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The Risks of Outsourcing Bio R&D: Implications for National Security and the US Economy, According t

Julio Avael III

While there are advantages to conducting biopharmaceutical (Bio) R&D in foreign locations (Cost, talent, etc.), there are also risks associated with dependency on foreign innovation systems. For example, the supply chain disruptions and reliance on pharmaceutical products manufactured in China stood out like a nail on the board during the COVID-19 pandemic. Likewise, Julio Avael III notes concerns about counterfeit drugs entering the US market through China. In one high-profile case, the Chinese pharmaceutical company, Changchun Changsheng Life Sciences, was found to have produced and sold substandard vaccines.

Julio Avael III notes that another major issue during the pandemic was the shortage of active pharmaceutical ingredients (APIs) used to manufacture drugs. China is a significant producer of APIs. The shutdown of factories in China due to the pandemic led to a shortage of APIs in the global market, affecting the production of various drugs. Currently, 42 countries operate manufacturing facilities that produce APIs for the US market, with India accounting for 62.1% of generic APIs. Italy followed with 32.3% and China with 22% (Schneider, M. (2023, February 17).

With the pandemic slightly in the distance, Julio Avael III notes the US is now seeing some of the same countries that produce a significant source of Bio R&D and manufacturing capacity of the US (China, India) actively promoting alternative currencies, such as the yuan and the ruble, in international trade and investment and using alternative payment systems to bypass the US-dominated global financial system.

The implications for the US not manufacturing and supplying its own research and development (R&D) and medicine may be significant. The lack of R&D and manufacturing capacity can lead to a loss of competitiveness and innovation in the pharmaceutical industry, as other countries with more robust capabilities may dominate the market. This can impact the US economy, as the pharmaceutical industry significantly contributes to GDP and job creation. According to the Bureau of Economic Analysis, the pharmaceutical industry contributed approximately $611 billion, or 3.5% of the United States' gross domestic product (GDP) in 2019.

Regarding national security, relying on other countries for critical medicines (as seen during the COVID pandemic) can leave the US continually vulnerable to disruptions in supply chains and at a disadvantage during geopolitical tensions: including times of war. In addition, the US Military will be at a stark disadvantage and not wartime ready if the military does not have adequate medical supplies and inventories.

Julio Avael III believes the US must make it attractive for the biopharmaceutical industry to produce advanced Bio technology within the US with US talent. Plus, the US must navigate means to make the technology easier to create and less costly. For example, rolling back the Orphan Drug Act could reduce drug prices. As AI and robotics begin to thin out the labor force in the US, it is untenable for US residents to continue purchasing medication at current alleviated rates over the long term. However, a rollback in the Orphan Drug Act could also decrease incentives for pharmaceutical companies to invest in research and development for rare diseases. Additionally, The US may need to look at legislating laws preventing US MNE from making R&D investments in foreign countries that are actively moving away from US currency.

Julio Avael III believes the US should begin to turn all MNEs inward to the United States for all R&D activities in the biopharmaceutical industry. This includes incentives for the domestic production of APIs. In addition, the US must rework the national education system to focus on the workforce skill sets required to ensure the US becomes less reliant on foreign countries.

Lastly, the globalization of R&D by US MNEs has significant implications for the US innovation system. Therefore, the decision about bringing R&D back to the US should be based on a careful assessment of the costs, benefits, and impact on US trade allies.

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