To Solve Drug Shortages, We Must Start by Fixing a Broken Economic Model

SummitONE provided optimism for responding to the challenges of drug shortages in America

Last month, at the annual Angels for Change SummitONE , more than 150 leaders in health care—representatives from pharmaceutical manufacturers, wholesalers, distributors and hospitals, patient groups, and government policy experts—all convened in Lake Zurich, Illinois, at my company’s headquarters, with one objective: to end drug shortages in this country once and for all.?

The theme was “ALL IN,” acknowledgement that all stakeholders in the complex supply chain of care have a role to play to end shortages. It’s also Fresenius Kabi’s collective goal to ensure that medicines—especially the essential medicines Americans rely on every day to treat cancer, stop infections, and perform surgery—are in stock, on the shelves, and in the hands of doctors, nurses, pharmacists, and patients who need them. At this summit, Fresenius Kabi USA was honored to give the keynote address and outline the causes and potential solutions for shortages as we see them. This article is a summary of these remarks, and I’m pleased to share them again here.

Not a new challenge In July, the FDA reported there are more than 100 active drug shortages in America, a number that has increased over the last decade. Not only are there more shortages, but the average duration of a drug shortage has increased. It's now three years versus two years, according to U.S. Pharmacopeia .

Drug shortages primarily affect generic and multi-sourced drugs that cost less than a few dollars per dose. Many are lifesaving medicines, but over the years, due to intense competition and higher production and regulatory costs, their prices have declined to unsustainable levels.

In contrast, branded drugs, like what you see advertised on television, are rarely in short supply. In America, more than 80% of all prescription drug spending is on branded drugs, even though 9 out of 10 prescriptions in America are for a generic medicine, according to the Association for Accessible Medicines. That’s how different the economics are for branded versus generic medicines.

When drugs fall into shortage, it can compromise patient care, delay treatments, and lead to the use of less effective or more expensive alternatives. Drug shortages are simply unacceptable.

A broken economic model

A root cause of shortages is the economics of generic medicines. U.S. Pharmacopeia reports that “lower priced drugs have a higher likelihood of being in shortage.” Their report acknowledges that drugs with low prices are most commonly older drug products which are usually generics. While there are some exceptions, on average the cost of making generic medicines goes up every year in the U.S., and the prices paid for them go down. When the prices fall below the cost of production, manufacturers are forced to stop making the drugs or move production offshore to lower cost markets. Either way, the risk of shortages increases.

Here is what we know. Most medicines in shortage today cost less than $5 a dose, and nearly a third of sterile generic injectables in shortage cost less than $2 a dose, according to the USP Annual Drug Shortages Report . Yet these specialized drugs are made under the most controlled conditions found anywhere in the pharmaceutical industry, because these medicines are injected or infused into the bloodstreams of some of the most vulnerable patients treated in the U.S. health care system.

Some argue we need to attract more manufacturers to the market, but there are already more than 100 companies producing generic injectables for the U.S. There is also more than enough idle manufacturing capacity in the U.S. to solve drug shortages.

Unpredictable supply disruptions

Of course, supply disruptions can occur at any step in the pharmaceutical supply chain from raw materials to production quality issues to the shipment of finished products. Access to ingredients can be disrupted. Geopolitical tensions can disrupt supply. Natural disasters like hurricanes and tornados have sidelined production locations in recent years. These events can, and often do, come with little or no warning. For unexpected issues like these, the solution is greater resiliency, but this requires investment by all stakeholders in the supply chain—and if there is no incentive, or no means to invest, then resiliency will suffer.

The cost of changing regulatory requirements

Regulatory requirements help ensure drug safety and protect public health, and keeping up with changing regulations comes with a cost. In 2014, for example, the FDA tripled the number of batches needed to apply for a new generic drug application and doubled the stability testing requirements. The point is not that these are inappropriate requirements. The point is that new requirements like these increase the cost of manufacturing generics, even as the prices for them drop. Over time, this is not sustainable.

Dependency on foreign suppliers

The reliance on foreign suppliers for raw materials and finished products is not a bad thing in and of itself, but it does make the U.S. vulnerable to disruptions in other parts of the world. The solution is not to onshore everything. Global supply chains can be resilient and building more capacity in the U.S. without fixing the economics will fail. But it's undeniable that local manufacturing provides shorter, more resilient supply chains, which can react faster to shortages. Let’s fix the economic model that is driving U.S. manufacturers to discontinue U.S. production in the first place.

Lack of incentives

Our current economic model does not provide incentives for supply chain participants to invest in redundancy and supply resilience. Adding excess capacity, maintaining excess inventory, and diversifying supply sources come with added costs, which many can’t afford. Without appropriate financial incentives for resilience, manufacturers will continue to leave the market or opt for leaner operations that are inherently more susceptible to disruption.

Some good news: four strategies to ensure a resilient, U.S. drug supply

There are clear steps we can take to end drug shortages. The key is to work together all along the supply chain, and patients are counting on us.

1. Reward resiliency

No one disputes that we should be willing to pay more than the price of a bottle of water for a reliable supply of lifesaving essential medicines, and policymakers are increasingly considering reforms. At Fresenius Kabi, we support efforts that reward resilience by incentivizing reliability as well as quality and compliance. We favor practical steps to establish resiliency benchmarks for the purchase of essential medicines, including securing levels of surge inventory of active pharmaceutical ingredients (APIs) and finished doses, creating redundancy via API and fill-and-finish production lines and locations, and establishing geographically diverse and direct shipping capabilities.

2. Recognize the value of essential medicines

We support new incentives to encourage production of essential but lower-margin medicines and fixing unhelpful legislation such as inflation-based rebate penalties. When lawmakers put in place price controls on drugs, they need to treat brands and generics differently—and protect the sustainability of generic and biosimilar medicines that save the country billions of dollars a year. We also favor utilizing the tools lawmakers have, including the U.S. tax code, to incentivize use of existing domestic capacity for production of essential medicines and to explore ways to bolster U.S. production of APIs.

3. Implement new inventory strategies

Wholesalers and other buyers play a critical role in preventing shortages and have expanded their efforts in this respect, including being early participants in initiatives like the End Drug Shortages Alliance . From the data we see, the biggest three U.S. wholesalers today typically hold only about 20 days of inventory of essential medicines. This should be increased to allow manufacturers time to react to shortages. In addition, the U.S. needs to adopt more efficient and effective methods for developing national or regional stockpiles of finished doses and APIs so that they can be quickly converted into finished products and provide a buffer against shortages. These inventory reserves could be vendor-managed to ensure the stored products are rotated appropriately. Many manufacturers are well equipped to manage inventory like this.

4. Streamline regulatory processes without compromising safety

The FDA should explore accelerated approval pathways and prioritized reviews for domestically manufactured drugs as well as resiliency measures that support shortage-prone drugs. Supporting redundancy initiatives and more efficient inspection processes can all help mitigate delays and reduce compliance burdens.

Together, we can end shortages

As drug shortages persist in America, millions of dollars are spent annually on anticipating and managing them. What if we redirected our collective efforts toward solving root causes instead? This is the vision of Fresenius Kabi, the End Drug Shortages Alliance, and the recent SummitONE meeting. It is inspiring to see representatives from the entire pharmaceutical supply chain, policymakers, and patients unite with a shared commitment to end drug shortages. We’re at the forefront of addressing this critical issue, and we appreciate all who joined us to tackle it head-on, highlighting progress made, and identifying remaining challenges. Together, we can fix a broken model and end drug shortages once and for all.