The Domino Effect: Raw Material Shortages

The First Domino

Last month we covered the omnipresent topic of drug shortages, an issue that never seems to completely go away. We know that these shortages are a result of typical causes such as production delays, recalls, an increase in demand, etc. 

Now, we are experiencing a shortage that is directly attributed to the conditions of the COVID-19 pandemic—raw material shortages. These shortages have now affected many different facets within the healthcare industry across the board, which has a direct effect on pricing increases, availability, inferior products, and having to go without products, among many other issues.

The Second Domino

COVID-19 has had a major impact on the supply-demand gap, with a 1,000- 2,000 fold increase for many PPE products. The large increase in usage created supply shortages, panic buying, and panic stocking. Further, the surge in global demand resulted in product shortages, and the overall impact of COVID-19 on these products has caused a material disruption in raw material cost and availability. 

One executive told congressional staff that “raw material for gowns is unavailable at any price, at least in the quantities we need to make gowns” and warned continuing to supply PPE under these conditions is “not sustainable.”

Suppliers are reporting that in many cases the Pan-Asian raw material source suppliers have raised costs by 500% or more and are selling materials to the highest bidders. Additionally, temporary factory closings and constrained labor availability due to physical distancing requirements, coupled with overall increased demand have contributed to an unsustainable situation.

Renegotiating Contracts and Exceptions 

As a result of the increases in raw materials, the finished product pricing has greatly increased so most of the Group Purchasing Organizations (GPO’s) in the healthcare industry have had to approve exceptions to the Terms and Conditions from their suppliers to prevent widespread cancellations of GPO agreements. Without the acceptance of the price increases, the prices would most likely have been increased even more if the contracts were canceled versus renegotiated. 

An example of these contracts (from just one of the many GPO’s in the healthcare industry) had initially reported renegotiated contracts from over 9 manufacturers of exam gloves and an additional 9 manufacturers of disposable non-sterile apparel alone and with many more to come.

Multiple Markets Affected By Shortage of One Raw Material 

According to the CEO of Clorox, their disinfectant wipes are going to be hard to find until 2021. Clorox is struggling to keep up with the high demand for disinfectants, which has increased at rates up to 500% in some categories.

As production increased, manufacturers encountered shortages of the specialized, non-woven fabric called polypropylene, used to make PPE masks. The material is “melt-blown” to create small, electrically charged fibers that trap small particles and prevent the spread of infectious diseases. 

The same materials that are used in masks and other PPE products are used to make the sheet in many disinfectant wipes creating a lateral shortage affecting a completely different market.

China

  • China manufactures 90% of PPE products in the world. 
  • The number of facilities in China supplying active pharmaceutical ingredients (APIs) had more than doubled since 2010 to 13% of all those serving the US market. 
  • Currently, US FDA registered pharmaceutical manufacturers source their API’s from China at 13%, 26% from the EU, 28% domestically here in the US, and 13% from the rest of the world. 

The American Society of Health-System Pharmacists (ASHP) announced an 11-medicine list of drug shortages, which mainly included hospital-level antibiotics and anesthetic medications including: meropenem, ceftazidime, ampicillin, and doxycycline, as antibiotics and vecuronium, rocuronium, as anesthetics. 

Also, this list included albuterol and fluticasone, which are used to open airways in the lungs. The FDA has identified about 20 other drugs, which solely source their active pharmaceutical ingredients or finished drug products from China.

India

India is the global leader in generic drug production, while China is the world’s largest supplier of active pharmaceutical ingredients (API). 

  • India imports nearly 70% of its APIs from China and also depends on them for a variety of other key ingredients in drug production. 
  • Indian pharmaceutical companies supply approximately 40-50% of all U.S. generic drugs. 

In early March, India restricted exports of 13 APIs and the drug formulations made from them in an effort to protect itself against domestic shortages. Given drug companies do not disclose supply chain specifics, it is difficult to predict which specific drugs would be affected by a continued disruption in India. 

Further, in India, the Indian Pharmaceutical Alliance (IPA) asked the government to restrict all pharmaceutical products, APIs, and formulation to domestic consumption only. This shortage has already begun to affect API and bulk prices in Indian party trades. The average increase was reported to be about 10–15%; however, it may reach 50% in some cases.

How Do We Stop These Shortages? 

Unfortunately, there is not a lot that we can do about the shortages now, but we can hopefully learn from our current situation. 

A few steps we can implement in the future to help mitigate the impacts of some of the shortages would be:

  •  to lengthen the expiration dates on shortage drugs
  •  improve critical infrastructure by requiring risk management plans
  •  improve critical infrastructure with data sharing
  •  require more accurate supply chain information
  •  establish reporting requirements for medical device manufacturers

This global health emergency has shed light on the need for everyone in the healthcare ecosystem to re-evaluate their supply chains by not just having a single source, but a secondary and tertiary as well.

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