In the Case of Prescription Drugs, a Resilient Supply Chain Is not a Domestic Supply Chain

December 06, 2023

The NYT had an interesting column today on the growing problem of drug shortages by Emily Tucker. The piece made several important points, but one of them could use a bit more attention.

Tucker notes that a resilient supply chain is not necessarily a domestic supply chain. This is exactly right, but the point deserves far more emphasis than it is given in this piece.

At the height of the pandemic there were shortages of a wide range of items, as demand increased and production was often curtailed due to pandemic conditions. This led to a call for increased domestic sourcing.

Some of this effort was badly misplaced, as stockpiling failings were often treated as supply chain issues. The lack of availability of masks and other protective gear was a stockpile problem, not a supply chain problem.

Even if all our masks were produced in Ohio, we could not get the hundreds of millions of masks needed at the start of the pandemic. It takes time to produce a huge number of masks and large volumes of protective gear more generally. These should have been stockpiled.

The fact that the country did not have a substantial stockpile at the start of the pandemic was a major failing of the Trump administration. This made it harder to curtail the spread of the disease and needlessly exposed many healthcare workers at a time when there were no vaccines or effective treatments.

Part of the problem with drugs in short supply is that many have limited markets. If a drug is designed to treat a relatively rare disease, there will not be an incentive for a company to have large amounts of backup capacity, or to spend a lot of money ensuring the quality of its manufacturing process, once it is available as a low-priced generic.

However, if the drug is being produced for a worldwide market, and not just the U.S. market, it is more likely that there will be several manufacturers producing any given drug. In that scenario, there will be a higher probability that one company’s output can be replaced by competitors, if it is forced to temporarily stop operating due to mechanical problems or quality control issues.

For this reason, it is important that we look to make the market as large as possible. This means removing barriers, other than necessary quality controls, to imports and encouraging other countries to do the same. In this story, a resilient supply chain is an international supply chain that encompasses as large a share of the world as possible. Restricting ourselves to domestic producers is the wrong way to go.


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