Over several decades, federal policymakers have enabled and incentivized profit-maximizing corporations to offshore the production of pharmaceuticals, systematically dismantling domestic manufacturing capacity. Through the 1960s, pharmaceutical products consumed in the United States largely were manufactured within the country’s borders. Today, whether it is antibiotics, antivirals, analgesics, or most of the essential medicines used in acute and intensive care settings, the majority of critical medicines used by Americans are not made in the United States.
Domestic pharmaceutical production capacity is so gutted that we lack the ability to manufacture many generic antibiotics, including those used to treat children’s ear infections, strep throat, pneumonia, urinary tract infections, sexually transmitted diseases, Lyme disease, and other infections. The United States depends on China for generic drug categories that include antibiotics, antidepressants, oral contraceptives, chemotherapy drugs, and medicines for diabetes, Parkinson’s, epilepsy, HIV/AIDS, and Alzheimer’s.
Overreliance on medicine from any one or a few distant countries is a threat to public health. Climate disasters, geopolitical conflicts, and global pandemics necessitate onshoring and diversifying pharmaceutical supply chains. Dependence on Chinese medicine imports additionally represents a critical national security vulnerability. These risks demand urgent policy interventions. Onshoring production of essential drugs and their components — key starter materials (KSMs), intermediates, and active pharmaceutical ingredients (APIs) — is vitally important for America’s national security and public health. Essential drugs with the greatest risk of shortage, which are almost entirely generic drugs, must be the top priority.
The reason the United States does not produce drugs or their components domestically is simple. It is no longer profitable to do so. This situation is a result of policy choices made at home and abroad. On the supply side, foreign countries, especially China, subsidize their own industries in strategic ways that undermine U.S. production. But U.S. tax policy also encourages the offshoring of production, as does the absence of any labor or environmental standards for imports. On the demand side, dominant middlemen, like group purchasing organizations (GPOs) and wholesale drug distributors, use their buyer power to flatten existing domestic generic manufacturers’ profit margins to razor-thin or negative levels.
Middlemen buyer power, together with the inability of generic drugs to compete on quality, has created what experts call “the commoditization loop,” where downward price pressure drives manufacturing overseas, further concentrating production in low-cost countries. Other dominant middlemen, pharmacy benefit managers (PBMs), control access to pharmaceutical markets and engage in anti-competitive tactics to disadvantage certain generic drugs. Creating functional markets so that firms can invest in domestic production and make money doing so requires assessing and addressing each of these problems. Attempts to fix the problem piecemeal are doomed to fail.
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Part One of this paper explains the risks of U.S. dependence on foreign countries for essential medicines and tells the history of how we got here. Part Two discusses how successful onshoring of pharmaceutical manufacturing requires restructuring markets by reining in the market power and anti-competitive practices of pharmaceutical middlemen. Part Three sets forth a vision and plan for incorporating antimonopoly by design to build deconcentrated pharmaceutical manufacturing market structures. Part Four briefly discusses trade policies to be implemented as competition policies restructure markets and as industrial policies invest in, and create reliable demand for, domestic manufacturing.