II. The coming changes will make the FDA's product safety and quality responsibilities formidable and more global in the years ahead
Because the changes shaping the world of the future will be so large and so fundamental, FDA must substantially evolve its product safety and quality model in order to keep ahead of the coming risks. Import growth will accelerate at the same time that highly-sensitive production processes are moving to new geographies. Increased access to the global marketplace will increase the specter of harm to consumers from economic or other intentional adulteration, fraud, and counterfeiting. FDA has already begun working diligently to build relationships with global and domestic partners, pushing for strong global safety standards. However, the magnitude of the challenge will require faster progress towards closer cooperation than has happened in the past.
Global changes will have significant implications for the manufacturers and products that FDA regulates
The global trends in the coming decade will have major implications for FDA. The manufacturers and producers that FDA regulates will face intense pressure to lower costs and increase worker productivity. Government agencies, meanwhile, will become even more active and influential stakeholders in the global market. These pressures will continue to drive more, as well as more complex, production abroad, dramatically increasing the already high volume of FDA-regulated products that are imported into the U.S. Products entering the U.S. will come from new and different markets and will flow through long, multi-step processes to convert globally sourced materials into finished goods. As global product flows change, many individuals will encounter the growing dangers of fraud and economic or other intentional adulteration of both foods and medical products. In order to cope with the magnitude of the fundamental global shifts on the horizon, FDA must substantially revise its approach to global product safety and quality.
a. Increasing pressure to reduce costs and increase productivity.
The push to drive down production costs will be a pervasive influence on many countries across a range of industries, particularly those regulated by FDA. Growth in the prescription drug market has flattened in recent years and the rate of return on biopharmaceutical investments has dropped to just above the cost of capital. Exhibit 1 shows a steady and significant increase in spending on R&D in the pharmaceutical industry, even as the number of NME approvals has dropped dramatically in the last 10 years.
On the demand side, cost-conscious patients and payors will continue to insist on access to lower-cost medical products and services. Together with the low sales growth shown in Exhibit 2, this has placed a heavy strain on profit margins for pharmaceutical companies.
- Exhibit 1 – R&D productivity declining
- Exhibit 2 – Cost pressures facing pharmaceutical companies
- Exhibit 3 – Increase in government healthcare spending
- Exhibit 4 – Growth in FDA imports
- Exhibit 5 – Import lines of FDA-regulated products
- Exhibit 6 – Market for Contract Manufacturing Outsourcing
- Exhibit 7 – Illustrative supply chain for canned tuna
- Exhibit 8 – Increase in total foreign exports from developing countries
- Exhibit 9 – Growing exports of FDA-regulated products from emerging economies
The pressure for cost savings will be similarly intense for food and consumer goods companies. Consolidation among retailers has already given a few powerful, global players tremendous leverage to negotiate down prices as they compete for cost conscious shoppers. Upstream, four players control nearly 50% of the global seed market. This, coupled with increased scarcity in a number of source materials, means producers will be paying more to their suppliers at the same time they are bringing in less revenue from retailers. Adding to the struggle for name-brand consumer goods manufacturers, price sensitive consumers are turning to private label goods, increasing the market share of those products (food and personal care products) to an estimated 24% by 2016. Retailers have tried to reinforce this trend by using more sophisticated branding as a source of differentiation from other retailers.
Coping with these increased cost pressures, the healthcare industry in particular will have to find ways to increase labor productivity. Over the past 15 years, employment in this sector has grown approximately 3% with little substantial increase in employee productivity. This workforce will need to find ways to become more efficient and productive in the years ahead to meet growing demands without adding to already stretched costs. As a result of these influences, managers will look to identify cost-savings opportunities at every stage of production and will continue to challenge requirements that add expense to the manufacturing process.
b. Greater government influence in healthcare markets.
Officials managing the skyrocketing costs of growing public health programs in all parts of the world are becoming more proactive in seeking to control costs and improve quality. Government spending on healthcare has been on the rise since at least 1990 in the G7 economies, as seen in Exhibit 3. In the U.S., Medicare expenditures are projected to reach nearly $900 billion by 2018. Between 2000 and 2025, experts predict that the Medicare population will grow at four times the rate of the “employed” population between ages 18 and 64. The sum of all non-private hospital expenditures is likely to reach over $1 trillion by 2015. To cope with the growing public burden, countries like the U.K. and Australia are becoming more proactive in managing the costs of healthcare products and services, including deeper engagement with providers and more strategic contracting. The Center for Medicare and Medicaid Services already requires that hospitals report quality information in order to receive full reimbursements, and a wave of new regulations in connection with the 2010 Affordable Care Act carry significant implications for all players in the healthcare sector.
Like the consumer demand for low cost and high quality, governments will play an increasingly active role in shaping the dynamics of the healthcare market. Successful manufacturers will account not only for the preferences and habits of individual customers and providers, but also the needs of an increasingly strained public healthcare system. Like the private manufacturers, FDA will find other U.S. government agencies to be significantly more important and potentially more influential stakeholders in their work than ever before
c. Growing globalization of production of FDA-regulated products leading to growth in imports.
One of the most important consequences of the pressure to reduce costs and increase productivity
will be that companies continue to move manufacturing activities to new and different locations,
looking to global supply chains to reduce production costs. Some estimates predict that by the end of 2010, more than 40% of the final assembly in the consumer goods and life sciences industries will be performed outside of the producer’s home country, due largely to the lower cost of production.12 In pharmaceutical production in particular, the cost of formulation of an Active Pharmaceutical Ingredient (API) can range from 15% to 40% less to produce in India as compared with the U.S.13 Just as cost pressures will only become more severe over time, companies will continue the movement of manufacturing and production activities to low cost countries for the foreseeable future.
As a result of the increase in the globalization of production, more food and medical products are entering the U.S. than ever before, and the growth in imports will only accelerate in the future. Since 2002, imports of FDA-regulated products have grown almost three-fold from 7.9 million import lines per year to 18.5 million lines per year in 2009, shown in Exhibit 5. This amounts to a 13% annual growth rate across FDA-regulated products, with imports of medical devices and radiation-emitting consumer products quadrupling during the period 2002-2010. In fact, FDA-regulated products now account for approximately 10% of all imports to the U.S. and already an estimated 16% of U.S. consumer spending on these items is spent on imported goods. While foods and medical devices have seen the largest volume of imports, all of FDA’s product groups have seen substantial import growth and will likely experience more.
Food products, representing the largest share by volume of import lines, have grown by an average of nearly 10% each year for at least seven years. This growth led to an increase in the volume of food import lines from 5.6 million in 2002 to 10.7 million by 2009, with seafood and spices among the most imported food items. Currently, between 10% and 15% of all food consumed each year by U.S. households is imported from abroad. Factoring in the use of foreign-produced spices, the proportion of American diets impacted by imports is even higher. In some food categories, more food is imported than produced domestically. For example, 60% of fruits and vegetables and 80% of seafood are produced outside the U.S.
Imports of pharmaceutical products have also grown rapidly, at approximately 13% per year, over the past seven years and accounted for more than 350,000 import lines in 2009. This volume accounted for approximately 30% by value of pharmaceutical products used annually. The rise in imports has contributed to a growing trade deficit in pharmaceutical products. In 2000, the U.S. imported $1.7 billion more in pharmaceutical products than it exported. By 2008, that discrepancy had grown ten-fold to $18 billion. Even more than finished medications, the U.S. is increasingly relying on foreign producers for key components. For example, approximately 80% of active ingredients found in pharmaceutical products on U.S. store shelves come from overseas, growing from $2.8 billion in 2000 to nearly $4.6 billion just seven years later.
As with foods and drugs, medical device imports have been growing steadily. The number of medical device import lines has risen an average of 10% per year between 1998 and 2008, and now stands at 7.1 million lines per year. Importation of medical devices is broad-based, spanning all major device types. Today, imports represent more than 35% of the U.S. medical equipment market.
Table 1 – Proportion of FDA-regulated products that are imported
|Number of import lines in (2009)||Proportion of total |
spend met through imports (2010)
|Medical Devices||7.1 million||52|
With the expected growth in foreign manufacturing in the coming years, the U.S. will likely continue to increase the volume of FDA-regulated products that it imports, though estimates of the growth rate of imported products vary. On the low end, some expect a 5-8% projected growth rate, slightly lower than the 10% growth rate of the past decade. On the high end, there have been estimates that imports of FDA-regulated products will triple between 2007 and 2015, corresponding to a 15% growth rate. In either scenario, the growth in imported products is expected to outpace the growth of domestic products, leading to an even higher proportion of food and medical products coming from overseas.
d. Changing nature of risk in global supply chains.
Companies will not only be producing more FDA-regulated products abroad, but the products will follow complex paths through multi-step supply chains to reach the U.S. One example of this complexity is an increased number of processing steps and number of entities touching a given product. The market for contract manufacturing outsourcing in pharmaceutical production is evidence of this trend, growing to an estimated $46 billion in 2010, more than double the size of the market nine years ago, as seen in Exhibit 6.
One stark illustration is the multi-stage path that a single commodity, canned tuna, takes from the time the fish is caught in East Asia to the time the finished product reaches store shelves in the U.S., shown in Exhibit 7.
A growing number of the products regulated by FDA will follow similarly complex paths before they reach American consumers. With so much movement across such large distances, businesses and regulators face a difficult challenge maintaining visibility into the end-to-end process. It will also become increasingly difficult to prevent and detect the intentional efforts by some importers to manipulate the system and avoid scrutiny.
As supply chains become more global and complex, they will also carry an increasing number of complicated, high-risk products to the U.S. from abroad. Between 2000 and 2007, the U.S. quadrupled its importation of “high risk” medical products, such as vaccines. For foods, between 70 and 85% of the import refusals of produce and seafood, the two largest categories of food imports, were
for potentially dangerous violations including the presence of pathogens, chemical contamination, and “other sanitary violations.” For medical devices, complex products, which were once primarily manufactured domestically, are increasingly being manufactured overseas and imported. As a consequence, it will become more difficult to distinguish the risk and complexity of a product based on where it is produced.
Compounding the difficulty of evaluating such risks, FDA needs to fully understand the dynamics of a new set of foreign trading partners that will be important sources of FDA-regulated products. While a large portion of U.S. medical product imports have historically come from Western Europe, there are indications of a shift. Import lines from emerging markets, including Mexico, India, China, and Thailand, increased faster between 2002 and 2009 than lines from developed markets, and this disparity is likely to continue. China and India are each expected to see a more than 400% increase in their product exports between now and 2020, with China accounting for nearly 20% of all global product exports by that time.
This export growth will have a direct impact on FDA’s product safety efforts, as seen in Exhibit 9. The value of local pharmaceutical production in 2012 in India and China will likely be 2.5 times what it was in 2006. China already has the largest number of foreign, FDA-registered drug manufacturing establishments, followed by India. The picture is similar for foods and medical devices as well. China and India are each expected to see 9% annual growth in food exports between 2010 and 2020, and China has the fourth-highest volume of imports to the U.S. of medical equipment and is the leading supplier of sutures, sterile, surgical, and dental goods as well as mechano-therapy apparatus. In fact, China has the highest number of FDA-registered class II or class III medical device manufacturing establishments of any country in the world outside the U.S.
The expected cost pressure confronting global businesses may be the most influential factor driving a higher volume of production to developing markets. Both India and China offer a number of cost advantages, most notably the cost of skilled labor. India in particular trains six times the number of chemists annually than the U.S. produces and companies can access this talent for 10% of the cost of the same talent in America. In total, estimates indicate that bulk manufacturing in India can reduce costs for U.S. and European companies by 30 to 40%.
The cost advantage of skilled labor in India and China has also increased the number of drugs developed in Asia. Together, India and China have more than 30% of the world’s drug master files (DMF), and the number has been growing due in part to the abundant supply of trained scientists and a significant cost differential for product development. The cost of developing a DMF in India is one-quarter the cost in the U.S. At the same time, China has tripled its annual R&D investment over the past 15 years and will likely have the largest R&D workforce in the world by 2015.
In addition to new geographies, imports of FDA-regulated products are coming from a wide and diverse range of producers. Almost half of all imports to the U.S. are the only shipment that the exporter sends in a given year. Fully 80% of imports come from companies that send 11 or fewer total export shipments each year. This means that public safety will require effective supervision of a high number of small producers and importers.
The anticipated shift in global production will mean new and different challenges for FDA. A recent survey of retailers in Asia revealed their greatest sources of safety concern to be residual chemicals, contamination and spoilage, veterinary and plant diseases, and intentional poisoning. Mexico and China already account for a high percentage of food imports and a higher percentage of import refusals, while India accounts for 2% of food imports and more than 10% of import refusals. As these countries account for an increasing proportion of U.S. food and drug imports, FDA must first study past non-compliance issues and then take an integrated global view of product safety risk and align its resources with the greatest sources of future risk.
e. Increased risk of counterfeiting and other fraud.
Perhaps the most serious challenge on the horizon for FDA is that growing access to the global marketplace will also expose Americans to a set of economically-motivated harms including counterfeiting, fraud, and other intentional adulterations. Recent, highly-public incidents involving adulterated heparin and melamine-tainted baby formula underscore how serious the potential danger can be and the daily collection of unsolicited email that the average American receives regarding pharmaceutical products sold via the Internet is a stark reminder of the prevalence. They also serve as a reminder that there are manufacturers around the world for whom the temptation of economic gain is greater than any concern for risk to human and animal health. Asian retailers already rate intentional poisoning as one of their top concerns. The profits to be earned through fraud or adulteration will only increase as pure source materials become scarcer and more expensive.
The U.S. has seen a steady increase in the number of counterfeiting incidents. The World Health Organization estimated that between 5 and 8% of all of pharmaceuticals worldwide were counterfeit in 2003. Americans’ increased willingness to purchase pharmaceuticals online to be shipped directly to their homes from around the country and world makes them even more vulnerable. Even substances that are not by themselves harmful can be life-threatening if fraudulently substituted for critical treatments. As criminals find new incentives and new opportunities to manipulate the contents of FDA-regulated products and easy access to distribution channels via the Internet, the agency must remain vigilant and proactive.