2011-06-14

Pharmaceuticals Shortages

You may have been reading headlines recently about widespread shortages of pharmaceutical products across America. (If you haven't, you can read all about it here, and here, and here, and here, and so on.) The question is why are the world's wealthiest and most developed nations experiencing shortages of products produced by some of the largest and most lucrative corporations in the world?

The answer is neither complex nor surprising, however it does involve a full understanding of the pharmaceutical market in general. Unfortunately, a small blog like this is no place to gain such an understanding. I'm not sure I have the time to provide enough background information. I can, however, point to a few major issues facing the industry that would result in drug shortages.

What is a Safe Pharmaceutical Product, Anyway?
We all want drug products that meet the tightest possible safety standards. Unfortunately, though, this is an extremely childish view of what pharmaceutical products actually are.

When we're talking about foodstuffs, we're talking about edible materials that either are or are not contaminated by hazardous bacteria. Controlling for this kind of food safety is an easy thing to do. One simply sterilizes the production machinery, pasteurizes the ingredients, possibly adds preservative agents (even simple things like salt), properly packages the food, and away we go. It's easy because food is safe by virtue of the fact that it is edible. If it weren't safe to consume, we wouldn't be eating it. So all anyone really needs to do is control against contaminants.

Pharmaceutical products are completely different. The concept of a safe medication is an entirely relative one.

For example, consider the nature of chemotherapy. Here the objective is to literally poison the body, bring it as close to death as necessary, in hopes that a person's tumors will die before the person dies. These products are inherently poisonous - but that is precisely the point. If they were safe to consume, they wouldn't kill cancer. The only thing that makes chemotherapy agents safe is the medical supervision under which they are administered.

So, when a product is inherently poisonous, how can a manufacturer adhere to safety standards?

The other important issue here is that "safe" medications are really "safe, if" medications. Botox might be the perfect example. Injected locally into the joints, it can be an effective relief of certain kinds of arthritis. And yet, Botox is really nothing more than the bacteria that we call botulism, the same stuff that will kill you if it starts growing in your mayonnaise.

The bottom line is that every pharmaceutical product must be assessed in terms of treatment benefits versus side-effect costs. It's not a "yes/no" decision. In some sense, every pharmaceutical product is both safe and dangerous.

This is important because FDA safety standards and regulations are extremely costly for drug manufacturers. These costs have a real impact on manufacturers' ability to produce drugs in a cost effective way. There is a long list of good, useful, "safe" drugs that are no longer produced because the manufacturing costs are too high. These are medications that could make our lives better, but they can't come to market because no one wants to make them. They're too expensive!

Cutting back on regulations would reduce the cost burden on manufacturers, which would allow them to produce more medications. Expensive regulatory hurdles also act as a barrier to entry for small drug start-ups who could compete with "Big Pharma" to help drive prices down for all of us.

"Comparative Effectiveness" Run Wild
The current regulatory trend in the pharmaceutical industry is something called "comparative effectiveness research." The goal of this research is to determine which product or course of therapy produces the greatest number of positive health outcomes at the lowest cost. At face value, this is an admirable goal. But the devil is in the details, and in this case, there are lots of devils involved here.

One huge devil is the concept of what a "good deal" might be when comparing two drugs. Looking again at the cancer market, we must keep in mind that sometimes it is not a question of curing a disease, but merely preserving a few good years (or months) of life. So, if I told you that one drug costs $20,000 per year and adds 18 months of life with a 5% chance of total remission, but another drug costs $100,000 per year and adds 24 months of life with a 30% chance of total remission, which would you take?

Obviously, such decisions are highly personal. There is no "one right answer" that a government agency can uncover. Different decisions will be appropriate for different patients, and patients need to make these decisions for themselves, regardless of how much money Medicare will save if they take the cheaper drug.

How does this play into drug shortages? Pharmaceutical companies' products often don't receive regulatory approval unless they meet the baseline requirements set by comparative effectiveness research - research which, as you can see, is totally subjective. There are long lists of drugs that many of us could choose to take, but are denied the opportunity to even think about.

Generic Producers Are Also Not Safe
Generic companies, too, are subjected to regulatory burden. In many cases, they must sell to government agencies at government-dictated prices or not at all. This prevents generic manufacturers from having the kind of production flexibilities that are inherent to the nature of their business. Rather than being able to quickly meet demands, they have to sell off stocks and below-favorable prices or lose everything. In many cases, this simply results in generic manufacturers' choosing not to produce the medication in question, again, because it isn't cost-effective to do so. Suppliers would like to meet market demands, but regulations are preventing them from being able to make any money doing it. So who would do it?

Furthermore, in many countries, generic prices are regulated as a dictated percentage of the brand drug's price. That means that when brand drugs' prices are forced downward by price regulations, the generic companies also suffer. Again, who wants to manufacture products if there isn't any money to be made in the market? Supply decreases.

Inflation Affecting Ingredient Costs
It goes without saying that as currencies continue to devalue through inflation, ingredient costs expressed in those currencies will continue to increase. Raw chemicals are not more valuable than ever, and this presents real cost challenges to drug manufacturers. Ending the central banks' silly fixation on Quantitative Easing immediately means literally saving lives.

The Elephant in the Room
I plan on blogging more about the following issue, but here I am just going to introduce the concept...

It is no surprise that some of the world's largest drug manufacturers are American companies, and that the world's largest pharmaceutical market is the United States. For years, the lower regulatory standards of the United States has allowed the drug manufacturing industry to flourish. This has been great for Americans, but it has been even better for other countries.

Why? Because if a manufacturer can get their product into the U.S. marketplace, then that provides enough revenue for that company to then attempt to enter the tighter regulatory environments of foreign countries, where they sell fewer pills at lower prices and great costs. (!!!)

In essence, relatively freer U.S. markets have been subsidizing the world's pharmaceutical regulations for years.

But now all of that is changing. Regulations are getting stricter in the United States and Obamacare is only beginning to take root. Costs are increasing, and that doesn't just mean that the United States will suffer some drug product shortages. It also means that the entire world's drug production is at risk. You can't simply sever an apple tree from its roots and expect it to go on producing apples. Something has to give.