Why the Medicines Hospitals Need & Impact Most Are Least Profitable

Every hospital depends on medicines that few companies can still afford to make. Antibiotics, IV fluids, sterile injectables, and pediatric and emergency drugs are the products hospitals cannot function without, and they are also the products the industry is quietly walking away from. USP's 2025 Annual Drug Shortages Report shows that pattern hardening rather than resolving, and regulators in the US and EU are now moving to price in the cost of unreliable supply.¹ Companies that have already built one digital infrastructure to protect their most valuable brands have a narrowing window to extend it to the medicines patients depend on most.

The Products Nobody Notices Until They're Gone

No hospital executive loses sleep over a blockbuster oncology drug disappearing overnight. They worry about antibiotics, IV fluids, sterile injectables and pediatric medicines, the products nobody talks about until they're gone.

None of these drugs will ever be a blockbuster, and none will headline an earnings call. Individually, they generate thin margins, face intense generic competition and often sell for just a few dollars a unit. Collectively, they are the products hospitals cannot function without.

That is no longer a hypothetical concern. USP's 2025 Annual Drug Shortages Report, released in June 2026, found that year-end active shortages fell 23%, from 98 in 2024 to 75 in 2025, marking the second consecutive year of decline.¹ That sounds like progress, but the detail underneath tells a different story. About 95% of those 75 shortages carried over from the prior year, and the average shortage now stretches beyond five years, up from about two years in 2019. Sterile injectables, the dosage form where a gap is most dangerous to patients, account for 71% of what remains. Product discontinuations rose to 170, the highest total since 2019, and skewed toward low-priced products, pointing to generic-market economics rather than isolated manufacturing accidents as the driver. In August 2025, the American College of Physicians declared drug shortages a public health crisis.²

Revenue does not measure criticality. Patient dependence does. That gap is the paradox at the center of pharmaceutical supply chains today, and the data now shows it hardening rather than resolving.

Why It All Comes Back to Incentives

Strip away the regulations, the statistics and the technology, and this comes down to incentives.

Low margins lead to less investment. Less investment leaves aging facilities running past their prime. Aging facilities produce more quality failures. Quality failures interrupt supply. Interrupted supply becomes a shortage. Shortages draw government intervention. Government intervention rewrites procurement rules. New procurement rules demand digital resilience. And digital resilience, in the end, becomes a decision only the board can make.

Markets reward profitability. Healthcare depends on availability. Those two logics have been quietly diverging for years, and the products caught in the gap are the same ones described above.

Manufacturing and quality issues at existing plants are consistently cited as among the most common documented causes of drug shortages, a downstream symptom of underinvestment rather than a separate problem. Add to that raw material and active pharmaceutical ingredient sourcing concentrated in a handful of countries, with some products entirely dependent on China or India, and demand that is hard to forecast for low-visibility products. A generic sterile injectable running on a thin margin has little room to fund a second manufacturing site, hold meaningfully larger safety stock or modernize aging equipment, even when doing so would reduce the quality failures that trigger shortages in the first place. The rise in low-priced product discontinuations in USP's 2025 data is the clearest evidence yet that companies are exiting products rather than investing to sustain them.¹

This looks less like a classic market failure and more like a misaligned incentive structure, sharpened by concentrated purchasing power. Group purchasing organizations and large buyers have historically contracted on lowest unit price, a rational response to a low-margin category, but one that leaves little room to reward suppliers investing in redundancy.

Something Unprecedented Is Happening

Regulators on both sides of the Atlantic are beginning to acknowledge that lowest purchase price and resilient supply are not always compatible objectives. Until recently, that acknowledgment was mostly discourse. As of mid-2026, it has moved into binding or near-binding policy.

In the European Union, the Council and Parliament reached provisional political agreement on the Critical Medicines Act on May 12, 2026. The agreed text directs contracting authorities to move away from a lowest-price criterion in public procurement of critical medicines, alongside collaborative cross-border procurement and faster funding for strategic EU manufacturing projects. The final text is expected in the Official Journal toward the end of 2026.

In the United States, enforcement of the pharmaceutical industry's core traceability law is no longer a future milestone; it is active now. The wholesale distributor deadline passed in August 2025, and large dispensers followed in November 2025. Only small dispensers remain under exemption, through November 2026. Congressional proposals introduced in 2025 would additionally require manufacturers to give earlier, more detailed notice of anticipated shortages.

On the identifier side, the FDA published its final rule in March 2026 standardizing the National Drug Code to a uniform 12-digit format. The rule carries a seven-year runway, effective 2033, giving manufacturers, distributors, pharmacies and payers time to rebuild the systems that will carry this next.

None of this guarantees outcomes. The EU text still needs formal publication and application dates, and US procurement at the group purchasing organization level still runs overwhelmingly on lowest bid today. But the direction is no longer aspirational policy language; it is dated, published regulation with enforcement mechanics attached.

Why Companies Can No Longer Run Two Operating Models

For 20 years, the industry could afford to run two digital futures: one for blockbuster innovation and another for mature generics. That era is ending.

The first future got AI-assisted demand forecasting, predictive maintenance, continuous manufacturing and real-time supply chain visibility, because disruption threatens high-value brands. The second was managed through outsourcing, plant consolidation and constrained IT spending, and USP's discontinuation data suggests that when margin pressure gets severe enough, companies choose to exit low-priced products rather than invest in keeping them viable.

That divide is becoming harder to justify, not because the economics of each tier have converged, but because the same digital infrastructure can now serve both, and regulation is forcing much of it to exist industry-wide regardless of which tier a product sits in. This does not mean every generic product warrants specialty-level investment. It means identifying the relatively small subset of mature, low-margin products that are systemically critical, sterile injectables, now 71% of active shortages, are a working definition of that subset, and directing resilience investment there deliberately, even when the direct financial return is modest.¹

Companies can no longer run two operating models. Everything that follows explains why.

From Compliance Obligation to Resilience Infrastructure

This raises an obvious question: if the industry is finally investing billions in digital supply chain infrastructure because regulations require it, can that same infrastructure solve the resilience problem regulators never originally designed it to address?

The traceability build-out underway across the industry, unit-level product tracing in the US, a parallel identifier standardization effort now finalized with a 2033 deadline, and the data-exchange standards that let trading partners share this information, was implemented to satisfy specific regulatory requirements. But the infrastructure it requires, accurate master data, consistent product identifiers and structured visibility across manufacturing sites and trading partners, is also the precondition for recall precision, package-level counterfeit prevention, real-time inventory visibility, earlier disruption signals and the data foundation predictive analytics will eventually run on.

This is not a new pattern. Automotive manufacturers built visibility for quality recalls years before that same infrastructure became the foundation for predictive maintenance. Retailers built barcode infrastructure for inventory control before turning it into real-time customer fulfillment. Pharmaceutical traceability may now be approaching a similar inflection point, where trusted identifiers and shared data built for compliance get repurposed for resilience.

The industry is not yet broadly running AI-driven decision-making on top of this data; most implementations remain closer to descriptive dashboards than mature prediction. That is a sequencing question, not a ceiling. Better data does not automatically create better decisions, but AI cannot create better decisions without better data, and inconsistent data quality across trading partners remains the real, unresolved bottleneck standing between where the industry is and where this infrastructure could take it.

For Boards and Executive Leadership

Framed in enterprise risk terms, this is not solely a supply chain operations issue.

It is operational risk: concentrated manufacturing and thin safety stock for systemically critical products increase both the probability and severity of disruption, and USP's data shows the shortages that remain are lasting longer, not resolving faster. It is regulatory risk: traceability enforcement is active, identifier standardization carries a hard deadline, and the EU is closing in on binding text that explicitly discourages lowest-price-only procurement. It is reputational risk: shortages of essential medicines draw scrutiny disproportionate to their revenue contribution, reinforced by bodies like the American College of Physicians now formally calling this a public health crisis. And it is investor exposure: supply chain resilience increasingly shapes how institutional investors and ratings agencies assess operational risk, and increasingly factors into M&A due diligence.

The capital allocation question is not whether to spend more on generics broadly. It is narrower and more answerable: which small subset of low-margin products are systemically critical enough that a shortage would create disproportionate exposure, and does resilience investment for that subset belong in a risk committee's oversight rather than just an operations budget line. Sterile injectables, at 71% of current active shortages, are the clearest starting point.

In other words, the question is no longer whether resilience has a cost. The question is who ultimately pays for the absence of it.

The organizations likely to make the greatest progress will not necessarily invest the most. They will align procurement, manufacturing, quality, regulatory affairs and supply chain around a common definition of resilience, with cross-functional accountability and visibility at the audit or risk committee level, rather than leaving it to plant-level or procurement decisions where the incentive to minimize cost dominates by default.

Where Does the Industry Go From Here?

Every organization sits somewhere on the same curve: cost reduction, then compliance, then visibility, then predictability, then resilience, then strategic advantage. Most of the pharmaceutical industry, for its essential-medicines portfolio, is still clustered in the first two stages. The companies that move furthest and fastest will not be the ones who spend the most; they will be the ones who move deliberately through that sequence rather than skipping straight to technology.

That means segmenting deliberately, using the evidence now available, rather than treating every generic product the same way. It means reusing digital capability across tiers instead of building it twice. It means treating traceability as infrastructure the business needs regardless of what regulators require next, not an obligation that ends the day the audit passes. And it means naming the cost trade-off explicitly, at the level where it can actually be decided, because resilience investment has to be paid for by someone, manufacturer, payer or patient, and that decision belongs with executive leadership and the board, not by default with whichever function controls the smallest budget line.

The pharmaceutical industry has spent more than a decade building compliance infrastructure. The next decade will determine whether that same infrastructure becomes the foundation for resilience or simply remains another regulatory cost. The technology already exists, and the regulations are largely in place. What remains is a decision of leadership, investment and priorities.

Companies can no longer run two operating models. The only question left is which one survives.

References

1. United States Pharmacopeia. Annual Drug Shortages Report. USP. Published June 2026. Accessed July 27, 2026. https://www.usp.org/supply-chain/drug-shortages/annual-drug-shortage-report
2. American College of Physicians. ACP says prescription drug shortages are a public health crisis, offers recommendations. ACP Newsroom. Published August 11, 2025. Accessed July 27, 2026. https://www.acponline.org/acp-newsroom/acp-says-prescription-drug-shortages-are-a-public-health-crisis-offers-recommendations