Olin research: Incentivize domestic drug production to combat medicine shortages

Metoprolol combats high blood pressure. Furosemide is used in treating congestive heart failure and liver disease. Midazolam is essential before doctors put patients on a ventilator. Azithromycin fights infections.

All are commonly used and, indeed, classified as essential by the US Food and Drug Administration. None are manufactured in the United States. And all of these and more have come into critically short supply—some in the last decade, some in the last year, some right now.

The solution: Take some difficult steps to bring the production of critical pharmaceuticals back within the borders of the United States, according to a new research study by data scientists associated with WashU Olin.

Tony Sardella is an adjunct lecturer and senior research advisor to Olin’s Center for Analytics and Business Insights. Paolo De Bona, PMBA ’20, is a consultant and formerly a staff scientist at WashU’s School of Medicine. Together, the pair conducted an extensive review of academic research, media reports and public policy statements to discern the causes of chronic pharmaceutical shortages in the United States and develop policy solutions to address them.

“These drugs are not just in shortage. They’re essential medications for patient care,” said Sardella, also founder of the data research and intelligence firm evolve24. “And currently the economics are not conducive for US based production.”

The work has gained the attention of policymakers in Washington, DC, and compelled the pair to join with the Brookings Institution in hosting a public forum on the subject. The webcast event, open to the public, is June 11, 12:30 – 1:30 p.m. CT.

Overview of results

In their review, Sardella noted that, in many cases, drug shortages didn’t become urgent because the international supply chain was essentially resilient enough to mask them. But the issue became painfully acute during the global pandemic, when borders closed and governments or private industry kept the supply of chronically scarce drugs within their own borders.

“The risks from not having domestic sources for these drugs weren’t as significant before,” Sardella said. But once the pandemic hit, “what was a public health issue became a national security risk as well.”

In their paper, Sardella and De Bona make the case that the dynamics of the pharmaceutical industry are unique and often disincentivize new players from entering the field. Indeed, those dynamics reward mergers as industry players get bigger to compete. The result, often, is that international players scoop up what were once domestic drug producers.

Their research also identified another weakness in the pharmaceutical supply chain: a deeply fragmented industry in which many players survive on thin profit margins. That leads to just-in-time merchandising, which creates vulnerabilities in drug supplies.

For example, the researchers noted that for every $100 spent on medicine, manufacturers yield $15, wholesalers make 30 cents, pharmacies make $3, insurers make $3 and pharmacy benefit managers make $2. The rest is eaten by production costs.

“This low profitability was responsible for several M&A activities, which in turn led to high consolidations that resulted in three large wholesalers accounting for more than 85% of the current market,” the researchers wrote.

Incentivizing domestic drug manufacturing

Their paper acknowledges deep concern over the notion of drawing more drug production back within US borders. Some of that concern focuses on systemic issues, not the least of which is the reliance by all drug makers—foreign and domestic—on overseas sources of the raw materials for many drug formulations.

“That is the most challenging issue—to get that kind of production back here—because they rely on big chemical factories requiring extensive capital investment,” Sardella said. “That would be part of a massive change.”

Ultimately, Sardella’s and De Bona’s proposed solution to the problem includes a host of policy and funding recommendations. Some are highly technical, such as redefining what “made in America” means in the context of drug production in order to guard against unfair competition for federal drug contracts by foreign manufacturers.

Others are literally dollars-and-cents proposals.

“The government should support reshoring by giving financial aids, such as tax credits and forgivable loans, to build or renovate production plans,” the pair wrote. “However, the government should increase transparency in the grant assigning process and establish criteria to determine which company would offer a stable and reliable supply based on its track record.”

In addition, the data scientists suggest policy changes such as creating streamlined approval processes for new production facilities and avoiding the practice of creating guarantee contracts with manufacturers. Those contracts, they say, can limit the supply for certain medications and undermine the resilience of the supply chain.

“From our analysis, shortages of essential drugs and dependence from potentially hostile countries constitute very close but distinct issues that may require separate actions,” the researchers wrote.

Pictured above: Tony Sardella and Paolo De Bona, MBA ’20.