The Usual Suspects: HRT Treatments, ADHD Drugs and Antibiotics are Again in Short Supply. Here’s Why

SCAIR® Director of Risk Management Catherine Geyman analyses current critical drug shortages alongside earlier incidents – and highlights some common themes.

The British Generic Manufacturers Association (BGMA) has published data showing just how serious drug shortages are in the UK right now. These shortages are nothing new, but the scale of the problem is.

The drugs concerned are the usual suspects – they include antibiotics, HRT treatments and medications for epilepsy and ADHD. The two main causes are also familiar – supply chain disruptions and unpredictable demand. This is exacerbated by their underlying lack of profitability, something that makes many generic drugs unattractive to manufacture.

According to the BGMA, there were 101 supply shortfalls recorded in April 2024 compared with 45 in November 2021. The National Pharmacy Association is now urging politicians to make tackling drug shortages a manifesto pledge, in response to the increasing number of Serious Shortage Protocols issued in 2024. This follows a UK Parliamentary Research Briefing published in May 2024, which calls for reform of medicines shortage management.

Hello Again, HRT and Antibiotics Scarcity

The spectre of unobtainable HRT medication has been looming over many women for years. It was an acute problem back in 2022, when the doubling of HRT prescriptions since 2017 was recognised. The demand and supply issues have only continued to increase since then, with little respite.

The Parliamentary Review acknowledges that the history of the HRT shortage problem stretches back to 2018, when oestrogen patches were in short supply. This situation continued into 2019 and 2020. However, a study of FDA Enforcement Reports, performed by Intersys back in 2018 during the ReMedies project, suggested that this was not a new problem: the estrogenic steroid Estradiol was identified as the most frequently recalled drug in the US over the preceding five years.

The acute antibiotic situation in the winter of 2022-23 was another ‘perfect storm’ example of a peak in demand coinciding with manufacturing problems. In December 2022, oral antibiotics such as amoxicillin were in short supply in the US owing to a rise in respiratory infections, especially in children.

In January 2023, the European Medicines Authority also listed both amoxicillin and amoxicillin/clavulanic acid on their shortage list, citing the main issues as a surge in infections coinciding with manufacturing issues and production delays caused by lack of personnel. At a similar time in the UK, the Department of Health and Social Care (DHSC) issued a series of SSPs for Phenoxymethylpenicillin V (Pen V).

Again, nothing new here. In a 2018 white paper, the Access to Medicines Foundations warned that antibiotic supply chains were close to collapse. A key conclusion was that ‘success will depend on the development of stronger incentives for pharmaceutical companies to enter and stay in the market.’ Sound familiar?

An ADHD Medication Shortage. But Why?

The spotlight, from a drug shortages point of view, is also shining bright on attention deficit hyperactivity disorder (ADHD) treatments. In fact, the scarcity of ADHD drugs was also cited as a case study in the aforementioned Parliamentary review.

Diagnosis of ADHD has rocketed in recent years. In the US, the National Health Interview Survey estimated the prevalence in children to be around six per cent in the 1990s. By 2016, it had risen to ten per cent. As a piece in the New Scientist has noted, it looks likely to have continued rising since: figures from the Centers for Disease Control and Prevention show ADHD diagnosed in two per cent of children aged three to five years, ten per cent among those six to 11, and 13 per cent for those in the 12 to 17 age group.

And, while it may be much more widely diagnosed in the US, the trend is the same elsewhere. In the UK, 1.4 per cent of boys aged 10-16 had an ADHD diagnosis in 2000. By 2018, that had risen to 3.5 per cent. More widely, a study last year by researchers at University College London, who reviewed seven million individuals on the UK’s IQVIA Medical Research Data, found a 20-fold increase in ADHD diagnoses between 2000 and 2018.

ADHD Medication Shortages: Highlighting the Constraint on Supply Chains

Part of our ability to track the rise in ADHD is from prescription data. Unlike other fairly common conditions affecting childhood learning, for instance dyslexia, ADHD is often treated with drugs. In the UK, five types of medicine are licensed for ADHD treatment: methylphenidate, lisdexamfetamine, dexamfetamine, atomoxetine and guanfacine.

That’s led to suspicions that it’s the pharma industry as much as concerned families pushing the growth in diagnosis. The rise in social media and self-diagnosis has also contributed. Others, though, suspect there’s still under-diagnosis, particularly in adults; and some blame the lack of specialists to diagnose the condition in school children.

What is beyond dispute is that drug supplies are struggling to keep up and that the ADHD medication shortage is the result.

Moreover, Takeda’s dominance of the ADHD market (never absolute anyway) has been dented by the expiration of its patents last February, so in theory the supply situation should have improved with the advent of generic alternatives. Takeda did manage to get a paediatric extension until Aug 2023, but we are now more than six months on from that.

So why was there such an acute ADHD medication shortage in the last six months? Well, in addition to demand spiralling, patient advocacy groups cited the regulatory quota system as the root cause. This explains why multiple companies were impacted: the active ingredients are controlled substances and as such there are centrally imposed limits on how much can be made.

Regulatory Wrangles: Enter the FDA and DEA

For years, we’ve recognised that regulatory issues and enforcement action are often drivers of drug shortages. It’s a key risk in M&A due diligence, for example, and one reason our Regulatory Incident Monitor is so useful. We also know generics are no panacea. Generics bring down drug prices, widening access. But they do so by reducing manufacturers’ margins, cutting the drug’s profitability. As we’ve previously noted, there’s a price for low-cost drugs.

The ADHD medication shortage adds a new wrinkle to the old story, however. Crucially, this time, it’s not the FDA being blamed for restricting supply but the Drug Enforcement Agency, the federal law enforcement agency tasked with combating illicit drug trafficking and distribution. Crucially, its role includes combating the abuse of prescription drugs. Such drugs include lisdexamfetamine and other potentially addictive amphetamines used for ADHD and classed as Schedule II controlled substances by the DEA.

The DEA denies the claim that they are at the root of the ADHD medication shortage issue. In an open letter last November, DEA administrator Anne Milgram said drug makers were failing to use existing allowances.

However, other DEA regulatory actions have compounded the problem. Across October and September last year, the DEA issued five Orders to Show Cause and one Immediate Suspension Order against six DEA-registered companies. One of the companies to receive an Order to Show Cause was Ascent Pharmaceuticals, which manufactures methylphenidate, a common ADHD drug. Although an Order to Show Cause does not immediately stop production, the company’s need to make changes to comply with audit findings will inevitably impact supply.

Is the Situation Improving?

The quota issue is being addressed by the Drug Enforcement Administration, but the benefits of that decision will take time to filter through.

Our own analysis of US FDA Drug Shortages from April and May (see chart showing the % of ADHD presentations that are either completely unavailable, supply constrained, to be discontinued or available), backs up the claim that the situation is improving; there are a reasonable number of drug licence holders in the market, but shortages persist across all manufacturers of other lisdexamfetamine dimesylate capsules, except Takeda.

SCAIR®'s analysis of US FDA drug shortages from April and May 2024

The improvements have not completely resolved the issues in the UK. According to the BBC, patients and pharmacists are still spending much of their day hunting for medication.

Interdependencies, Uncertainties and Risk – the Old Supply Chain Story

While the drug-shortage situation remains critical, root causes can always be debated. However, a number of facts are clear:

demand is a key driver;
manufacturing problems are not limited to the manufacturers – various regulatory agencies play a significant role in supply constraints;
generics offer no quick fixes to shortages;
and the interdependencies of the global pharma supply chains mean shortages in one country can quickly go global – pharma companies fish in a very small pool of suppliers that swim in dangerous waters.

But, then, anyone who has been paying attention already knows that. These are the challenges that SCAIR® has long sought to address. The battles over ADHD are just the latest in the long-running war to keep shortages at bay.

Lessons from the pandemic: Life sciences supply chain vulnerability and the cost of resilience

Just when we thought it was over. As countries such as the UK finally looked like they may be emerging from the pandemic, Omicron has brought unwelcome uncertainty to the Covid crisis, which continues to escalate at an alarming pace.

Regardless, however, coronavirus will at some point become endemic. As governments around the world are now accepting, we will learn to live with it. As the year closes, it is a good time to look to the future. Part of that will mean we must stop blaming every supply chain problem on either the pandemic or Brexit.

The disruption we’ve seen to life science supply chains over the last two years has roots that go back much further.

At the outset, it’s important to recognise that life science supply chains do face significant and particular challenges. Like many modern supply chains, they are complex, and like many others, drug manufacturers face general pricing pressures, geopolitical threats, and a heavy reliance on outsourced manufacturers.

Like not quite so many, the failure in supply of key drugs can be life changing. Furthermore, like fewer still, they are very highly regulated. This regulatory environment is perhaps what differentiates them most.

That’s the background against which Covid has played out.

A crisis in demand

Turning to the crisis itself, we can make two observations.

First, even in the early stage of the pandemic, the most frequently cited cause of disruption was not the inability of supply chains to deliver– whether government restrictions on travel or movement, import bans or lack of available workforce as a result of illness or lockdowns.

We know that because the FDA publishes drugs shortages and their root causes. Our month-by-month analysis of this data using our own supply chain risk management software SCAIR®, show that the number of drugs first reported as in shortage started rising in February and peaked in April. The most frequent cause, however, was not Covid-related constraints but increases in demand – by far.

In many cases, the shortages were for antivirals beings used to treat covid, as well as anaesthetics and sedatives used for mechanical intubation. That wasn’t just a US issue, either. The British Generics Manufacturers Association reported a five-to-tenfold increase in demand for intensive care medicines in the UK.

The key point, though, is that it was not the virus itself limiting supply. Supply chains were simply unable to respond quickly enough to surging demands. Covid effectively shone a light on this.

A long-standing problem

That’s even clearer if we take a longer view.

Look at the cause of shortages over the five years from 2013 to 2017. Over this period, there was no particular surge in demand, so that wasn’t the leading reason. But neither were there any natural disasters or major fire/explosion across those years.

Instead – and by quite a way according to the 2019 FDA Drug Shortages Task Force Report – most shortages were due to quality issues. This was the root of 62% newly reported drug shortages between 2013 and 2017: anything from a single contaminated batch of raw material through to a plant shutdown for systemic quality failures that can go for months. This data also shows that drug shortages have been with us for some time. Indeed, the peak in 2011 saw it recognised as a crisis and drug shortage task forces set up in the US & EU. But they’re still with us and on the rise again even before the pandemic. In 2017 the FDA reported 39 new drug shortages – up 50% up on 2015 and 2016. In 2020 there were 43, and the FDA worked with manufacturers to prevent 199 others.

So, drug shortages are nothing new, and they’re not usually the result of unpredictable natural disasters or other catastrophes, either. Instead, they’re due to fundamental and long-standing structural supply chain issues.

So why can’t we address these?

Long-term trends

To answer that, we need to look at the cause of those issues. They are varied.

One is that a broad range of drug supplies can be reliant on a small number of specialist supplier facilities. The 2020 Report to US Congress on Drug Shortages from which the above data is taken specifically mentions this: Several shortages in 2017 and 2018 were down to two large drug manufacturers closing facilities for remediation.

There are also longer-term trends that have made supply chains more fragile in the last two decades:

Adoption of lean or just-in-time (JIT) manufacturing. These methodologies aim to cut working capital and make supply chains more efficient. The net result is leaner supply chains, lower stock levels and less in-built resilience.

Outsourcing to countries with lower labour costs and, in some cases, less mature regulatory systems. Drug supplies have become dependent on fewer and, in some instances, lower-quality manufacturers.

Increasingly global supply chains adding to logistical complexity, decreasing supply chain visibility, and increasing exposures to threats from more volatile regions.

The downside of regulation

There’s a final factor, too, though, and it comes back to that distinctive characteristic of life science supply chains: regulation. Pharma, biologics and medical device manufacturers all have to comply with a strict framework and stringent standards put in place to protect patients.

Few would argue with regulatory standards to ensure safe drugs and treatments. But tough regulations can, in practice, actually work against patients when something goes wrong. The loss of a critical supplier or manufacturer (possibly due to regulatory action itself) can result in lengthy supply shortages whilst regulators validate and approve an alternative.

Which drugs are most problematic?

It’s informative to look at which drugs are most likely to be affected, too. FDA data analysis shows that the drugs most often recalled over the past few years are generic injectables: Low margin drugs that are very difficult to make. Older drugs, approved many years ago (and therefore more likely to be near the end or out of patent), are also more likely to be recalled.

Furthermore, our own analysis from SCAIR®, shows that 69% of companies reporting shortages in the US experienced an adverse inspection (or an OAI “official action indicated” notice) in the preceding four-year period. Many of these resulted from problems with manufacturing in India and China. The chart below shows the percentage of companies in different countries that received an adverse inspection. Green is under five per cent; red is over eight per cent.

The reliance on cheap manufacturing bases seems likely to be closely correlated with the likelihood of quality failures and subsequent shortage.

Now what?

So, what can we do?

There are, perhaps, two answers. The first is for manufacturers. They are unlikely to predict the precise circumstances of a shortage: It will probably stem from a series of unlikely events coming together. They can, however, identify their most vulnerable supply nodes and then make contingency plans to respond to an interruption or disruption to these, regardless of the cause.

With potentially thousands of suppliers, focusing on those key vulnerabilities requires a systematic approach:

First, filter down the list of suppliers to identify the most critical. The criteria used will vary, but uniqueness will probably weigh heavily. Those without alternatives are inherently more critical.

Then focus on high revenue products and map internal and external supply chain relationships, relating each critical supply node to the product sales it contributes. This enables us to put a number on the value at risk should a supplier be lost.

Overlay the threats and scenarios that could affect supplies. For each scenario – such as a natural disaster in a particular area – we can then estimate the actual financial impact of the loss of a supply node across the portfolio of products.

Finally, for each scenario, consider and justify mitigations and optimise risk transfer decisions. This involves a cost-benefit analysis of mitigations such as holding strategic stock, validating alternative suppliers or investing in business interruption insurance.

The price of resilience

From the manufacturers’ perspective, this is complex but achievable. Some years ago, a survey by consultants KPMG found only nine per cent of respondents believed their organisation could assess the impact of a supply chain disruption in a matter of hours. Almost one in five (17 per cent) said it took three weeks or longer.

Modern technology has improved that; the challenge is often now too much data rather than too little. Identifying critical vulnerabilities so that they can be mitigated is possible. The question is, can investing in contingencies be justified?

New, in-patent products have the margins to support investment in stock, secondary suppliers and other mitigations that ensure high quality, resilient supply chains. Many critical generics with low margins – and especially those with complex production processes – do not.

In the last 18 months, the pandemic has seen a surge of state funding into medicines innovations and research. There has also been significant public/private investment in the biologics supply base. Governments have been forced to look at their supply chains, and many have invested in critical infrastructure to leave them less dependent on foreign manufacture.

As yet, though, most of this work has not addressed the price dynamics and vulnerability that characterise many generics’ supply chains. Regulation that ensures the highest patient safety standards is invaluable, but it does have a cost, and somebody has to pay. Until governments and societies grasp that nettle, it will often end up still being the consumers who find they struggle to get the drugs they need.

Catherine Geyman, Director, Intersys Risk

Sharing Insights on Supply Chain Risk: Intersys at BCI World 2021 Virtual Conference

What has the pandemic taught us about our supply chains? It's a question that was top of the agenda at the recently held BCI World 2021 Virtual Conference - one of the largest Business Continuity and Resilience events in the world. It was also the perfect platform for Intersys Risk Director Catherine Geyman to share her more than two decades' worth of expertise in supply chain risk management.

Catherine led a workshop on The Appetite for Risk in the Life Sciences Industry. The interactive session shed light on pressing issues such as the cause of recent drug shortages during the pandemic as well as generic trends to have influenced supply chain vulnerability over the last two decades. There were deeper insights (driven by SCAIR®) into what steps organisations can take to strengthen supply chains, and what lessons other industries can learn from the rather complex nature of life sciences supply chains. Catherine Geyman, Director Intersys Risk Ltd said:

“The workshop provided an opportunity to share the impact of the pandemic on life sciences supply chains, and also to reflect on some of the pre-existing drug shortage issues such as the pricing pressures on generic drugs. It was also a chance to contemplate on the fact that the life sciences industry really is one of extremes. At one end of the spectrum there are the new biologics, treatments that target small patient groups with rare diseases and are unfortunately unaffordable to the individual. On the other side of the spectrum you have the older, generic (but none the less critical) drugs that are priced so low that not enough manufacturers are encouraged to make them, meaning that any problem in the supply chain only gets amplified and impacts the patient."

We hope that such discussions and debates will go some way towards shaping priorities for the future.

The Complex Truth Behind Vaccine Nationalism

No winners in the short term

Vaccine nationalism shows no signs of going away, and moves to re-shoring in certain parts of the pharma industry look certain. While that may bring some benefits in the long-term, there will be downsides. Either way, don’t expect it to deal with drug shortages.

The row continues. With the EU on Thursday stopping short of vaccine export bans but backing more stringent export controls to pressure AstraZeneca to "honour its contract". The rhetoric around vaccine nationalism is not improving. Earlier in the week, the Commission confirmed plans for all vaccine shipments to be assessed on the destination country's rate of vaccinations and exports. Talk now is trying to achieve a win-win, but in truth supplies from the Halix, Netherlands, factory due for delivery to the UK remain at risk.

According to one data analytics firm, a ban could delay the UK vaccine drive by two months – without necessarily bringing much benefit to the EU; the number of vaccines in question would only accelerate its efforts by about a week. It could also impact the capability of other vaccine manufacturers used by the EU, were the UK to retaliate; Pfizer has warned that its production on the continent relies on materials shipped from Yorkshire. In particular, Croda International, a chemicals firm based in Staith, Yorkshire, provides Pfizer's factories with the fatty molecules its vaccine needs.

As the UN-backed global vaccine alliance Gavi has warned, export bans could “prolong the crisis, add to our economic difficulties and lead to further loss of life”. And that’s before we consider any potential escalation into a wider trade war.

Frankly, the bigger problem the EU may face in its drive with the AstraZeneca vaccine is public confidence. That has plummeted in Europe, following the hopelessly mixed messaging from political leaders and public health bodies over recent weeks over its safety and efficacy.

In the short-term, then, there’s little benefit to be discerned from the wave of vaccine nationalism that even the WHO is warning against. In the long-term, though, recognition of the weakness in some supply chains and limited capacity to deal with such a crisis might encourage some useful changes.

Moves to protectionism and export bans only threaten to undermine pharmaceutical supply chains; indeed, a central complaint against the EU is that it is, as one commentator puts it, “taking a sledgehammer to something brittle”. Many EU leaders have urged caution. On the other hand, countries’ efforts to develop domestic production could provide a constructive approach to boosting capacity and building resilience.

A big shift

Well, perhaps.

Certainly, there seems little doubt that the reshoring of some pharma production will outlast the current crisis.

Moves to address this and develop domestic capability, therefore, predate the current row. Last year alone, the UK government announced investments in vaccine manufacture of over £240 million. October saw building of the first national Medicines Manufacturing Innovation Centre (MMIC) begin up in Scotland. The government’s also working with generics Wockhardt on fill and finish services as part of the effort to accelerate vaccine manufacturing in the UK. Other plans are also in the pipeline.

These plans are for the long term. In part, that’s because Covid may require vaccine production capacity for years to come, with new vaccines and boosters to deal with resurgences and mutations. It’s also because Covid has highlighted just how little production capacity countries such as the UK had in place.

There are long-term trends working against the continued reliance on outsourced centres, too. Outsourcing production to low-cost locations such as China does rely on them continuing to be low cost. With a growing middle class there and rising wages, that won’t last forever. The average wage in the country is around 90,000 yuan – still under US$14,000, but more than double its level a decade ago. And China looks set to have weathered the Covid crisis much better than most: Growth in the country is set to top 6% this year.

However, there is also the issue of drugs shortages, which predates the pandemic and can only be solved by increased capacity and diversity of supply. The last year’s crisis has merely been the jolt to turn plans to address supply chain vulnerabilities into action.

The UK's concerns about outsourcing pharma production are echoed and perhaps magnified across the Atlantic. The US government has made no secret about the fact that it considers reliance on outsourcing drug production a national security issue. A case in point would be The Commissioner of Food and Drugs at the FDA Janet Woodcock’s testimony at the hearing of the US-China Economic and Security Review Commission where she declared: "...use of foreign-sourced materials creates vulnerabilities in the U.S. drug supply".

No quick fix

All this is true as far as it goes. When it comes to supplies and development of sophisticated vaccines, there’s little doubt the UK – and other countries – will be on a better footing for the next crisis if it comes. We should, though, be wary of drawing conclusions that are too broad.

For a start, as the current dispute is showing us vividly, there are no quick fixes. As we noted last month, the problems illustrate the enormous complexity and uncertainty of some of the manufacturing processes involved. Ramping up and establishing production lines in existing facilities takes time; building new facilities takes even longer. In many cases, we’re talking long-term capital projects, taking 18 months or more before even opening the doors. The current efforts will have an impact on national capabilities, but the changes won’t all happen overnight.

Efforts to boost pharma production capacity are also likely to come up against constraints – not least because we’re seeing so many countries seeking to boost their capabilities at the same time. Traditional pharma production centres such as India are also ramping up production; the Serum Institute in India (which makes the AZ vaccine) is the largest vaccine production facility in the world.

Among the key challenges is going to be finding the labour they need. The UK, in common with other countries, faces a long-term shortage of skilled workers to fill engineering and other key technical roles. Even before the pandemic, the Association of the British Pharmaceutical Industry warned that the UK risked falling behind the rest of the world in terms of students studying STEM subjects. With the advent of Covid, there are likely to be fewer opportunities to recruit internationally to make up for domestic shortages. Brexit might not help, either, if it limits businesses’ ability to recruit from abroad.

Quality not quantity

But will they even want to?

The key question is where the investment needed to reshore pharma manufacturing capacity will come from – and how well that’s going to match up with the UK’s needs. The answer may be, not quite as much as some expect.

On the one hand, there’s little doubt that the UK government’s actions, in common with others around the world, will significantly boost our capabilities to product vaccines for Covid and other similar diseases. We can speculate, too, that a wider resurgence of onshore pharma production might benefit from support as part of the government’s “levelling up” drive to spread growth across the UK.

The problem is that there’s a fundamental mismatch between the sort of production that’s likely to be attractive to governments and the products where we most often see a problem with supplies. Outside the pandemic period, it’s not new, cutting-edge vaccines and drugs we run short of: It’s low-cost, low margin generics. They’re hardly the engines of growth and highly skilled jobs that governments tend to promote. Production of these moved to low-cost offshore centres for a reason.

So, if not governments, then what about the pharma industry itself? Well, if the sounds coming from the US are anything to go by, there’s little appetite there. As this piece notes, pharma companies aren’t convinced by the economics; “The industry's reasoning isn't complicated: Manufacturing stateside would likely cost a princely sum compared with the cheaper wages and lower costs abroad, and would upset the balance of pharma's global supply chain.” Moving all manufacturing to Western markets is “impractical and likely not feasible”, according to the Pharmaceutical Research and Manufacturers of America (PhRMA).

There’s little reason to suspect European manufacturers will feel any differently. If anything, all the talk of export bans is likely to make them even less keen to relocate much of their manufacturing capability to more tightly controlled markets.

That’s not to say there will be no benefits from the renewed interest in domestic development and production in markets like the UK and US. Government support is likely to help the industry develop. It’s not just promoting new vaccines and treatments, but also prompting improvements in technology and production processes – helping the drive to continuous manufacturing, for example.

But it’s more likely to be an evolution than a revolution. Dependence on cheaper offshore production centres for many drugs will remain for the time being – as will the risk of shortages of generics on which so many depend. The vaccine wars will eventually see a truce. When it comes to tackling wider supply chain vulnerabilities, though, the industry faces many battles ahead.

Who’s to Blame for the Vaccine Wars?

Vaccines and Vindictiveness: Why Pushy Politics Won’t Fix Production

With potentially thousands of lives at stake, vaccine supply has become a highly charged issue. In truth, however, pointing the finger is not going to fix the real challenges facing supply chains. Intersys Risk Director Catherine Geyman takes a close look at the current conflict between first-to-market vaccine manufacturers and the EU, and what we can learn from this difficult episode for governments and pharmaceutical businesses.

With threats on export bans and the reignition of Brexit debates, the contractual dispute with AstraZeneca has taken a decidedly political turn. In that context, a bit of pharma bashing is the easy option. After all, some may say, it is AstraZeneca that’s failed to deliver. But there’s just a couple of problems with that…

First, even its supporters would concede that the EU is not entirely without fault. More bluntly, as Matthew Geyman argues, the EU ordered too late, paid too little and has delayed too long even to approve the vaccine. (It only did so on January 29.) And it’s not just AstraZeneca saying this. Some of the German press agree.

Don’t forget that AstraZeneca is not making a profit; it is supplying the vaccine at cost. If the EU then chooses to spend months beating down the price and AstraZeneca has set up separate supply chains to serve local markets, it follows the EU will not be served by an over-abundance of manufacturing capacity and that EU capacity will simply not have had enough time to optimise its processes (which, as we note below, are complex).

According to the rapidly withdrawn tweet by Belgian minister Eva De Bleeker, the EU is paying €1.78 per dose compared to the UK’s $3-4 per dose. Both are far cheaper – by orders of magnitude –than any of the other vaccines.

Perhaps more importantly, though, pharma bashing ignores just how incredibly complex and expensive it is to produce vaccines and ramp up capacity. Sometimes, as AstraZeneca has explained, it simply can’t be done. It’s not a case of just trying harder.

As a headline writer puts – Even Presidential Pre ssure Might Not Get More Vaccine to Market Faster. One expert in the piece, Lawrence Gostin, a professor of global health law at Georgetown University, explains, “The big problem is that even if you can get the raw material and get the infrastructure set up, how do you get a company that is already producing at maximum capacity to go beyond that maximum capacity?”

Screen shot of tweet about cost of covid drugs — Belgian minister Eva De Bleeker revealed in a tweet, later deleted, that the EU is paying €1.78 per dose compared to the UK’s $3-4 per dose. Both are far cheaper than any of the other vaccines.

Nothing new under the sun

Scaling up from clinical trial-sized batches to full scale production is difficult for any novel medicine, but vaccine processes are particularly complex and challenging. Unlike the more predictable chemical synthesis of traditional drugs, biologics processes for vaccine production usually involve the reproduction of living cells. Sometimes these processes don’t behave predictably and the amount of useful cells produced (aka yield) can be disappointing. AstraZeneca’s delivery commitment to the EU back in August is not very different from a farmer pledging a supply after planting a crop in the spring: he may hope for the right weather conditions, but he can’t know for sure the exact size of any harvest in the autumn.

The lower-than-expected yields AstraZeneca has experienced are hardly unique, and the EU is not the only customer to have been affected. Supply chain issues have been a concern for Pfizer since December, and the UK contended with its own AstraZeneca shortages last year.

And it’s not just an issue amid the massive demand prompted by the global pandemic. We saw these sorts of shortages with swine flu over a decade ago and more recently in the run-up to the winter 2019-20 regular flu season, before Coronavirus hit.

But if this should encourage some cooler thinking in the EU, we should also acknowledge that its response is not entirely unprecedented. Vaccine nationalism is nothing new; part of the 2009 swine flu shortage occurred because an Australian company decided to satisfy its own country’s needs first. Nor are export bans new: it’s worth noting that the UK itself put restrictions on exports for some covid drugs (for treatment rather than vaccination) early last year – and this wasn’t the first time.

In the heat of a race to save the lives of thousands of their populations, it’s not surprising tempers run high. Rather than who to blame, though, we should look at what can we learn.

A syringe extracting covid-19 vaccine from a vial. — Vaccine production can result in unpredictable - and sometimes disappointing - yields.

Political risks back for supply chains

Not all of those lessons will be encouraging.

The first and most obvious one is that political risk remains a major factor in pharma businesses’ supply chains and those that rely on them. Of course, this isn’t new either – even if concerns around US-China trade disputes seem a long time ago now. The Belgian medical regulator’s raid on AstraZeneca’s vaccine production factory near Brussels at the behest of the European Commission certainly brings the point home, however.

It’s easy to say we should keep politics out of vaccinations, but that is probably unrealistic. In some cases it may even prove unhelpful. The politicisation of the vaccine roll-out isn’t just about potential export bans; we’ve also seen how political will and urgent need can smooth the path to market. Israel is leading the world in its vaccine drive and reportedly has the interventions of its prime minister and health minister to thank: their conversations with Pfizer’s chief executive led to the country promising to rapidly roll-out its vaccine drive and share the data with the company on its impact in return for plentiful supplies. Today, more than half the country has had at least a first dose of the vaccine, against 12% in the UK and three per cent in Germany.

Whether for good or ill, recent weeks have shown that businesses cannot ignore the role of politics in times of crisis.

Contractual complications and onshoring

Other issues are likely to come out of the recent debates. One is a renewed focus on contract terms. Certainly terms such as “best efforts” are coming under a new level of scrutiny, and we may end up seeing some legal clarity on what commitments such phrases actually compel of each party. Who knows how impartial any decision on that will be if the AstraZeneca contract is ultimately contested in the European Courts.

Another long-term impact we’ve already seen as a result of the pandemic, though, is also likely to be reinforced by the recent battles: the move to onshore production.

Britain started 2020 with little vaccine manufacturing capability. The last year has seen massive investment in developing its domestic capabilities in England, Scotland and Wales. These include:

expanding and accelerating construction of the Vaccines Manufacturing and Innovation Centre in Oxford
establishing the rapid deployment facility at Oxford Biomedica
collaborating with the Cell and Gene Therapy Catapult, to fund a state-of-the-art facility in Braintree, Essex
funding the Centre of Process Innovation in Darlington, to develop facilities for producing vaccines using new RNA-based technology
supporting the development of Valneva’s manufacturing facility in Livingston, Scotland, to create a major UK vaccine facility capable of mass-producing vaccines.

The UK is still dependent on overseas covid-19 vaccines, not least for the Pfizer supplies from Belgium that the EU is threatening to block. However, that dependence is far lower than even a year ago, and will likely decrease in future. It’s no accident that the new Novavax vaccine is to be manufactured in Stockton-on-Tees.

The pandemic has seen a massive increase in onshoring, and that’s likely to stay. In light of the recent disputes and the uncomfortable ongoing dependency on India and China for API Production, few countries now will risk not having substantial domestic capacity. The UK’s efforts signal a good start but the level of investment pales into insignificance next to the financial onshore incentives already injected into the US economy.

Back to Brexit

Finally, the recent spat has once again raised issues for pharma from Brexit. Unlike in previous instances, however, we now have greater clarity about the impacts of leaving the EU in practice. There is, it’s fair to say, something for everyone.

On the one hand, the faster UK roll-out was, at least in part, made possible by the UK’s exit from the EU. Early approvals by the UK’s Medicines and Healthcare Products Regulatory Agency contributed significantly to the speed of the UK’s programme. The European Medicines Agency has been much slower. Had the UK still been in the EU, it could theoretically have opted out, but since no EU member has, that seems unlikely. The UK would also almost certainly have relied on the Commission’s procurement programme – subject to so much current criticism.

It is hard to escape the conclusion that the UK’s improved vaccine roll-out represents an unexpected Brexit dividend.

On the other hand, the threats of export bans from the Commission underline quite how different the UK’s relationship with the EU now is, and the new risks that has introduced.

In this – and perhaps in future other areas – Brexit provides the UK with opportunities to carve its own path. That will sometimes give it opportunities for faster, nimbler responses. But it’s also a road that it will sometimes have to travel alone.

Catherine Geyman, Director, Intersys Risk

More than Covid: Lessons for Supply Chain Resilience from 2020

Hard Truths from a Pandemic

Pharma and others in the life sciences shouldn’t let the lessons learned from the crisis go to waste. As we emerge on the other side, now is the time for a strategic review of supply chain vulnerabilities. Intersys Risk Director Catherine Geyman, takes stock of the situation.

It’s been an unprecedented year for life sciences. The pressure on both supply and demand as a result of the pandemic was unparalleled in modern times.

As Peter Ballard, Chair of the British Generic Manufacturers Association (BGMA) put it in the organisation’s review: “At the peak of the first wave in the UK, the pandemic derailed all sense of normality. It thrust healthcare and its supply chains into the forefront of public consciousness as the NHS staff struggled to keep pace with patient demand with the resultant knock-on effect to the medical supply chain.”

It was the perfect storm: huge increases in demand which could not have been planned for by the pre-covid supply base; and massive disruption to supply chains as a result of staff absences and government constraints.

In the UK, generic medicines make up more than three-quarters of all prescribed drugs. According to the BGMA, which represents UK-based generics manufacturers and suppliers, demand for some drugs was five to ten times higher than usual. At the same time, an export ban on active pharmaceutical ingredients (APIs) from India – accounting for about half of APIs used by British generic medicines – came in, in March. BGMA members reported a 24% reduction in supply from the country. Companies also saw a decline of over a fifth in finished products from India.

And it wasn’t just the UK, of course. We’ve looked at shortages in the US earlier in the year. There, our analysis showed that, with a few exceptions, shortages were mainly demand-driven, as the virus saw a clamour to get hold of certain anti-virals, anaesthetics and sedatives. Companies reporting new drug shortages in the US rose from 19 in January to 71 by April. Nor was it just a life sciences issues, even if the industry was hard hit. As the Harvard Business Review recently noted, “The supply shock that started in China in February and the demand shock that followed as the global economy shut down exposed vulnerabilities in the production strategies and supply chains of firms just about everywhere.”

With vaccines developed, this might be the beginning of the end for Covid. For those in pharma and the broader life sciences, though, it should just be the beginning of a strategic review of the impacts on their supply chains and what we can do differently in future to minimise disruption.

To quote the BGMA again: “COVID-19 has presented unprecedented challenges, but it would be unforgivable not to learn from those and apply that experience to the future.”

It’s in this spirit that I recently held a webinar on Understanding Risk in Pharmaceutical Supply Chains.

Learning the lessons?

As that webinar underlines, there are two reasons why we need to take this opportunity to look back before going forward. First, because it might be unwise even now to think the challenges the virus presents are at an end. The vaccine roll out will take time in the UK and elsewhere; the Pfizer supply chains themselves are already facing disruptions due to out of specification raw materials. Many still fear a third wave of the virus after Christmas. In other words, there are still plenty of opportunities to surprise and disrupt supply chains.

Even if we have managed to put this crisis behind us, the pandemic has shown what is possible. It could happen again. Businesses must prepare for the next crisis, not the last one.

It doesn’t take a worldwide catastrophe to cause supply chain disruptions, however. Well before this spring, drug shortages were again making themselves felt.

Unsurprisingly, there are several reasons for shortages. In some cases, it is other significant events; it’s worth remembering that before Covid the critical concern for the UK was Brexit, something of which we may shortly be reminded (particularly since buffer stocks put in place for Brexit have been used during the pandemic). US supply lines, meanwhile, have been repeatedly hit in recent years by hurricane activity in the likes of Puerto Rico.

But in addition to these significant disruptions to supply, there are a whole host of other, lower-impact, higher frequency events and risks that, if not managed, can escalate over time and eventually cause supply interruptions. They include failures to meet on-time, in-full (OTIF) targets as a result of delivery delays or batches not released; process variability, quality deviations or unreliable manufacturing or API plants; lower profile supply chain disruptions – the result of critical material shortages, facility damage or transit failures; and, finally, product shortages as a result of recalls or other regulatory intervention.

The majority of these events normally do not reach public scrutiny as they are usually handled and mitigated by having safety stock in place. If problems persist, however, that reserve can be eroded and eventually exhausted, resulting in drug shortages.

The critical point is that Covid did not always cause the weaknesses we’ve seen in supply chains. It often just revealed them.

Long-term fragility

To understand why, and how drug shortages have re-emerged to challenge the industry, it’s necessary to recognise the long-term trends that have increased companies’ exposure to supply chain disruptions. Three related themes are essential.

The first is the accountant’s drive to make supply chains more efficient that has seen businesses cut back on stock and redeploy backup facilities to productive use. Mergers and acquisitions resulting from the same push for efficiency, meanwhile, have reduced the number of suppliers for crucial APIs, eliminating redundancy in the supply chain. This a relatively simple point: By reducing both the range of alternative providers and internal production capability and stock levels, we’ve inevitably reduced the resilience of supply.

The second is again the result of the determination to cut costs: Outsourcing to countries with lower labour costs, which has focussed industry dependencies on fewer API or contract manufacturers. As noted above, this has resulted in businesses heavily dependent on India, and to a lesser extent China for APIs. Disruption in the event of an export ban or similar block on supplies will almost inevitably be felt downstream. Indeed, this issue rapidly came to the fore right from the start of the pandemic.

The industry’s decision to shift API production to Asia has also increased drug supplies’ reliance on jurisdictions with less mature regulatory systems and, hence, potentially lower standards. There is no escaping that the regulatory track record of China and India is demonstrably inferior to that of the UK, Europe or the US.

In the image below, the colour coding shows the frequency of OAIs (Official Action Indicated notices) issued to facilities by the FDA as a percentage of the number of inspections conducted. In the US and Europe, the likelihood of an OAI was usually below five or six per cent (green and light green). In China and India, the rate was more than eight per cent (red).

Source: research by Intersys Ltd as part of the ReMediES project.

That’s a particular issue because while manufacturing of APIs has moved to jurisdictions with arguably lower standards, regulatory requirements have, if anything, moved the other way.

In practice, this can result in disruptions to the supply chain in one of two ways. First, where a compliance failure occurs, the OAI often results in prolonged plant shutdowns for remediation. Second, remediations that result in major changes or new suppliers will take time to be approved by the regulators.

It’s an irony that the regulatory measures in place to protect patients, can count against the patient if something goes wrong in the supply chain and extensive regulatory re-approval is required for the solution to put it right. This is far from being a theoretical risk. An FDA report in 2019 showed that of 163 drugs that went into shortage from 2013 – 2017, 62% followed supply disruption associated with manufacturing or product quality problems. Moreover, there is an interplay between regulatory risks and the other vulnerabilities from long-term trends touched on above. As a result, certain types of drugs are particularly vulnerable to supply chain interruptions.

This is confirmed by both the FDA report and a study led by Intersys with the Institute for Manufacturing at the University of Cambridge, part of a cross-industry collaboration project called ReMediES, which revealed that 69% of product shortages in 2018 followed OAIs issued to the company reporting the shortage. Both studies showed that the drugs most likely to be in shortage were generic injectables, which require rigorous manufacturing processes but do not provide much profit margin as a result of competition. (A BMGA study of 40 originator products to come off patent since 2014, shows sale prices fell by an average of 89%.) Older drugs with a median time since first approval of almost 35 years are also more to be in shortage.

Price competition for older generics makes investment in robust quality management systems difficult. Moreover, in the event of an interruption that causes the drug to become scarce, low prices and regulatory hurdles discourage new market entrants from correcting the situation.

Seeing is believing

There’s one final factor that explains the rising disruption to supply chains, and it’s an important one: The increasingly global nature of life sciences businesses and the complexity of their supply chains has decreased visibility and oversight of them. The result is that both the underlying vulnerabilities and interruptions to supply chains are more difficult to detect and address.

As my presentation outlined, the life sciences supply chain takes in a broad range of other industries. These also vary considerably, depending on whether we consider biologics, traditional pharmaceuticals or medical devices. These bring a range of second-tier suppliers and contract manufacturers into consideration. As a result, life sciences businesses can find themselves exposed to a range of risks to livestock, chemicals or engineered components businesses.

Trying to predict the full range of possible events that could impact these suppliers is arguably impossible. What businesses can do, however, is to identify the most critical suppliers, and determine the value at risk for the critical dependencies of key products.

Understanding where these vulnerabilities lie enables the business to focus on these so that impacts on them are identified and responded to more quickly. Quantifying the value at risk, meanwhile, allows proper evaluation of risk mitigation options through a cost-benefit analysis.

Crucially, neither require you to anticipate what event might cause the disruption – only the vulnerabilities and value at risk. That’s important because it’s what the last year has really shown us: That we need to be ready for anything.

For more on these issues and particularly how SCAIR can help with identifying mapping, quantifying and addressing critical exposures, watch the webinar for free here.

Catherine Geyman, Director, Intersys Risk Ltd

Analysis: Pharma Supply Chains and Covid-19 - The Story So Far

How pharma supply chains are faring during the global pandemic

A close look at the data reveals that it is not supply chain breakdown that has led to drug shortages, but increased demand, says Intersys Risk Director Catherine Geyman

It’s too early for pharmaceutical supply chains to declare victory against the threat of Covid-19. If nothing else, the world remains wary of a second wave and further lockdowns. The industry can, however, make a good case that for now it’s avoided defeat. Despite some initial fears at the outset of the crisis, most pharma supply chains have kept producing.

Operations and procurement teams across the pharma industry have worked hard to ensure that their supply chains have held up well over the crisis. Mostly it’s paid off. In fact, that’s generally true for businesses across industries – particularly given the scale of the crisis. As a recent piece in The Economist put it, “In the face of Covid-19 [the] sinews of business have, for the most part, held up remarkably well… Systemic risks such as those which brought the banking industry crashing down during the financial crisis have, as yet, failed to materialise.”

That is not to say that we haven’t seen problems. As we’ve detailed before, drug shortages are now a persistent feature in the market. In January, even before the scale of the crisis became clear (though its prevalence was growing in China), the US Food and Drugs Administration posted new shortages for 19 companies (covering 11 drugs). Nor does it mean we didn’t see a significant increase in this number as the crisis took hold. February saw the first problems triggered by active pharmaceutical ingredients (API) supplies impacted by Covid-19. By April the number of new shortages reported had rocketed to 71.

Hand affixing label to cardboard box containing drug supplies. — Drug shortages had been a persistent feature in the market before the arrival of Covid-19.

Supplies and demand: causes of drug shortages

A study of FDA Drug Shortage reports performed using SCAIR® tells a more complicated story, however. In particular, it shows increased shortages driven by demand, not by Covid-19 supply chain failures.

At the start of the year, new FDA Drug Shortage reports were, in fact, all discontinuations – simply notifications of manufacturers taking commercial decisions to cease production of a drug. They were not shortages in the common sense at all. That is not unusual, and February through to May saw between 10 and 16 discontinuations added each month.

Moreover, according to the reasons reported by the manufacturers, the increase of shortages in April wasn’t the result of delays or API shortages caused by Covid-19. It was almost entirely due to a surge in demand. The number of new drugs shortages from companies as a result of demand increases rose from none in January and February, to six in March and 40 by April. In May, there were 15 reported.

Of course, that’s not to argue that the pandemic didn’t result in drug shortages. The surge in demand was driven by the virus: the analysis shows the highest demand was for anaesthetics, with new shortages for drugs such as Propofol and Midazolam – both used to treat Covid-19 patients requiring mechanical ventilation. Requirements for some sedatives and anaesthetics was up by half. Even before this, in March demand-driven shortages had begun to increase for anti-infectives. This coincided with speculation that antivirals such as chloroquine phosphate might protect against the virus.

Coronavirus and supply chains

There were some shortages as a result of supply chain issues in the first quarter, but the reasons given by manufacturers do not directly blame Covid-19. The FDA announced in February that it had seen the first shortages caused by the outbreak (although it refused to name the drug). Still, the supply of Pindolol due to API shortages was categorically not related to China. More supply problems saw new shortages in March, caused by supply chain issues: Teva’s Amoxapine tablets (due to manufacturing capacity constraints); Nizatidine capsules (supply interruption following other manufacturers discontinuations); and Alkaloida Chemical’s Hydroxychloroquine Sulfate Tablets (shipping delay). None can be linked explicitly to Covid-19, though, despite reports that reopening Chinese factories were operating at only 50-80% capacity.

In fact, according to the SCAIR® analysis, it’s not until April that a drug shortage can be definitively attributed to the pandemic’s impact on supply chains: Teva’s Propofol, which suffered delays to shipping. At that point, some two dozen or more countries were on lockdown. The majority of shortages – 40 out of 71 – were still down to demand increases, however. And most of the rest of the drugs in question were discontinued.

In what would seem the biggest test of pharmaceutical supply chains for years, the industry can be reasonably pleased, or at least relieved, with its performance.

A new environment

Or perhaps only partly.

It’s true that things could have been much worse and that the paralysis of supply chains some feared as a result of the pandemic did not materialise. Even adding another in April and three more in May, the number of new shortages reported to be as a result of Coronavirus supply chain issues since January is just five.

We should note several facts, though. First, the FDA data lists new shortages. Many of these persist, so any shortages are often degree cumulative. Second, concerns over API shortages from China and, more particularly, India are real. The dependency on these two countries for APIs remains a real concern. The number of problems due to APIs, even if not explicitly linked to Covid-19, more than doubled in May to five. Overall, there have been ten since January.

Finally, even if supply chains have not collapsed in the face of the pandemic, it would be hard to argue they’ve proved entirely up to the task. The dozens of shortages we’ve seen as a result of demand increases are something that will require a hard look.

When the ReMediES project consortium looked at the causes of all ongoing drug shortages in 2018, the reasons for shortage reported by the manufacturer was not taken at face value. More in depth research into the health of the reporting company’s supply chains was undertaken. Previously published non conformities (recalls, certificate suspensions, inspection results) were analysed and an adverse FDA inspection was established as the most frequently occurring pre-cursor. The study revealed that an FDA inspection OAI preceded 69% of drug shortages – and almost three quarters if we exclude product discontinuations. Demand was a factor, but not the main issue.

(For a greater insight into the causes of supply chain interruptions, based on 2018 data, visit the SCAIR® ReMediES page where you can download the ReMediES white paper.)

The pandemic has changed that. Onsite inspections by the FDA are suspended, and regulators in the US are doing all they can to keep supply chains moving to satisfy essential demand. What we’ve seen is that regulation, or at least its application, is flexible in a time of crisis. Supply chains, perhaps less so.

The issue is not merely that production was unable to keep up. We must probably accept there will always be limits to what can be achieved in the face of an unexpected and massive surge in demand. But the lack of transparency of those supply chains, both internally and externally, makes it that much harder – and that much more likely that shortages will result. As analysts noted at the time back in March, the lack of clarity about companies’ supply chains made predicting the impact of Covid-19 on drug availability more difficult. And that has consequences for planning for and mitigating any shortages.

Ultimately, the supply side of the biopharma industry has generally proved resilient to Covid-19; it is unprecedented demand that has created the most disruption. Considering the current circumstances, the outcome is an endorsement for the work of supply chain managers who invest in designing and maintaining robust supply chains.

Coronavirus puts a spotlight on business interruption exposures

Insurers may emerge from the coronavirus crisis with their balance sheets or their reputations intact – but probably not both. Either way, though, it’s clearer than ever that business interruption (BI) insurance alone is never going to be a sufficient answer to complex issues around supply chain risks.

Even before coronavirus, business interruption was frequently among the most critical risks identified by firms. Insurer Allianz's most recent "Risk Barometer" survey (just before coronavirus struck the UK and elsewhere) found BI was once again right near the top of businesses' concerns – second only to cyber incidents.

The failure of most businesses to take up policies covering BI has, therefore, long been a bugbear of many insurers and brokers. The Chartered Institute of Loss Adjusters has consistently found businesses to be badly underinsured. As many as 40% are estimated to lack adequate cover.

In light of recent events, though, those businesses may well feel vindicated.

Underinsured or uninsured?

Across the world, businesses who did take BI cover are gearing up for legal battles against insurers refusing to pay. In the UK, much of the attention has focused on Lloyd's insurer Hiscox. It has accepted claims for event cancellations and abandonments resulting in a $175m bill from the pandemic. Still, it is refusing to pay out to other businesses disrupted, such as estate agents and pubs and clubs. The Night Time Industries Association represents the latter and is among those taking legal action against the insurer.

It's far from the only target attracting businesses' ire, though. Similar scenes are playing out across the world. In the US, for instance, there are cases in progress in half a dozen states already and many more seem likely to follow. As one lawyer across the pond puts it: "There likely will be years of insurance coverage litigation relating to the making and denial of such claims."

It's not just individuals and businesses taking issue with the insurers, either. Legislators in several US states have proposed laws to mandate coverage of coronavirus losses under existing policies. Back in the UK, the Financial Conduct Authority has written an open letter to insurers of SMEs to urge them to assess and settle valid BI claims quickly. Even where claims are not to be paid in full, it urged insurers to make interim payments.

"A key objective of the FCA is to ensure that financial pressures on policyholders are not exacerbated by slow payment; such claims should be paid as soon as is possible", it advised.

Too big to bear

Even so, policyholders probably should not get their hopes up. In the US, legal moves to effectively impose coverage retrospectively are untested and could be declared unconstitutional. More widely, while there will be exceptions, most are unlikely to be covered.

In some cases, that's simply because business interruption insurance, if purchased at all, is restricted to losses linked to property damage. In others where on-damage BI cover is taken, insurers specifically exclude pandemics or losses as a result of government action. Even if they do not do so explicitly, they may do so implicitly in their standard policies by offering the option of coverage riders to address them. Most businesses will not have taken these up – the organisers of Wimbledon being notable as an exception.

As one commentator summarises: "Most businesses will not be insured for Covid-19 disruption, and in many cases the [insurance] wording is clear cut."

And there's nothing in the FCA letter to change this – quite the reverse, in fact.

"Based on our conversations with the industry to date, our estimate is that most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the Covid-19 pandemic," it notes.

It also adds this: "While this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances."

Moreover, whatever the rights and wrongs in terms of the wording of particular policies, the track record for class actions against insurers isn't encouraging for businesses making a claim.

Indeed, it may be that insurance – at least in its current form – isn't particularly well placed to cover such risks. It's not just insurers who say coverage for a nationwide lockdown is unrealistic. It might be that there genuinely isn't the capacity to compensate all those affected: one strong argument against the legal changes proposed in the States.

"Because the number of potential claims under such hypothetical retroactive changes would be extraordinarily high in the current environment, we estimate that this would have a material adverse impact on the capitalisation of the industry globally," as one credit rating agency puts it.

Supply chain vulnerabilities

All this is not to say that BI insurance has no uses. It can help mitigate the financial impact of business interruptions. We have also seen some developments to address some of the traditional weaknesses in the cover. As we've covered previously, pharma businesses, for example, can now cover losses stemming from regulatory action, which can result in losses many times the value of any property. Given that few businesses are likely to exit this period with an improved balance sheet and financial stability, it would be foolish to ignore whether insurance could provide a useful buffer in case of other disruptions.

Even before the latest issues, though, BI had often proved a complex and expensive cover that didn’t always end up meeting customers’ expectations. And it doesn’t look like the insurance is going to get any cheaper in the aftermath of the pandemic.

What is certain is that insurance is no substitute for taking time to understand BI exposures and, where possible, taking practical steps to mitigate them: reviewing suppliers, assessing dependencies, validating alternative sources and holding strategic stock of key materials.

All this is more important than ever because the pandemic has not just revealed new risks for which many businesses understandably still don't have a response; it also has in many cases revealed fragility in supply chains that many now will be looking to confront. That requires significant work in exposure modelling and risk quantification to help with their business continuity planning. This crisis has revealed many of the weaknesses in supply change, but that at least gives businesses improved insight and better data in approaching these tasks.

As we emerge from this crisis, there is an opportunity to review its impacts to see how we can build more resilient businesses for the future. Let’s make sure it doesn’t go to waste.

Coronavirus Drug Shortages Highlight Pharma Supply Chain Dependency on China and India

Covid-19 threatens to cripple medicine supply lines bringing China, India dependency into sharp relief

Should pharma be panicking over the Coronavirus and Drug Shortages? Intersys Risk Director Catherine Geyman evaluates the tough choices facing pharma.

The epidemic has raised criticisms of the dependence on overseas supplies for our medicines, in particular active pharmaceutical ingredients (APIs) and generics in the pharma industry. The Economist’s recent piece, for instance, suggested that prior to Covid-19, there was widespread complacency.

“Until about the third week of January, only a few pharmaceutical executives, drug-safety inspectors and dogged China hawks cared that a large share of the world’s supply of antibiotics depends on a handful of Chinese factories,” its article opened, before continuing in similar vein.

Nor is it just industry outsiders. This week, the chairman of India’s Pharmaceuticals Export Promotion Council of India (Pharmexcil) said Europe was panicking following its government’s decision to restrict exports of 26 APIs (mainly to protect domestic supplies): “[W]e control almost 26% of the European formulations in the generic space. So they are panicking,” said Dinesh Dua.

This is unfair, however – at least as far as the pharma industry goes (and for quite a few others). It is not just a “few” executives who have been concerned about the reliance on China and India for APIs. Many European and US pharma supply chain managers have worried about it for years.

Governments, too, have noted the reliance on China with concern. Last year, a hearing of the U.S.-China Economic And Security Review Commission in Congress considered this very issue. Senator James M. Talent provided a concise summary: “According to the Food and Drug Administration, 13.4 percent of U.S. drugs and biologic imports are from China, as well as 39.3 percent of medical device imports, making China one of America's top sources for medical products. These numbers understate significantly the true sourcing of health products in China because China is also the primary supplier of precursors for pharmaceutical companies in other countries such as India which, in turn, are major suppliers of finished product to the United States.”

Strikingly, the hearing also heard that the US considers this a national security issue.

“The growing reliance of the U.S. on foreign sources for critical defence related material is an issue that must be addressed at the national level,” Christopher Priest, Chief of Staff for the Defence Health Agency Operations Directorate, which oversees the medical needs of the US Army, Navy, and Air Force, told the hearing.

Ultimately only time will reveal the true impact of Covid-19 on global pharmaceutical supply. Most well managed biopharma companies will hold significant stocks (months) of API to ensure their patients are protected from this type of unpredictable event. However, there is also a large number of low cost generic drugs that simply do not have the margin to support significant stock holdings, and many companies producing the same generic drug may be dependent on a single source of API in India or China. The global drugs market was already in a precarious position with drug shortages, so this is simply going to exacerbate that situation.

Quantifying the value of stock in terms of continuity of supply and identifying critical supply dependencies are key drivers of interest in tools like SCAIR®. Companies are increasingly urged by their stakeholders to understand and map their dependencies and exposures, precisely because they have been concerned about how vulnerable they are to a disruption.

Probabilities and pandemics

SCAIR®’s approach is to focus on impact rather than probability to ensure the company has taken measures to protect itself against major supply chain interruptions, regardless of their source. It is a more manageable challenge than quantifying likelihoods or assessing probabilities, which is a difficult task.

This is not just because it is hard to predict outcomes (after all, who really knows how far and fast Coronavirus will spread and the impact it will have?). It is also because we often don't understand probabilities and misinterpret risk terminology.

In a recent discussion of Covid-19 and risk perception on Radio 4’s World at One, Cambridge professor and chair of the Winton Centre for Risk and Evidence Communication, David Spiegelhalter made the point that most people don’t understand the term “reasonable worst case scenario”. That is despite it being a key phrase used in contingency planning activities for the Coronavirus and much else. It’s often taken as meaning a likely outcome, rather than as what it is: a catastrophic but credible scenario. A similar misunderstanding could often be detected in reporting around the Yellowhammer Brexit contingency planning.

As one critic of the resulting “hysteria” put it at the time: “It is not a prediction but a worst case scenario, helping the government in its planning to mitigate the risks.”

Even if we understand the terms, though, our brains are not well suited to evaluating probabilities, as another academic on the Radio 4 discussion pointed out. The “probability neglect bias” makes us less focussed on probabilities and more on outcomes, explained Dr Barbara Fasolo from the LSE: it’s the reason we panic over unlikely disasters and also why we bother playing the lottery.

In controlled experiments this bias leads to seemingly irrational behaviour. For example, people do not differentiate between a one percent probability of getting a non-lethal but painful electric shock, and a 99 per cent probability. In fact, they are willing to pay the same amount of money to avoid either set of odds. In real life, as with the Coronavirus, though, the probabilities themselves are massively unclear, which only makes rational judgements harder.

Consequently, impact quantification for scenarios rather than probability assessment is usually more helpful. You can spend an awful lot of time and money trying to work out the likelihood of each major interruption scenario, but that is usually wasted. It is much better to spend resource planning for and remediating the sources of risk that can do the most damage to your supply chains.

Hobson’s choice

However, once the assessment is done, there remains the challenge of the lack of attractive alternatives.

As stated, the dependence on China is not a new concern for pharma. Coronavirus has just brought it into relief. Recently, we’ve had concerns around the potential impact of the US China trade war, for example. More longstanding are concerns about quality – and that applies more so, if anything, to India. An analysis last summer showed that, of the 75 warning letters sent by the US FDA to pharma manufacturers for violating safety or quality standards in the 20 months to August 2019, half were to companies in China or India. For non-compliance notices from the European Medicines Agency, meanwhile, the proportion was almost two thirds (64%).

So why haven’t US and European pharma businesses addressed the risk?

For two related reasons: first, because change is difficult and expensive. Once a company has tuned its process to and validated its use of a certain type of API from a particular source, it is costly to replace and revalidate the source. There is therefore an in built bias to stay with current suppliers.

Second, while change is costly, APIs and generics are cheap. As we’ve noted before, there’s little incentive for new players to enter the market – and certainly not in Western countries where labour is relatively expensive and overheads are high. Moreover, as The Economist piece correctly states, the rest of the world will have lost a lot of its expertise in making APIs, and it’s difficult to start back up. We go back to what the FDA has called a “broken marketplace”, with prices not rising despite shortages and production typically not increasing enough to restore supply to pre-shortage levels.

Pharma has long noted the risks of reliance on Chinese sources, but a cost-risk-benefit analysis has so far always come down in favour of the status quo – because it’s cheap.

One exception to this is Sanofi who recently announced the creation of a France-based offshoot that will produce APIs. We’ll have to wait and see if other businesses will follow suit.

No upside in Covid-19

So, will Coronavirus force pharma to rearrange their supply chains? We shouldn’t bet on it – at least in the short term.

In the long term, the rise of the Chinese middle class and increase in wages means that the future of cheap production in the country is uncertain. And, when it finally looks like it is no longer economical, it may well be that pharma businesses learn from the past and don’t simply look for the next cheap production base.

In the meantime, though, businesses face significant costs and disruption of changing suppliers – and massive uncertainty over how the pandemic will develop and the potential disruption involved. It’s hard to justify the move.

Of course, in a sense this is a similar dilemma to that facing governments around the world as they determine what and how far to go in combatting the spread of the virus. Do too much, and if they succeed they will be said to have over-reacted; too little and they’ll be blamed for the consequences as the virus spreads. It’s a no-win situation. But governments have relatively unlimited resources, and risk only their popularity, which may recover by the next time their public heads to the polls. Pharma businesses don’t have that luxury – a rash move could cost them their competitiveness and ultimately profits.

For the time being then, most will choose to sit tight and wait to see if change is forced upon them. But that doesn’t mean they can’t be ready.

With tools like SCAIR® managers can map their supply chain dependencies and exposures. Soon with functionality we’re adding they’ll even be able to overlay custom events (such pandemic hotspots) to further quantify impacts and scenarios. With this they can see dependencies, loss estimates, vulnerabilities, and the ultimate financial impact of events, so they can be ready to act if the time comes.

If you want to be prepared for the worst, let alone avoid it, it pays to know what the worst might look like.

Catherine Geyman, Director, Intersys Risk Ltd

The Real Reasons for UK Drug Shortages

What is Causing the Current Drug Shortages in the UK?

A recent BBC Radio File on 4 programme highlighted the worsening drug shortage problem in the UK . In this blog post, Intersys Risk Director Catherine Geyman further analyses the various complex issues that are driving this healthcare crisis.

“Patients have died in hospitals because of these shortages.” That was the stark message from BBC Radio 4’s investigation of UK drug shortages for File on 4 on Tuesday.

The programme is well worth a listen. It powerfully gave us a human face to the problems these shortages cause in the form of Michelle, who has trouble getting epileptic drugs to control her seizures; or the mother relying on an out-of-date, and therefore unreliable, adrenaline injector for her son.

It also does a good job of exploring some of the reasons. These include the restrictions on pharmacists – unable on their own initiative to even prescribe two 250ml dose pills of the same medicine where 500ml pills are unavailable. One striking nugget: The Serious Shortage Protocols, which I examined on this blog in July and which empower pharmacists to make this kind of substitution, have so far been introduced for only one drug – antidepressant Fluoxetine.

As the programme made clear, though, the reasons for shortages are complex, and there’s no quick fix. The central issue was particularly well captured in one part of the report: “One issue that is mentioned by pretty much everyone you speak to in the industry is globalization; making drugs and distributing them is now a huge, worldwide business. The longer the supply chain is stretched, the more fragile it becomes.”

It is the many and varied problems with the supply chain that are usually behind these shortages. I’ve looked at this before in relation to HRT medicines and adrenaline injectors – both shortages that featured in the programme. It’s manufacturing problems that are often to blame here, and indeed, according to the European Healthcare Distribution Association are responsible for 60% of medicine shortages.

Current drug shortages, but long-term issues

There are, though, perhaps two issues that we would take with this analysis. The first is that none of this is really new. It’s been clear for a while that medicine shortages are back in a big way, and most of these causes have been well explored already.

That, though, is possibly unfair; it's always good to raise awareness of these issues – and not just with the general public. One of the new developments reported by the programme was that the UK’s Healthcare Distribution Association is sending a leaflet explaining the complexity of the supply chain to all 16,000 of the country’s pharmacists. That suggests a lack of awareness even among those directly involved.

A more fundamental problem is that globalisation and complex supply chains – which are both longstanding – don’t sufficiently explain the number and extent of shortages we’re seeing now. Sourcing active ingredients from China and India is nothing new, after all. We could blame Brexit, of course, but the evidence for that being a significant contributor to even current drug shortages is weak.

One possible cause that could be further explored is the current high levels of mergers and acquisitions in the industry. As we’ve seen before, poor due diligence when it comes to takeovers can result in years of problems. More simply, this consolidation inevitably reduces the supply base – indeed in some cases M&A is specifically designed to reduce competition, decreasing the number of drugs available for particular conditions and increasing dependency on those that remain. That inevitably reduces the resilience of the supply chain.

It’s not all about cost

Even here, though, the issue is more complex than it might seem. In some cases, it’s true that supply of drugs for some conditions is down to just one or two producers. Inline with the programme’s perspective, that consolidation is the result of drives to cut costs, but that is only half the story.

First, the manufacture of complex drugs can be difficult and expensive, and the low cost of generics fails to incentivise more players to enter these markets. But, more crucially, that cost never rises. The FDA’s recent paper on Drug shortages suggested evidence of a “broken marketplace” – where a shortage of supply does not result in the price increases predicted by basic economic principles.

And this may have something to do with another point: The extensive regulation of the industry. Regulators have strict codes of practice in place and these vary according to the market that businesses are selling to. That means manufacturing certain drugs requires significant expertise and knowledge of relevant local regulation. This in turn means a long lead time to set up and get approval for new manufacturing assets to alleviate the issue – with no guarantee for those doing so, that the shortages will persist long enough for them to profit.

There’s a myriad of other issues, too, of course, but these should amply illustrate two points. First, that there’s no easy solution and this problem will be with us for some time. And, second, that all manufacturers and others can really do for now is use the tools available to really interrogate their supply chains and achieve a clear view of their resilience and the likely areas of weakness.

Catherine Geyman, Director, Intersys Risk Ltd.