Wilson Sonsini Goodrich & Rosati

Introduction

Against a backdrop of an ongoing, disruptive COVID-19 pandemic; natural security concerns about disruptions in the availability of drugs, personal protective equipment, and diagnostic tests—and the widely variable quality of these; acrimonious U.S.-China interactions; and the tumult of a presidential election year in a politically and economically polarized nation; the President signed an executive order directing the U.S. government to prioritize purchases of U.S. made drugs and critical manufacturing inputs. The policy objectives of the executive order (EO) include promoting domestic drug and medical supplies manufacturing capability; creating a robust domestic market for U.S. manufactured drugs and medical supplies that are critical to the national security of the United States; identifying and mitigating supply chain vulnerabilities; and speeding drugs and medical countermeasures to market.

Background

Many American Generic Drugs Are Manufactured in China

By some estimates, 90 percent of all drugs prescribed in the U.S. are generic. Generic drugs (and other drugs) are, with simplification, made in a two-step process. First, the active drug molecule, or API, is made. Then the API is formulated into the generic drug dosage form (for example, a pill). According to a U.S. Food and Drug Administration (FDA) fact sheet, more than 80 percent of APIs are manufactured outside of the U.S., many of them in China. And this dependence on China for the medicines taken by U.S. citizens has been identified as a significant security risk.

Dependence on China for Generic Drugs (and Medical Supplies) Is Asserted to Create a Multi-Layered National Security Risk

Washington Post opinion piece makes the case that China has a "virtual monopoly on ingredients required to manufacture critical medicines." This virtual monopoly is asserted to create a national security issue.

Compounding security concerns are over-layered by recurrent foreign manufacturing deficiencies and breakdown in quality systems—many of which are actively concealed from FDA inspectors (as chronicled, for example, in the investigative book, Bottle of Lies).

The opinion piece notes, "If China shut the door on exports of medicines and their key ingredients and raw material, U.S. hospitals and military hospitals and clinics would cease to function within months, if not days." Among other things, the opinion piece recommends: "Government agencies should work with the private sector to find ways to rebuild our domestic manufacturing capacity for generic drugs, if necessary, and to diversify our sourcing."

Another article notes that medical supplies companies are springing up "overnight" in China; that some of these companies are falsely faking U.S. government approval; and that Chinese government intervention could prevent shipment of legitimate medical supplies to countries such as the U.S.

The Executive Order Instructs Federal Agencies to Take Certain Actions with the Goal of Decreasing the Multi-Layered National Security Risk

The EO instructs federal government agencies to take actions, individually and collectively, that could result in mitigation of the significant security risk relating to Essential Medicines, Medical Countermeasures, and Critical Inputs (the essentials). The EO provides a broad definition of each essential, but the specific medicines, etc., of each group are not identified. Therefore, the EO directs that the FDA Commissioner, in consultation with other federal agencies and personnel:

shall identify the list of Essential Medicines, Medical Countermeasures, and their Critical Inputs that are medically necessary to have available at all times in an amount adequate to serve patient needs and in the appropriate dosage forms. (Emphasis added.)

Specific EO Agency Instructions

Specific EO actions include having federal agencies:

  1. Prioritize purchase of U.S. manufactured essentials; and by doing this, creating a robust market for these essentials;
  2. Provide guidance to aid essentials manufacturing in the U.S.;
  3. Decrease the regulatory burden for manufacture and FDA approval or clearance, when applicable, of these essentials;
  4. Block the importation of foreign made essentials when their foreign manufacturers refuse or delay an FDA inspection;
  5. Identify supply chain vulnerability and recommend changes in regulations aimed at decreasing these vulnerabilities;
  6. Prioritize federal contracts for essentials between the federal government and U.S. manufacturers; and
  7. Take all appropriate action to modify "U.S. Federal procurement product coverage under all relevant Tree Trade Agreements … to exclude coverage of the essentials."

Exceptions to the EO Directives

The EO also creates exceptions to prioritizing the purchase of U.S. manufactured essentials, including:

  1. Where the prescribed behavior is inconsistent with the public interest;
  2. The relevant product is not produced in the U.S. in sufficient and reasonably available commercial quantities and or a satisfactory quality; and
  3. The application of the EO would cause the cost of procurement to increase more than 25 percent (unless applicable law requires a higher percentage).

    Also included in the exceptions is any situation where a contemplated action is unlawful.

Our Observations

EOs are binding, with the force of law, on federal agencies so long as the EO finds basis in the Constitution (e.g., Article II), statute, or explicit or implied acts of Congress. EOs also are generally finite in that they can be canceled, repealed, held to be unlawful, or expire. Thus, any impact of the EO will depend, in part, on the length of time the EO remains in effect. In a presidential election year, the lifespan of any current administration's EO could be very short.

Next, if the EO is successful in its policy goals, it is reasonable to expect an unlawfulness challenge by one or more foreign essentials manufacturers in federal court. The outcome of such a challenge, if brought, is an open question.

Additionally, the EO may—to an extent that is hard to predict, grow the U.S. manufacturing base for essentials. In doing so, the EO would—to an extent that is hard to predict—decrease essentials imports. For example, a recent article announced an anticipated large federal government contract to move foreign pharmaceutical manufacturing to a new plant located in Virginia.

Foreign essential manufacturers should therefore consider how this may impact their business, both from an economic impact perspective, and from the possibility of having manufactured essentials banned from the U.S. marketplace for refusing or delaying an FDA inspection.

U.S. essentials manufacturers, on the other hand, should position themselves to capitalize on changes expected to arise from the EO. For example, the FDA clinical trial and approval (or license) process can be long, expensive, and uncertain. EO initiated changes could provide a faster path to e.g., drug or generic drug approval or license. Branded and generic drug manufacturers should be prepared to take advantage of the faster path.

Finally, we expect to see an increase in the number and rate of execution of contracts between the federal government and U.S.-based essentials manufacturers. Federal government contracts have unique requirements that U.S. essentials manufacturers should be aware of and be capable of adhering to. Also, because there will be winners and losers, we expect to see increasing controversy over the awarding of these contracts.

Conclusion

In summary, the EO may result in significant changes favoring essentials manufacturing in the U.S., and this, in turn, may have multifaceted implications. 

×