The shortage of a simple, over-the-counter painkiller shows how dependent the U.S. has become on China for vital pharmaceutical supplies.
For weeks this spring, as the coronavirus pandemic gripped the world, Nicole Izsak wasn’t able to stock up on acetaminophen at her neighborhood pharmacies on New York City’s Roosevelt Island.
“They had nothing of any brand,” Ms. Izsak, a nurse who volunteers at the island’s Covid-19 medical facility, said after occasionally checking at the local Duane Reade and Walgreens. The headache remedy found in most families’ medicine cabinets is also a key fever reducer.
Acetaminophen is one of a slew of life-or-death ingredients for medicines now produced in significant amounts by China. Many of these are commodity chemicals that U.S. makers found unprofitable to produce. China makes about 70% of the acetaminophen used in the U.S., the Commerce Department and analysts estimate.
The dependence, exposed by the supply-chain disruptions and a surge in buying brought on by the pandemic, has raised concerns among Trump administration officials, lawmakers and corporate chiefs.
A $765 million government loan to Eastman Kodak Co. last month was targeted at reducing America’s reliance on other countries, including China, for drugs, according to the U.S. International Development Finance Corp., which provided the loan. Kodak will use the funds to produce ingredients for generic drugs in the U.S. and said it expects the production of pharmaceutical ingredients to make up 30% to 40% of its business over time.
Other important pharmaceutical ingredients made in China include the blood anticoagulant heparin, of which 80% of the global supply is made in China, and even higher levels of the world’s antibiotics, according to estimates from industry experts at the Council on Foreign Relations, a think tank; the U.S.-China Economic and Security Review Commission, created by Congress to study national security and trade; and others.
Commonly used antibiotics amoxicillin, ciprofloxacin and tetracycline are particularly dependent on China, according to industry analysts and Indian drugmakers that rely on Chinese material. High blood pressure treatments, including valsartan, are also predominantly produced in China, the analysts say.
India, the world’s largest producer of generic medicines, depends on China for 80% of its active pharmaceutical ingredients, or API, the chemicals that give drugs their medicinal properties, according to industry data and Indian companies.
Overall, China makes nearly half of the planet’s API, according to Britain’s Medicine and Healthcare Products Regulatory Agency and pharmaceutical analysts. The U.S. Food and Drug Administration said it doesn’t have information about the volume of API produced in China.
“The national security risks of increased Chinese dominance of the global API market cannot be overstated,” said Christopher Priest, deputy assistant director at the Defense Health Agency’s operations directorate, part of the Defense Department that ensures medically ready combat forces.
The coronavirus crisis caused disruptions for a wide swath of manufacturing. Attention has mostly focused on the inability to source testing and protective gear such as masks from China. Important materials that come from other countries were also disrupted by the pandemic—including testing swabs made by a key supplier in northern Italy, which was hit hard by the outbreak.
As Chinese factories and exports shut down during that country’s quarantine, the flow of medical ingredients dwindled. China’s exports to the U.S. of acetaminophen and related pharmaceutical chemicals fell 70% in February from January, reaching their lowest level in seven years, according to data from the Commerce Department. Exports picked up again in March and April.
Pharmaceutical-industry analysts said the February drop was likely caused by China pivoting to local needs as it battled the pathogen.
Just-in-time manufacturing and stocking have become standard among the pharmaceutical companies that package the Chinese ingredients into medicines, and also among high-quantity buyers such as hospitals. Holding slim inventories keeps costs low when trade flows are smooth, but results in shortages when components are delayed or demand increases suddenly.
The U.S. Senate in March introduced two bills to restore America’s capacity to make API. The bills, now working their way through Congress, seek to probe how much America’s national defense systems rely on Chinese pharmaceuticals, call for more disclosure on drug sourcing by drugmakers and authorize $100 million to encourage companies to make more API in America.
President Trump’s chief trade negotiator, Robert Lighthizer, told fellow trade ministers from the world’s biggest economies earlier this year that one lesson of the pandemic was that “over-dependence on other countries as a source of cheap medical products and supplies has created a strategic vulnerability.”
The FDA in April attributed some recent drug shortages to higher American demand for drugs, and one unspecified shortage in February to a coronavirus-affected plant in China. The regulator said it has asked drugmakers to “evaluate their entire supply chain.”
Johnson & Johnson, which owns and produces the Tylenol brand under a subsidiary, said it attributed Tylenol shortages in the U.S. to “record-high” demand. It said the majority of its Tylenol is made with American-made ingredients and that it had no supply issues with China. The company declined to provide sales or production data for Tylenol. Industry analysts estimate the brand accounts for about 15% of the U.S. analgesics market.
China’s commerce ministry said in a statement in April that China is willing to support and assist countries affected by Covid-19 and “has not and will not restrict export of medical supplies.”
Some Chinese political thinkers have become more vocal about advocating the use of medical supplies for political advantage.
“If China wants to retaliate against the U.S. at this time, aside from a travel ban, it could also announce strategic restrictions on the export of medical products to the U.S.,” said an opinion essay by Huang Sheng, a financial commentator and nationalist book author, published in March on state-run Xinhua News Agency.
When President Trump said in April he believed Beijing wanted him to lose the re-election, the editor of a nationalist-leaning tabloid tweeted, “Mr. Trump, you can’t win without China…We provide medical supplies to the U.S.”
Chinese pharmaceutical executives told Chinese state media in late March that logistics disruptions would likely cause overall global API supply to fall by 20%.
Chinese drugmakers, including Zhejiang Huahai Pharmaceutical Co. , the world’s leading producer of antihypertensive drugs, said that the pandemic hampered their ability to ship products.
The world’s largest factory for acetaminophen, the powdery chemical also known as paracetamol, belongs to Anqiu Lu’an Pharmaceutical Co. in China’s Shandong province. It can produce 40,000 metric tons a year, about a quarter of global demand, and it ships 80% of its output to more than 100 countries. The company said its operations weren’t affected by coronavirus closures.
The U.S. was once the world’s largest producer of acetaminophen, which is derived from phenol, a byproduct of petroleum processing. Until around 2000, American companies including Monsanto Co. and global giants such as BASF Corp. maintained acetaminophen factories near oil refinery complexes in Texas and Louisiana.
Production capacity left American shores as the pharmaceutical supply chain globalized, and intensifying competition pushed ingredient factories toward low-cost Asia. Most American and global pharmaceutical companies began to focus on pursuing potentially lucrative, blockbuster patents rather than producing lower-margin bulk pharmaceuticals that are no longer covered by patents.
China had a surplus of low-wage chemists, less-stringent safety and environmental standards and, since 2001, vastly greater access to global markets after joining the World Trade Organization.
The chemical manufacturing industry “over the last 30 years has gradually moved offshore,” said Benjamin Shobert, senior associate for international health at Seattle-based National Bureau of Asian Research. “Trying to unwind this is trying to unwind globalization.”
Chinese companies—as well as some international companies such as French pharmaceutical giant Rhodia SA—put their factories in China’s manufacturing-heavy eastern coast, including in Shandong, amid one of the world’s largest concentrations of oil refineries.
China’s industrial and economic boom fed the production of pharmaceutical chemicals. Growing demand for petroleum buoyed acetaminophen production. Soybean oil from expanding crops was used in the production of antibiotics. Rising pork consumption meant more heparin, which is made from pig intestines.
Before it was incorporated in 1998, Lu’an was a small state entity responsible for barely 1% of global acetaminophen output, according to Chinese industry and state records. By 2008, China’s industry had been reduced to four major producers, with Lu’an at the top.
Rhodia quit the pharmaceutical ingredient business in 2008. That left American company Covidien—now owned by Minnesota-based Medtronic PLC—as the world’s sole major non-Asian acetaminophen maker. As profit margins fell, Covidien spun off its acetaminophen business into Irish-based Mallinckrodt PLC in 2011.
By then, Lu’an was aggressively expanding overseas. In the U.S., Lu’an built ties with pharmaceutical importers, many among them small Chinese-run companies, shipping records show. These firms process Lu’an’s acetaminophen into tablets and capsules for generics and secondary brands.
Such importers also help Chinese makers like Lu’an navigate relationships and regulations requiring FDA approval around American drug wholesale and distribution, said Edwin de Voogd, a former senior vice president at Shanghai Fosun Pharmaceutical Group Co.
Privately held Lu’an doesn’t regularly disclose financial data. A Wall Street Journal calculation indicates it produced about $250 million worth of acetaminophen last year, based on average prices.
Mallinckrodt, which still has five plants in the U.S. that produce acetaminophen, said in a statement that it supports strengthening domestic API supply. “Overreliance on non-U.S. manufacturers for essential medicines, notably acetaminophen, puts the U.S. healthcare system at risk,” it said.
Last year, Mallinckrodt posted net sales of acetaminophen API of $190 million, or 6% of its total net sales, down from 13% in 2013. The company meets less than a fifth of estimated global demand for acetaminophen.
French giant Sanofi SA said in February it would create a new company to make APIs. “In Europe, the new API industry champion is expected to help in balancing the industry’s heavy reliance on API sourced from the Asian region,” Sanofi said.
Lu’an attributed its success to “huge-scale” production and competitive prices. “Bringing API back to the U.S. is costly and lacks market competitiveness,” the company said to the Journal in a written statement. It said U.S. efforts to reshore its API manufacturing “don’t conform with the laws of market economics.”