profiles, biologics have been the main factor driving recent growth in drug spending.
The global drug supply chain can ultimately be divided into three phases: research & discovery (R&D), product development, and manufacturing. The first link in the value chain is R&D, during which researchers seek to understand a disease, identify and validate a target drug, and develop compounds. This process is and has been conducted by start-up drug-making companies, academic and research institutions funded by public grants, and in-house R&D teams at drugmakers. The second phase is product development, in which the discoveries of the R&D process are moved through preclinical and clinical trials and regulatory approvals. For large drugmakers, this is usually done in house or outsourced to contract research organizations (CROs). Similarly, biotech start-ups funded by venture capital may also use CROs, such as WuXi Clinical. The third stage of the process is manufacturing, which includes the procurement of chemicals and other materials, the production of the central ingredient in the desired drug, formulation of the final drug product, and packaging. Historically, drugmakers often maintained in-house manufacturing capacity. However, in the past decade, cash flow and efficiency strains have pushed them to adopt a business model of outsourcing the manufacturing stage to contract manufacturing organizations (CMOs) such as Samsung Biologics. Over the years, CMOs have moved up the value chain by offering CRO-like research services to essentially become a “one-stop-shop” for drugmakers looking to outsource noncore capabilities like research and manufacturing. This trend has contributed to the increasing consolidation of drug manufacturers and also spawned the rise of contract development and manufacturing organizations (CDMOs)—which effectively combine the services of CROs and CMOs—such as WuXi Biologics.
Outsource or Die
The rising costs and complexity of commercializing various drugs have pushed most drug companies—such as AstraZeneca—to restructure their drug-making process from a fully integrated, in-house operation to one leveraging the outsourcing of noncore functions. Despite advances in biotech and artificial intelligence (AI)-driven drug discovery, bringing a drug product to market has become slower and more expensive over time. On average, it takes 10 years and approximately $2 billion for a drug to progress from discovery to market, in part because the costs of discovery and clinical testing have more than doubled in the past decade. The rise of regional privacy regulations such as the EU’s General Data Protection Regulation have also increased the complexity of managing global clinical trials, making outsourcing to CROs an even more attractive option. Particularly for manufacturing, outsourcing is an attractive business strategy for drugmakers because it relieves the need to maintain the often high capital expenses of global manufacturing facilities.
While drugmakers are turning to biologics to drive growth, the high cost of developing biologics and its copycats (known as “biosimilars”) will continue to drive drugmakers to outsource noncore functions. This is especially acute in America and for biotechnology start-ups. As large molecules, biologics are inherently more complex and costly to manufacture. Adding to the cost burden is the fact that U.S. regulations require a higher clinical threshold for approvals of biosimilars. As of 2021, European regulators have approved 55 biosimilars now available in the EU market, while U.S. regulators have granted 26 approvals (and only 11 of those approved are on the U.S. market). Additionally, growth in the biologics market is driven largely by biotechnology start-ups with little to no manufacturing capacity, making outsourcing a business imperative.
Indeed, CDMOs have taken note of this market dynamic and are positioning to take advantage of the opportunity. South Korea made a strategic decision to shift its focus from conventional manufacturing toward advanced technologies, investing heavily in its biotech manufacturing capabilities. Now, two of its CDMOs, Celltrion and Samsung Biologics, are among the largest in the world. Both companies have invested billions of dollars to build up their biologics capabilities and are each expecting more than $1.5 billion in annual sales this year. China, a latecomer to the biologics space, has grown its capacity at breakneck pace, with its growth rate doubling the global average over the past decade. Based on sales figures, half of the top 10 CDMOs are East Asian companies, while only two are from the U.S. (Catalent and Patheon).
The TSMC of Drugs
The global drug supply chain is very different from that of the semiconductor industry, but there are parallels in how the industries transitioned to business models that warn of future national security risks. In the early years of the semiconductor industry, U.S. industrial policy guided production capacity using a mixture of supply incentives, demand support, and regulatory coordination to create a competitive ecosystem. As semiconductor chips became more advanced, however, the increasing cost of production forced chipmakers to outsource manufacturing. It was this market trend that propelled TSMC into manufacturing dominance. Twenty years ago, roughly 20 manufacturers served the global market; today, TSMC stands alone, accounting for 90 percent of market share for the most advanced chips.
America’s over-reliance on TSMC for semiconductor production fostered a regional chokepoint that became a major national security issue when coronavirus disruptions contributed to a worldwide chip shortage. Prices for electronics components ballooned while tensions between China and Taiwan pushed policymakers to find ways to shore up critical supply chains. These efforts culminated in the CHIPS and Science Act, which provides over $50 billion in government spending to boost domestic semiconductor manufacturing, aimed at addressing the over-reliance on production in East Asia.
The drug manufacturing ecosystem, while not as consolidated today, will likely start to resemble the semiconductor industry as demand for biologics continues to increase and drugmakers continue to outsource manufacturing capacity to cut costs. It may not be in Taiwan, but the TSMC-equivalent of drugs looks poised to be in East Asia once again.
The prospect of an East Asian company dominating drug manufacturing poses significant national security risks to the United States, particularly in the resiliency of America’s drug supply chain. Global drug production already suffered severe disruptions when China’s “zero-Covid” approach to pandemic response halted production in its factories, which are a major source of the active ingredients in many generic drugs. For example, propofol, an anesthetic used to maintain ventilation of COVID-19 patients, was one such drug affected by shortages. These disruptions exacerbated decades-long shortages that have plagued the U.S. drug supply. Additionally, a chokepoint in East Asia threatens the delivery of critical medicines to U.S. patients in regional flare-ups.
In addition to supply chain issues, the lack of biomanufacturing capacity has impeded a coordinated global pandemic response. As seen in the coronavirus and H1N1 outbreaks, a mismatch in vaccine supply and demand caused wealthy countries to bid against each other, driving up vaccine prices and depleting supplies from low-income countries, which were left more vulnerable. Indeed, almost two years into the pandemic, America remains vulnerable to new coronavirus variants partly because there are not enough vaccines to go around for the rest of the world, consequently buying the virus time to mutate.
America watched idly as the manufacturing crisis in the semiconductor industry took shape, causing far-reaching economic and national security risks. The drug industry is facing a similar trajectory, which would be even more disastrous given the direct risks to people’s health. Washington must learn its lesson and take action today.
The Role of Government
America must shore up an end-to-end and vertically integrated bio supply chain ecosystem. More broadly, policymakers should address the U.S. drug manufacturing challenge as part of a national bioeconomy strategy. Growing the bioeconomy will be the means for national power this century since biotechnology is putting in place a new paradigm of production, establishing regional leaders, and bringing massive wealth to those who own the new means of production. The extent to which the U.S. bioeconomy grows (or doesn’t) will have significant implications for U.S. national security and a host of domestic and international challenges, including global health, climate change, the security of global food supply chains, and, in turn, the relative balance of geopolitical power in the decades to come. The U.S. government has stepped in to create markets in the past when it is of strategic importance, as it did with the semiconductor industry in the postwar years. It should do so again today.
A coordinated strategy from Washington should deliver government funding that is significant and enduring enough to incentivize industry to follow. Congress should provide $200 billion over 10 years across four categories: $100 billion for biomanufacturing infrastructure, $50 billion for regulatory resources, and $50 billion for data and data aggregation technologies.
With regard to biomanufacturing infrastructure, Congress should enact legislation to provide financial incentives to industry for building out a dense network of regulatory-compliant biomanufacturing facilities, which will be crucial in promoting a commercially competitive U.S. biomanufacturing base. Biomanufacturing in this case refers to the capability of using biotechnology to produce drugs, food, or other commercial products. In terms of regulatory resources, Congress should provide significantly more funding to resource regulators—such as the Food and Drug Administration (FDA), Environmental Protection Agency, and the U.S. Department of Agriculture—with the capacity not only to handle approvals in a timely manner but also to adapt regulatory structures to incentivize the adoption of innovation. The United States has one of the strictest regulatory regimes in the world, a strength that should be used to America’s advantage.
Incentivizing a Network of Biomanufacturing Facilities
The FDA governs what drugs are sold on the U.S. market. Its drug approval process includes stringent specifications on how a drug is produced, including standards on the facility, equipment, product handling, and ventilation. Biopharmaceutical drugmakers are required to specify a drug’s production process before it receives FDA approval, forcing drugmakers to decide early on in the development cycle whether to spend millions of dollars to own and build out its own regulatory-compliant facility or contract this part to a CMO for far less. Cost is therefore a key factor in a drugmaker’s decision to outsource. To incentivize private investors and drugmakers to invest in domestic biomanufacturing capacity, the federal government should subsidize the cost of attaining such compliance.
Just as important, policymakers should incentivize innovations in biomanufacturing that play to America’s strengths, including for new types of and ways of producing drugs to bolster the U.S. drug supply chain. Newer drugs such as cell and gene therapy are more complex in terms of the number of production steps or the molecular size, which may not be best suited for traditional manufacturing approaches. Biotechnology can alleviate supply chain bottlenecks even for traditional drugs. For example, synthetic biology can alter the same yeast fermentation process used to make beer to produce vinblastine, a chemotherapy product. Synthetically producing vinblastine could ease America’s reliance on the drug’s existing production method, which involves harvesting an endangered plant in Madagascar.
To lessen the financial burden of prototyping and scaling up production, Congress should lower drugmakers’ costs of procuring infrastructure by building a national network of biomanufacturing facilities that act as test beds for companies to scale up their production. Efforts like the Defense Department’s BioMADE and the National Institute for Innovation in Manufacturing Biopharmaceuticals are good first steps to address the issue, but U.S. biomanufacturers need significantly more resources to meet capacity demands.
Providing Regulators With the Resources to Be Creative
A healthy bioeconomy supply chain ecosystem requires an effective regulatory regime, but today’s under-resourced regulators stand to stifle innovation. Today, once a drugmaker specifies the manufacturing process for a particular product to the FDA, any change to the production process requires a major amendment to be filed with the FDA, incentivizing most drugmakers to continue with the original process even if a newer, more economical or efficient technology is available. To counter this impediment to innovation, Congress should significantly increase appropriations to regulators for expanding their workforce, modernizing information systems, and accelerating efforts to adapt regulatory schemes to incentivize the adoption of new innovations. A well-resourced regulatory regime is one of America’s greatest commercial advantages. In the future, as new therapies become increasingly complex and the discrepancies in regulatory frameworks around the world deepen, the extent to which the FDA can adapt and coordinate internationally will heavily impact the speed of commercialization of U.S. drugs.
America’s drug industry is poised to face the same manufacturing crisis the semiconductor industry faces today: a supply chain mired with chokepoints in East Asia that pose direct risks to U.S. national security and economic growth. The recent White House Executive Order on Advancing Biotechnology and Biomanufacturing Innovation calling to safeguard the U.S. bioeconomy is a welcomed first step. Washington must continue the momentum and double down on building out a network of biomanufacturing facilities and resourcing regulators, in order to shore up an end-to-end bioeconomy supply chain ecosystem.