(Photo: Polina Tankilevitch)(Photo: Polina Tankilevitch)

This is an excerpt from Medically Necessary, a health care supply chain newsletterSubscribe here.

The report: The White House released a report last week that examined vulnerabilities in the pharmaceutical supply chain and offered recommendations to fix those problems.

The report largely focused on the ongoing problem of drug shortages, especially for cheap generic medicines. The number of new shortages of drugs peaked at about 250 in 2011. That number has fallen sharply since then, but ongoing shortages remain high.

The report calls for financial incentives to encourage manufacturers to improve quality and reliability. It also recommends increasing visibility in the drug supply chain and encouraging more domestic production.

Background: In February, President Joe Biden issued an executive order calling for an examination of supply chains for several critical industries, including health care. 

The 100-day report issued last week is the first step. The order also directs the Department of Health and Human Services to publish a more detailed report within a year. The 100-day report also examines the supply chains for semiconductors, batteries and critical minerals.

The conclusions: The report identifies many of the same issues that private companies and researchers have complained about for years: low profit margins, geographic concentration and a lack of data.  

According to the report, generic drugmakers face steep competition, pushing prices toward the cost of production. 

In addition, the report argues the enormous negotiating power of large drug distributors and group purchasing organizations makes it difficult for generic drugmakers to raise prices. 

These factors limit financial returns and make it difficult for normal market forces to correct for shortages, according to a 2019 Food and Drug Administration report.   Manufacturers sometimes stop making products with low profit margins, which can lead to shortages. 

These cost pressures have forced manufacturers to move production abroad, where labor costs are cheaper, according to the report. The report points to the geographic concentration of facilities producing drugs or ingredients for drugs as a vulnerability.

The report highlights the example of Puerto Rico, which has a large concentration of drug production facilities. Hurricanes Irma and Maria damaged some of those facilities in 2017, contributing to shortages. 

The report also warns that relying heavily on China, a major U.S. geopolitical rival, for production of drugs and active pharmaceutical ingredients puts the nation’s supply chain at risk. It warns that foreign governments could interrupt access to drugs or supplies.

The Congressional Research Services estimated that in 2019 35% of antibiotics used in the U.S. came from China. China is also a major source of active pharmaceutical ingredients serving the U.S. market.

The large number of foriegn facilities producing drugs and active pharmaceutical ingredients can make it hard for regulators to get a complete picture of the supply chain. But the FDA also lacks critical data about drugs in the U.S.

Currently, the FDA doesn’t have information about the volume of active pharmaceutical ingredients produced at facilities, so it’s difficult to identify risks to the supply chain.

Taking action: The report, predictably, calls for further study and suggests some long-term goals. But it also details a few immediate actions.

HHS will form a public-private consortium to encourage companies to produce drugs, or active pharmaceutical ingredients, in the U.S.

The consortium’s first task will be identifying a list of critical medicines that should be the focus of this effort, according to a White House fact sheet. The group will also create a map of supply chains for essential medications.

HHS will also use $60 million of COVID-19 relief funds to invest in advanced manufacturing technologies, essentially high-tech improvements to make manufacturing more efficient. 

The White House report suggests that U.S. drug manufacturing facilities should focus on high-tech manufacturing to gain an edge over lower-tech competitors in China and India.  

The new consortium will help companies address regulatory issues about advanced manufacturing techniques and support training for workers to carry out those techniques. HHS is also planning to host a “high-level” summit on supply chain resilience.

The long game: Bigger changes to the pharmaceutical supply chain would happen over the coming years, or even decades. 

Recognizing that low profit margins make the pharmaceutical supply chain less resilient, the White House report recommends reviewing the federal government’s reimbursement rates for drugs that could go into shortage.

The report also suggests placing consistent orders through government agencies so manufacturers will have more certainty about future demand.

The report recommends developing a system for rating the quality of generic drugs, a project the FDA is already pursuing.

The White House hopes a rating system would incentivize manufacturers to upgrade their equipment and processes, hopefully reducing shortages. Notably, the report describes this type of rating system as voluntary. 

To improve supply chain visibility, the report recommends giving FDA the authority to collect more information about drug production from manufacturers.

That could include collecting information about the volume of drugs and active ingredients produced at specific facilities. It might also mean requiring manufacturers to notify the government about spikes in demand.

The reactions: The Association for Accessible Medicines, a trade group representing generic drug manufacturers, lauded the new report.

“We believe that with the right conditions and incentives in place, the United States can play a larger role in the global production of essential medicines,” CEO Dan Leonard said in a statement.

Civica Rx, a nonprofit focused on reducing drug shortages, and Phlow, a B corporation aiming to produce drugs and ingredients in the U.S., both praised the report’s conclusions. In particular, a Civica Rx statement praised recommendations to bolster domestic manufacturing, review drug pricing and implement quality ratings.

Phlow, which has already received government investment to produce drugs and pharmaceutical ingredients in the U.S., says it hopes to expand that partnership.

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