The Drug Shortage Debacle—And How to Fix It

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The Drug Shortage Debacle—And How to Fix It
Awi Federgruen: The Drug Shortage Debacle—And How to Fix It - WSJ.com
11/6/12 Tuesday3:50 PM
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The Drug Shortage Debacle—And How to Fix It
The National Vaccine Advisory Committee says government price controls are the primary
reason for the decline in the number of suppliers.
Article
Comments (39)
By AWI FEDERGRUEN
Last week brought news of major shortages for two critical cancer drugs.
Methotrexate is the essential treatment for one of the most common forms of
pediatric leukemia, while Doxil is used to treat ovarian cancer and AIDS-related
sarcoma. The shortages occurred when Benvenue, one of only four domestic
suppliers, closed its plant because it could no longer guarantee product safety.
These shortages were not rare episodes. Last year, a record of 267 drug shortages
were reported, up from 58 in 2004. Even more tragically, most 2011 shortages
remain unresolved. What's going on?
First, the number of suppliers of generic drugs has dwindled. There were 26 U.S.
vaccine makers in 1967; today there are only six. Supply disruptions are common,
including the possibility that a facility completely shuts down for a protracted time
because of quality or safety problems.
Second, unlike in most consumer-goods industries, many pharmaceutical
manufacturers have failed to invest in the technology and quality-control
improvements that would reduce the risks of partial or complete facility shutdowns
—and this despite the FDA's regularly issued guidelines for good manufacturing
practices.
Behind both problems are the government's tight price controls for generic drugs,
especially when purchased by Medicare and Medicaid. Low prices induce drug
makers to exit various markets, or at least to reallocate their manufacturing
capacity toward more profitable, patented pharmaceuticals. Low prices also tend to
eliminate the rationale for investments in better manufacturing technologies and
processes, as shown in my 2009 study in the Journal of Management Science.
Government price controls on generic drugs limit the manufacturers' margin to 6%
in many cases.
In the case of vaccines, for example, the Centers for Disease Control and
Prevention pays as little for generics as it can negotiate. This results in an average
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Awi Federgruen: The Drug Shortage Debacle—And How to Fix It - WSJ.com
reduction of 40% off the catalog price that applies to sales in the private sector,
according to a 2006 study in the journal Clinical Infectious Diseases. As that study
noted, the federal government's own National Vaccine Advisory Committee
identified price controls as the primary reason for the dramatic decline in the
number of suppliers.
Second, the government's oversight of manufacturing safety and quality is
unnecessarily contributing to shortage problems. The pharmaceutical industry
generates many applications for new manufacturing facilities and manufacturing
processes within existing facilities. The government has failed to allocate the
money to hire enough reviewers to analyze the applications or inspectors to visit
the facilities.
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The backlog of applications for new generic drug facilities and manufacturing
processes at the FDA remains a year long, according to the Generic
Pharmaceutical Association, and generic drug reviews take 15 months longer on
average than evaluations of brand-name products. The generic drug industry, tired
of the government's inability to execute, has proposed providing the agency with
$299 million in annual fees.
It is clear that the way to resolve the shortage of critical drugs is to relax or
eliminate government price controls, and to increase the FDA's review and
inspection capacities. In the latter case the generic drug industry is willing to foot
most or all of the bill.
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Unfortunately, the Obama administration has thus far pursued the opposite
objective, at least as far as price controls are concerned. Last November, it issued
an executive order instructing the FDA to report any violations of price controls to
the Justice Department.
It is not as if President Obama is unaware of incentives. His best-known statement
about the health-care industry is: "The doctor may look at the reimbursement
system," he declared during a news conference in 2009, "and say to himself, 'You
know what? I make a lot more money if I take this kid's tonsils out," rather than
treating him for allergies. Nevertheless, this elementary insight seems to have
eluded his administration in the case of drug shortages.
The industry's FDA funding proposal should be approved as part of the upcoming
renewal of the Prescription Drug User Fee Act. This may be one of the few areas in
which Congress and the Obama administration could find common ground.
The benefits are high in relation to the costs. In the fall of 2004, the nation faced a
major shortage of the flu vaccine due to an unexpected closure of Chiron Corp.s
plant in the United Kingdom. The problem caused alarm, and with good reason.
Even in a year without a vaccine shortage, no less than 200,000 hospitalizations
and approximately 36,000 deaths are directly attributed to influenza or resulting
complications. The annual economic burden imposed by influenza alone, according
to a study in the journal Vaccine, has been estimated at $87 billion, while the part of
the FDA budget paid by the taxpayer, amounts to $3.5 billion.
In the years since, the number of drugs with major shortages has more than
quadrupled. Fortunately, the cure for this problem is within our reach.
Mr. Federgruen is a professor at Columbia Business School.
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Awi Federgruen: The Drug Shortage Debacle—And How to Fix It - WSJ.com
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