What happens if China weaponizes its global dominance of pharmaceutical ingredients?

The urgency of tackling pharmaceutical supplies lies at the heart of the US-China Economic and Security Review Commission’s annual report, published last week. It proposed that Congress immediately amend a 2020 law to expand the authority of the US Federal Food and Drug Administration (FDA) to require pharmaceutical firms to report the volume and origin of the building blocks of modern drugs. It also asked the regulator to encourage the use of supplies from non-Chinese sources.

It wasn’t the first time the body has brought up the issue. However, the speed with which the US essentially folded after Beijing expanded export controls on crucial rare earth minerals last month is a sign that this other glaring vulnerability can no longer be brushed aside.

The US and other countries rely heavily on China to make the foundational ingredients for their medicines. Because of its enormous and commoditized industry, China plays an outsized role in the global drug supply chain. It is a significant producer of compounds called key starting materials (KSMs), which are used to produce ingredients called active pharmaceutical ingredients (APIs).

Still, definitive data on the exact level of US dependence is hard to come by. Major drugmakers have little incentive to spell out just how deep that reliance runs. The best estimates come from the US Pharmacopeia, a non-profit that sets quality standards for medicines.

Looking into the drug master files that pharma manufacturers have submitted to the FDA, it found that China wasn’t part of the landscape back in 1980. Twenty years later, it was submitting 5% of all files, outpaced by India at 19%. But, by last year, it had overtaken India with a 45% share of total filings. What complicates the picture is that the South Asian nation, the world’s top supplier of generic medicines, itself relies heavily on China for KSMs, which is not reflected in FDA filings.

What’s more, the non-profit identified a key trend: that half of the active ingredients used in the US came from just one source. China is the exclusive supplier of at least one chemical used in nearly 700 crucial medicines. For example, at first blush, the antibiotic amoxicillin, used to treat everything from bronchitis to urinary tract infections, appears to have a diverse array of sources from Spain to Singapore. But its four key inputs come almost entirely from just one: China.

As shortages of medical supplies during the pandemic demonstrated, it’s a bad idea for countries to be so dependent on any single source, much less, in the case of America, a rival.

It’s worth noting that not once during the height of the trade war escalation did Beijing threaten to withhold medical exports. But geopolitics isn’t the only risk factor. Another global virus outbreak could also shut down the supply chain.

Leland Miller, a member of the US security review commission, told me that Beijing controls a “scary chunk" of active drug ingredients. Although the group doesn’t have the authority to give orders to the US Congress, the ultimate goal would be to create a supply chain involving India and other allies that will be independent of China in specific areas, he said.

This will be a challenging enterprise, given the low margins and low profits in making the starting compounds used to manufacture medicines. China began to liberalize production back in the 1980s, along with the rest of the economy, with an emphasis on lowering costs for the local population. One state media report cited an executive as saying costs for US firms would jump by 50% if they were to try to replicate the supply chain for raw pharma ingredients.

That is exactly what Washington will have to try to do, at least on a limited or exceptional basis for the most crucial medicines. There’s already a blueprint in the form of the Pentagon’s agreement with MP Materials, a rare earths producer with a mine located in California. The deal includes a 10-year price floor, with the US Department of Defense promising to pay the company the difference if the market value for their products goes below a certain amount.

The scenario for the pharmaceutical industry is likely to be similar. China controls the spigots in many pivotal sectors, but the US will have to decouple from it in areas deemed priority by Washington in the context of national security. ©Bloomberg

The author is a columnist for Bloomberg Opinion’s Asia team, covering corporate strategy and management in the region.