In Short Supply — America’s Drug Shortage Problem

By Rafael Hoffman

These shortages have similar causes to ones that occurred in the past. These drugs have been around for a long time and their patents have expired, what we call generic drugs. That opens the market to intense competition and as a result prices are low. With razor-thin profit margins, manufacturers can’t afford to invest in capacity.

This issue tends to be most acute when it comes to generic injectable drugs. Since they go directly into the bloodstream, injected drugs bypass our protective barriers. We cannot afford to have bacteria or other contaminates in injectable drugs, so there is a very high bar of sterility. Pill production is cheaper. It also has a lower bar for sterility, because pills pass through our protective digestive system.

That is why you more commonly see shortages of drugs like the two cancer medications, cisplatin and carboplatin, which are given intravenously. For the same reason, sterile water is often in shortage. There are high quality standards needed for the manufacturing process and low profit margins. If one maker exits the market, either for financial reasons or because inspectors spot a problem and cease production, none of the competitors can afford to have extra stock lying around. Even if they want to ramp up production, that takes time. During those gaps is usually when these shortages occur.

Many observers are probably surprised to hear that drug makers have thin profit margins as high pharmaceutical costs have been part of the national discussion for a while. How do these two factors coexist?

There is an important distinction to be made. Brand name drugmakers that hold active patents on their leading products are making fat profit margins. Those companies can afford to build up stock and do. Even so, there are occasionally shortages of branded drugs. For example, we’re seeing shortages of the new weight-loss drugs. That’s driven by demand being far higher than the manufacturers anticipated. The manufacturers will catch up and those shortages will be brief.

That is in contrast to producers of generic drugs who don’t have patent protection and aren’t really making money. Teva, probably the world’s largest generic drug maker, has seen its share prices fall more than 50% in the last decade. The problem has gotten more attention recently, but shortages of these low-price drugs have been going on for decades.

How much of the drugs used in America are produced overseas?

About half the drugs we use in America are foreign-made and about two thirds of the ingredients that go into the medicines we use are made overseas, mostly in China, India, and Italy. All three have big market shares, but India has emerged as the leader in generic manufacturing.

Are there significant advantages to domestic production?

There are a few key advantages. First, it is easier for the FDA to inspect a domestic manufacturer. The FDA has offices in India and China, but they are understaffed because it’s easier to find Americans to work domestically. That increased access allows the FDA to do a better job of ensuring safety standards and also to prevent regulatory issues from affecting supply chains.

An additional issue emerged during the COVID pandemic when some nations closed their borders and decided that their own citizens should take priority in receiving drugs. It led to a delay in getting some vaccines to the U.S. That disruption was relatively short, but the stress it caused made it feel like a long time. Those type of unpredictable events have far less effect on medicines produced in the U.S.

The last major factor is that some of America’s geopolitical rivals are also important suppliers, including China. So far, there have been remarkably few disruptions, but the potential for major supply issues is real.

Is there a realistic path to shifting more drug production to the U.S.? Are there major barriers?

For many products, domestic production has higher costs and, as a result, higher prices. Americans would have to be willing to pay a few more cents for each of their generic doses. Currently, many pharmacies and hospitals are choosing drugs based largely on price, so they have strongly preferred foreign manufacturers.

What role did the COVID pandemic play in exacerbating drug supply issues?

During the COVID pandemic, many patients deferred elective and necessary surgeries and other treatments. When those patients went to have their procedures, it led to a jump in demand, which manufacturers were not prepared for.

Another problem that had an impact during COVID was that, for a period of time, the government was not sending inspectors into manufacturing establishments. As a result, some manufacturers got sloppy and, when inspectors returned, they found more problems leading to more closures and disruptions at one time than usual. That effect was relatively minor, but it made an impact.

What other elements play a role in shortages of drug supplies?

Another contributing factor is supply shocks. Sometimes a manufacturer finds the market so unprofitable that it exits. The FDA and manufacturers have improved their communications, so there should be some warning if a supplier plans to exit a market. However, there are also unanticipated exits or unanticipated disruptions.

Given the thin profit margins, the only way to make money is to have a relatively small group of companies that each have a large share of the market. If one stops producing, there are not a lot of competitors to fill the gap. Even when companies try to pick up the slack, it can take quite a while to rev up production. If a company exits the market permanently, others will eventually take its place. But, if the disruption is temporary, others are reluctant to make the changes it would take to fill that gap since they are concerned that demand will be short-lived and will disappear when their competitor comes back online.

Add to that the fact that if a new producer wants to jump into the market, it’s not enough for them to set up production, they also need licensing from the FDA, which is usually a long and complicated process.

Quality control issues also contribute. If a manufacturer of a sterile drug finds sterility problems, and cannot quickly resolve them, then it needs to shut down the facility, and possibly restructure its production process. That can take a year. We saw that quality problems for Abbott caused a shortage of infant formula.

Some blame drug shortages on the market being purely “profit-driven.” Do you feel this is accurate?

You could turn that statement around somewhat and say that a big part of the problem is that generic producers who are trying to make profits are not achieving them.

That said, there is a new model out there, Civica, which is a non-profit organization supported by hospitals, which is making bulk purchases of generic drugs in an attempt to establish more reliable supplies at consistent prices. It could work, and it would be interesting to see other business models emerge that could address the chronic problems the market has.

Experts have blamed difficulties in tracking suppliers as part of the reason for chronic shortages. Why is this market so difficult to track effectively?

There are two problems. First, manufacturers and the FDA treat information about the supply chain as a commercial secret. Second, manufacturers are not supposed to be communicating with each other because that can lead to antitrust violations, like price fixing. The government doesn’t want them coordinating to keep production low and prices high. So, that leaves a lot up to the FDA to serve as an intermediary.

It also puts an onus on the manufacturers to notify the FDA in a timely manner of any factors that could affect the supply they produce.

Are there factors in how the FDA conducts its regulatory role in the drug market that have contributed to unstable supply lines?

There has been a good deal of research looking into this. Right now, it can take months or even years for the FDA to approve a new manufacturer for a drug. That has two serious negative effects. Most importantly, it prevents even willing manufacturers from filling production gaps in a reasonable amount of time.

Secondly, at least one study showed that the FDA’s foot-dragging made it easier for manufacturers to collude. A few generic drug-makers formed a cartel and agreed not to enter markets to compete with one another. Manufacturers outside the cartel would have entered sooner had the FDA been faster to license them.

Is there a positive role the federal government could play in addressing drug shortages?

In addition to speeding up the licensing process, I think government could do a better job of not just tracking supply and manufacturing capacity, but also gathering and disseminating more and better information about the quality of producers. If purchasers, in this case wholesalers, pharmacies, and hospitals, knew more about the quality and capacity of producers, they might be willing to pay a few more pennies and commit in advance to purchases. That would help stabilize the market.

There has been some anxiety in the industry about publicizing more information. Drug-makers are worried that they would score low on these metrics and lose business. But I think it’s ultimately better for the good producers, as well as the public, to have some imperfect and occasionally embarrassing information than to have no information out there.

What changes could producers and other market stakeholders make to bring more stability to drug supplies?

If buyers were willing to pay manufacturers for greater capacity, by committing to contracts for guaranteed volume at somewhat higher prices, then we could resolve this. But now hospitals and pharmacies shop mostly based on price.

Civica has done that on a small scale, but the big wholesalers and group purchasing organizations could do it themselves on a much larger scale. To make that happen, producers need to have more transparency so purchasers can see who the reliable high-quality manufacturers are. If the orders and the profits are there, we will see supply build up and these shortages would largely go away.

Buyers haven’t been willing to pay a few cents more, because they haven’t been persuaded that it’s worth it. But if you can demonstrate that you’re going to get the quality products, you’re going to get the reliable supply. If you can convince a hospital that by using this supplier, you’re going to be able to give a full dose of chemotherapy to your patients, then they might be willing to sign contracts to pay a few cents more.