Political Change Around China Means Change for Pharma

Pharmaceutical firms are operating in an increasingly volatile world. With the aging population and the rise in chronic illnesses in developed countries, demand for medicine is constantly increasing – and that is contributing to worsening drug shortages across the globe. At the same time, a shifting regulatory landscape involving China is adding yet another layer of complexity to pressured supply chains. We are at risk of a perfect storm.

Drug manufacturers have long relied on China for many raw materials and services. Chinese manufacturing is competitive on price because of lower labor and manufacturing costs, and over 40 percent of APIs are sourced from China.

Geopolitical uncertainties and tightening regulations mean that pharmaceutical firms are now having to quickly divert resources away from Chinese manufacturing sites. In turn, this move is leading to growing concerns about the risk of a global supply crunch in critical medicines and raw materials, if alternative suppliers cannot be mobilized quickly. China’s new anti-espionage laws are creating concerns that Western pharmaceutical companies will be unable to certify manufacturing sites in China because of business risks. As well as impacting supply chains, the issue could also spark price fluctuations and competition for limited manufacturing capacity and materials supply, potentially decreasing affordability and exacerbating inequalities in healthcare access.

The BIOSECURE bill in the US is also affecting relations with Chinese companies. The latest draft, unveiled in May 2024, proposes a restriction on the ability of US biotechnology companies to engage in work with contract developers and manufacturers linked to the Chinese government or any “foreign adversary” seen as posing national security risks.

For any companies doing business in China, it’s important to step back and reassess your manufacturing strategies. In the short term, any company working with a country impacted by anti-espionage rules should conduct thorough due diligence on current and prospective suppliers, focusing on those located in regions impacted by the regulations; for example, assessing their security measures, compliance with regulations, and track record of handling sensitive information.

Pharmaceutical firms with operations linked to China should also provide training to employees on data protection practices, security protocols, and the risks associated with espionage. Building a culture of awareness and vigilance will also empower staff to identify and report any suspicious activities or security breaches. Cybersecurity measures, such as multi-factor authentication, encryption, and regular security audits, should also be implemented to help protect sensitive data and intellectual property.

However, the long-term solution to dealing with unexpected disruption or political changes is to embed resilience into all of your supply chains. Pharmaceutical firms must reduce dependency on a single sourcing location. Reliance on a single country for production, whether in China or any other nation, exposes companies to geopolitical risks, trade disruptions, and regulatory uncertainties.

Pharmaceutical firms could consider building offshoring into their long-term strategies. This presents a viable avenue to mitigate dependency on a single nation and bolster resilience, particularly in light of increased geopolitical volatility. To strategically reallocate production away from China, firms must meticulously assess potential offshoring destinations based on infrastructure readiness, regulatory alignment, and geopolitical stability.

However, offshoring pharmaceutical production away from China can entail substantial cost increases because of transportation expenses, investment in new infrastructure, and higher labor costs. Companies face a dilemma: either accept reduced profit margins, which could impact investment in R&D, or raise costs for patients. What’s more, varying regulatory frameworks can make it both time-consuming and costly to transition into new regions – and approvals are not always guaranteed.

An alternative option for offshoring lies in forging collaborative partnerships with manufacturing hubs beyond China. For instance, sites in Kenya, India, Sri Lanka, and Southeast Asia help decrease dependence on Chinese production sites. By leveraging the expertise and infrastructure of these regional partnerships, companies can strategically reallocate production away from China, while maintaining high standards of quality and compliance. The result: a more diverse and robust supply chain ecosystem.

Ultimately, the new anti-espionage rules in China and the potential introduction of the BIOSECURE Act in the US should serve as red flags for pharmaceutical companies. Now is the time to rethink supply chain practices and build resilience into operations. Though firms are currently facing volatility in China, we never know when or where we’ll see the next disruption.

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