Our nation faces a drug crisis. No, it is not the crisis of drug abuse, but one of potential scarcity for the drugs we rely upon every day for our health and wellbeing. Few people realize just how fragile our pharmaceutical supply chains are. For instance, most of the ingredients for drugs—and many of the finished products—are sourced from a single region of the world. Shortages are already common, including critical drugs that can save lives. Just how vulnerable are we to a pharmaceutical crisis?
Dr. Emily Tucker is an assistant professor at Clemson University’s Department of Industrial Engineering. Her main research focus is societal problems, including health-care policy, drug shortages, and supply chain resiliency. She recently spoke to DC Velocity’s David Maloney about our vulnerable pharmaceutical supply chains.
Q: A lot of people would be surprised to learn that most of the ingredients for our medicines and pharmaceuticals come from just one part of the world. Why is that the case?
A: Yes, about 75% to 80% of ingredients come from India and China. Largely, that is due both to the cost of production, which tends to be a lot lower in those countries than in the U.S., and production capabilities. Because they have been producing these ingredients for so long, they have developed the know-how to be able to do it relatively safely.
Q: Does that reliance on just two countries make those ingredients more vulnerable to shortages or supply chain disruptions?
A: To some degree it does. Whenever there is a centralized source of supply, it means if there is any issue within that geographic region—perhaps political instability or importation issues—it immediately propagates down the rest of the supply chain. If manufacturers were to contract with two or three or even more suppliers, that would give you diversity and redundancy in terms of production. However, that is rarely the case. Oftentimes, manufacturers will rely on a single supplier of their key raw ingredient, which does make the supply chain vulnerable.
Q: We have seen shortages with certain drugs throughout the pandemic. Is that because of a scarcity of key ingredients?
A: It has been an issue of both supply and demand. On the supply side, there have been labor interruptions because folks haven’t been able to get to work in the plants. There have also been other types of plant-related disruptions that affected the supply of these ingredients and medications.
On the demand side, we have seen some surges. For example, this morning I saw a report on a drug named Actemra, which is typically used to treat rheumatoid arthritis. It has recently been repurposed to treat patients with severe Covid-19. That means the demand for this drug is much, much higher than it has been typically, and if the supply remains constant, we could see shortages. That has certainly been a concern during the pandemic.
Q: What does it do to medical supply chains when we can’t get the drugs we need?
A: It is concerning. The major effect is downstream at the hospitals, at the health centers, and on the patients themselves, and it becomes very expensive. If the drug you typically use is unavailable, then you have to search for alternatives, and that can be costly. Managing and procuring these alternative supplies requires an estimated 9 million additional hours of labor per year, which costs health centers across the U.S. an estimated half billion dollars annually. And that cost is not borne by the manufacturers. It is borne by the recipients and purchasers of these drugs.
Then there are the downstream effects of shortages on the patients who need these medications. There have been cases where chemotherapy has been canceled because a key chemotherapy agent hasn’t been available. Surgeries have been delayed. It is hard to measure exactly what the impact has been, but the literature and the academic findings definitely suggest that it is very, very broad.
Q: Are generic drugs any less vulnerable than their branded counterparts to these supply disruptions?
A: You might be surprised to learn that they tend to be more vulnerable than patent-protected branded drugs. That is largely because generic drugs are much cheaper for patients and health systems to purchase. The downside to that is the profit margins are a lot tighter, which means that when a company is producing a generic drug, it is making a lot less money. So, there is less of an incentive for it to develop and maintain a more resilient supply chain, and, as a result, lower-priced generic drugs tend to be more vulnerable to supply disruptions than branded medications.
Q: Are there particular types of drugs that seem to be more vulnerable than others?
A: Largely, it is a combination of generic drugs and injectable drugs that have relatively low prices but are costly to produce. These tend to be chemotherapy agents, drugs that are used to treat central nervous system disorders, and cardiovascular drugs. These drugs are very complicated to manufacture.
Q: You mentioned that cost is a major factor in why we source drugs from India and China. We often hear of the huge profits that drug companies earn. Couldn’t they afford the cost of a more secure supply chain?
A: That is a legitimate question and a question I get a lot when talking about shortages. I think it is twofold. On one hand, if you look at the profit of a large pharmaceutical manufacturer overall, I think these companies could afford to develop more resilient supply chains for their lower-profit-margin drugs. That said, if you focus on these particular drug products that tend to be short—generic medications and injectable medications with very high cost—there currently isn’t any incentive for them to develop resiliency plans for those drug products. But if you zoom out and look at the company as a whole, there would be, in my opinion. I think that is a question for the public as well.
Q: So, with lives potentially at stake, we are really talking about an issue of national security, right?
A: We definitely are because, as you said, these patients’ lives are at stake. There has been a push at the government level as well as from advocacy and other medical groups to designate this an issue of national security. With that designation comes real status, and so there is an incentive at that point for funding for additional mandates that could require companies to become more resilient. It will be interesting to see how regulations change over the next few years. The justification for all of these is that patients’ lives are at stake. It is a concern if supply is not available.
Q: You mentioned regulation. I understand that is part of the problem, in that these drugs are highly regulated and there are a lot of hoops to jump through to make any changes in the supply. Can you explain how that works?
A: The pharmaceutical industry is very different from most other industries because of the regulations. For instance, a company has to go through an approval process just to begin producing a drug on a different manufacturing line within the same plant. Even more approvals would be needed to start producing that drug at a different plant entirely. That adds a lot of time as well as cost to the process.
What that does is to make the pharmaceutical industry a lot less adaptable or flexible if a disruption occurs. As an example, we might have an auto manufacturer whose truck plant goes down. Within a week, it might begin producing that particular truck at a different plant. That could never happen that quickly with pharmaceuticals because of the way regulations are set up. If a disruption occurs, it can take months for the company to be able to start producing a drug elsewhere. So how can we give companies the flexibility to adjust their operations while maintaining the strict safety standards we have in place for manufacturing medical products? That certainly is something that the FDA is working on and is a part of the conversation as well.
Q: So how can we make our pharma supply chains more resilient? Is it enough to simply diversify the supplier base?
A: That would definitely be a very solid option. I think when it comes to making a supply chain more resilient, there are a lot of different strategies, such as diversifying the supplier base as well as diversifying the plants the drug is made in. That would certainly add redundancy to the supply chain and would help support a more stable drug supply.
Another option for companies that might not have the resources to do that would be to invest in higher-quality production processes—ones that are less vulnerable to disruption.
Q: But of course, that comes with more cost, which means the drug is going to cost more at a time when many already feel that drug prices are too high.
A: Absolutely. I think cost is a major issue. I think it has been the main limiting factor to investing in strategies to improve resiliency. My argument in terms of investing in strategies would be to step back and look at the cost of the system as a whole. We talked earlier about how health systems tend to bear the costs of dealing with drug shortages. We could take the money we are now spending on additional staffing to procure substitute medications and invest it in higher-quality supply chains. I would need to look at the numbers, but I think that would be a worthwhile investment and would certainly lead to a more stable supply chain.
Q: That makes a lot of sense. Would it also help to bring some of the manufacturing back to North America?
A: Yes. I think it is important to remember that the shortages are not just caused by distance—the fact that our supply is too far away; they also occur because if a disruption happens, there is nowhere to go. I think if the pharmaceutical companies do decide to bring manufacturing back, it is important to invest in higher-quality facilities and/or to invest in multiple facilities to have that redundancy in the supply chain.
Q: Should companies look at carrying more safety stock to ensure an adequate supply of medications? And does the limited shelf life of some medications also play a role?
A: That definitely plays a role and contributes to these vulnerabilities. If a disruption occurs, the supply is just out. Very little safety stock is being held at any layer of the supply chain, whether it is the manufacturer, the wholesaler, or within the hospital system. That is due to this very cost-constrained situation of the health system.
I think one of the main deterrents to that is how long these shortages tend to last. The average shortage is over a year, so to be able to continue to supply that long, the safety stock levels would need to be very, very high. In some of my research, I found that safety stock would be useful, but the cost of maintaining that level would essentially pay for a company to employ a second supplier or invest in higher-quality manufacturing.
Perishability definitely comes into play as well, so if a company were to start maintaining high levels of safety stock, it would be important for it to rotate its stock so that it is shipping out the oldest inventory first.
Q: Are there any other things we should be doing to make our pharmaceutical supply chains more resilient?
A: We need to start making big changes in the pharmaceutical industry. Drug shortages have been an issue for 20 years now, which has led to immense cost and patient health issues. It is really only in Covid times that a spotlight has been put on the medical supply chain. There have been pushes and mandates for companies to be more resilient if the drug is critical to patient health. We know it is an issue; we have been shown it is an issue. But we need to start making some changes to address the issue. We are at the point now that we have enough information to be able to start making some of these changes.