Latest FDA report on drug shortages: Can the economics be changed?

Drug shortages have been a recurring theme in the US for a decade at least, and the subject of multiple studies. The usual fault-finding is problems in manufacturing quality; disruptions in API supplies (much of which comes from outside the US); and lack of coordination when manufacturers make decisions on entering or exiting certain product categories. These factors have been cited time and again over the past decade, along with the facts that the most stubborn shortages occur among generic injectables, and that many generics have one or a few suppliers only.

Now, a newly constituted task force, with specialists from HHS, CMS, the Federal Trade Commission and others put the emphasis on a different factor: “Economic forces are the root causes of drug shortages.” Economics and market forces show up three ways:

• Lack of Incentives to Produce Less Profitable Drugs. When market conditions limit manufacturers’ profitability, they reduce a firm’s motivation to maintain a presence in, or enter the market for older prescription drugs, and to invest in manufacturing quality and redundant capacity.
• Market Does Not Recognize and Reward Manufacturers for Mature Quality Management Systems—positing that if customers took better recognition of the quality programs of the better manufacturers (and if they had a way to determine that better quality), those manufacturers would be more reliable, and could justify earning a premium for drugs so produced.
• Logistical and Regulatory Challenges Make It Difficult for the Market to Recover After a Disruption—with disruptions ranging from natural disasters to irregularities among non-US product or API providers. It can take years for regulators (across multiple national jurisdictions) for a manufacturer to expand production or enter new generic markets.

Unresolved root causes

As noted in a footnote on the first page of the report, “This Task Force is not to be confused with a previously established drug shortage task force, which ... has focused its activities on preventing and mitigating actual drug shortages.” That effort involves coordinating advance warnings from manufacturers of upcoming production shortfalls or cancellations, and, in some cases, arranging emergency import of short-supply drugs—a sort of steady-as-she-goes approach that does not resolve root causes. This new task force, by contrast, highlights the economic forces at play; what is shocking is that it recommends higher prices at the very time when most of Washington (if not the entire country) is united on bemoaning high drug prices.

Another shocker is the evidence that accelerating the approval of ANDAs—the first step for a generic manufacturer to win permission to market a drug—has had little effect. “[A]s of June 2019, for all generic drugs with approved applications, 39 percent were observed to be marketed, and the remaining 61 percent were approved but not marketed,” according to FDA analysis. Manufacturers don’t make ANDA applications casually (they can cost millions of dollars); that companies would do so but then not act on the approvals is a sign of a distorted market:

The economic forces driving drug shortages arise primarily from private sector behavior, including business decisions made by pharmaceutical firms, GPOs and other intermediaries in the supply chain, as well as drug purchasers such as hospitals and other health care providers.

The study makes three recommendations, none of which are items that can be acted on swiftly and surely:

1. Create a shared understanding of the impact of drug shortages and the contracting practices that may contribute to them

2. Create a rating system to incentivize drug manufacturers to invest in achieving quality-management system maturity

3. Promote sustainable private-sector contracts—which would include providing financial incentives for manufacturers to enter markets, and to reward their higher-quality operations.

All this being said, the report’s conclusion is distinctly downbeat: “Given the potential scale of impacts from drug shortages, and the fact that these impacts have continually been underestimated, it is likely that drug shortages will continue to persist absent major changes to this marketplace.”