Thursday, May 24, 2018

Why there are shortages of generic sterile injectables

This Fortune article by Erica Fry about Pfizer/Hospira's generic sterile injectable shortage/manufacturing problems is very informative, and I feel that it's the first piece to get the economics of the field (which seem wildly apparent to me) exactly right: 
The medications most vulnerable to running short have a few things in common: They are generic, high-volume, and low-margin for their makers—not the cutting-edge specialty drugs that pad pharmaceutical companies’ bottom lines. Companies have little incentive to make the workhorse drugs we use most. 
Congress’s response was to pass legislation in 2012, requiring manufacturers to give more notice ahead of anticipated shortages—but that seems to miss the point: What we’ve been witnessing, in slow motion, is market failure. It boils down to a lack of economic incentives. 
Manufacturers of widely used, inexpensive drugs make relatively little off the products, whose prices are largely determined in contract negotiations between drugmakers and group purchasing organizations (or GPOs), which exist to broker better deals for hospitals. That makes this a high-volume, low-cost game, a reality that has driven consolidation in the market. It’s also a highly regulated and somewhat costly industry, which has chased some companies out. The economics make it hard to invest in the business or in building supply chain redundancy. When shortages happen, the financial losses tend to be marginal and temporary; there are too few players for customers to take their business elsewhere. What’s left is a system with just enough inventory to get by if nothing goes wrong. 
Last year, a lot went wrong.
It seems to me that a field that relies on low margins and high volumes and high regulatory standards and high capital requirements will have a low number of players, and a very low number of entrants.  

2 comments:

  1. The lack of mobility for customers, though, seems to argue that if you can get into the business, you should be able to raise prices (maybe like the airline industry - relatively high barrier to entry as well, and unfortunately no profits to show for it). The GPOs aren't going to eat the added cost - they're going to pass it on, and likely have data to argue with insurers that paying more for a consistent supply gives better outcomes for patients and lower costs for insurers (I don't know that insurers will listen or care, so long as money keeps flowing to them, but that's another systemic problem...)

    Fortune seems to be advocating for less regulation, which is another solution. I guess it's a question of whether people end up worse off with a worse but sterile drug or a drug that works but has cardboard in it. It seems like a question that makes little sense in a market in which we pay something like 50% more (as a nation, not as individuals, though it comes from someone) for health care than anyone else.

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  2. I used to work for AMRI in Albany in process development and was there for both the sterile fill manufacturing sites in both Burlington, MA and Albuquerque, NM. As soon as the company closed the acquisition of the Burlington site, it was hit was a warning letter. It took something like two years (with the employees annoyed at just how bad upper management was that they appeared to be totally blindsided by this) to finally clear the warning letter. I hadn't realized Pfizer had screwed up even worse. It's a tough, tricky thing to do and the monitoring does need to be tough, since we are talking about injecting things directly into the bloodstream.

    Once again, it's probably going to come down to money. This strikes me as the opposite pole of the highly-expensive drugs that people find it easy to complain about. Drive the price down too low, make it barely profitable to run, and eventually the work will either move to cheaper locations in other parts of the world or it simply won't be done at all.

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