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Medicine Shortages: Diversification of Supply Chains As the Primary Goal

Point of View, 17.05.2023 Forschungsgebiete

Supply shortages of medicines are becoming a growing problem in the EU. There is no lack of political initiatives, but the crucial point is often missing: the diversification of supply chains, says Michael Bayerlein.

In a “non-paper” published at the beginning of May, 19 EU member states – including Germany, France, Hungary and Poland – outline ways to combat the growing problem of supply shortages of medicines. The situation is particularly dramatic for generic drugs, i.e., medicines without patent protection. Antibiotics, oncological preparations as well as medicines containing paracetamol and ibuprofen, such as syrups for children’s fevers, are particularly affected. In order to solve the problem, the relocation of production sites back to the EU takes a central role, both in the non-paper and in the latest proposal of the German government offered on the sidelines of the meeting of EU health ministers in Stockholm. However, the foundation and ultimate goal of any strategy must be the diversification of supply chains. Previous initiatives have neglected this aspect.

Initiatives to Address Bottlenecks

Health Minister Karl Lauterbach is promoting a “pan-European response”. His proposal to bring some generic drug production back to the EU is based on a current German legislative initiative to combat the supply shortages of generic drugs. Among other things, this initiative provides for incentives to relocate production back to Germany by requiring European production sites to be awarded contracts even if they charge higher prices.

 

The non-paper of the 19 EU member states takes a similar approach. It calls for a “Critical Medicines Act” to relocate essential steps in the production process back to the EU, following the example of the “European Chips Act” and the “Critical Raw Materials Act”. Although it makes sense to follow initiatives in the area of critical raw materials, the relocation of production back to the EU and also the obligation of manufacturers to stockpile – as included in the German legislative initiative – cannot be the only way. Although relocation and stockpiling may make sense in individual cases that still need to be examined in detail, these strategies are associated with enormous costs. Since manufacturers usually relocate due to low profit margins and a lack of investment incentives, production would have to be permanently subsidised or market prices would have to be increased. The latter would be a burden on health insurers and/or insured persons. Therefore, there is another component that is crucial and has received little attention so far, but it could be the foundation for a robust European pharmaceutical supply: The diversification of supply chains.

Necessary Diversification of Supply Chains

The EU is largely dependent on foreign-produced intermediates, active pharmaceutical ingredients (APIs) and finished pharmaceutical products (FPPs) in order to import generic drugs. Trade data from Eurostat shows that in 2021, 79 per cent of all antibiotic API imports (trade code 2941) came from China and 82 per cent of ibuprofen API imports (trade code 29163990) came from China and India in roughly equal proportions. In addition, the production of more than 50 per cent of global API production is concentrated in five producer countries. This strong concentration means that European supply chains are extremely vulnerable and present security-relevant weaknesses. During the Covid-19 pandemic, the geopolitical implications of medical supplies was already evident, and it is foreseeable that they will be increasingly instrumentalised in the future. To overcome this import concentration, new supply chains must therefore be opened up. Two points are important here.

 

First, more transparent supply chains are needed to identify critical dependencies. Currently, neither the European Health Emergency Response Authority (HERA) nor any other body has the power to require companies to disclose their supply chains. The European Commission should examine whether such a competence can be created through EU law. However, in order to avoid unnecessary bureaucracy and to protect companies, a disclosure obligation only makes sense on an event-related basis. The Commission could find inspiration in competition law, which requires transparency from companies in certain scenarios, such as subsidies and mergers.

 

Second, the EU will continue to be dependent on cheap medicines from abroad, since a large-scale relocation of production to the EU cannot be financed in the long term. This is all the more true as kick-start financing alone will not be sufficient, and permanent support for companies from states, health insurers and/or insured persons will be needed. To build up new supply chains, companies – mediated and secured by member states or the EU – could find new suppliers and manufacturers in Africa or South-East Asia, for example, or build up and expand local production, following the example of the “European Raw Materials Alliance” (ERMA) and the “Raw Materials Investment Platform” (RMIP). This also involves costs, as projects can fail, and diversification runs counter to cost-saving economies of scale. However, these costs are likely to be lower than those resulting from a strategy that relies solely on relocating production back to the EU and stockpiling goods that are already in short supply.