In order to diagnose the cause of the recent increase in shortages of sterile injectable drugs, we need to understand that the market is rather concentrated. According to the FDA, in 2010, the top five manufacturers accounted for 80 percent of the volume of drugs injected, and the top three alone accounted for 71 percent. Further, 342 of 569 sterile injectable drugs — 60 percent — were virtually single-sourced, with one supplier accounting for at least 90 percent of supply. With only six of the 569 drugs did the top two suppliers account for less than 50 percent of the supply.[12]

This leads to a lack of back-up capacity. Current oncology shortages are all due to three key manufacturing lines operated by two firms,[13] and this has long been the case.

There is a widely held belief that there has been significant manufacturing consolidation recently. This is unfounded. Fewer than a dozen mergers occurred between 2005 and 2011, and these were small.[14] Indeed, in 2001 the top five manufacturers accounted for 90 percent of the market, and this market concentration has declined since then.[15] For generic injectable drugs overall, the number of manufacturer-drug combinations increased by 45 percent from 2006 through 2010. In every year, the number of manufacturers entering the market with a new drug exceeded those leaving it, and manufacturers have stated plans to increase capacity.[16]

Shortages are episodic, not permanent. The monthly volume of drugs injected for the entire set of 168 drugs identified by the IMS Institute for Healthcare Informatics as experiencing shortages last October has actually increased or at least remained stable over the last five years: from 55 million to 56 million standard units for injectables and 125 million to 157 million standard units for orally administered drugs.[17] Monthly sales increased from $250 million to $350 million over the period.[18] Thus, the average price per unit increased from $1.39 to $1.64. The volume of shipped sterile injectable oncology drugs increased by 14 percent from 2006 through 2010.[19] Almost all sterile injectable generic drugs used in the United States are manufactured domestically,[20] though foreign markets supply as much as 80 percent of the raw materials.[21]

The shortages derive from the limited number of suppliers of each drug. Even if the drugs have a stable supply over the longer term, market share changes dramatically in the short term, even month to month. This effect has increased markedly in the last year.[22] The most plausible explanation for these dramatic shifts in market share is that individual manufacturers are stopping production due to the supply-side issues discussed below.

Nor is the problem that generic manufacturers are having special difficulty gearing up to produce drugs newly available to them. On the contrary, most of the drugs experiencing shortages have been subject to generic competition for two decades: Almost 20 percent of reported shortages were for drugs introduced before 1980; just over half were for drugs introduced before 1990; and three-quarters, for drugs introduced before 2000.[23]

These shortages have led to a growing “gray market” of nontraditional distributors who compete aggressively to supply medicines when the traditional channel suffers a shortage. These distributors, unfortunately, often have very limited supplies, sometimes for just one or two patients at a time. Health-system pharmacists are skeptical about the quality of the medicines, especially because these distributors often do not offer a return or refund.[24]

A 2011 survey of 42 acute-care hospitals discovered that the average gray-market markup was 650 percent. The highest markup was 4,533 percent, and 10 drugs had markups greater than 1,720 percent.[25] Coping with shortages is an increasing burden. The time pharmacists spend managing shortages has tripled between 2004 and 2011, from two or three hours a week to nine.[26] Interestingly, the problem of shortages is almost uniquely American.