Monday, July 23, 2012

Predicting Drug Shortage in the US

In most markets, shortages (and surpluses) are rare. Instead, prices change to keep the quantity of products supplied and the quantity demanded balanced. For example, when, because of a supply disruption, the market supply of a product declines, prices rise and consumer demand adjusts. In general, the number and severity of shortages in any sector depend on the extent to which the demand for a product and the supply of a product respond to price (the price elasticities of demand and supply). Very low price responsiveness on both the demand and supply sides for many medically necessary prescription drugs means that shortages of prescription drugs (or of upstream Active Pharmaceutical Ingredients – API) are not an unexpected phenomenon in this sector in the presence of supply or demand changes that are not fully anticipated by manufacturers.
 The degree of price responsiveness for medically necessary prescription drugs is low, both in the short run and in the long run, for two reasons. First, these drugs are, by definition, medically necessary, implying that they have few substitutes and consumption cannot generally be shifted over time (for this reason, shortages of drugs for the treatment of chronic conditions are much less likely to occur). Second, consumers in the prescription drug market generally purchase services through health insurance contracts that pay providers using pre-established payment rates and guarantee to provide consumers necessary services. Final consumers’ demand for services is largely unaffected by changes in price. Although hospitals and physician offices may face increases in price, their demand for the prescription medications used to treat their patients is also not very responsive to the price paid to manufacturers for the drug5.
This lack of price elasticity on the demand side is mirrored on the supply side, particularly in the short run. Costly, specialized equipment is required to produce prescription medications, production processes are complex, especially for sterile injectable products, and firms are required to adhere to Current Good Manufacturing Processes (CGMPs). Substitutions of products within a class can often be (and usually are) achieved on the same supply line, but a specific class of drugs usually requires equipment and regulatory approvals that are limited to that class. Drugs have a limited shelf life and holding excess inventory is costly meaning that drug manufacturers try to keep inventories as low as possible. Raw materials for production are frequently difficult to source, must be validated by manufacturers, and require regulatory approvals. It will generally take a long time – years – for the industry to increase capacity in response to an increase in prices. If the increase in prices is expected to be temporary (as would be expected in the case of a shortage due to a production line disruption), investments in increased capacity are unlikely to occur. In the longer run – over a period of 2-3 years, for example – supply will be much more price responsive.
This framework suggests that the development of shortages will be a function of the short run elasticity of demand and supply for a particular drug, and of unanticipated demand and supply changes that occur in that market.
It is expensive to hold capacity ready to make a drug and yet earn no sales from that capacity the vast majority of the time. In our current system this cost would fall on the generic drug firm that chose to build excess capacity or dual source; it would have high costs relative to its competitors. Clearly, in a competitive market, which the generic drug industry is, no firm will choose this route unless it receives a higher price in the market or other compensation.
Sterile Injectable Oncology Dru

 In 2011, FDA has continued to see an increasing number of shortages, especially those involving older sterile injectable drugs, including cancer drugs, anesthetics for surgery, drugs for emergency medicine, and electrolytes for intravenous feeding .   The current class-wide shortages in the industry appears to be a consequence of a substantial expansion in the scope and volume of products produced by the industry that has occurred over a short period of time, without a corresponding expansion in manufacturing capacity. While several manufacturers are currently expanding capacity, most of this capacity will not become available for several years. The expansion in product scope and quantity, in turn, stems from both an increase in the overall volume of chemotherapy drugs used and an unusually high rate of patent expirations in this sector that began in 2008 and has continued through 2010. While the generic industry is highly competitive in the long run, the supply of products is constrained in the short-run, because it takes several years for new firms to enter or for existing firms to add capacity. In the short run, existing firms make strategic decisions about how to deploy production capacity among products, based on their conjectures about what choices their competitors will make.


Table 1 and Table  is divided into the group of 44 drugs that experience a shortage by 2011 and the group of 28 drugs that never experience a shortage from 2006 to 2011.

Table 1 suggests, on average, drugs that subsequently experienced a shortage are those in which the volume of sales was declining in the 2006-2008 period prior to the shortages. Drugs that have not experienced a shortage since 2008 had an average

Table 2 suggests that among the group of drugs that eventually experience a shortage, average prices decreased in every year leading up to a shortage. In contrast, the average prices of drugs that never experienced a shortage over this period did not change substantially either in the earlier or later period.


Table 1
Annual Change in Medicare Part B Volume of Services of Oncology Sterile Injectable Drugs


Table 2
Annual Change in Medicare Part B Volume of Services of Oncology Sterile Injectable Drugs





Source Department of Health and Human Service