Stuart R. Gallant, MD, PhD
Imagine that you have an infection, and you need a common antibiotic, but you cannot find a drugstore that is able to provide it. Or, imagine that your young son has been doing great in school, and his recent prescription for methylphenidate has been helping him concentrate, but his supply of pills is running low, and you cannot restock. Drug shortages are a recurring problem affecting critical drugs in the United States [1, 2]. Today’s post looks at drug shortages, their causes and cures.
What Is A Drug Shortage?
As shown in the flow diagram above, there are three areas that drug inventory is held—at the pharmacy, by wholesalers, and by the manufacturer. Ideally, a drug manufacturer has a model of expected drug utilization—the rate at which physicians prescribe a particular drug, taking into account seasonal variation in the need for the drug, as well as the delays posed by filling the inventory of pharmacies and wholesalers. The manufacturer should maintain inventory levels sufficient to meet the average demand, as well as seasonal surges, and to act as a reserve if manufacturing is interrupted for a period of time.
A shortage occurs when the drug manufacturer(s) cannot meet demand over a sustained period of time. As of the day of this post, the FDA shortage database lists 123 drugs as currently in shortage [3]. In truth, that sounds worse that reality—many of these drugs have ready substitutes with the same or similar efficacy. However, some drugs do remain on the shortage list for extended periods of time and have no ready substitute.
Causes for shortages include supply issues (inadequate manufacturing capacity, manufacturing quality problems, lack of critical raw materials, natural disaster) and demand issues (unpredictable increase in demand as for certain medications during Covid-19, poor inventory control, hoarding and stockpiling, changes in prescribing practices). Solutions for drug shortages need to take into account the relevant cause or causes, but broadly speaking solutions include:
- Forecasting: Manufacturers need to maintain accurate models of supply and demand to anticipate when shortfalls may occur.
- Inventory Control: Manufacturers need to maintain adequate inventories to account for baseline demand and seasonal surges.
- Risk Based Planning and Risk Management: Risk analysis of the entire supply chain should conducted to spot weak points and develop management strategies to prevent disruptions.
- Increasing Supply of Certain Drugs: At the end of the day, some drugs are not produced in sufficient supply to meet demand. In those cases, additional manufacturing runs need to be conducted and, if appropriate, manufacturing capacity needs to be added.
An Investment-Based Solution to Drug Shortages
To implement solutions to the problem of drug shortage, investment is required for forecasting and inventory software and hardware, supply chain robustness (for example by developing secondary supplies of hard to source raw materials), and manufacturing quality improvement and capacity expansions. But, where will needed investment capital come from, given that most of the drugs in shortage are low cost generics (the medications in the lower right-hand corner of this grid):
Because these medications are low cost, they have low gross margins and less ability to support investment based on revenue. To ensure adequate access to capital, investment needs to be spread over an extended period of time at favorably rates. This is the ideal spot to employ industrial revenue bonds (IRBs). Here’s how an IRB program would work:
- What drugs are included: A drug would be defined as a strategic drug affected by shortage if: 1) it had no readily available alternative of equal efficacy, 2) it had been affected by shortage for a significant amount of time (i.e., X months out of the last 24 months with X chosen by appropriate medical experts), 3) if the cause of the shortage had not be definitively solved (e.g., if a new supplier became available, then a shortage could be defined as solved, and the drug would not be on the list), and 4) lack of the medication has a significant adverse effect on patient outcome.
- Eligible companies: Industrial revenue bonds (IRBs) are a form of financing in which bonds are issued by a government (in this case a state or territory of the United States) which acts as guarantor. Recipient companies get long-term low interest financing, as well as property tax exemption. Eligible companies would include pharmaceutical manufacturers manufacturing strategic drugs affected by shortage in the US, as well as companies which file abbreviated new drug applications (ANDA)—indicating an intention to manufacture shortage affected drugs in the US.
- What would capital be used for: The bond funds could be used for a variety of purposes targeted at eliminating shortages: facility or land purchase, facility expansion, facility improvement (both manufacturing equipment and data systems), redundancy (back up power, flooding protection, etc.), cost saving measures (solar power installation), inventory control and forecasting hardware and software.
- How would repayment occur: The state or territorial government would guarantee the bonds and hold the facility and/or equipment as collateral. The bonds would be repaid by the manufacturers to the bond holders.
- How would performance be guaranteed: Participating manufacturers would provide both explanation of what the proceeds of the IRBs were for and the expected improvement in the supply of the particular drug (in doses per year or equivalent projections). Manufacturers would be responsible for documenting performance throughout the life of their IRB.
How Does This Solve the Problem?
The ideal pharmaceutical plant (whether for a branded drug or a generic) is highly automated, using the latest technology to make its workers efficient and competitive at the same time it produces high quality economical drugs. Unfortunately, pharmaceutical plants have a limited lifetime. If they do not receive regular upgrades, they eventually become inefficient and even dangerous, producing low quality medications.
Use of IRBs allows the cost of upgrading pharmaceutical plants and processes to be spread over many years. At the same time, the choices about which systems to upgrade first are selected by the manufacturer, leveraging the knowledge of the pharmaceutical firm about its customers, processes, and suppliers. This isn’t a top-down mandate—it’s a bottom-up risk assessment by the pharmaceutical firm of what improvements would make its products more competitive and allow the company to grow market share. Also, it’s not a giveaway. The funds are eventually repaid from company revenue.
The reason that this type of approach is better than blanket tax breaks is that it only targets the problem at hand (i.e., drug shortage), and it ensures that funds are spent to alleviate that problem alone.
Incidentally, this type of program would be a significant assistance to the FDA. On some occasions, the FDA is forced to choose between allowing a delinquent factory to continue manufacturing or allowing a supply shortage to develop. With the existence of this type of financing, the FDA inspector can say, “You know your vial filler is not up to snuff, you need to contact the IRB program to finance another one.”
[1] Lazar, K., et al. “‘Beyond hellacious’: Parents frantic as supply of antibiotic used for children’s infections falls short,” Boston Globe, Nov. 20 (2022). www.bostonglobe.com/2022/11/20/metro/anxieties-rising-supply-antibiotic-used-childrens-infections-falls-short/
[2] Swetlitz, I. “ADHD Drug Shortages Spread to Generic Ritalin,” Bloomberg, Jan. 5 (2023). www.bloomberg.com/news/articles/2023-01-05/adhd-drug-shortages-affect-generic-ritalin-concerta-amid-adderall-supply-issues
[3] www.accessdata.fda.gov/scripts/drugshortages/default.cfm
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