Ignoring a solution to chronic drug shortages

Because, Gaugh said, drug makers such as Hospira, Inc. and Ben Venue Laboratories, Inc., the U.S. subsidiary of Germany’s Boehringer Ingelheim Corp., are now “pouring hundreds of millions of dollars into [their] facilities to get them to the level that they need to be from a quality-compliance perspective.”

Boehringer Ingelheim did reportedly spend $350 million to overhaul the aging Ben Venue plant in Bedford, Ohio — the source of more than 100 essential generic drugs, including the chemotherapy drug Doxil — after a brief suspension of operations in 2011 due to serious quality and sterility problems. In December, however, that troubled plant was shut down for good. The German conglomerate attributed the closing to projections that the facility would rack up $700 million in operating losses over five years.

Hospira declined to make executives available for interviews, but issued a statement saying that it was investing in new production capacity. Two other U.S. manufacturers, Baxter International, Inc. and West-Ward Pharmaceuticals Corp., did not respond to written requests and phone messages for interviews.

Even if there is additional private sector investment, would a government entry into the market necessarily be a bad thing? Gaugh didn’t address that question directly, responding instead that building a government drug plant would be a “complex” undertaking. “We’re talking about billions of injectable vials that are made by these five or six private corporations,” he said.

Claire Sheahan, the association’s media spokeswoman, interjected: “This isn’t the first time in history that people haven’t been able to get things. And the government doesn’t normally take that path where they go into the business. They find other solutions.”

Enrique Seoane-Vazquez, director of the International Center for Pharmaceutical Economics and Policy at the Massachusetts College of Pharmacy and Health Sciences, says if the government enters the drug manufacturing business to guarantee supply, “we are going to have an immediate increase in prices.” Why? The government, he explains, will have to spend billions to create extra production capacity and inventories for spikes in demand, costs that will lead it to raise some prices.

Though acknowledging his opinion is not based on any economic analyses (there are no case studies available), Seoane-Vazquez notes that “in the area of vaccines, when you have the government negotiating prices, we know that over time that number of producers goes down. This is something that could generate future problems, if the companies decide not to manufacture specific products.”

But hasn’t this already happened? A 2011 economic analysis by the Department of Health and Human Services (HHS) found the generic drug market to be highly consolidated, with three or fewer companies cornering the market for sterile, injectable generics — the sort most in shortage. It cited a study in the New England Journal of Medicine that said just three manufacturers supplied 71 percent of America’s sterile, injectable cancer drugs and 91 percent of sterile, injectable nutrients and supplements.

As brand-name drugs come off patent, big manufacturers expand the number of products they make but not the facilities that make them, according to a study by the IMS Institute for Healthcare Informatics. It reported that between 2006 and 2010 the generic sterile injectable market had grown by half without a proportionate increase in manufacturing capability.

The way pharmaceutical companies have responded to increasing demand for more and more generic medications is to run their factories full tilt, 24 hours per day, adding as many as 50 medications to a single production line.

For decades now, drug makers have run their businesses this way because building extra capacity and backup systems “is a pretty expensive thing to do,” says Bona Benjamin, coordinator of the drug shortages web resource center at the American Society of Health-System Pharmacists in Maryland.

As a result, companies choose which drugs to manufacture based on projections for demand and, if they have competitors, what others may produce. Oftentimes, they prioritize newer generics with bigger profit margins, even if that increases the likelihood of shortages, according to a report released in February on the drug shortages by the Government Accountability Office. What’s more, the watchdog agency said, older generics are routinely “discontinued in favor of producing newer drugs that are more profitable or that have more demand.”

When older, less profitable generics are made, they’re produced in limited quantities because unsold pharmaceuticals can’t be stockpiled like bricks; they have a short shelf life. As HHS pointed out in its 2011 economic analysis: “There is little cost (except reputational) of producing too little of one drug (rather than another), but a potentially high cost of producing too much of that drug.”

Erin Fox, director of the University of Utah’s Drug Information Service, which has been tracking drug shortages in America since 2001, says pharmaceutical companies have been doing this for years: skipping upgrades to factories, cutting overhead by making only as many products as they know they will definitely sell.

“It’s a pretty common business model,” Fox says, “and it probably works great for products like peanut butter. I mean, if there’s a shortage of peanut butter, okay, you can do without it until the factories catch up with demand. But if we don’t have some of these critical medications — well, people die.”

Looking at all of the costs

As for concerns over a market distortion or a sudden jump in prices if the government started producing generics — those fears are overblown, says David Himmelstein, a professor of public health at the City University of New York and a co-founder of Physicians for a National Health Program.

Actually, Himmelstein says, “it’s even ridiculous to think of this as a market. The very fact that drugs are patented means that there is no market, right? Drug companies are given a monopoly. They control the market. So, by definition, there is no market. They are not in business to do good; they are in business to make money. Milton Friedman said many years ago that the acceptance by corporate officials of a social responsibility other than to make as much money for their shareholders as possible is a dereliction of duty. So the problem isn’t that they’re misbehaving, it’s that they are behaving. They are behaving exactly as they’re supposed to.”

The pharmaceutical industry manages to make “enormous profits,” he adds, “so you ought to be able to undercut the prices charged for medicines and still do very well. And if government was not in search of a profit, it seems to me that you could make back the initial investment pretty readily.”