Before you jump to conclusions that ‘all drugs are too expensive,’ which has become the missive—if not the chorus—from the public, what needs to be explicitly stated is that no problem gets solved by defining it with anecdote and emotion. I’ve been on several government and NGO panels discussing and establishing prices for drugs, biosimilars, and medical devices. Only those privy to the cost and availability data for drugs in all their transparency can intelligently structure a problem statement, and importantly for the end result, create effective countermeasures.
The very first root causes mentioned in the FDA’s report are “Economic Forces.” This may not be very surprising, since the Task Force incorporated economists within its ranks, but clearly whenever a product or service is created, its existence is predicated upon micro- and macro-economic forces. There is a certain and finite quantity of supply, and some (hopefully) non-zero level of demand. This is why we have so-called “Supply and Demand.” Trying to sell lemonade? Start maybe at $1.00 per cup, depending upon what your supply of cups, napkins, water, and lemonade powder cost, and how many customers you expect will stop by your stand on a sunny Saturday. If, after an hour or two outside, nobody has bought a cup, perhaps you’ve overestimated demand for your product at its current price. The end of this previous sentence is the critical piece of the principle of elasticity of demand. If you reduce your price (as you see sometimes on the handmade street signs that have been redlined with a Crayola marker) to, let’s say $0.75, or $0.50, you are very likely to see an increased likelihood of customers stopping by. This is exactly why clearance prices work: When you have a glut of inventory at a store after the holidays, you cut the prices to half, one-quarter, or less of the original retail price. The influence of this action alone brings a very predictable surge in demand.
So it’s not surprising, then, to see that the FDA has recorded “Economic Forces” as the most leverage-ridden root causes of drug shortages.
The report identifies three root causes for drug shortages:
- Lack of incentives for manufacturers to produce less profitable drugs;
- The market does not recognize and reward manufacturers for “mature quality systems” that focus on continuous improvement and early detection of supply chain issues; and
- Logistical and regulatory challenges make it difficult for the market to recover from a disruption.
The first root cause, lack of incentives for drug manufacturers, is listed first not by chance, but because it was determined to be the highest-leverage factor. Contracting activities have created a new philosophy of a “race to the bottom” of pricing.
Over the past 12 ½ years of smartphone adoption worldwide, much of the innovation was competition between companies jockeying to be first-to-market or first in sales. Also fueling the boom was economies of scale: As the technology gets replicated millions of times, it becomes less expensive on a per-unit basis. Those miniaturized CPUs in your smartphone, touchscreen technologies, etc., all reduced in price—sometimes by a factor of one hundred or more—because of the replication.
The report also recommends enduring solutions to address drug shortages. These solutions include:
- Creating a shared understanding of the impact of drug shortages on patients and the contracting practices that may contribute to shortages;
- Developing a rating system to incentivize drug manufacturers to invest in quality management maturity for their facilities; and
- Promoting sustainable private sector contracts (e.g., with payers, purchasers, and group purchasing organizations) to make sure there is a reliable supply of medically important drugs.
Interference in Free Market Economics
Smartphone manufacturers can charge whatever they’d like for their newest model. If it’s priced at $2,000 in a market where the customers are willing to pay $700, there’s a risk that very few people will buy them. But at the same time, this also creates a separate, secondary effect of exclusivity: People can use the relative rarity of the expensive model as a social signal of their status (whether or not they can actually really afford it). We see this all the time with handbags, watches, clothes, and cars.
Drug manufacturers have received more pressure socially and politically to NOT approach the global pharma markets like Apple does with its iPhone, for example. There have been recent analyses and news coverage suggesting even that the reason there are drug shortages is that, in fact, drug prices are too low. Because of social pressure and a public misunderstanding of how market economics work, the government then interferes in the system. This interference in free markets has led to complexities in supply and demand (prices, shortages, etc.) and market competition which are difficult to predict, and really only can be viewed post-hoc in retrospect. That’s where we’re at now, reading into the story and building a narrative about what factors are most important after the events are done. This is no different from attempting to explain the performance of a sports team after the season has completed, and attributing spikes and troughs in performance to factors like ‘culture,’ ‘size of contracts,’ ‘whose heads are in the game or not,’ etc. But an observational study of the market and shortages is the best we have at the moment. So now we’re left with acting upon the results.
Mature Quality Approaches
The second root cause listed by the Task Force is “the lack of recognition and reward for mature Quality Systems.” This aspect of the economic ratio within the demand elasticity is the most difficult of the three in my view to ‘detect,’ and therefore to influence. What the Task Force is getting at is that Quality Systems which are well-designed and are preventive rather than reactive are not only more effective, but much more rare. Their feeling is that if every pharma company had processes and systems which were designed properly (e.g., lean, Six Sigma, QbD, PAT), there wouldn’t be the same manufacturing errors, development costs, market shortages, etc. But creating a feedback loop to actually incentivize the solution to this root cause is enormously difficult. The FDA is working on an initiative at the moment which is essentially designed to help do exactly that. But even a regulatory incentivization, while helpful for a framework, is not financial incentivization to build-in proactive Quality. You’ll find companies ‘doing the right thing’ much more frequently where it’s financially rewarded.
Regulatory and Logistics
The third root cause identified by the Task Force is the “regulatory and logistical challenges” which make it difficult for the market to recover from a disruption. Some of this has to do with investors and the Wall Street effect. For example, when bluebird bio was unable to meet investor’s expectations and their own forecasts for manufacturing and supply of Zyntelgo earlier this summer and delayed launch, their share price responded immediately in a negative way. Part of this is exactly the set of market forces mentioned above which can help us to improve the situation with shortages, but the other part is a punishment effect which ripples through drug manufacturers’ development programs as ephemeral money dries up, and there is suddenly a deficit in funds for continued development of that particular (or worse, other) programs.
In real-world terms, if one manufacturer is in stock-out (or recall, such as with FDA’s recent alert of voluntary recalls of the proton-pump-inhibitor (PPI) medication ranitidine because of potential carcinogen N-Nitrosodimethylamine (NDMA) found in it from starting materials) there is not necessarily a way to simply ‘transpose’ the production to another facility or manufacturer. The stakes are too high, the potential for process changes or error is, regulatorily, too high. This makes ‘lift-and-shift’ an impossibility as a solution at the moment, and probably ever. Especially with more of the treatments being biologics, cell therapies, and gene therapies, this is much more difficult than with small molecules. Multiple manufacturers with generics can help offset the shortage, but for on-patent novel treatments, it’s not possible, and if the generics manufacturers aren’t charging enough, they also aren’t necessarily incentivized to fill the production shortage.
Cost is a Slippery Word
So what does it cost to develop and bring to market one new pharmaceutical treatment? Clearly this answer depends on the type of drug being developed: Small molecules tend to cost less than biologics, which tend to cost less than cell therapies, which tend to cost less than gene therapies. But there are too few molecules on the cell and gene therapy sides of the equation to get a reliable and durable estimate. A frequently quoted number is $2.6 billion, which was derived from the Tufts Center for the Study of Drug Development (CSDD). Challenges to this figure include “unrestricted grants” from pharmaceutical companies to Tufts (and therefore, potential bias), as well as the interest rate Tufts uses for its calculation of capital investment, which if substituted by a more common value could reduce the figure to under $2 billion. So, even though it’s a slippery number (maybe $2 billion, plus or minus a billion), it’s still very expensive. This is also the reason frequently cited for why the vaccine market is content with being uncompetitive. Some experts have weighed in for decades that a universal flu vaccine is possible to develop (think: one flu shot for virtually lifetime coverage), but that innovation and development efforts have been largely nonexistent because there’s no incentive to do so.
Whether it’s that newer drugs cost too much to develop, they cost too much at retail, they cost too little at retail (so free market economics can’t take over), or there’s systematic interference in that complicates price and supply effects, we’re still left with the issue that there are drug shortages, and that’s not likely to improve.
As the eminent statistician George E.P. Box observed, “All models are wrong. Some models are useful.” All of our data models try to approximate truth in nature to the best degree we can. But there are also sociological factors which introduce near infinite opportunities for variance in the data. So what may look logical when looking ‘internally’ at a model of drug pricing and availability can fail spectacularly when exposed to the models looking ‘externally’ at social factors (negative media coverage, social media influence, political viewpoints, geopolitical events, etc.).
The reality of the divide between the pharma industry and the public has created a lot of distrust and discord, and it includes my above-mentioned internal and external factors necessarily as part of the relationship between manufacturers and consumers. We can’t pretend this divide doesn’t exist, nor can we dismiss the public’s emotions by just pushing cold, clinical ‘facts.’ Our products are still fundamentally designed with humanity in mind as the sole consumer, and we seek as an industry to extend or preserve or improve life. The public’s reaction and emotional concerns matter.
- FDA. (2019). Drug shortages: Root causes and potential solutions. https://www.fda.gov/drugs/drug-shortages/report-drug-shortages-root-causes-and-potential-solutions
Dr. Ben Locwin is a medical and healthcare executive. He’s spent time developing pharmaceutical and medical device cost models, worked directly with Wall Street investors, and has frequent opinions about economics. He has worked with FDA to help develop some novel approaches to quality and manufacturing improvement, and give frequent keynotes within the industry.