The real reasons we have drug shortages

16 minute read

Why have we got an endless supply of vegemite and toothpaste while some vital anaesthetics and antimicrobials can be impossible to come by?

To recall a day when petrol was in short supply across Australia, you’d have to stretch your memory back to the 1973-74 oil crisis. You would have to go even further back, to 6 July 1942, to relive the moment when tea was rationed in this country.

In a prosperous, free market economy, the widespread rationing of consumables is unheard of outside of world wars, catastrophic natural disasters or diplomatic standoffs.

So it is very unusual for our national supply of bananas, Weet-bix or iPhones to be compromised. Yet shortages of essential pharmaceuticals have become chronic and unpredictable over the past decade.

The TGA’s website currently lists 219 drug shortages – and this is only 15% of the pharmaceuticals that are actually in short supply, according to a survey of hospital pharmacists.1

Among some of the worst-affected are drugs such as vancomycin, ampicillin and amoxicillins.

Fentanyl, a powerful painkiller used in most surgical procedures, went into nation-wide shortage in May. Hospitals are now rationing stock so that fentanyl is available in situations where there is no safe alternative.

Remifentanil also recently went out of stock. This very potent, short-acting narcotic analgesic is essential for brain surgery.

“We had to basically quarantine off using remifentanil in other roles so we could preserve its use in that area,” Professor David Scott, the president of the Australian and New Zealand College of Anaesthetists, said.

Likewise, as most GPs will be aware, certain vaccines have been in short supply.

Notably, vaccines for hepatitis A and B, typhoid, TB and even the old diphtheria and tetanus vaccines have been difficult to access.

And other drugs prescribed frequently in general practices, such as metformin, seem to suddenly and intermittently disappear without warning.

Pharmacists can often feel like Mother Hubbard in these situations. At one point during the metformin shortage, patients were walking into pharmacies every five or 10 minutes with a prescription for metformin that could not be filled, Greg Kossena, managing partner of Cowes Pharmacy in Victoria, said.

GPs weren’t aware that metformin was unavailable, possibly because the TGA website did not list the shortage. While metformin was interchangeable with immediate release metformin, pharmacists couldn’t make the switch without calling the GP, which was time-consuming and frustrating for all concerned, Mr Kossena said.

In the case of metformin, he and the other pharmacists were ringing so many GPs that Mr Kossena ended up faxing a letter to all the clinics alerting them to the shortage. “It’s not something that we are supposed to do, but we have to do it,” he said.

Clinicians were managing the medicines shortage through safe but sub-optimal treatment adjustments, Professor Scott. But adaptation was covering up the extent of the crisis. Ongoing shortages carried significant risks of delay in beginning the optimal treatment. And the necessity of choosing an alternative meant a potential product mix-up due to unfamiliar packaging.

We don’t want to wait until we have a number of serious adverse events before we eventually do something about drug shortages, but “that’s the fear, isn’t it?” Professor Scott said.

“Let’s say we’ve brought in a whole lot of drugs to substitute from a less well-regulated source because we were patching up the short supply, and that drug actually happened to be contaminated or wrong,” he said. “We need to be much smarter than that.”

Drugs are different

Looking through the reasons provided by pharmaceutical manufacturers for their supply issues produces few insights into the root causes of drug shortages in Australia. “Manufacturing issues” and “unforeseen increase in demand” are about as far as most companies go in explaining the cause of the problem, even when pressed for details.

The Medical Republic asked AstraZeneca to elaborate on the reasons behind the fentanyl shortage and received a succinct response.

“The out-of-stock situation was caused by an unforeseen increase in demand. We responded quickly to fill the gap and we will keep monitoring the situation,” a spokesperson said.

In another instance, a GSK spokesperson offered a link to a press release, which briefly explained that the Twinrix Adult vaccine was in short supply due to a “precautionary disruption in the manufacturing process” and that Engerix-B vaccine production was “back to normal” but would take time to re-build capacity.

“Vaccines, in particular, are complex to make, often taking up to two years,” the spokesperson explained. “Due to the complex manufacturing process, it is difficult to increase supply quickly.”

Medicine supply chains were complicated, the GSK spokesperson said. Active ingredients were often produced at multiple sites and shipped around the world for assembly and packaging. If there was an issue at any site or with transport logistics then supply could be interrupted.

GSK’s explanation for drug shortages, echoed by many experts, is essentially that drugs are different to other products.

The reason we can’t compare drugs with vegemite or toothpaste is because drugs have higher regulatory burdens, stricter auditing processes, very little margin for error, and higher stakes if something goes wrong.

Unlike many other products, demand for drugs is closely tied to the burden of disease, government approvals, subsidies and therapeutic guidelines. Changes to any of these can create sudden, unexpected increases in demand.

Drug companies often run their factories at capacity and set the production schedule months in advance. The same production equipment is used for multiple drugs. All these factors limit the ability of manufacturers to upscale production to respond rapidly to peaks in demand.

The supply of drugs is also dependent on government subsidies.“When supply of a vaccine is constrained globally, we must prioritise countries where we have existing contractual agreements or where governments decide to commit to implement a public program,” GSK’s spokesperson said.

The UK was bumped up the queue for access to the meningococcal B vaccine, Bexsero, this year because the UK government had a mass vaccination program, whereas Australia only had the vaccine on a private prescription basis, GSK told Pharma in Focus in March.

Moreover, the patenting system for drugs warped the financial incentives in the industry, according to Dr Simon Quilty, a physician at Katherine Hospital in the Northern Territory.2

The originators for on-patent drugs typically have a 20-year monopoly on manufacture, so there is a high profit margin and a strong incentive to keep production stable.

But the profit incentive dropped away once the drug went off-patent, he said.

This lower return on investment could explain why fewer drug companies were interested in generics, particularly generics that were challenging and expensive to manufacture, Dr Quilty said.

Rationing of consumables is now almost unheard of in prosperous free-market economies

What changed?

Pharmaceutical supply chains may be more brittle than those of other industries. But this fails to explain why the drug shortage situation appears to have developed only recently – and is getting worse.

“I’ve been in community pharmacy for 17 years now,” Mr Kossena said. “There has always been a problem here and there, but nothing like probably the last six or seven years.”

Professor Scott confirmed the issue was becoming more widespread.

“It is no longer every six months that a drug goes in short supply. Now, there is always at least one drug that seems to be there in every specialty area,” he said.

Shortages first began to appear in Australia around 2009, according to Dr Betty Chaar, a researcher in professional ethics in pharmacy practice at the University of Sydney.3

“We started having problems sourcing injectables in hospitals in 2012,” she said. “We had some important anaesthetics that were going out of supply at that time.”

And the problem appears to be global. In 2011, former president Barack Obama issued an executive order compelling manufacturers to declare predicted shortages six months in advance. Canada followed suit in 2012 after a fire at a plant threatened the supply of 90% of the country’s injectable generics.4

Over the past couple of decades, manufacturing of pharmaceuticals destined for Australian markets had moved offshore, largely to China or India. The death of Australia’s manufacturing industry placed drug production outside our jurisdiction and beyond our influence, Dr Chaar said.

Globalisation has increase efficiency of production but it has also reduced overlaps within supply chains.5 This meant multiple drug manufacturers were often reliant on a single supplier of raw materials worldwide, placing the industry at very real risks of disruption, Kristin Michaels, the CEO of the Society of Hospital Pharmacists Australia, said.

When there are only one or two suppliers, interruptions through political upheavals, trade disputes, contamination during transport, or even weather events and natural disasters are more likely to result in prolonged drug shortages.

This trend is also evident in other industries which depend on the effective functioning of just a few key sites around the world. For example, when monsoon rains flooded industrial areas around Bangkok in 2011 it caused a year-long global shortage in disk drives.6 Thailand has a quarter of the world’s hard-drive production capacity.

Additionally, with a global market comes global competition between buyers. And the business reality is precedence is given to markets with the highest return on investment, the Pharmacy Guild of Australia says.

As Australia represents only 2% of the global pharmaceutical market, we do not have the purchasing power to secure supply in times of global shortage, Belinda Wood, the CEO of the Generic and Biosimilar Medicines Association (GBMA) says.

Australia’s size may put us at a disadvantage the world market, however, Australia also pays a lot more for drugs than other countries. For example, PBS-listed medications cost around 3.7 times more than the international benchmark.7 And chronic drug shortages are also reported in the US, New Zealand,8 Canada, and the UK, which seems to suggest that market size offers little protection against worldwide disruptions in manufacturing.

Who’s to blame?

It is plausible that drugs have just been particularly badly hit by the forces of globalisation. But that’s not what the US’s Food and Drug Administration (FDA) has found. The majority of drug shortages in the US are not caused by the unavoidable factors that disrupt a globalised market, such as natural disasters, a raw materials shortage or a product being discontinued.

The majority of production shortages (66%) result from serious and preventable quality issues. “Quality or manufacturing concerns can involve compromised sterility, such as roof leakage; mould in manufacturing areas; or unsterilised vials or containers to hold the product – issues that could pose extreme safety risks to patients,” the FDA said.

The shortage of the generic sterile injectable propofol in the US in 2009, for instance, could be traced back to an FDA inspection that found high levels of dangerous toxins in a product.10

Factory shutdowns through US regulatory action can have ripples in supply chains around the world. A warning was issued about a possible shortage of bee venom in Australia after a Denmark facility failed an FDA inspection and was banned from supplying the US last year. The supplier to the Australian market came under greater pressure to make up for the shortfall in the US market, portending a shortage of bee venom in Australia.

Ageing facilities and a lack of investment in technology are contributing to the problem.11

“By adopting similar technological advances as other industries, the pharmaceutical industry could create a more robust drug manufacturing process with fewer interruptions,” the FDA said.

These quality issues were largely driven by market forces, however. “At the heart of the quality problem is the fact that generic manufacturers compete on price,” the FDA said. “Intense price competition is a reflection of the generic drug framework – that is, generic versions of the same drug are designed to have the same efficacy and side-effect profiles.”

There was a role for buyers to explore financial incentives to encourage high-quality drug manufacturing. “An important, but largely unrecognised, aspect of quality is the ability to reliably meet customer demand,” the FDA said.

“[The attitude is] basically let the free market sort itself out, but I think that’s a very narrow-sighted view. And, clearly it’s not working.”

Pay to play

Buyers wield a great deal of power in the pharmaceutical industry, with hospitals often banding together to negotiate contracts with manufacturers.

In the US, physician advocates have blamed “group purchasing organisations” (GPOs) for pushing prices down and driving generics manufacturers out of the market. Around 97% of US hospitals belong to at least one GPO and around 72% of hospital drug purchases are made through GPO-negotiated contracts.12

“This is a pay-to-play scheme in which these cartels award exclusive contracts to favored suppliers in return for exorbitant administrative marketing and other fees,” the Physicians Against Drug Shortages website states.

“In a nutshell, they’ve rigged the market. As a result of these dubious practices, there are now only one or two suppliers for many of these drugs, or none at all.”

Perhaps this is an issue confined to the US, but it sounds suspiciously similar to the hospital purchasing bodies in Australia. Hospital networks such as Ramsay Health Care negotiate drug contracts on behalf of 70 hospitals. St Vincent’s Health Australia does the same for 15 hospitals in Queensland, NSW and Victoria.

These large hospital chains or state-wide purchasing bodies sourced drugs for the lowest cost possible, Professor Scott said.

The strategy is extremely effective. In 2013, the Western Australian public hospitals paid 64 times less than the Commonwealth for olanzapine.13

The hospital chains often provide drug contracts to single vendors. As only one drug supplier had the opportunity to make any money and remain viable, the competitors dropped out of the market, Professor Scott said.

“That’s pretty much what happened with fentanyl.”

Pricing pressure forced generics drug companies out of the market or into mergers, Nadine Hillock, a public health pharmacist who is currently completing a PhD on drug shortages at The University of Adelaide, said. “There is not enough money in it for them and so it leaves quite a few products with only one or two suppliers.”

The collapse in competition in the generics industry was illustrated by the recent “blitz” in mergers and acquisitions.

A study published last month in the journal Globalization and Health found that generics companies were folding into each other at a greater rate than ever before.14 In 1995 there were no completed merger and acquisition deals that had a generic drug company being taken over. In 2014, there were 22 of these deals. This jumped to 34 deals in 2015, and 42 deals in 2016 (worth $44 billion).

The PBS price disclosure scheme, introduced in 2007, similarly put the squeeze on generics manufacturers. Under the policy, drug companies were required to reveal how much they actually charged pharmacies for generic medicines. The federal government then used this information to reduce the amount it paid to pharmacies for each drug dispensed.

Price disclosure provided an incentive for just-in-time inventories by generics companies and pharmacies, giving the system less cushioning in times of shortage,  Mr Kossena said. “I don’t know of any other industry which has a situation where whatever is on the shelf is worth half as much as it was the day before.”

The prices of generics were pushed so far down the government stepped in last year to increase the price of around 60 medicines – including antibiotics and cancer medicines – where ongoing supply had been identified as a real risk, GMBA’s Ms Wood said.

However, the PBS did have a supply guarantee that ensured suppliers of generic medicines entered the market with a business model that supported their long-term participation in the market, Ms Wood said. There were requirements on generics suppliers to notify the government when supply was interrupted and penalties were applicable for failure to notify.

Are there solutions?

Professor Scott described the drug shortage as a “market failure in an area of critical practice”, adding there was a lack of political will to engage with the crisis.

“[The attitude is] basically let the free market sort itself out, but I think that’s a very narrow-sighted view. And, clearly it’s not working,” he said.

To alleviate drug shortages, Australia should create a list of critical drugs. Then we must enact a policy whereby we at least had dual supply of these essential medications, Professor Scott said. There should also be tax incentives for suppliers who manufactured critical pharmaceuticals in Australia.

A big area of focus has been the declaration of shortages by pharmaceutical companies.

Australian delegates, including Dr Chaar and representatives from the TGA, attended the International Pharmaceutical Federation summit addressing global medicines shortages in 2013.

One of the recommendations from that summit was to construct a website to list medicine shortages, which the TGA did in May 2014.

“The TGA has a medication shortages information website. But even if you type in metformin now it doesn’t come up. Sometimes the pharmacies are the only place that seems to know that things are unavailable,” Mr Kossena said.

Australia still relies on the goodwill of pharmaceutical manufacturers to voluntarily provide information on shortages to the TGA, although many pharmacists and doctors are agitating to make these declarations compulsory.

Pharmaceutical lobby groups are opposing this change as declaring shortages is generally bad for business.

And mandatory declarations about expected shortages could have unintended impacts on patients by instigating panic buying or premature changes to prescriptions, Ms Wood warned.

The prominence of this debate indicates interested parties in Australia are more concerned with damage control than with trying to find a solution to the shortages. There is a strong sense of resignation that drug shortages are mostly beyond Australia’s control.

But the relatively recent emergence of drug shortages, and the apparent flaws in the structure of the pharmaceutical industry, does indicate more can be done.

“This global problem need a global solution,” Dr Margaret McCartney, a GP based in Glasgow, said. “A stable supply of (usually) cheap useful drugs should be an international priority, and if the free markets can’t manage it then we need a system that can.” 15


1 Medicine Shortages in Australia: A snapshot of shortages in Australian hospitals, The Society of Hospital Pharmacists Australia, June 2017

Medicines shortages in Australia—the reality, MJA, 30 June 2014

Medicine shortages in Australia: causes, impact and management strategies in the community setting, International Journal of Clinical Pharmacy, online 6 July 2016

Canadian drug shortage: recent history of a mystery, CMAJ, 23 April 2012

5 Risk-Based Approach for Prevention and Management of Drug Shortages, PDA, 2014

6 Global Supply Chain Ecosystems: Strategies for Competitive Advantage in a complex, connected world, page 72, 2015

7 Cutting a better drug deal, Grattan Institute, March 2017

8 Patients regularly face medicine shortages as New Zealand struggles to secure supply,, 6 February 2016

9 Strategic Plan for Preventing and Mitigating Drug Shortages, FDA, October 2013

10 Economic and technological drivers of generic sterile injectable drug shortages, Clinical Pharmacology and Therapeutics, February 2013

11 Modernizing Pharmaceutical Manufacturing to Improve Drug Quality: Ensuring a Safe and Adequate Supply of Drugs, FDA, 1 February 2016

12 Hospital drug shortages: what is really causing them? Medill Reports Chicago, 26 May 2016

13 Australia’s bad drug deal, Grattan Institute, 2013

14 Merger mania: mergers and acquisitions in the generic drug sector from 1995 to 2016, Globalization and Health, 22 August 2017

15 Margaret McCartney: Daily drug shortages place avoidable pressure on primary care, BMJ, 11 May 2015

Published on 11 September 2017

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