Download SB 1010: Advance Notices Would Wreak Havoc on the

SB 1010: Advance Notices Would Wreak Havoc on
the Biopharmaceutical Supply Chain
SB 1010’s 60-day notice on price increases will substantially disrupt the biopharmaceutical supply chain
nationwide, encouraging purchasers to capitalize on the notices by stockpiling, which consequently
threatens patients’ access to medicines and encourages secondary distributors to aggressively mark up
prices in selling critical shortage drugs to the highest bidder.
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Wholesalers, on average, keep 10-12 days’ worth of supply of any specific medicine in the
warehouse, which may serve multiple states or otherwise huge geographic areas.
Wholesalers are generally under a contractual obligation to honor purchasing requests (e.g., from
Walgreens) and may have to draw inventory from other states or regions to meet the request.
The production by biopharmaceutical manufacturers is heavily regulated by the FDA, and
production schedules are often set one to two years in advance.
In the case of knowing when a price increase will occur and the amount of that increase, any
purchaser of medicines, particularly one that is publicly traded, would be more or less obligated
to take advantage of this notice, as any increase would essentially be “free money” because their
reimbursements from payors for that drug would increase on the date the list price increases.
This creates a recipe for disaster in supply chains across the country as wholesalers’ stocks are
depleted and manufacturers are to refill these depleted quickly – even from emergency stocks (as
we are aware of no manufacturer, even in small molecules, that keeps a 60-day or more
emergency stock on hand of any drug).
These shortages created by stockpiling will also encourage growth in the “gray market” where secondary
distributors sell critical shortage drugs to the highest bidder, often across state lines (meaning that other
states with more lax monitoring and enforcement of this market could cause serious issues for California).
Below is a real California example cited in the U.S. House of Representatives’ Oversight Committee
report on gray markets where a shortage drug was bought by a California hospital at an 8,500 % markup.
In the drug chain illustrated above, which documents the shipment of 25 vials of a chemotherapy
drug called fluorouracil in September 2011, a New Jersey secondary distributor called Tri-Med
America began a chain where the drugs were sold five more times at significantly increasing
prices before reaching their end user, a hospital in California.
A survey of hospital and other purchasers by Premier identified an average mark-up in gray
markets of 650% from the contract price, with higher mark-ups for some critical care drugs,
oncology drugs, and anesthetics.
The following is a Q&A on SB 1010 with a biopharmaceuti cal supply chain expert:
Examples of how the 60 day notice of a price increase could impact access to medicine through
stockpiling.
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Because the drug supply chain routinely crosses state borders, compliance with the 60-day
notification provisions would essentially result in notification for the entire country. We cannot just
notify one state of a price increase and expect that information to stay within state borders.
There are significant consequences associated with purchasers suddenly buying increased quantity of
a particular drug all at once. The most significant being drug shortages and nationwide disruption of
the supply chain. For example, a company could buy up every available bottle of a certain drug—not
just in California but nationwide—knowing that they would be up 10% in just a few weeks.
Legitimate patients in Florida (for example) could lose access to that drug because the supply has
been hoarded by distributors and pharmacy chains because of the California notification.
The 60-day requirement exceeds the available inventory of many products at the manufacturer
distribution centers.
Would this provision affect both specialty medicines and non-specialty medicines?
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Yes. The supply of drugs produced by a manufacturer is not infinite. Due to FDA manufacturing
rules, manufacturers have to plan for production months or even years in advance. This is true for
both specialty medicines as well as non-specialty medicines.
Note on Specialty Drug: At our company, some of our critical cardiac drugs have only 3-6 weeks of
inventory in our own warehouses. That could easily be depleted with an investment of a mere $10-20
million, and could put thousands of patients at serious risk of death. At a minimum, every single one
of them would have to be admitted to a cardiac unit for monitoring for 3 days (GIP indicates that this
information is on the label).
Note on Non-Specialty Drug: See the 3rd bullet above in the previous question. On the one hand,
specialty drugs are a target because their high cost means the storage requirements are lower for the
same guaranteed return. On the other hand, with non-specialty drugs you have more players able to
spec-buy (wholesalers and retailers) and because of higher velocity, less risk for the buyer.
What are some things wholesalers and chain pharmacies could do to buy up a medicine to avoid the
higher price 60 days later?
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The wholesalers will buy as much product from the manufacturer as possible in order to meet the
needs of their clients, i.e. Walgreens, CVS, etc. Their clients then buy as much product from the
wholesaler as possible until the supply is drained. This then puts the wholesaler in a position where
they must demand additional inventory from the manufacturer immediately in order to continue
selling the product. If the manufacturer cannot keep up with the demand, which is likely due to FDA
manufacturing rules, etc., patient access is negatively affected.
Could there be a situation where big chains (Walgreens, CVS) buy up supply and access it limited
in rural areas with no chain drug store, or only independent stores?
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Yes. Walgreens, CVS, etc. have greater financial flexibility to spend $10-20 million depleting the
stock of a particular medicine from the wholesaler. This could then leave smaller, rural pharmacies,
and their patients, without access or availability to this medicine.
How would this provision affect hospitals and medical offices?
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We think that advanced notice has almost no benefit to hospitals or medical offices. In fact, the only
people who will benefit from the proposed notification provisions are the middlemen, not patients or
the healthcare system.
Hospitals: Almost all drugs purchased by hospitals are done through GPO contracts. Their acquisition
price is fixed for a specific period, and is independent of the “list price.” Advance notice of a price
increase would have no impact on them. **Note – this is where the wholesalers would make HUGE
dollars – they would buy up at the old price, sell at the fixed contract price after the price increase,
and charge the (now larger) difference back to the manufacturer**.
Medical Offices: Medical offices purchase from wholesalers. Individually, their opportunity and risk
creation is small, but cumulatively, they create the very challenge we are talking about. If we think
about the financial capabilities of large group practices, or Kaiser for example, you can immediately
envision the risk to the supply channel as a whole.
This raises troubling issues about reimbursement for services. If the office is using product they
purchased at the old price, and maybe they bought more than their short term needs, and they submit
for reimbursement to public or private payers after the increase, what should their reimbursement be?
If the “new” level, then it means that the payer pays the new high price anyway, and excess
profiteering is happening at the medical office. And if an office had excess product, and wanted to get
reduce their inventory to recoup the financial benefit, would the office perhaps consider unnecessary
medical treatments?
Additional thoughts on the 3-day Amendment?
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Three days certainly reduces the risk, but does not eliminate it. Purchasing in this business is very,
very efficient. Orders are placed all along the supply chain via electronic means. So, the risk remains,
just for a shorter period of time.