Let’s Fix Our Broken Drug Supply Chain

Let’s Fix Our Broken Drug Supply Chain

            By Sander A. Flaum, MBA, Principal, Flaum Navigators, Advisory Board Member and Executive-in-Residence, Fisher College of Business, The Ohio State University

            You can’t turn on a news show (regardless of your political tribe) without hearing about America’s supply chain blues. It’s the Grinch that’s stealing Christmas. Why don’t we have enough cars, gas, houses, toys, soap, running shoes, diapers, video games? Good question. I imagine the Democrats can’t wait until our economic engine kicks into high gear again.

            Curiously, we aren’t hearing so much about the one critical commodity that’s almost always in short supply.  Pharmaceuticals! Long before COVID, we were having supply issues with drugs. In fact, the FDA has a dedicated task force just to keep track of drug shortages, many of which are essential components of routine hospital care and others part of lifesaving anticancer cocktails.

            We didn’t always have these issues. But somewhere along the line as the Government was rubbing its hands and figuring out how to “fix” our healthcare system, the wheels began to go off the track. Many policy makers developed the odd belief that the amount of profit drug sales generate (as opposed simply to revenue) has no connection whatever with a manufacturer’s willingness to produce the drugs.

            Consider generics, as created years ago by the Hatch-Waxman act. At first it looked like public policy genius. By allowing companies to produce low-cost versions of brand-name drugs whose patents have expired, people around the world began saving trillions of dollars. Not too shabby, paying $5 copay for a drug that once cost 10 times that amount.  One fear within our industry, that patent loss would stifle innovation, turned out to be a non-issue.  Actually, the reverse was true and we’ve seen a cornucopia of new and better molecules emerge.

            The problem is that as generics have become cheaper and cheaper and profit margins become ever thinner, manufacturers have a choice of cutting their losses by stopping production or by shifting production overseas, where raw materials and other costs are less, and well, it has to be said, inspection is not always stringent.

            Devaluing prescription drugs has created some of the scandals that rock our industry from time to time. Here’s one you’ll remember. A  company got a monopoly on an old drug that had fallen into general disuse but was still essential for a few patients. The new owner then escalated the drug’s price from $13.50 to $750 a tablet, a factor of 56, knowing that payers would continue to cover the meds because the actual dollar amounts for that one drug were negligible within the healthcare system..

            Outsourcing generic manufacturing has lead to a different set of problems. Not loo long ago, millions of  hypertensive patients learned that the valsartan (once Diovan) they were relying on had been pulled because of contamination issues and was being replaced by telmisartan (formerly Micardis.) Superficially this made sense because both drugs are ARBs and theoretically about the same.

            But are they?  If you’ve been in the industry for any time, you know that even when two drugs are the same molecule, we continue to see differences in response. If you were taking valsartan, I’ll wager you weren’t happy with the switch.

            How can we break the cycle of low generic prices, shortages, predatory pricing, and risky outsourcing? Here are three ideas:

1. Require Medicare to pay premium prices for generics sourced and made in the US.
2. Pay higher prices for higher quality drugs.
3. Allow aggressive promotions of generics (right now it’s considered misleading even to imply you offer a better generic).

What do you think?