Originally published on Mar 15, 2018. 

The Story
Four major hospitals, Ascension, Intermountain Healthcare, SSM Health and Trinity Health, have decided to battle vertical integration… with vertical integration. The group of hospitals announced a collaborated effort to manufacture and market generic drugs. This is an industry first!
Per the Intermountain CEO: “The new company intends to be an FDA approved manufacturer and will either directly manufacture generic drugs or sub-contract manufacturing to reputable contract manufacturing organizations, providing patients an affordable alternative to products from generic drug companies whose capricious and unfair pricing practices are damaging the generic drug market and hurting consumers. The company will also seek to stabilize the supply of essential generic medications administered in hospitals, many of which have fallen into chronic shortage.”
The Problem
The lack of supply for critical drugs is first and foremost an issue of providing adequate care. Horror stories often times focus on a patient not receiving life-saving products in time.
High costs to healthcare providers are a simple case of supply and demand. On the distribution side, opportunist drug wholesalers buy up shortage product to make, in some cases, over 1000% margins. The business model sparked a congressional investigation (read here: https://goo.gl/G5irpt) of some of the biggest violators only six years ago. On the manufacturing side, drug manufacturers predictably raise cost when they have no competition.
A Better Solution
Every drug manufacturer performs at least one of 3 components of manufacturing:
  1. Own the drug file with the FDA (NDA, ANDA etc.)
  2. Physically manufacture the product
  3. Label the product
There are 3 business models concerning drug manufacturing:
  1. #1, #2(optional) & #3:Traditional Manufacturer
  2. Only #2: CMO
  3. Only #3: Private Labeler
At this time, it seems like, from the Intermountain CEO’s words, that the hospital will follow the Traditional Manufacturer route – win drug files with the FDA. With what is likely massive non-profit foundation cash reserves, the group should be able to afford the filing fees, which could be millions of dollars. Unfortunately the time to market is usually 2 years, although FDA does give a fast track option for certain drugs.
I believe a better way forward would be partnering with a reputable a 503(b) facility. This way, they could launch a shortage product in 3 to 6 months while minimizing upfront costs. Further it would specifically focus the hospital on getting shortage items into inventory – not ambitious plans of a marketing and logistics powerhouse.
A 503(b) facility performs human drug compounding – the FDA allows these facilities manufacture shortage products.
So what does this mean? It means that the industry titans aren’t going to get to have all the fun (profit). The recent mash ups (Red Oak/CVS/Caremark/Aetna, Cigna/Express Scripts and Amerisource/Walgreens) have all continued to put pressure on the rest of the supply chain as companies fight to gain leverage ; and now the hospitals are fighting back.


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