Drug Shortages Continue To Rise, With No Near-Term Resolution

November 15, 2011
Nicholas Basta

Pharmaceutical Commerce, Pharmaceutical Commerce - November/December 2011,

A combination of regulatory processes and business practices are worsening an already-bad drug shortage situation

The $300-billion US pharma industry has a problem: in an era of reduced margins, payer skepticism and higher taxes, it can’t make enough product to meet demand. A sporadic number of drug shortages has blossomed into a near-constant battle among pharmacies, especially at hospitals, to get supplies to keep patients on therapy—even to scheduled needed surgeries. In the worst cases, patients have reportedly died; in other cases, procedures are being delayed and patients with chronic conditions are stretching out their supplies and hoping for the best. Hospital pharmacies are racking up extra costs—estimated at over $216 million nationally—to acquire sufficient stocks.

“Drug shortages are a national health crisis,” said ASHP executive VP and CEO, Henri Manasse, PhD, ScD, in a mid-summer statement. PhRMA, in a statement around the same time, called the drug shortages “rare,” noted that most of the shortages are generics, and said that manufacturers are taking unnamed “aggressive actions,” while admitting at the same time that some shortages are caused by individual company decisions to discontinue specific medicines. GPhA, more on the firing line for these shortages, is looking for regulatory relief.

In truth, the drug shortage situation has been building gradually over time (Fig. 1), reminding one of the cliché about the frog sitting in water that gets warmer and warmer until he boils to death. And it’s not that nothing has been done about it: a CDER Drug Shortage Program (which has a staff of five) has mitigated or sidestepped 38 potential shortages in 2010, and 99 shortages through September in this year by working with manufacturers to get needed production equipment approved for use, locating alternative suppliers, negotiating with DEA for necessary commercial arrangements and a few other strategems.

FIG. 1: National drug shortages, 2001-11

FDA is authorized to allow the importation of unapproved drugs at its discretion, and that tactic, which few in the manufacturing community are comfortable with, is something of a last resort. The overall CDER process is highly dependent on manufacturers giving early notice of potential shortfalls, which isn’t always performed, or even possible. (Getting a required early notification is one of several items being discussed for legislative action in Congress.)

FIG. 2. FDA ANALYSIS OF SOURCES OF SHORTAGES

The CDER program has also looked into causes of shortages (Fig. 2), and while many of them are specific to manufacturers’ inability to produce acceptable product, some causes are more systemic. In 2010, 74% of all shortages involved sterile injectables, which require both careful production steps and complex packaging steps. Specific problems among these:

43% due to “significant” GMP issues such as particulates or impurities 20% due to production delays and capacity issues 10% due to raw-material (API) issues 8% due to discontinuations

and several lesser factors, including increased demand caused by another product’s shortage. Many of these products are indeed generics (although there are branded products suffering the same problem) and in some cases, the products are sole-sourced, of limited market size, and may simply be uneconomic to produce for a resource-constrained manufacturer.

GPhA, in testimony at the September FDA hearing, listed three causes and potential solutions of current shortages:

• “Insufficient early collaboration and communication between industry and FDA with respect to regulatory actions that could impact supply.” One of the potential solutions is “enhanced intra-agency dialogue within FDA”—but this seems to imply that a drugmaker with manufacturing deficiencies would get a bye from FDA inspectors because the drug could become short-supplied; GPhA also calls for a process where remedial actions could be taken without “completely disrupting the manufacturing of necessary products.”

• “Manufacturers face a very extensive process to qualify an alternate API supplier … as a result, many drugs have only one API supplier or manufacturing site approved.” To fix, GPhA suggest that alternate suppliers could be approved through a more “streamlined” process; also that a CBE-30 (Changes Being Effected) supplement—the regulatory mechanism to make production modifications—be expedited.

• “Inability to source sufficient API for controlled drugs due to annual manufacturer-specific allocations … established by DEA.” But difficulties like this one have already been addressed by the FDA Drug Shortage Program; it just seems that everyone involved has to act faster.

These solutions certainly make sense, but seem to be resolvable simply by heightened awareness by both manufacturers and FDA regulators. To which the question can be asked, if these haven’t been done extensively to date, what’s the holdup?

GPhA also highlighted an “opportunity” for its own members: “Work with FDA to develop guidance that better outlines the process for suppliers to proactively report drug shortages to the FDA’s drug shortage staff.” This is a theme that nearly everyone looking into the situation has recommended. Currently, manufacturers can voluntarily report a potential shortage to FDA; the process could be made mandatory (or, alternatively, manufacturers could simply be more forthcoming than they have been).

ASHP had advocated for this a year ago at a national meeting on drug shortages. A bill, “Preserving Access to Life-Saving Medications Act” (S 296) was introduced by Senator Amy Klobuchar (D-MN) in February, but has been sitting in committee since; a parallel House bill, HR 2245, was introduced in June. Both bills require manufacturers to notify HHS/FDA at least six months prior to a planned discontinuation or interruption of production of “medically necessary” drugs; and for HHS to establish a schedule of monetary penalties for noncompliance.

But these bills might take care of some, predictable, shortages, they wouldn’t address sudden or unexpected disruptions. (PhRMA, ever helpful, noted that shortages can be caused by “natural disasters.”) And the bills call for manufacturers both to have a grip on what overall supply and demand for a product is (thus tracking not only its own production, but that of its competitors), and to be able to factor in the availability of alternative medications—something that manufacturers probably could do, but which involves prescriber input as well. Cases of sole-source API would need to be evaluated as well. Given that many of the short-supply products are of low economic value, it’s hard to say that these measures would change the situation even if they were enacted.

‘Fragile’ supply chain

Such economic constraints highlight another set of factors in the shortage situation: what Erin Fox, head of the Drug Information Service (DIS) at the University of Utah Health System, calls a “fragile” supply chain. DIS, partially supported by Novation, one of the leading GPOs for hospital purchasers, collects data from all sources on shortages and then posts this information, at the American Soc. of Health-System Pharmacists site, among other locations. (She also notes that the Fig. 1 data, presented at an FDA hearing in September, now stands at 213, a new record.)

Fig. 2. FDA's look at drug supply problems.

According to her testimony, tighter inventories across the supply chain can lead to less resiliency; in addition, with 80% of raw materials sourced abroad, supply chains are stretched (and questions abound over the quality of manufacturing at some of these locations). Consolidation—both as manufacturers merge with each other, and as markets for some drugs dwindle to a handful of suppliers, few of which have the capacity to suddenly fill in for another if one of them had a significant manufacturing problem—is a factor as well. “Over time, I think these shortage problems will abate, but it’s going to take time to resolve, and cause a lot of extra work for hospitals,” she concludes.

The Big Three wholesalers, who handle nearly 90% of drug deliveries, sit in the middle of this supply chain. They (as well as other full line wholesalers) say that they have allocation systems in place to address shortages; Cardinal Health has what it calls a “dynamic allocation system” that calculates shipment volumes based on past ordering patterns; AmerisourceBergen has a similar system, which it calls its “fair share program.”

“We believe we have a fair amount of success in doing these allocations, but if there’s no product available, then there’s no product to sell,” says an ABC spokesperson. “Our National Logistics Center [which oversees shipments to Cardinal Health’s 22 distribution centers] does help us,” says a Cardinal spokesperson. “Without the NLC, if a product were in short supply, we’d need to work with each specific manufacturer to figure out how much of that specific product should be sent to each one of our regional DCs. Particularly when many products are simultaneously in short supply, each of those ‘one-off’ interactions with manufacturers can cause inefficiencies and delays.”

Price ‘gouging’

The whole discussion about shortages underwent a step change when Premier, Inc., a leading GPO, issued a report in August highlighting “gray market vendors” who were making “unsolicited” offers for short-supply drugs, with price increases that had an average markup of 650%, with the highest markup being 4,533%—figures that, compared to Premier contract prices, it said were evidence of “price gouging.” Thereafter, ASHP, in testimony to a Senate hearing, alluded to “the negative impact that the secondary or ‘gray’ market is having on hospitals and health systems, especially concerns about product safety and exorbitant price inflation.”

Later that month, a nonprofit group, the Institute for Safe Medication Practices (ishp.org) published results of a poll of hospital pharmacists, finding that “unscrupulous gray market distributors have been quick to jump in with inexplicably obtained supplies of these drugs that they are more than willing to sell to healthcare providers at exorbitant costs.”

In point of fact, although Premier says that it performed a “calculated” analysis of “average” markup, the sample base was simply those solicitations that Premier member hospitals chose to send in; not necessarily representative of anything at all. In a subsequent communication with Pharmaceutical Commerce, the company says that a re-evaluation of the solicitations showed the markup was a range between 29 and 729%—which it says are well above Wholesale Acquisition Cost (WAC) prices in some cases.

In October, the House Committee on Oversight and Government Reform held a hearing on drug shortages, with the ranking minority member, Elijah Cummings (D-MD), sending letters to small distributors, and opening a ‘tip line’ for healthcare providers to send in information on solicitations.

There is little doubt that there are opportunistic pharmaceutical buyers who are taking advantage of the situation. At the same time, though, independent wholesalers who operate in a legal, aboveboard manner see themselves being tarred with the same brush as the opportunists, and also see themselves being pushed to the edge by a dynamic set in motion by the giant GPOs and other organizations involved with pharmaceutical distribution. “Some of our members are doing business in short-supply drugs as a matter of course in meeting their customers’ needs,” says Karen Moody, president of the National Council of Pharmaceutical Distributors (NCPD; Washington), and president of the independent distributor Atlantic Biologicals (Miami). “But we resent being pigeonholed as a gray market, or that we’re engaged in price gouging.”

To the charge that distributors like NCPD members are flooding pharmacy buyers with solicitations, Moody says that she can produce a comparable stack of requests coming from buyers who are desperately seeking supplies, and that NCPD members have numerous letters of commendation from satisfied customers, including those who write that an NCPD member company “has helped me find product when no one else could.”

Another claim, from the Institute of Safe Medication Practices, that secondary wholesalers are creating the shortages by buying up and hoarding product, is belied by data from a survey, presented to FDA in September, on drug shortages by the American Hospital Assn, who found that while 92% of hospitals surveyed were finding that drug costs had increased, 85% of them had “purchased excess inventory”—itself a cause of higher costs, and hoarding-related shortages.

GPO pricing

But the most critical point, the one that has US Rep. Cummings’ office so exercised, is the price gouging claim. Pat Earl, affiliated with NCPD (and president of a company called Safe Pharma Distributor Network in Bowling Green, OH), has an analysis that shows that the WAC price of propofol, one of the current short-supply drugs, is $5.60, while the contract GPO price is 48¢. A distributor buying the drug from a major wholesaler would pay the WAC price plus the wholesaler’s markup of, say, $1, and add a markup of $1 of its own, is delivering product to a customer at a markup of 1,483%.

Many drug shortages, she says, “are a direct result of GPO favoritism and their loss leader pricing strategies,” which—aside from the discussion about shortages—is almost a testimonial to GPOs’ success in reducing hospital supply costs. The trouble with those low prices, however, is that they discourage more manufacturers from entering the market for relatively low-cost generics, and drive supply contracts to those companies with the least capability to invest in better, less problematic production equipment.

Woven through the claims and counterclaims between GPOs and independent wholesalers is the status of “authorized distributor of record” (ADR)—the agreement, usually simply in the form a letter, from a manufacturer that a certain wholesaler is the authorized purchaser and primary source of a product. The Big Three wholesalers (along with other HDMA members) are ADRs for the products they sell; some independent wholesalers are ADRs for some manufacturers, but are conscientiously excluded by other manufacturers who don’t want to deal with them. ADR status is central to many states’ definition of the “normal channel of distribution,” which, ironically, has the result that pedigree authentication of the source and transfer of product is not necessary. Non-ADRs live in an environment where having a pedigree is essential to their doing business.

“Some of this appears to be a replay of the mid-2000s, when regulators attempted to drive independent distributors out of business after a spate of counterfeit drugs showed up,” says Gene Alley, VP of NCPD and president of Stat Pharmaceuticals (San Diego), an independent distributor. After pedigree and licensure rules went into effect in many states, the number of small distributors dropped from around 7,000 to around 1,800, according to US Census Bureau data. “Some people want to stay in that pre-2005 mindset, and overlook the fact that it wasn’t a bunch of legitimate wholesalers trying to become criminals back then, but rather a bunch of criminals who decided to become wholesalers,” says Alley.

The National Pharmacy Purchasing Association (San Diego), a professional group representing pharmacy buyers, has just issued a policy statement on the drug shortage crisis, saying that “The Association has a faction of members who are vehemently opposed to the existence of [secondary wholesalers] … while an equally passionate faction of our membership not only does business with them on a routine basis, but just as fiercely defends their right to exist.”

Current drug shortages are not going to be resolved by turning drug-distribution practices inside out; FDA’s findings that most shortages are attributable to manufacturing deficiencies establishes that. FDA-manufacturer coordination might be smoothed by the Congressional bills introduced this year that would mandate communication between industry and FDA, and give FDA more flexibility in addressing shortage situations. The ADR/non-ADR problem awaits passage of a national pedigree and licensure program, which was addressed mostly recently by HR 3026, introduced by Rep. Jim Matheson (D-UT). Both pieces of legislation might be rolled up in the current PDFUA legislation, which is required to be passed by the end of September to keep FDA funded. Until those proposed regulations come into force, pharmacy buyers are going to continue to struggle. PC

BOX: OBAMA EXECUTIVE ORDER ADDRESSES DRUG SHORTAGES

Just as this story was wrapping up, the White House held a session to announce a Presidential Executive Order—something that the New York Times said hasn’t happened with FDA since 1985—directing that agency, plus the Dept. of Justice, to take actions to address the problem. According to the White House, while some manufacturers are currently obligated to report shortages to FDA, not all of them have done so; in addition, voluntary reporting of upcoming potential shortages is being sought. FDA is charged with bumping up its Drug Shortage Program staff (from the current five to 11-13). DoJ will look into the claims of “price gouging,” and Obama cited the Premier health alliance report mentioned here as one of the justifications.

In conjunction with the Executive Order, HHS released a study of drug shortages, noting, among other things, that the market for sterile injectables (especially oncologics) is “robust and growing,” but manufacturing complexity constrains the number of companies that can enter the market, while GPOs, who concentrate the main buyers of sterile injectables, have gradually abandoned “failure to supply” clauses in contracts, which penalize contract suppliers who fail to meet commitments. And it suggests that GPOs could strengthen these clauses, in return for allowing higher prices for products to be entertained.

An FDA report, updating some of its Drug Shortage progam results, was also released in conjunction with the Executive Order. One interesting finding: in a bit of a bureaucratic snafu, it turns out that while all sole-source CDER drugs approved under NDA and ANDAs have a prior-notification requirement when they become unavailable, hardly any biologics (managed by CBER) do. The definition of “medically necessary” drugs varies across FDA divisions as well.