Nearshoring Pharma to CaliBaja

SAN DIEGO COUNTY – After the COVID-19 pandemic left shocks throughout the global supply chain, U.S. business leaders and government agencies have been pushing to bring production for key industries – such as pharmaceuticals – closer to home and lessen the U.S.’s reliance on foreign nations such as China.

The Institute of the Americas (IOA) and the Burnham Center for Community Advancement (BCCA) released a report last month titled “Assessing Generic and Biosimilar Drug Manufacturing in North America & the Potential Opportunity for the CaliBaja Region” that makes the case for nearshoring critical pharmaceutical production to Mexico. IOA and BCCA held a forum discussing the report on July 16 at UC San Diego that included panelists and speakers representing government and pharma from both sides of the border.

“We see this moment as an opportunity to advocate strongly for our region and become that supply chain and security nearshoring solution that will actually improve quality of life, not just in our region, but throughout the country and the world,” said BCCA President and CEO Tad Parzen in his remarks opening the forum.

IOA President and CEO Richard Kiy highlighted the study’s findings that the U.S. is too reliant on China and India for pharmaceuticals, particularly in APIs (advanced pharma ingredients). According to the report, 45% of finished dose units and 60% of API drugs consumed in the U.S. market today come from China or India.

Pharma manufacturing to Tijuana/CaliBaja is a “unique opportunity to attract inbound investment to this region, Kiy said, adding that currently there are only four pharma companies in San Diego’s neighboring city south of the border. “We believe there is opportunity to do more.”

In addition to producing API in Mexico, nearshoring the manufacturing of biosimilars – drugs that are nearly identical to name brand drugs that are past patent protection – present a “special opportunity” to San Diego because it is a Top 3 U.S. biotech hub and CaliBaja offers a cost advantage for manufacturing.

Kiy added that biosimilars is an industry in its “infancy,” with only 46 FDA-approved drugs, but 118 in the pipeline. U.S. companies control 39% of the biosimilar market and much of the production has been moved offshore to low-cost regions like India. India, however, is not as aligned regulatorily as Mexico, which has adopted an FDA-style framework, Kiy said, adding that Indian pharma companies could potentially invest in Mexico as well to take advantage of its more closely aligned to FDA standards.

Government Reps Weigh In

In a video presentation, California Governor’s Office of Business & Economic Development Senior Deputy Director of Global & Strategic Program Planning & External Affairs Emily Desai said that Mexico is the state’s top export market and second largest trading partner, Last year, 15% of California’s trade last year was with Mexico, representing more than $95 billion in goods. Mexico is also already the state’s 13th largest source of foreign investment, with a majority of those investments going to Los Angeles and San Diego, she said, adding that with a population of 7 million and GDP of $250 billion, “this binational region is well positioned to reap the benefits of nearshoring efforts.”

In his keynote address, Rep. Scott Peters – who is co-founder and co-chair of the Congressional Life Sciences Caucus – said that this year Mexico surpassed China as the U.S.’s largest trading partner.

Peters described the IOA report as a “document that will be talked about in D.C.” for its “clear-eyed” assessment of the challenges to pharmaceutical supply chains that were exposed by the pandemic.

“As a nation we are experiencing a shortage of essential medicines, medicines our doctors and hospitals rely on to care for the sick and keep people healthy. Earlier this year we hit a record high of 323 active drug shortages in the United States,” he said, adding that many of the shortages are in older, less expensive generic drugs.

“These are drugs where the profits are no longer protected by patents – they’re not cash cows,” explaining that as demand for these drugs fluctuates in the U.S., manufacturers don’t see reason to keep manufacturing lines “warm” and ready to produce low-cost drugs.

Generic drugs are also vulnerable because of over-reliance on less friendly regions to produce the basic components of the drugs, he said. “And if China and India aren’t going to send them to us, we basically won’t have them.”

Peters said CaliBaja is “poised to solve this problem” because Mexico has “the manufacturing know-how and skilled workforce” to make generic drugs and told the forum he will “make the case” for supporting nearshoring drug manufacturing to Mexico in Washington. He shared that policies supporting the effort should include “levers,” such as advanced market commitments to buy APIs made in Mexico; a storage and distribution strategy that accounts for drug expiration; and federal resources to incentivize continuous manufacturing at existing facilities for rapid automated sustainable dependable API production.

Additional Study on Nearshoring

Following the presentations and keynote was a panel discussion moderated by IOA Diplomatic Fellow Shane Christensen.

Panelist Andrew Rudman, former director of the Wilson Center Mexico Institute, shared insights from a Wilson Center report he co-authored titled “Strengthening U.S.-Mexico Quality Pharmaceutical Supply Chains.”

Rudman said that post-pandemic, much of the supply chain discussion centered around semiconductors and minerals needed for advanced electronics. The Wilson Center report focused on “the idea of, ‘How do we build a quality supply chain and how do we do it bi-laterally given the advantages of U.S.-Mexico cooperation?’” he said.

That report found that 40% of API for pharma in U.S. comes from India and 13% from China.

“What’s even more interesting is India is dependent on China for API. So, a lot of the drugs coming from India are really coming from China,” Rudman said. “We have a situation where we are really dependent on a single country or a single manufacturer.”

According to the report’s findings, important oncology products are dependent on mostly India API for multiple drugs – even ones that compete with each other – often from same API manufacturer. Rudman described the situation as a “perfect example” of why the U.S. should nearshore API production, adding that the goal is not necessarily to eliminate China as a supplier, but to lessen dependence on a single country.

Nearshoring pharma manufacturing could emulate the recent bi-lateral work between the U.S. and Mexico in the semiconductor and medical device manufacturing spaces, Rudman said, although there would still be some important policy and economic conditions to work through.

For one, producing in Mexico is more expensive than India or China. “The question is, are we willing to pay more for a given drug to be more confident in its reliability and its availability,” he said.

Another is the importance of guaranteed manufacturing commitments.

“The companies that invest what could be up to a billion dollars building a new facility have to know that somebody is going to buy their products,” he said.

Strategies for Resourcing Nearshoring

IOA Senior Advisor John Fry dug into the IOA/BCCA report’s findings and recommendations for implementation strategies to spur more pharma manufacturing in CaliBaja. The report, he said found that binational solutions around domestic Mexican manufacturing can happen with the right resources in place, and that resources could be expanded with extra foreign investment.

“There is also the possibility of, say, Indian pharmaceutical companies that could invest in both the U.S. and particularly Mexico to be cost competitive – they’re continuously trying to find ways to enter the U.S. market,” he said. “And that could be another opportunity for binational cooperation.”

The IOA report found that there are currently four pharma manufacturers in CaliBaja, but there are many Mexican companies that want to be “part of the solution,” Fry said. What they can do, he added is “leverage the No. 1 medical device cluster in North America – that’s what we have today between San Diego and Tijuana” – and retrain that workforce to make pharmaceuticals.

Another strategy to foster more pharma manufacturing in CaliBaja is a nonprofit or community approach. Highlighted in the report is a case study on the API Innovation Center in St. Louis, Missouri, which took a community approach to expanding manufacturing in their region.

“They decided to form a nonprofit corporation, brought together education, private companies to produce API and target the right API to make,” Fry said, adding that the San Diego/Tijuana region could model the approach, not necessarily form a nonprofit, but bring together education institutions, industry groups and biotech companies.

Viewpoints from South of the Border

Panelist Juan de Villafranca, president and CEO of AMELAF, an organization that represents 45 private-owned pharma labs, and a former ambassador for Mexico, also stressed binational cooperation for what he described as a “big opportunity” in CaliBaja that is “strategically important” in addressing access to new medicines at a good price and good quality and economic development.

“We have to convince leaders of the importance of developing pharmaceuticals in the region,” he said.

De Villafranca to the success of NAFTA in how binational cooperation can be achieved.
“Nobody believed it would work, but today lots of industries have parts manufactured in Mexico and the U.S. to make fantastic products,” he said. “It can be done in pharma.”
Impeding a more binational approach to pharma production is “a comfort zone” that the U.S. and Mexican pharma industries have been operating in,” he said, adding that companies need to take advantage of the “new world” created from the supply chain disruptions.

The challenges in expanding pharma manufacturing in Mexico “are deep,” he said, “but here we are looking north, we don’t see a situation of competition. In many places this we feel it is something we can combine and compliment with the U.S.”

Astrea Ocampo, director general of Mexican pharmaceutical company Grupo Neolpharma, pointed out that China’s success in developing pharma manufacturing capabilities “isn’t luck,” but rather policies that created incentives and strong workforce to feed the pharma industry there.

Ocampo said that Mexico’s pharma industry hasn’t bridged to the U.S. in a meaningful way because companies three have a “natural inclination” to look toward other Latin American countries for expansion opportunities.

“There’s an element of fear, but I think that the regulatory frame of the United States actually makes it easier than other markets,” she said.

“Mexico can deliver nearshoring” for the U.S., she said, especially in areas like biotechnology and biosimilars, which she described as “doable” but requiring resources – a challenge for Mexican companies which are mostly private-owned.

“The U.S. has venture capital stock market to raise capital, whereas in Mexico you have to do it with your own resources,” she said. “That’s one of the reasons you won’t find a lot of Mexican companies in the United States.”

Ocampo added that any nearshoring efforts would require a long-term plan, one that incorporates Mexico’s life science companies throughout the country, not just in CaliBaja.
“Mexico needs to be enlisted as a whole, rather than by regions,” she said.n