On August 6, 2020, the White House issued an Executive Order (“EO”) aimed, with a focus on the federal procurement process, at “ensuring essential medicines, countermeasures, and critical inputs are made in the United States.” As a result of the global COVID-19 pandemic, the White House recognizes that protecting US “citizens, critical infrastructure, military forces, and [the] economy” requires development and maintenance of domestic supply chains for “Essential Medicines,” “Medical Countermeasures” and “Critical Inputs” (as defined in the EO). To address these national requirements, the EO directs federal departments and agencies that procure such products “to consider a variety of actions to increase their domestic procurement” and to identify vulnerabilities in the relevant supply chains.
The Specifics of the EO
The EO’s requirements concerning “maximizing domestic production in procurement” will likely be of most immediate interest to companies involved, or seeking to become involved, in the relevant federal market. Among other things, the EO imposes several requirements to facilitate maximizing domestic production of Essential Medicines, Medical Countermeasures, and Critical Inputs:
- Agencies must, to the maximum extent permitted by law:
– work with the Food and Drug Administration (“FDA”) Commissioner and use authorities under applicable procurement laws to “limit competition to only those Essential Medicines, Medical Countermeasures, and Critical Inputs that are produced in the United States”; and
– divide procurement requirements among two or more manufacturers located in the United States when appropriate.
- The Office of Management and Budget (“OMB”) is required, within 90 days of the EO’s issuance, to review agencies’ abilities to limit online procurement of Essential Medicines and Medical Countermeasures to e-platforms that comply with certain Department of Homeland Security best practices regarding trafficking in counterfeit and pirated goods, as well as protection of intellectual property rights.
- Agency heads and the FDA Commissioner must develop and implement procurement strategies, including long-term contracts, to strengthen and mobilize the Public Health Industrial Base to “increase the manufacture of Essential Medicines, Medical Countermeasures, and Critical Inputs in the United States” (also within 90 days).
- After the FDA Commissioner identifies the initial list of Essential Medicines, Medical Countermeasures, and Critical Inputs (and after any modifications to that list), the US Trade Representative must take any appropriate actions to modify US federal procurement product coverage under free trade agreements and the World Trade Organization Agreement to exclude coverage of Essential Medicines, Medical Countermeasures, and Critical Inputs.
- Also, after the FDA Commissioner identifies the list of Essential Medicines, Medical Countermeasures, and Critical Inputs, the Secretary of Defense must use his authorities under the Department of Defense (“DoD”) procurement laws and regulations to restrict procurement of these products “to domestic sources and to reject otherwise acceptable offers of such products from sources in Qualifying Countries” when necessary for the national defense.
The EO also requires the Secretary of Health and Human Services (“HHS”) to work with the FDA Commissioner and the OMB Director to identify vulnerabilities in the supply chain for Essential Medicines, Medical Countermeasures, and Critical Inputs. They must then report on ways to mitigate the identified vulnerabilities by (among other things):
- considering additional regulations or revised guidance related to these products;
- entering agreements with defense, security, the Department of Veterans Affairs (“VA”), and other agencies to disclose records regarding the security and vulnerabilities of these products’ supply chains; and
- recommending statutory changes needed to accomplish the goals described above.
The EO also requires the HHS Secretary and the FDA Commissioner to accelerate FDA approval or needed clearances for domestic producers of the essential products, and it instructs the Environmental Protection Agency (“EPA”) Administrator to streamline environmental requirements as necessary to provide for the development of Advanced Manufacturing facilities for essential products. At the same time, the EO instructs the HHS Secretary and the FDA Commissioner to negotiate with other countries such that they increase regulatory burdens on their producers, e.g., increase the number of unannounced inspections of regulated facilities (and refuse admission of products produced in facilities that unreasonably delay inspection).
Significantly, the EO expands the authorities vested in the HHS Secretary during the pandemic under the Defense Production Act. Specifically, the EO makes clear that HHS shall “prioritize the performance of Federal Government contracts or orders for Essential Medicines, Medical Countermeasures, or Critical Inputs over performance of any other contracts or orders, and to allocate such materials, services, and facilities as the Secretary deems necessary or appropriate to promote the national defense.”
In the near term, it is not clear the EO will have a material impact on procurement. As discussed above, the EO contemplates regulatory implementation, which will take some time. In addition, the EO provides for key exceptions to domestic preference provisions. Under current law, the federal government must prefer domestic products (and at certain dollar thresholds may only procure domestic products) subject to various exceptions, including for products manufactured or transformed in countries with which the US has trade treaties.
Specifically, it provides that the head of an agency may determine with respect to a particular contract or order that: (1) application of the domestic preference restrictions would be inconsistent with the public interest; (2) the relevant Essential Medicines, Medical Countermeasures, and Critical Inputs are not produced in the United States in sufficient and reasonably available commercial quantities and of a satisfactory quality; or (3) application of the restrictions would cause the cost of the procurement to increase by more than 25 percent (or a higher percentage to the extent applicable law requires a higher percentage). Until domestic production is well underway (with the benefit of regulatory relaxation contemplated by the EO or long-term procurement contracts), unit costs may be higher than the threshold.
Going forward, the EO likely will have a significant impact as it is geared toward increasing demand for domestically manufactured drugs and supplies and using procurement to energize and maintain that demand. Multiple agencies procure substantial quantities of pharmaceuticals and medical supplies. In some instances, the only source of active pharmaceutical ingredients (“APIs”) or drugs are China or India. Americans consume approximately 40 percent of the world’s supply of bulk components used to produce generic pharmaceutics but only 10 percent of these materials are manufactured in the United States. Many medical supplies, such as masks and other personal protective equipment, are currently primarily produced in China or other locations outside the United States.
For example, the Department of Veterans Affairs (“VA”) is the largest integrated health care system, providing care at 1,255 health care facilities, including 170 medical centers and 1,074 outpatient sites of care of varying complexity (Veterans Health Administration (“VHA”) outpatient clinics), and serving 9 million enrolled veterans each year. The VA spends billions of dollars every year for drugs and supplies. DoD also purchases pharmaceuticals and supplies for military treatment facilities. Similarly, HHS purchases some drugs, particularly for the National Stockpile. Following the COVID-19 pandemic, the National Stockpile likely will maintain much greater reserves of drugs and key supplies.
Prior to issuance of the order, the Trump administration already had taken steps to bolster domestic production of drugs. For example, in May 2020, the Biomedical Advanced Research and Development Authority (“BARDA”) within HHS awarded a $354 million contract to Phlow Corporation to expand pharmaceutical manufacturing in the United States for use in producing medicines needed during the COVID-19 response and for future public health emergencies. Phlow will produce APIs and the chemical compounds for those ingredients to make critical medicines to help alleviate or prevent drug shortages. On July 28, 2020, the International Development Finance Corporation announced that it had signed a letter of interest to provide a $765 million loan to Eastman Kodak Company to support the launch of Kodak Pharmaceuticals, a new arm of the company that will produce critical pharmaceutical components for generic drugs.
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