Tony Sardella and Paolo De Bona, MBA
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.

In Business & Research

One Response to "Olin research: Incentivize domestic drug production to combat medicine shortages"

  1. avatar Carol Rae Hansen

    You didn’t speak about quality control, about which the FDA and American purchasers have virtually no control, another MAJOR THREAT TO AMERICANS. As you know, China has had serious problems associated with domestic and foreign sales of common but dangerously adulterated products, as with the likely knowingly unscrupulous oligarch production of Chinese baby food and American pet food, with Malemine (an organic formula C3H6N6 plastic made with cyanamide and formaldehyde). A domestic PRC agent (Jiang Weisuo), in 2005-2006 began to report “unauthorized substaces” added to milk, but his complaints to regulators and dairy producers “yielded no result.’ FYI: Malemine was used to increase the nitrogen content of diluted milk, giving the appearance of higher protein levels, in order to pass quality control levels. At least 22 companies were involved in 2008, when the scandal broke, with at least 300,000 victims, including at least 6 babies, who died of kidney stones, and an estimated 54,000 babies were hospitalized by PRC counts presumably undercounts. After the PRC halted the publication of data to the public later in the year, Reuters and other news bodies picked it up. They found 94,000 cases excluding municipalities, by the end of September. On December 1 Xinhua’s Ministry of Health revised victim numbers to 290,000, with 51,900 hospitalizations, and 11 suspected deaths. The WHO called this “deplorable,” and at least 11 Western countries halted all imports of PRC-derived dairy products. As well, there have been reports of deaths of Chinese babies since 2008, which have, reportedly, resulted from formula, milk, chicken, eggs, baking powder and other foods contaminated by cytomazine, a melamine derivative pesticide commonly used in China. It also sickened American children and poisoned Chinese zoo animals (a lion cub and baby orangutans) as well as American pets. The latter problem surfaced in late October, 2008, despite a ban imposed in June, 2007 following the scandal over pet food ingredients exported to the U.S. Other harmful chemical additives have been found: peroxide to keep milk from going bad, industrial vegetable oil to boost fat levels, and whey is used to increase lactose levels. MUCH MORE … AS WELL AS A DESPERATE ATTEMPT TO COVER-UP BY PRC DUE TO SUMMER OLYMPICS.

    Other examples abound. For example, my group of Breast Cancer survivors, have had to routinely pay by ourselves for private assays of our daily aromatase inhibitors, which reduce the likelihood of a cancerous reoccurence. You can imagine how often that occurs! Members even went to NYC to have a serious chat about the results of that first assay with the insufficently diligent importing pharmacy. Instead of the American brand Arimidex (ATC Code: L02BG), a roughly $6,000 annual Estrogen blocker hormonal treatment, most quality private insurance now only wish to pay $25-30 for quarterly installments (90 pills) and charge us $300 a quarter or $1,200 annually, for bottles of generic aromatase inhibitors. Once our group started having egregious side effects, presumably after Arimidex past its proprietary development cost exclusive 20-year license by the FDA, and because our pharmacies and insurers substituted for it with generics, we traced the trail from India (with 80% of inputs from China) through Israel to the U.K., then to Canada, and finally to the U.S. At that point,our personally paid-for assays showed chalk and “unknown substances,” clearly NOT MUSHROOMS, which bona fide aromatase inhibitors are derived from, as they inhibit aromatase when evaluated by enzyme assays, especially the white mushroom, which has shown the greatest ability to inhibit the enzyme. Subsequent assays after hair fell out, pains originated, etc. further assays showed chalk. At that point, we ceased the inordinately long supply chain with little or no quality control and only purchased from “Made in Canada” drugs, which caused no side effects, and only one of our group suffered a reoccurence and died. Several years later, that firm had a tragic accident involving the death of the producers in a vehicular accident, and their company folded. We were tossed out into the generic market again, or we paid privately $6,500 this time with greater pharmacy consolidation, with some firms now controlling the entire chain of production from inputs through insurance to pharmacy sales to patient, despite federal regulatory legislation that would appear to apply. Sadly, American and Canadian firms are no longer financially possible or domestically manufactured options for this life-extending drug (I am in year 9 post-chemotherapy and post-radiation). We must now must buy from India, again, via Israel; you can imagine how this makes us feel with India’s Delta Pandemic outbreak, and produuction of pharmaceuticals slowed or halted as a result, or Israel’s latest shooting war with Hamas. We have had no side effects, but whether or not we now have an active ingredient we do not know, nor do we know if we can get production when it is time again to buy a 90-day supply in two weeks. It is all up in the air! FYI: I have a Government (Political Science) from Harvard University, so I know whereof I speak.

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