Impact of Regulations, Manufacturing and Pharmaceutical Supply Chain (PBMs) on Drug Shortages and Affordability Part 2:

Part 2 is an overview of impact of manufacturing, causes of shortages and PBM’s role in drug prices and shortages. In Part 1 ⁽¹⁾ of the blog I have suggested that there are opportunities if regulators facilitate the processes. In this part, I am enumerating opportunities that are worth considering and can be exploited. Observations and views are mine and no reflection of any entity or their performance. There is no financial relationship with any company.

Manufacturing and Technologies:

All involved in pharmaceuticals understand the current landscape but still it is good to refresh. Pharmaceutical manufacturing has two distinct components: API manufacturing and their formulations (FDF: finished drug forms). At times I have seen in press, academia and even the regulators calling just the formulation to be pharmaceutical manufacturing. Without an API, there is no pharmaceutical/drug and the product is just a placebo of no value. Two make the whole. 

Manufacturing Landscape:

Table 1⁽²⁾ is a snapshot of the pharma’s current manufacturing landscape for some APIs and their formulations. It is worth understanding it. Since many sites are producing the same actives and formulating them, my conjecture is that most processes are fitted in the existing equipment ^{(3, 4)}, a feature of batch processing. This generally results in the processes not being the most economic compared to equipment designed for a specific product. Companies are also not able to take advantage of economies of scale. 

Since patients need pharmaceuticals to extend life they will pay the highest price. Pharmaceutical industry capitalizes on this sentiment in profit making rather than competition. No one wants to acknowledge this but the fact remains. Simply said, inefficiency sells in pharma, my perspective. Reverse calculations tell us how a drug is priced ^{(5, 6)}and one can see profits at different levels. This further explained later. 

Drug	Number of API Sites	Number of FDF Sites
Ciprofloxacin	22	536
Atorvastatin Calcium	44	865
Omeprazole	87	768
Modafinil	29	70
Metformin HCl	77	752
Metoprolol	41	338

Table 1

High concentration of ANDA’s with limited companies ⁽⁷⁾ also adds to the current manufacturing complexity.Since the same equipment is used for multiple products, any investment that will lower costs and improve profitability through process improvements or equipment enhancement for selected processes are difficult to justify. In addition, use of same equipment to produce different actives and formulate them necessitates stricter compliance with cGMP requirements. Asset utilization is not the best. As explained later, combination of all can be a leading cause of shortages and data integrity.Landscape is ripe for simplification and much higher profitability.

A methodical review of APIs and their formulations tells us that opportunities exist to improve profits and reduce shortages. “Nondisruptive creation” ⁽⁸⁾ and “creative destruction” ⁽⁹⁾ are two potential ways to make drugs affordable, reduce shortages and for the companies to make significantly more monies than the current levels. However, this requires out of the box thinking and a different business model. Both would be considered disruption to the current business model. In each case plants will use optimum and competitive manufacturing technologies. Such plants will be able to react to shortages quickly, make drugs affordable and satisfy the growing pharmaceutical needs of 80% of the global population ⁽¹⁰⁾. 

In “nondisruptive creation” ⁽⁸⁾ and “creative destruction” ⁽⁹⁾ models, number of plants producing APIs and formulating them will be considerably reduced through consolidation. Plants will be based on economies of scale, most economic processes, and can react to any market changes. As explained in Part 1 of this post, FDA’s quick approval path might encourage companies to compete using either of these models. In either of the models, companies can select APIs and their formulations that interest them and commercialize the best manufacturing technologies to fulfill global demand ⁽¹⁰⁾. 

Modafinil, Ciprofloxacin, Atorvastatin and Omeprazole, Metoprolol ^{(11, 12, 13, 14, 15)} are just few APIs that can be produced in their dedicated single plants using continuous process to meet the global API demands. Metformin and omeprazole most likely would need multiple continuous plants. API processes will be most economic and highly profitable. Multiple FDF facilities would be also needed for these products. Technologies for continuous API and FDF plants have existed for over 60+ years. 

In Table 2, number of sites from Table 1 are used as an illustration for Omeprazole. API volume is an assumption. Most likely each plant does not have the most economic process. If omeprazole demand is quadrupled, it definitely becomes a continuous process candidate. Batch finished dose plants still would be uneconomic. Since the current processes meet each company’s profitability goals, economic processes are generally not the consideration. 

API, Kg. /yr.	# of patients	# of 20 mg. tablets per yr.	Tablets/ FDF plant	API, Kg./plant
1,400,000	191,780,822	70,000,000,000	91,145,833	16,092

Table 2

Omeprazole and esomeprazole can be manufactured at a single properly designed continuous plant. FDF doses can be finished in less than 20 properly designed continuous plants. Manufacturing cost of drugs could drop as much as 40%. It is an opportunity. Fundamentals of engineering, science and economics will guide to the most optimum model and process. Companies will have to make sure that they do not succumb to regulatory, academic or equipment vendor pressures in selection of their processes. 

Since companies will have to file and get regulatory approval, my conjecture is that the likelihood of moving from the current model to the alternate models ^{(8, 9)} for the existing drugs are very slim. This is difficult due to FDA current approval process and companies would need to think out of the box, not an easy thing when they are profitable. 

For the landscape to change FDA and other regulators, as stated in Part 1 of the blog, will have to facilitate and create competitive environment for the companies. My hope is given an opportunity companies will do that ⁽¹⁶⁾.Going forward companies will have to decide their best options. Significant upside of consolidation will be a much smaller but extremely robust portfolio of the companies. They will meet any and every demand upturn or downturn with much higher profits. Methodology can be used for any drug.

Continuous Improvement:

Continuous improvement, a mini version of “nondestructive creation” can also be used to reduce shortages and improve profitability and affordability. Such programs are necessary. However, as stated earlier due to regulatory obligations, such programs can be a challenge. 

Every process improvement in API and Formulation has to be tested on commercial scale to make sure product quality has not changed. It is well accepted that improvements tested in the lab and/or pilot plant will have to be confirmed on commercial equipment. Process improvement for each product at each site has to be justified. Testing of improvements is necessary as companies have an obligatory duty to meet regulatory requirements. Testing on commercial scale takes time, effort and money and can interfere with regular production schedule. Just for these reasons they, at times, are procrastinated and/or avoided. 

Shortages:

In the business world, it is well known that shortages can result from any one or combination of the following. 

1. Lack of profitability for the product
2. Raw materials 
3. Product and production planning
4. Process equipment availability, breakdown/malfunction or poor preventive maintenance

If companies are forced to lower their profits from their desired levels and cannot justify improvements, it is very possible that they may not produce selected products and this can result in shortages. Companies with a large ANDA portfolio ⁽⁷⁾most likely will shy away from equipment modifications as they may lose their operating flexibility, unless they adopt an alternate model. Another factor that has measurable impact and cannot be overlooked is savings vs. investment. If equipment has to be added or modified for a single product and interferes with other products, it is very likely that the modifications cannot be justified or will be procrastinated and eventually can be the cause of shortages. 

 

Last three of the above are related to company’s manufacturing and management practices. 

Shortages due to the second and third items above can happen only if the manufacturing company is not on top of its game in anticipating market needs and production planning. Even seasoned players can overlook the needs or a surprise is popped by raw material suppliers or customers. Effective communication with suppliers can be ward off supply surprises. However, customer surprise can be anyone’s calling and an opportunity. Company’s desire not to produce the product due to its profitability below a certain level is its own choice. 

Manufacturing is affected by equipment availability, production scheduling, technology and equipment related issues. Companies must know their equipment and their capabilities. Missteps lower equipment utilization and can also result in shortages. As stated earlier “nondestructive creation” ⁽⁸⁾can reduce shortages. If manufacturing is on top of its game, demand ups and downs can be absorbed. 

Equipment availability/utilization, capabilities and that includes production schedule and preventive maintenance needs must be continuously reviewed. cGMP needs can influence equipment availability and scheduling complexity. If a company must repeatedly contend with same issues, it needs to review its operations, that includes staffing, equipment and process design. My conjecture is that ten companies producing ~69% ⁽⁶⁾of ANDAs must make sure no balls are dropped. I am sure that could happen even in optimally designed plants. My conjecture is that just to ward off such mis-steps pharma has excess capacity. 

Excess production capacity also tells us that most of the processes are inefficient along with poor asset utilization and there are opportunities to improve profits. However, compared to other industries pharma companies do not avail the opportunity as they are able to make good profits and don’t need to optimize their production. As stated earlier, even with overcapacity careful production planning is critical. We have to recognize that inelasticity of batch operations and cGMP practices at times prevent ability to cope up with sudden demand changes. 

Since batch operations operate periodically in a year, manpower and appropriate equipment availability can also throw production planning off schedule and can result in product shortages. Production volume and run length have significant influence. Longer production runs can be used to alleviate shortages, as practiced in other industries. In the manufacturing world, products with comparatively lower profitability and production volume generally get the least scheduling priority and can also fall off the schedule resulting in shortages. cGMP needs can push more drugs in this domain. As emphasized earlier process improvements even to reduce shortages must be approved by the regulators, companies hesitate to change and ignore shortages. 

My expectation is that raw material suppliers are also looking at the items discussed above as they must manufacture products for their customers. They would like to streamline their operations and improve their profits by bringing certainty. If their customers are supplying to the largest market, the US, I believe each will pay more attention to the needs of customers on the US ANDA list. These are assumptions that will have to be proven. 

Shortages can be reduced if companies have a good marriage of their products, technology and equipment. Companies have to be a “nondestructive creator” for their selected APIs and formulations. They need to re-evaluate their portfolio. Generally, batch product companies don’t look at the crystal ball but it needs to be looked at. My conjecture is that companies have all of the pieces parts that need to be assembled differently. Effort can be very effective in reducing shortages and improving profits. 

PBMs (Pharmacy Benefit Managers) and Insurance Companies: 

Growing up I was always warned “be careful of the middleman”. In the United States Pharmacy Benefit Managers (PBMs) are the middlemen between manufacturers and patients. They are the BLACK BOX. No one really knows the workings of this box but attempts are made ⁽¹⁸⁾. Insurance companies are also part of this BLACK BOX. Insurers love to take money but hesitate the payback. This is well known. 

It is fascinating that no one knows real prices in the US. They can be reverse calculated by anyone who is knowledgeable in chemistry, manufacturing and costing. Reverse calculations ^{(5, 6)} give us significant clues. Table 3 is an illustration of prices of some drugs that would be ex-factory after their margins. Second last column is tablet selling prices to PBMs that include every margin, FDF conversion cost, profits at every level. Ten times the API selling price should cover more than any cost oversights at pharma factory level. Last column are the selling prices in US with or without health coverage. It is easy to understand the price differentials and would make even the most naïve cringe. Selling prices for some drugs in India are documented ⁽⁶⁾. 

Drug	API $/kg	Mg./ tablet	Tablets /kg	API $/tablet	$ per Tablet 10 X API	Price per tablet in US, $
						With health coverage	With no coverage
Ciprofloxacin	24	500	2,000	0.012	0.12	0.20	3.58
Atorvastatin Calcium	302	10	100,000	0.00302	0.0302	0.02	3.50
Omeprazole	2	20	5,000	0.00004	0.0004	0.05	0.30
Metformin HCl	4	500	2,000	0.002	0.02	0.07	0.70

Table 3

Occupants of the supply chain black box have made sure it is not disturbed. Generally, such situations are an indication that there is a whole lot hiding which not many should understand. Listening to Drug CEO testimony ⁽¹⁷⁾, an interesting comment was made how drug prices are set. Higher list price results in higher rebates for the PBMs etal. companies and is the driver to be on the formulary listing. No one really knows the truth as there are many vested interests. Fact remains that the drugs are priced on the sentiment “patient will pay the highest price to extend life”. 

With ever increasing and higher drug prices fingers get pointed and the poor patient, who is trying to figure out how to buy medicines either mortgages her/is assets or at times must decide between their food and drugs dies as s/he cannot afford drugs ⁽¹⁹⁾. There is latent irreverence for the patient in the pharma hemisphere. General thinking “Oh well s/he was going to die sooner or later” but the shareholders should have high return on their investment. Mission accomplished. Irony is the patients put food on the table of all involved and gets no respect. 

On an anecdotal note in the hearing ⁽¹⁷⁾ companies claimed that they have their drug list prices are available on their websites. Good luck in trying to figure out prices of any drug! Fancy webpage designs but no prices. 

Under the current system bottom-line is that getting on the formulary, which gives preference to drug company and PBMs profits, is more important than the patient’s life and drug affordability. Question we need to ask FDA and others is why a generic drug that has been approved but has its availability controlled through formularies and not readily available at the local pharmacy. If US Congress has to tackle the juggernaut, so be it. My conjecture is that lobbyists will make sure that such simplicity does not happen. 

Meetings ⁽²⁰⁾ are held but nothing meaningful results. Each participant that includes brand and generic pharma companies, regulators and the supply chain participants have shared responsibility for the current woes of high/increasing drug prices and shortages. There is blame game. 

Lately drug companies have not introduced exceptionally better drugs than the current drugs at affordable prices ⁽⁹⁾. This is especially true for mass need diseases. To assure revenue growth, the easiest answer to revenue increase is to raise prices. It has become a habit. Once the existing blockbuster patents expire, I am not sure how pharma will continue their revenue growth. Over the long-term orphan drugs will not carry them over the finish line. 

There is a “creative destruction” solution ⁽²¹⁾ but everyone involved will make sure it never comes to fruition. In the simplest terms if a drug (brand or generic) has been approved by FDA, it should be readily available through a legitimate prescription at the local pharmacy or a web portal. Same drug e.g. ciprofloxacin could be manufactured by multiple FDA approved companies and be available at competitive prices through convenient outlets. There would be no preference between manufacturer “a” vs. “b” and there will be price competition. FDA’s approved drug list should be the formulary. There will be resistance.

What Does the Future Hold?

All said and done drug prices are going up and shortages are increasing. Every participant has contributed to high drug prices and shortages and no one wants to put on the yoke to make drugs affordable and eliminate shortages. It is not too late to fix the current landscape without government intervention which generally is brutal e.g. price fixing/controls.

To the pharmaceutical industry, issues and potential solutions are irrelevant because they are capitalizing on constant needs of patients who want to extend their life. They have tremendous opportunities to improve their profits and customer base ⁽¹⁰⁾. Instead of a revolution we have complacency. In the business world, “process of continuous improvement” is important but it seems like this philosophy has by-passed pharma as it is using its patients as pawns rather than competition to be profitable. 

Again, pharma and associates have to be proactive to reduce shortages and make drugs affordable while increasing their profits through “nondestructive creation”. It has to adopt better manufacturing technologies on its own volitions rather than being swayed by external influences. PBMs and associates need to adopt “nondestructive creation” and if they don’t “destructive creation” being considered ^{(22 )}could change the landscape. 

Pharmaceutical industry would not want government edicts to control shortages and control unscrupulous price increases. PBMs will also have to be reined in. Drug prices like Veteran’s Administration may have to be negotiated. US Legislators also have to wean off political influences to further their careers and serve the needs of the electorate. All this is a tall order and needs to be addressed rather than ignored. 

Girish Malhotra, PE

EPCOT International 

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2. PharmaCompasshttps://www.pharmacompass.com
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4. Malhotra, Girish: Why Fitting a Square Plug in a Round hole is Profitable for Pharma and Most Likely Will Stay? Profitability through Simplicity, August 1, 2014 
5. Malhotra, Girish: A Blueprint for Improved Pharma Competitiveness, Contract Pharma, Vol. 16, 7, Pg. 46-49, September 2014
6. Malhotra, Girish: Comparison of Drugs Prices: US vs. India; Their Manufacturing Costs & Opportunities to Improve Affordability, Profitability through Simplicity, January 18, 2018
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8. Kim, Chan W., Mauborgne: Nondisruptive Creation: Rethinking Innovation and Growth, MITSloan Review, February 21, 2019
9. Schumpeter, Joseph:Capitalism, Socialism and Democracy, 1942, Accessed November 29, 2018
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13. Malhotra, Girish: Alphabet Shuffle: Moving From QbA to QbD - An Example of Continuous Processing, Pharmaceutical Processing, February 2009 pg 12-13
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15. Malhotra, Girish: Batch, Continuous or "Fake/False" Continuous Processes, Profitability through Simplicity, July 20, 2017, American Pharmaceutical Review, Vol. 20 Issue 6 September/October 2017 pgs. 86-91, Contract Pharma, Nov./Dec. 2017 pgs 56-58, Chemistry Today, November/December 2017, Vol. 35(6) pgs 62-65
16. Field of Dreams
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20. Malhotra, Girish: Identifying the Root Causes of Drug Shortages and Finding An Enduring Solution, Profitability through Simplicity, December 7, 2018
21. Malhotra, Girish: Improving Drug Affordability for the United States Populous through Alternate  Business Models, Profitability through Simplicity, May 4, 2018
22. Malhotra, Girish: Could Amazon (A), Berkshire Hathaway (B) and J.P. Morgan Chase (M) be the Anti-Ballistic Missile (ABM) needed to Control/Curb Rising Healthcare Costs? Profitability through Simplicity,February 9, 2018