Pharmaceutical supply chains are complicated systems comprised of four main categories –
- Suppliers of raw materials (including active pharmaceutical ingredients [APIs]),
- Manufacturers of the finished form of the drug,
- Wholesalers or distributors, and
- The pharmacies that dispense them (to hospital staff or to patients via community pharmacies).
While many of the major drug companies are based in the United States, the suppliers and manufacturing facilities are largely not. Most of the APIs for U.S. drugs come from India and China (75-80%). Nearly 40% of the finished forms of drugs come from India, and little inventory is held at downstream stakeholders (wholesalers or pharmacies). This means that the U.S. drug supply is largely dependent on international suppliers.
Production interruptions or uncertainty can lead to shortages of medications for U.S. patients. Hundreds of drugs have been short in the past decade. These have ranged from oncology medications to central nervous agents. Patients have died, and health systems have been hit hard by costs to manage shortages. While these supply chain vulnerabilities have existed for years, the pandemic has put a spotlight on pharmaceutical supply chains.
These supply chains are often lean, and international components can add unpredictability. Unexpected price increases and economic volatility can affect cost. Political instability can affect access, and facility oversight by regulators is more difficult. This can contribute to suppliers falling short of current Good Manufacturing Practice (cGMP).
What can be done?
The first thing to remember is that strategy matters. Once a disruption happens, it is generally too late to shift production to avoid a shortage. Regulatory approval processes and the time to build and/or retool facilities are lengthy, and pre-planning can be the difference between a shortage and resilience. Strategies include reducing the likelihood of a disruption itself (e.g., improving quality) or being able to handle stressors if they occur (e.g., adding redundancy).
Note that bringing manufacturing back to the United States will not be enough to reduce shortages. A lean, low-reliability supply chain doesn’t become more resilient simply by switching the location of low-reliability facilities. The manufacturing quality itself needs to improve. Alternatively, the number of facilities that can make specific critical medications could increase. U.S.-based manufacturing could increase domestic jobs and decrease lead time uncertainty, and while beneficial, neither tend to be major drivers of typical pharmaceutical shortages.
How do we encourage companies to maintain more resilient supply chains?
One option would be for the U.S. government to change regulations on supply chains of critical medications. A “stick” approach could be to mandate that companies maintain redundant facilities or to improve facility quality. A “carrot” approach would be to provide financial incentives for redundancy or U.S.-based manufacturing. My research suggests that the stick approach (mandates with price increases to cover the cost) would be far less costly than the carrot approach (financial incentives to be resilient). Especially for low-margin medications, the opportunity cost of not supplying them is very low. The financial benefit would need to be quite high to sufficiently incentivize these supply chains to be resilient without mandates.
The justification for federal involvement focuses on patient need. Unlike optional products, critical drug shortages can have life-threatening consequences. The chemical sector (which includes pharmaceuticals) is one of 16 sectors designated as critical infrastructure in the United States. National policy has been directed to prioritize and secure these sectors.
Beyond government intervention, other stakeholders can have influence in drug availability. New U.S. non-profit organizations have been founded to attempt to supply critical medications reliably and affordably. These organizations could similarly choose to manufacture products in the United States, maintain multiple facilities and use high-quality manufacturing processes.
Purchasers, including health systems and Group Purchasing Organizations (GPOs), can have an impact as well. Yet, their current ability to gauge supply chain reliability is limited. Pharmaceutical supply chains are highly proprietary, and this opaqueness can mask risky interdependencies (such as manufacturers sharing a single supplier). Purchasers do not know where facilities are located nor the quality of the facilities. Increased supply chain transparency, including which facilities produce which drugs, could support market-based solutions to drug availability. Purchasers could design contracts based on quality metrics or to support U.S.-based manufacturing.
With any of these changes, there may be spillover effects. Re-shoring could increase U.S. jobs, but could also reduce drug availability abroad. Developing strategic manufacturing alliances, rather than a complete re-shore, may improve drug access worldwide. Improving facility quality or maintaining multiple facilities that can produce a drug, wherever they are located, may have the biggest impact at reducing shortages. Careful re-shoring is only one answer to a complex problem.
It’s important to understand that drug availability in the United States, or lack thereof, is an issue of national security. Shortages of critical drugs occur far too often, especially during the Coronavirus disease (COVID-19) pandemic, and one contributor is the uncertainty in their supply chains. A combination of re-shoring and maintenance of high-reliability facilities could help reduce this uncertainty. Drugs have improved the lives of millions. It is worthwhile – for the industry and for patients – to figure out how to effectively maintain resilient pharmaceutical supply chains.