High-profile shortages of amoxicillin, cancer drugs, and medications to treat attention deficit hyperactive disorder (ADHD) have put drug shortages in the headlines over the past year. Less visible but equally alarming have been shortages of lifesaving emergency drugs such as atropine and epinephrine. Many of these shortages are persistent.
Manufacturing quality problems have persistently topped the list of reasons for drug shortages, representing 56% in 2011, 62% between 2013-2017, and 46% in 2022. Anecdotally, manufacturing problems disproportionately affect finished dosage form (FDF) facilities making generic sterile injectable drugs, and many large facilities are in the United States and Europe. The U.S. leads GSI production with over 40% of overall production volume.
Other causes of shortages – natural disasters, discontinuations, upstream supply disruptions, and demand increases – have followed manufacturing quality in varied order, depending on the year. To the extent there is a pattern to these causes, it is the increased frequency of demand-driven shortages that began with the pandemic, with shortages in that category reaching an all-time high in 2022 of 29%.
Notably, no shortages in the last 20 years appear to have been caused by export restrictions related to geopolitics, even during the pandemic.1
Sterile injectable drugs are particularly vulnerable to shortages because of the high rate of manufacturing quality disruptions they experience, coupled with inability of supply chains to absorb many such shocks.
The manufacturing quality disruptions are a result of market dynamics that start with hospital reimbursement mechanisms that incentivize hospitals to use the lowest priced drug available. These price pressures, coupled with inconsistent FDA surveillance, create a dynamic for manufacturers where there is little room for and return on investing in facilities, staffing, and oversight.
Generic drugs that are formulated as tablets or capsules also face similar price pressures from pharmacies, but they are less vulnerable to shortages because they face a different manufacturing environment and market structure. Manufacturing of those products is less complex, not requiring specialized facilities with employees following complex manufacturing processes and controls. Generic oral dose product markets are also less concentrated than sterile injectable ones, and there is more fungibility in oral dose production lines that can also be ramped up faster.
The shortage vulnerability of branded products, including injectable ones, also differs from that of generic injectables. Although branded sterile injectables face an equally, if not more, complex manufacturing environment, stable demand limits the need for switching between products on a line. Additionally, high margins earned by their products provide manufacturers with strong incentives to invest in trying to prevent disruptions to those products. Branded manufacturers have a greater incentive to invest in quality systems and to maintain spare capacity in case production unexpectedly must shut down. When production disruptions of this kind occur, they tend to resolve faster.
It is also worthwhile to highlight that two drug classes are responsible for much of the recent uptick in demand-driven shortages. On the one hand is the increase in demand for GLP-1 inhibitors, in shortage because of a significant increase in demand for off-label weight loss use. Given their production complexity, expansion of manufacturing capacity is lagging demand. Another prominent set of demand-driven shortages is the largely generic oral-dose group of drugs to treat ADHD. ADHD medications are controlled substances and although simpler to produce, the supply response is constrained by the aggregate and manufacturer-specific quota established by the Drug Enforcement Administration (DEA).
Without structural changes to how generic sterile injectable markets function, we are unlikely to see a change in the persistence of generic sterile injectable drugs. It is therefore encouraging to see Congress exploring policy ideas directly aimed at those shortages.
But pandemics, natural disasters, and export restrictions can also challenge supply chains. The question is: which supply chains would such shocks affect and to what extent?
A major geopolitical conflict could compromise many supply chains, potentially ones quite different from those currently at high risk of shortage. Such a conflict could also compromise production sites along many different stages of production, beyond the more limited set of FDF sterile injectable facilities that are at the heart of most current shortages. For these reasons, the location of API production has caught the attention of policymakers. But the U.S. government’s visibility falters beyond that, even though the exposure to countries with higher geopolitical risk is greater in the upstream supply chains.
One area that is particularly nontransparent to the U.S. government is the supply chain for precursors of API.2 A typical API will combine 2-5 starting materials with the help of so-called support materials. These support materials may include 1-3 catalysts, 3-10 solvents, and in some cases enzymes. An API may require several dozen inputs, with more complex APIs typically requiring more steps and therefore more starting materials to assemble the different intermediates that feed directly into the final API.
Government’s visibility is also lacking in the supply chain for excipients, the inactive ingredients that often make up 90% of a drug’s volume. “Inactive” is somewhat a misnomer because excipients help guarantee stability and bioavailability of the API, determine the texture and taste of the drug, and the rate at which it dissolves or binds. A given drug may typically have between 3 and 10 excipients, many of them not readily substitutable. Oral solid dose products typically have more excipients than injectables because they need excipients to help with the bioavailability of the API, while injectable products have almost complete bioavailability. Magnesium Stearate is perhaps the most common excipient, appearing in over 36,000 drug products.
In some ways, vulnerability of supply chains to natural disasters mirrors that of geopolitical risks: they can affect any part of the supply chain and there is similarly limited visibility upstream, limiting opportunities for a comprehensive vulnerability assessment beyond FDF and API. The difference is that supply disruptions due to natural disasters are likely more localized than geopolitical risks.
In turn, pandemics and CBRN threats primarily result in demand shocks for a relatively narrow set of products. For some pathogens, drugs and vaccines are known, but for others, drugs, tests, or vaccines may not exist. These threats also have the possibility of creating supply chain disruptions for which previous discussion offers a guide.
Table 1 summarizes the trigger characteristics across the most common trigger types.
Identifying appropriate policy solutions
The above discussion about various causes of drug shortages suggests that different strategies are needed to address existing and potential shortages. It also suggests that an effective strategy should consider prevention mechanisms that lower the chance of and the likely size of a specific shock type. Figure 3 characterizes the three major levers policymakers have in addressing shortages.
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An effective strategy is multipronged, addressing the three levers to varying degree. The most effective and most cost-effective combination of Figure 3 levers will depend on the nature of the shortage and the relative effectiveness and cost-effectiveness of the three types of levers. Policymakers can arrive at the right combination by identifying the actual problem, avoiding incomplete solutions, addressing unintended consequences, and considering return-on-investment – the four-part test I lay out earlier in this article.
Table 1 presents a simplified output of such an analysis for key shortage triggers.
Refining drug policy solutions
To help illustrate how I arrived at the policy solutions listed in Table 1, I apply the four-part test to the baseline version of several policy proposal categories: transparency, stockpiling, domestic manufacturing, advanced manufacturing, and hospital payment reforms. I show here how the tests might play out in different cases and under different circumstances.
For exposition purposes, the discussion below may not follow the order of the four-part text. In addition, the analysis here represents key aspects but is by no means a complete assessment of these policies. I also note that the criticisms included here do not imply that the policies have no standing, but rather that there are important aspects that policymakers need to consider and address.
Transparency initiatives are often invoked among reforms to address shortages. They cover a gamut, from government’s visibility and buyers’ visibility into supply chains, to whether government shares information in enough detail or in a readily available manner.
In the right context, transparency can help “assess, mitigate, prepare for, and respond to risks of medical product shortages.” For example, reforms in 2011 and 2012 gave FDA greater visibility into supply disruptions, enabling the agency to coordinate a response. With greater visibility into supply chains, the federal government can assess which supply chains are most vulnerable, prioritizing those for intervention. With more detail about what triggered a particular shortage, buyers can get feedback on which manufacturers are more reliable. With more information about reliability of manufacturers, buyers can shift purchasing accordingly.
However, transparency by itself will not accomplish anything if recipients of the information have no incentive to act on it. Releasing more information about reliability of manufacturers is not likely to succeed without a change in incentives to hospitals that currently focus on the lowest cost generic option. In fact, much relevant information about reliability of manufacturing already exists, but it is underutilized because hospitals are reluctant to buy anything but for the lowest price available.
In the wrong context, transparency can have unintended consequences. Take early warning systems for shortages. To a hospital, an early warning signal of shortage is a signal to start stockpiling, precipitating the shortage. Similarly, placing country of origin on a retail prescription label could backfire with higher rates of nonadherence if the only choice that a patient has at a pharmacy is whether to pick up a prescription or not, unlike in a retail store where a consumer has options to choose from multiple versions of the same product.
A proper assessment of transparency initiatives would involve applying the four-part test to each transparency proposal separately, paying particular attention to the intended audience and their ability and incentives to act on the information.
Holding higher levels of inventory can buffer against the adverse impact of a shock, no matter the shock’s etiology. This common application makes stockpiling and buffer inventories a potentially attractive policy solution.
Stockpiles and buffer inventory can be important because not every shock can be prevented. But one cannot buffer every drug product, and with most shortages lasting over a year, it would be prohibitively expensive to buffer a shortage with reserve stock that will last until the supply shortage is resolved. For this reason, it is important to prioritize which products are stockpiled, considering not only whether these products are medically necessary but also whether their supply chains are vulnerable. For other products, such as highly used large volume products like saline, stockpiling the FDF product may not be practical, requiring an alternative set of buffering strategies.
Stockpiling or buffer inventory proposals are also incomplete if they do not address panic buying that ensues at the first sign of a potential shortage. If the government creates a buffer inventory and then releases it, a “bank run” on the product is likely to result. Currently such “bank runs” are uneven, usually with the large hospital systems able get to the product first. For this reason, any government funded stockpile should have allocation mechanisms in place, even if they are simply historical allocations. Otherwise, providers most likely to currently suffer from shortages will continue to suffer.
Lastly, it is important to acknowledge that stockpiles or buffer inventories are a form of insurance in case shocks cannot be prevented or minimized. It may be near impossible to prevent a natural disaster, but on the other hand, quality lapses, which are the primary reason behind shortages, are not only possible but important to address. Without addressing the root cause of manufacturing quality problems, products not made to specification may and can reach patients during non-shortage times, potentially causing harm.
Domestic manufacturing is offered as a solution to drug shortages perhaps more often than any other policy proposal. This policy appears steeped in concerns over the loss of U.S. manufacturing base, coupled with concerns over supply chain exposure to geopolitical risks that were starkly underscored during the pandemic.
But for all the attention it attracts, the standard “we need to bring manufacturing back to the U.S.” proposal is challenged on three of the four parts of the test: addressing the right problem, completeness of the solution, and assuring cost-effectiveness.
On the right-problem front, domestic manufacturing can be a solution for addressing geopolitical risks. But proposals tend to focus on either the finished dosage form through “buy-American” policies or onshoring of API production. It is true that much FDF and API manufacturing has moved offshore, but does subsidizing U.S. production of drugs substantially improve supply chain reliability when those companies still rely on inputs from China? Without addressing that reliance, such proposals are incomplete, presenting poor return on investment for taxpayers.
Domestic manufacturing also does not address the drivers of persistent shortages of generic sterile injectable drugs. These shortages are not a result of geopolitics or domestic versus foreign quality differences. Rather, these shortages result because hospitals, the buyers of these drugs, do not reward manufacturing quality and reliability, leading to manufacturing quality shortfalls in domestic and foreign facilities alike.
The pricing market pressures driving existing shortages also highlight the need to attach strings on quality to domestic manufacturing investments or else such investments will falter. Any government subsidies to bolster domestic manufacturing in response to geopolitical risks should consider other types of shocks, such as natural disasters. For example, we might have a lot of idle capacity in Puerto Rico, but that is also an area vulnerable to hurricanes.
Domestic manufacturing as a solution is also challenged on the cost-effectiveness front. As described in the section on potential shortages, the pharmaceutical industry and the chemical industry that feeds the key starting materials for drugs may have extensive exposure to countries with high geopolitical risk. To lower this risk, a proper risk mitigation would make diversification through friend-shoring and near-shoring an integral part of U.S. government strategy.
Because outdated production technologies contribute to the high rate of manufacturing quality problems, the use of advanced manufacturing technologies – continuous manufacturing in particular – is often proposed as a solution that could lower the likelihood of manufacturing disruptions.
These proposals fail to recognize just how strongly economic forces driving shortages of generic sterile injectable drugs work against adoption of such tools. The low margins on drugs at greatest risk of shortage mean that the federal government would have to heavily if not fully subsidize these technologies. And even with full subsidies of installation costs, these technologies may not translate well into reliability in an environment where the unstable nature of the demand can lead to 20-30 products being run on a single line over a course of a year, leading to frequent switchovers that are at the heart of many of the existing disruptions.
To the extent the federal government were to subsidize technology improvements, it should consider whether other, potentially much simpler technology solutions may be more cost-effective. There may be appropriate cases for using advanced manufacturing but tying a significant share of subsidies to advanced technologies would limit the reach of widely-needed infrastructure investments.
Changing hospital payments to encourage hospital pharmacy procurement from more reliable manufacturers directly addresses the root cause of persistent shortages of generic sterile injectable drugs. By modifying how CMS pays for such generic sterile injectable drugs, CMS can steer hospitals away from their heavy emphasis on price and towards reliability of supply.
But even though this policy area addresses the root cause of the problem, how it is designed would influence its cost-effectiveness. To the extent that CMS were to adopt add-on payments, the effectiveness of such an add-on payment in preventing shortages would depend on CMS’s (or FDA’s) ability to identify which manufacturers are reliable. The better the predictive power of such measures, the greater the impact of an add-on payment program tied to such list of reliable manufacturers. If those measures are not reliable, CMS would be increasing government spending without making a difference on the shortage front. This in turn would translate into poor taxpayer return-on-investment.
Changing hospitals reimbursement for generic sterile injectable markets would also likely falter without changes to Medicaid inflation rebates for outpatient generic drug markets with a large 340B presence (e.g. generic cancer drugs recently in shortage). Medicaid inflation rebates neutralize price increases in the Medicaid and the 340B market segment. But without the ability to pass on cost increases, however reasonable, manufacturers will have little incentive to make the investments necessary to differentiate themselves on manufacturing reliability, which is the entire premise behind payment reforms to address shortages.
Conclusion
Our drug supply chains are not as reliable as we expect them to be, resulting in disruptions in medical care and causing patient harm. But little progress will take place unless there is a systemic change in the economic dynamics and the misaligned incentives that exist in the marketplace. Because economic dynamics are at play, there is an important role for the U.S. government to drive change.
But building reliability into supply chain does not come for free. Between the enormity of the drug supply chains and the limited resources that Congress is likely to appropriate toward solving drug shortage problems, government intervention can easily become a feel-good strategy that does little to improve supply chain reliability where it matters most. Policymakers can avoid such fate by properly mapping solutions to the underlying problem, avoiding incomplete solutions, considering return-on-investment, and addressing unintended consequences. This article presents a guide to the nature of shortages and ways to accomplish the best outcome we can obtain with limited resources.
The Pharmaceutical Intermediates Market size is estimated at USD 42.31 billion in 2024, and is expected to reach USD 60.52 billion by 2029, growing at a CAGR of 7.42% during the forecast period (2024-2029).
COVID-19 pandemic had a significant impact on the market studied. According to a study that was published in the American Chemical Society Pharmacology and Translational Science, 2020, new potential therapeutics for COVID-19 were discovered using a combined virtual and experimental screening strategy. Furthermore, they choose among the medications that were already in use and were examined to check for structural similarity against a library of almost 4,000 medications that were already in use, with hydroxychloroquine (HCQ) serving as a reference medication. The study suggested remdesivir and favipiravir therapies as prospective adjuvants in COVID-19 treatment and zuclopenthixol, nebivolol, and amodiaquine as potential candidates for clinical trials against the early phase of the SARS-CoV-2 infection. Thus, the pharmaceutical intermediates market witnessed significant growth during the covid pandemic and it is observed that even after the pandemic, the demand for pharmaceutical intermediates is high in the global market.
Specific factors that are driving the market growth include the increasing prevalence of chronic diseases and growing R&D initiatives and activities in the pharmaceutical industry. Given that these pharma intermediates are used in the treatment of cancer detection and a variety of chronic diseases, the rise in the prevalence of chronic diseases is projected to propel market expansion in the area under study. For instance, chronic diseases account for around 41 million annual fatalities, or 71% of all fatalities worldwide, according to the WHO's key facts on non-communicable diseases published in April 2021. The high fatality rate from these diseases increases the demand for early intervention, which in turn propels the market's expansion.
The market is expected to develop due to the rising prevalence of respiratory ailments such as lung cancer, chronic obstructive pulmonary diseases, and others. For instance, the WHO stated in its January 2022 report that Chronic Obstructive Pulmonary Disease (COPD) is the 3rd most common cause of morbidity and mortality globally. Low- and middle-income nations (LMIC) countries contribute largely to the global rise in prevalence of COPD. The necessity for effective treatment of the disease is brought on by the increasing prevalence of chronic obstructive pulmonary disease which is expected to increase the market growth.
There has been an upsurge in the usage of advanced technologies, such as high throughput, bioinformatics, and combinatorial chemistry for better drug candidate identification. The discovery and development of novel drugs to treat, prevent, or cure several diseases, including cancer, diabetes, cardiovascular disorders, and chronic kidney disease, has been accelerated by the significant rise in disease incidence rates around the world. The United States health care spending climbed 9.7% to reach USD 4.3 trillion in 2021, a substantially greater rate than the 4.2% increase recorded in 2020, according to the CMS data published in March 2022. Additionally, increased investments in R&D are a significant driver of market expansion. For instance, JSR life sciences introduced a corporate venture fund in March 2021 with a focus on small and developing biotech, attracting clients to its range of life sciences services. Hence, owing to the rising R&D activities in the pharmaceutical industry, the usage of pharmaceutical intermediates is expected to observe strong growth as well.
However, stringent regulatory issues regarding certain pharmaceutical intermediate substances are expected to hinder market growth.
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