A consortium of five hospital organizations representing 450 hospitals has announced plans to establish a not-for-profit generic pharmaceutical company to address the problem of needed medications that are in short supply or have undergone extraordinary price increases. The announcement was made in a press release on Jan. 18 and received front page coverage in the New York Times.

The consortium is led by Intermountain Healthcare (Salt Lake City, UT, US) and includes the U.S. Department of Veterans Affairs’ Veterans Health Administration, SSM Health (St. Louis, MO, U.S.), Trinity Health (Livonia, MI, US), and Ascension (St. Louis, MO, U.S.). The latter three are all Catholic not-for-profit health care systems. More hospital networks are expected to join the initiative.

Unwarranted and Arbitrary Price Increases

In their announcement, the hospital group blames the generic drug industry for “unwarranted and arbitrary price increases” and “creating artificial shortages” of important hospital-administered drugs, especially injectable drugs such as pain medications. The hospital group expects to stabilize the supply and price of these drugs by creating a new generics company that will either establish its own manufacturing operations or work with contract manufacturers to supply the medications.

If the new entity takes off it could be a boon to the contract manufacturing organization (CMO) industry, which is already working with FDA and other authorities to address the drug shortage problem though its trade association, the Pharmaceutical and Biopharmaceutical Outsourcing Association (PBOA). But is it realistic to expect that this new generic pharma company can really get off the ground?

Our initial reaction is that the group has some significant hurdles to overcome, the most serious of which is the manufacturing capacity to produce the drugs. Constraints on good manufacturing practices (GMP)-compliant capacity have been a significant contributor to the product shortages the new initiative seeks to address. The generic industry has been seriously impacted by GMP compliance problems at manufacturing facilities worldwide, including sites in the U.S., Eastern Europe, and India. Risks to product sterility and other GMP violations have led to warning letters and import bans, and the problems, which are often related to systemic quality assurance lapses, are still a long way from being resolved.

U.S.-based CMOs may have limited capacity to offer the hospital-initiated start-up company. Much of the U.S. industry is geared to higher value branded products, which have been booming thanks to new science and robust external financing for emerging biopharma companies. Capacity and cost structures at many U.S. CMOs are geared to innovator products, not low-price generics. Most CMOs that are supplying the generic market are manufacturing niche products from facilities with limited capacity. European CMOs could be a source, but much of the available capacity there is for ampoules and prefilled syringes, while the supply shortages are largely for products packaged in vials. Also, many European CMOs have limited or no prior experience with FDA GMPs.

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A Boon to the CMO Industry

Therefore, the hospital-owned generics company will face a steep hurdle: it will have to either build sophisticated procurement, quality assurance, and distribution operations capable of creating and managing a global network of active pharmaceutical ingredient (API) and drug product suppliers; or build a manufacturing facility that will require a sizeable investment (easily $50 million at the scale they are addressing) and three to five years to complete.

It’s also worth noting that none of the advisory committee members named in the hospital group’s press release has any significant generic industry experience. The committee includes two former Amgen executives, a former Medicare official, a management consultant, an investment banker and some hospital executives. One is led to question whether the group really understands what it is getting into.

Until more details become available, we think it unlikely that this new initiative will be a boon to the CMO industry. A more likely scenario, at least in the near term, is that the hospital group evolves into a purchasing consortium that negotiates contracts with existing generics companies guaranteeing pricing and volumes sufficient to maintain a stable supply of the products currently in short supply.