Perpetual Pharmaceutical Problems

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INDUSTRIAL ENGINEER –  Volume 44 Number 4 
Cornell Professor says supply problems are as certain as death and taxes

During the past year, the Food and Drug Administration has declared more than 250 drugs in short supply in the United States, according to a Feb.15 report on PBS’ NewsHour. Shortages range from inhalers for chronic emphysema, antibiotics for pneumonia and acute bacterial sinusitis, low-cost chemotherapy injections and methotrexate, considered essential to cure acute lymphoblastic leukemia in adults and especially children.

While such supply chain problems seem tailor-made for industrial engineers, IE Jack Muckstadt said they never will go away, although they may change from drug to drug. The professor in Cornell University’s School of Operations Research and Information Engineering called the methotrexate shortage for pediatric cancer patients a real “tear jerker.”

Complicating factors include production problems, shortages of the components that go into the drugs, the expense of building excess capacity, compensation and the difficulty of predicting demand, Muckstadt said.

A breakdown in any area can diminish supply, and drugs with expiration dates can’t be stockpiled. Many in shortage are low-cost generics with low profit margins, so spending hundreds of millions of dollars to expand production likely won’t pay off.

For example, a few years ago people got ambivalent about the prospect of getting the flu, or they did not want to spend $35. The vaccine manufacturer, stuck with unused and unsold product, curtailed production the next year. However, more people wanted flu shots, leading to shortages, Muckstadt said. And shortages in our economic system are common.

While businesses have made significant advances in demand prediction and increasing the probability that a drug that goes into trial will succeed, it’s not a perfect science, Muckstadt said, making drug manufacturing a risky business. Not everything is Viagra or aspirin that millions of people want in a market filled with varieties of competing products. “You’re talking about things that are very specialized and relatively speaking used in relatively low quantities relative to the total population,” he said.

Of course, the government could guarantee purchase of drugs in advance, but according to Muckstadt, that’s a slippery slope because at some point you run out of money to bail everyone out. Opening manufacturing to other business creates problems with licensing and compensation for the hundreds of millions of dollars it takes to get a drug through the FDA approval process.

Depending on business models and government action, drug shortages could increase in the future, Muckstadt observed, adding that U.S. drug pricing accounts for recovering investment costs, while Canada and other countries price drugs on the margin of what it costs to manufacture and distribute them. And the U.S. is trying to figure out how to hold down drug costs.

In the pharmaceutical industry, as in others, supply and demand are a function of some uncertainty, with randomness on the output and demand sides.