Navigating Challenges in Pharmaceutical Supply Chains: A Decade of Delays and a Path Forward

Introduction

The Drug Supply Chain Security Act (DSCSA), enacted in November 2013, was intended to transform the pharmaceutical supply chain in the United States. Despite its ambitions, the DSCSA faced another enforcement delay in November 2023, marking ten years without full implementation. This extension, announced in August 2023 by the Food and Drug Administration (FDA), permits additional time for stakeholders to develop package-level traceability systems.

• Industry leaders, who have long expressed concerns over technological and communication barriers, welcomed the delay as yet another year to avoid full compliance.

The FDA continues to monitor progress, but the repeated postponements have turned into a routine celebration for those in the industry who prefer to kick the can down the road. This ongoing delay affects pharmacists as well, who require electronic tracing data to legally receive and dispense medications.

Exploring the Cost Structures of Medicines Today

Direct Costs

• Cost of Goods Sold (COGs): This includes direct costs associated with the production of medicines, such as raw materials (active pharmaceutical ingredients and excipients), labor, and manufacturing expenses.
• Cost of Feedstocks and Logistics: Involves expenses related to raw materials and their transportation, significantly impacting overall COGs due to price volatility.

Regulatory and Safety Costs

• Environmental, Health, and Safety (EHS) Costs: Compliance costs related to environmental and worker safety regulations, which include investments in chemical safety, waste disposal, and pollution control.

Security and Risk Mitigation

• Security Measures: Ensuring the security of manufacturing sites and the integrity of the supply chain to prevent theft or diversion of medicines.
• Mitigation and Long-tail Costs: Future costs associated with potential adverse effects, product liability claims, and required post-market surveillance.

---

Overview

1. Introduction
2. Cost Structures of Medicines
   • COGs (Cost of Goods Sold)
   • Cost of Feedstocks & Logistics
   • Environmental, Health, and Safety (EHS) Costs
   • Security and Safety Measures
   • Mitigation and Long-tail Costs
3. Sources of Inflation and Risks
4. Government and Private Analysis
5. Quality Management and Improvement Limits
6. Indirect / Holistic Effects on Pricing
7. Innovation and R&D Costs
8. How Enthereal Sees the Risks
9. Been Here Before? 2013’s DSCSA
10. Conclusion and Call to Action

---

Cost Structures of Medicines

• COGs (Cost of Goods Sold): The foundational costs directly associated with the production of medicines, including
  • raw materials (active pharmaceutical ingredients and excipients),
  • labor, and
  • direct manufacturing expenses
  • externalized indirect costs to society
• Cost of Feedstocks & Logistics: These include the costs of raw materials and their transportation. Volatility in these areas can significantly impact overall COGs.
  • Feedstocks are usually molecules from petrochemical or biological origin. These feedstocks may be simple or complicated, may be of various grades of purity requiring additional processing before use, not to mention the logistics of extraction or growth and harvesting.
• Environmental, Health, and Safety (EHS) Costs: Compliance with environmental and safety regulations — and doing what it takes to prevent additional costs related to spills, clean-ups, health impacts to workers, and long-term impacts adds another layer of costs. These regulations — and their associated intended impacts and results — aim to ensure the safety of workers and minimize environmental damage, requiring investments in safe handling of chemicals, waste disposal, and pollution control measures.
• Security and Safety Measures: Ensuring the physical security of manufacturing sites and the integrity of the supply chain (to prevent theft or diversion of medicines and feedstocks) is crucial. Additional safety measures might include those for mitigating risks associated with handling and exposure to hazardous materials — and nearly all materials in large volumes and masses comprise numerous hazards.
• Mitigation and Long-tail Costs: These are future costs associated with potential adverse effects of manufacturing, exposures to products, and liability claims related to unmitigated risks. They also include the costs of ongoing monitoring and post-market surveillance required by regulatory bodies.

Sources of Inflation and Risks

Sources of Inflation

The pharmaceutical sector is susceptible to inflation through increased costs of

• raw materials,
• labor,
• regulatory compliance, and
• logistics.

Global economic factors, geopolitical tensions, and pandemics can exacerbate these issues — as we’ve seen

Other Risks

• Risks include political and regulatory risks, market access and pricing pressures, intellectual property challenges, major long-term supply chain disruptions, and the potential for adverse reactions due to exposure to feedstocks and process chemicals, leading to legal actions.

Government and Private Analysis

Recent analyses by government and policy entities have started to focus more on supply chain vulnerabilities, particularly in the wake of COVID-19. Efforts like the Quality Management Maturity (QMM) program and Drug Supply Chain Reliability (DSCR) Program initiatives aim to address these issues by fostering better quality management practices and enhancing supply chain resilience. However, challenges remain in fully capturing and mitigating all potential risks, given the global complexity of pharmaceutical supply chains and the evolving nature of threats.

Quality Management and Improvement Limits

The documents we’ve reviewed discuss various frameworks and recommendations for improving quality management in pharmaceutical manufacturing and supply chains. The concept of Quality Management Maturity (QMM) and its impact on drug shortages highlight the industry’s focus on quality beyond compliance, aiming for continual improvement and resilience in the face of supply chain disruptions.

Indirect / Holistic Effects on Pricing

• Purchasing and Market Dynamics: The roles of group purchasing organizations (GPOs), pharmacy benefit managers (PBMs), and other market intermediaries in influencing drug prices and availability. Their strategies and negotiations can impact manufacturers’ pricing strategies and investment decisions.
• Regulatory Landscape: Continuous evolution in regulatory requirements (both at national and international levels) necessitates ongoing investment in compliance and quality systems, impacting the cost structures of medicines.
• Innovation and R&D Costs: The high costs associated with pharmaceutical research and development, including for drugs that never reach the market, influence overall cost structures. Balancing innovation with affordability remains a key challenge.

How Enthereal Sees the Risks

The way Enthereal looks at the costs of making medicines, we see several key areas to concentrate on:

• COGs-related
  • Feedstocks, catalysts, and solvents (as well as labor and energy)
  • Operations
    • Logistics related to production and disposition of waste/spent materials
• Demand as seen through the lens of Value-in-context: related to valuing what society can and should afford for people:
  • Essential Medicines’ Resilience
  • Essential Medicines’ Black Swan Preparedness
  • Public perception and public health estimations of need for essential medicines
• Quality
• Geopolitical Risk

And we and others have been framing the question: how do we keep essential medicines supply chains resilient?

As we’ve seen in Enthereal’s “Biden Proposes Strategy to Combat Drug Shortages Through Supply Chain Resilience” and “Six Ways Biden White House Proposes to Bring Domestic Drug Supply Back to US” quality maturity, transparency, and hospital-level preparedness are prioritized.

But Enthereal stands by the observation that quality assurance improvements are not enough to make up for the costs due to inflation and exponentially-rising costs:

• on petrochemical solvents,
• heavy metal catalysts, and
• petrochemical inputs

— due to the economic grind of still-uncontrolled inflation and risks out of the control of the average quality manager including climate and geopolitical.

These risks cannot be managed or mitigated away simply by meeting the requirements of a quality assurance system — and even more transparency is not going to be enough.

Let’s look at a 10-year old effort to improve transparency in the US pharma supply chain.

Been Here Before? 2013’s DSCSA

It was the 5th year of Obama’s presidency. Democrats controlled the Senate, and Republicans controlled the House. Turns out, in 2013, the Drug Supply Chain Security Act, enacted in November 2013, intended to give stakeholders 10 years to transform our drug supply in the United States to be more transparent. Where did it go?

The DSCSA aimed/aims to enhance the security of the pharmaceutical distribution supply chain.

• It outlines steps to build an electronic, interoperable system to identify and trace certain prescription drugs as they are distributed in the United States. This system is intended to facilitate the exchange of information at the individual package level about where a drug has been in the supply chain, which helps improve detection and removal of potentially dangerous drugs from the drug supply chain.

So at least one major accomplishment towards the resilience of supply chains of pharmaceuticals, yes?

Well, actually, No!

The Drug Supply Chain Security Act (DSCSA) way back in November 2013, was supposed to, at the least, provide for the tracking and tracing at the package level of pharmaceutical products in the nation’s drug supply.

But since August 2023, DSCSA faces yet another one-year enforcement delay extension to the previous deadline, known for 10 years — now pushed off until November 27, 2024 — yes, marking ten years, now 11 years, without activation.

• Industry leaders, who have long expressed concerns over technological and communication barriers, celebrated the delay as yet another year to avoid full compliance.
• The FDA continues to monitor progress, but the repeated postponements have turned into a routinely welcomed delays by those in the industry who prefer to kick the can down the road.
• This ongoing delay affects pharmacists as well, who require electronic tracing data to legally receive and dispense medications, and they also have or should have known about a deadline that’s been around for 10 years.

Do Recent Government and Policy Analyses Consider the Most Significant Risks? How / how not?

The following are on the government-private policy-makers radar:

COGs-related

• QMM – purports to address quality management “maturity”
• MRAP – purports to address manufacturing resilience (which should include the risks in costs and access to required solvents, catalysts, feedstocks, operations, logistics, as well as people related risk expenses, including health and safety, environmental, which includes disposition of waste, mitigation of hazardous risk, and dealing with impacts of spills and exposures)
• HRSP – purports to address hospital level resilience and preparedness
• Where else are there sources of risk?
  • PMBs, other buyers, other market-makers, patients, distributors, and pharma companies themselves and their lawsuits
  • Disruptive / new technologies
  • Labor
• Energy risks can be mitigated with renewable sources, like solar and geothermal, that are increasingly available and – with energy storage – can provide base-level as well as peak demand energy supplies.

Feedstock, Solvents, and Catalyst Risks

This is the key take-away from this current report: besides inflation being everywhere in the economy, the costs of the actual materials going into pharmaceutical production have hard-to-see risks unless you are deep into the materials themselves.

There are no doubt a variety of ways of making pharmaceuticals, yet nearly every one involves a liquid phase solvent, catalysts, and feedstock molecules.

These are all subject to inflationary pressures. It takes more and more expensive petroleum energy to process the petroleum into solvents. It takes more costly petroleum to mine the heavy metals and process them to the specified purity.

And the feedstocks themselves often are wholly made from petrochemicals.

This would be completely fine forever, in the case there was an infinite supply of petroleum, there was an infinite supply of heavy metals, and if we lived in a world where the solvents could be infinitely made from a source of energy and materials that infinitely regenerated itself.

But that’s not the reality we live in. We do live in a reality where the infrastructure for petroleum, for heavy metals, and for petro solvents are limited. They are finite. They are not infinitely extractable and recyclable.

And as an aside — Enthereal’s founder realized there’s a way to make essential medicines, today, when properly bioengineered, that use only aromatic amino acids, water, micronutrients, and enzymes generated in living cells.

That makes obsolete the need for heavy metals, petro solvents, and petrochemical inputs, which cause much cancer and strife, for the skeletons of the medicines — when those medicines could be made from plant enzymes from ginger, parsley, and fennel together with commodity amino acids.

Demand Risks

There’s the assumption that demand for essential medicines will remain where they are or increase. If demand were to substantially change towards less demand, the existing essential medicine paradigms are certain to. collapse.

But that’s not what we – or anybody else – is expecting.

That being said, quick scaling-up is the property of some processes more than others.

Drug Shortages Prior to and During the COVID-19 Pandemic

https://jamanetwork.com/journals/jamanetworkopen/fullarticle/2817210

This last study adds color to our analysis by looking at drug shortages before and during the COVID-19 pandemic, giving us a view of what happens when pharmaceutical supply chains get challenged with a Black Swan event.

• This specifically focused on the impact of supply chain issues on drug availability. Its longitudinal cross-sectional study utilized data from the IQVIA Multinational Integrated Data Analysis database, covering more than 85% of drug purchases by US pharmacies from wholesalers and manufacturers between 2017 and 2021.

What They Found:

• Impact of COVID-19 on Drug Shortages: The study found that supply chain issue reports were significantly associated with subsequent drug shortages, with about 13.7% of such reports leading to shortages versus 4.1% for drugs without reports. This indicates a heightened risk of shortages tied to reported supply chain issues.
• Pandemic’s Peak Period Analysis: During the early months of the COVID-19 pandemic (February to April 2020), there was a notable increase in drug shortages, affecting both drugs with previous supply chain issue reports and those without. This period saw 34.2% of drugs with supply chain issues experiencing shortages, compared to 9.5% of comparison drugs without reported issues.
• Characteristics Influencing Drug Shortages: The study also highlighted how certain characteristics of drugs—such as formulation, essential medicine status, and brand-name versus generic status—influenced their likelihood of experiencing shortages. For example, oral formulations, essential medicines, and generic drugs showed different levels of vulnerability to shortages when supply chain issues were reported.
• Policy Implications: These findings underscore the need for continued and focused policy efforts to safeguard the US drug supply from future shocks, especially by prioritizing clinically valuable drugs at the greatest risk of shortages.
• The analysis supports the argument for enhanced transparency, strategic planning, and resilience in pharmaceutical supply chains to mitigate future shortages.

The Economic Jaws Crushing Generic Drug Production

Quality assurance are critical tools for safe and reliable pharmaceuticals, there’s little serious in any denial of that.

• But quality may not be the only tool to use for resilience of our essential medicine supplies

Quality systems do need oversight and nudges to work better, at times, but it is not the end-all be-all with respect to the economic challenges facing generic drugs / essential medicines manufacture.

• Increased regulation may put some smaller, stuck-in-the-old-ways industry players out, and perhaps those are the ones that need to go

Hospitals probably do need, in some cases, incentives to manage their supply chains to be resilient.

But that still leaves a fundamental dynamic untouched and unaddressed:

Anyone who has spent time in the manufacturing of nearly anything knows that feedstock costs can oftentimes be 75% to 90% of overall COGs.

In pharma, this is typically more like 30% (for better performers) while 50% of COGs is feedstock cost for the average companies —

• that means there’s less incentive in pharma to look at the costs and risks associated with feedstock acquisition than in other manufacturing sectors — even though this deals with people’s health and our security
• that means there’s less incentive to do anything about costs of generics
• which means that an actual, significant, not-going-away risk is being left to fester

There are only a few ways to mitigate the costs of molecule inputs and feedstocks:

• have multiple sources for critical ingredients (all of the ingredients in drug production tend to be critical) that have completely different origins of their primary feedstocks
• have alternative routes to production that can use less-expensive inputs
• produce your own – which necessarily requires more startup expenses, making that an option in only very rare cases where demand is reliable and other costs can be predicted, which is hard to do

Conclusion / Call to Action

Another 10 years may be too late to save the lives of millions during a Black Swan event that is easier to imagine than ever, given the recent pandemic and threats of new pandemics in our news feeds, every day.

Let’s not let this be the case, said by someone looking back: “There was something we could have done — a company called Enthereal had the vision and the technology in 2023 that aimed to enable readily-scalable essential medicines.”

“But the focus on finding the next blockbuster sustained the myopia, generic drug companies withered until there was only one generics maker, and then that one folded, and that was the day that there was no more aspirin, there was no more ibuprofen, there was no more epinephrine.”

Let’s spread the word that there’s a new paradigm in town, and we’re not here to replace everything else, we’re here to make deeply and actually sustainable Active Pharmaceutical Ingredients for essential medicines, one by one, as the economics – and the moment – require us to retool large-scale essential medicines production for the transforming times we’re in — to be actually sustainable — and to be actually affordable.