Friday, January 13, 2012

Advanced Analytics for Pharmaceutical Supply Chain Networks

Drugs produced by pharmaceutical companies not only keep people healthy, but can prolong and even save lives.

Hence, when shortages of medicines occur there can be devastating impacts.

There has been a lot of coverage lately in the media about drug shortages, with the number of drugs that were reported in short supply in the US in the first half of 2011 rising to 211 – close to an all-time record – with only 58 in short supply in 2004. According to the Food and Drug Administration (FDA), hospitals have reported shortages of drugs used in cancer treatment as well as in surgery, anesthesia, and intravenous feedings. The consequences of such shortages include the postponement of surgeries and treatments, and may also result in the use of less effective or costlier substitutes. The American Hospital Association reports that all US hospitals have experienced drug shortages, and 82% have reported delayed care for their patients as a consequence.

The reasons for such shortages are complex, and this important issue is starting to receive even increased governmental attention. As we note in our latest paper, "A Supply Chain Generalized Network Oligopoly Model for Pharmaceuticals Under Brand Differentiation and Perishability," co-authored with two of my doctoral students, Amir H. Masoumi and Min Yu, most cases appear to be related to manufacturers’ decisions to cease production in the presence of financial challenges. Pharmaceutical companies secure notable returns solely in the early lifetime of a successful drug, before competition takes place. This competition-free time-span, however, has been observed to be shortening, from 5 years to only 1-2 years. Hence, the low profit margins associated with certain drugs may be forcing pharmaceutical companies to make a difficult decision: whether to lose money by continuing to produce a lifesaving product or to switch to a more profitable drug.

The FDA, however, cannot force companies to continue to produce low-profit medicines even if millions of lives rely on them. On the other hand, where competition has been lacking, shortages of some other lifesaving drugs have resulted in huge spikes in prices, ranging from a 100% to a 4,500% increase with an average of 650%.

In addition, in 2011, pharmaceutical products valued at more than $30 billion were losing patent protection, with such products generating more than $15 billion in sales in 2010.

More than 80% of the ingredients of drugs sold in the US are made overseas, mostly in remote facilities located in China and India that are rarely -- if not ever -- visited by government inspectors.

Supply chains of generic drugs, which account for 75 percent of the prescription medicines sold in the US, are, typically, more susceptible to falsification with the supply chains of some of the over-the-counter products, such as vitamins or aspirins, also vulnerable to adulteration.

In the past, product recalls were mainly related to local errors in design, manufacturing, or labeling, a single product safety issue today may result in huge global consequences.

In our pharmaceutical supply chain network paper, we developed an analytical model, based on game theory and generalized network theory, that captures many of the realities of complex pharmaceutical supply chain networks today -- from competition, to brand versus generic drug consumption, to product perishability and even waste management issues. For flexibility purposes and generality, we modeled both elastic and fixed demand scenarios.

The analytical framework also allows for the quantitative investigation of the impacts of patent rights expiration on a pharmaceutical company's profits, as we demonstrate in a case study of cholesterol-lowering drugs. Our paper, we are pleased to report, has now been accepted for publication in the journal, Transportation Research E: Logistics and Transportation Review. In addition, we will be presenting it at the upcoming POMS Conference that will take place in Chicago, Illinois April 20-23, 2012.

And for a brilliant panel discussion, A Worldwide Standard of Care, at the World Science Festival in NYC, that includes Dr. Eric Lander, the head of the Broad Institute, click here.