President Trump’s executive order on essential medicines aims to encourage pharmaceutical companies to bring their manufacturing back to the U.S. But it may also have unintended consequences for both domestic and foreign companies.

Legitimate concerns exist about U.S. dependency on drugs, medical devices, and supplies manufactured abroad, and the Covid-19 pandemic has brought them into sharp focus. The executive order aims to address these concerns by extending advantages in U.S. government purchasing to essential drugs, critical countermeasures (such as certain devices and personal protective equipment), and critical inputs (such as raw materials and components) that are made in the U.S.

The order directs government agencies, when possible, to procure domestically manufactured active pharmaceutical ingredients, finished drugs, and medical devices. Recognizing the practical reality that a substantial portion of drugs and devices are currently manufactured overseas, the executive order also recognizes that some — if not most — procurements will need to be open to non-U.S. products. This would cause what are often referred to as preferences, which favor U.S. products vis-à-vis competing nondomestic products, to be applied.

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There is no question that companies that manufacture drugs and medical devices domestically stand to benefit under the executive order. Yet the order may have hidden consequences, perhaps unintended, that offer significant opportunities for companies that manufacture overseas. It also may create new risks for domestic manufacturers that supply drugs and devices in national procurements or tenders issued by foreign governments.

New procurement ground rules

The rules that govern federal procurements draw a critical distinction between products produced in “designated countries” with which the U.S. has trade agreements, such as European Union countries, Japan, and Israel, and those produced in “nondesignated countries,” such as China, India, and Malaysia. In standard purchases, the U.S. government generally treats products from designated countries the same way it treats products produced in the U.S.

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By contrast, it generally will not buy products produced in nondesignated countries. This restriction is significant but not ironclad, as it can be waived when a U.S.- or designated-country product is unavailable. And in certain cases, products with nondesignated country content are eligible for procurement when the final manufacturing occurs in the U.S. or a designated country.

The executive order arguably turns existing procurement incentives and preferences on their head in two ways.

First, the potential bad news (for companies that sell U.S.-made products): To allow the U.S. government to give significant preferences to U.S.-made products in federal purchasing, the executive order requires a trade agreement carve-out for products that are deemed medically necessary. This would remove the favorable treatment that products made in designated countries have been receiving for decades. Instead, products from these countries would be subject to preferences that effectively inflate their prices compared to the prices of U.S. products in the government contract evaluation process. These designated countries could well retaliate by erecting barriers to U.S.-made products in their own national procurements.

Next, the potential good news (for companies that sell products made in China, India, and other nondesignated countries): Beyond removing the favorable treatment currently extended to designated countries, the trade agreement carve-out in the executive order would eliminate the prohibition on U.S. government procurement of products from nondesignated countries. That would erase the distinction between products made in designated trade-partner countries and those made in nondesignated countries, and both categories of products would be disadvantaged compared to U.S. products.

They would not, however, be blocked. If no U.S. products were offered in response to a government request for proposal, or if a waiver was applied, products of designated and nondesignated countries would be subject to no procurement barriers at all, throwing open the door to U.S. procurement of products from nondesignated countries.

The devil may be in the details of how the government ultimately assesses product origin under the framework of the new executive order. The order lays out a strict standard for an item to be considered produced in the United States, which requires (1) all “critical inputs” (key components) to be manufactured in the U.S. and (2) final manufacture to take place in the U.S.

But under current regulations, which will apply unless they are revised based on the executive order, a commercial off-the-shelf product, such as a drug or medical device, will qualify as a domestic product as long as its final manufacturing is done in the U.S. For example, if an active pharmaceutical ingredient sourced from China is made into tablets in the U.S., the tablets are considered to be domestic products. Applying this existing standard could undermine the executive order’s “buy American” goals.

With this in mind, it is also worth noting that the buy-American and country-of-origin-based initiatives set forth in the executive order relate only to government purchasing, and not to other frameworks, such as Customs product marking requirements, which generally are governed by the same rules of origin that apply to federal procurements.

A few important caveats

Despite the certainty with which the executive order was announced, its implementation is not a certainty. Government agencies sometimes discover practical barriers or reassess policies, and such orders can be modified or even rescinded. And depending on the results of the election in November, a new administration might take a different approach.

This executive order would take time to implement given its defined timelines and any necessary changes to existing law or regulations the trade agreement carve-out would require. Additionally, there are broad exceptions that allow agencies to sidestep the executive order’s buy-American directives altogether.

Exceptions can be applied based on public interest, such as when the purchase of domestic drugs or devices would result in excessive cost to the government, or when U.S. supplies are limited or not available. There also is a broad exception that applies in the case of public health and other national emergencies.

Ironically, the Covid-19 pandemic that in many ways led to this executive order would provide an exemption from its terms.

These exceptions in the executive order likely reflect the reality that a great many medically necessary products do not qualify as produced in the U.S. under the executive order or even as domestic products under existing law. And it will take years to meaningfully expand the U.S. industrial base for manufacturing essential drugs and devices.

Regardless of how this evolves, one thing is clear. The executive order leaves pharmaceutical and medical device businesses with much to ponder and follow closely in the coming months with respect to U.S. and foreign government procurements.

Joy Sturm is a partner at global law firm Hogan Lovells and leads its life sciences procurement practice.

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