Concerns about quality and a fire at a Sandoz plant in Quebec exacerbated the current drug shortage in Canada.

Many are asking why the shutdown of a single facility could threaten the nation’s supply of vital prescription medications.

While federal and provincial governments have been eager to play the blame game, a shared sense of responsibility could lead to important changes to the way we secure the nation’s drug supply.

The Sandoz crisis

On March 4 a fire broke out at a Quebec manufacturing facility of the multinational generic drug manufacturer Sandoz. The fire halted production and led to medication shortages across the country. While the fire made for dramatic headlines, shortages had already been a problem at that factory for months. A few months earlier, the United States Food and Drug Administration (FDA) had warned Sandoz about potential quality problems, and Sandoz had slowed down its supply as it worked to improve its production processes.

The resulting shortage has hit hospitals especially hard because the Sandoz plant manufactures the vast majority of injectable medications used in Canada. Most oral medications, in contrast, are produced by multiple suppliers.

But why was one factory manufacturing such a large proportion of so many important drugs?  And who is responsible for ensuring a stable supply of such drugs in Canada?

The political blame game

The federal Minister of Health, Leona Aglukkaq, has argued that the blame lies with the provinces. In a special parliamentary session devoted to the drug shortage, she stated that “the shortage has been created largely by the decision of the provinces and territories to pick a sole source supplier, and that supplier cannot provide the drugs now.”

Provincial governments have pushed back, arguing that it is Health Canada’s role to regulate suppliers, and to inform provinces about changes. Deb Matthews, Ontario’s Minister of Health and Long-Term Care said “we did not get the advance notice that we should have received” and “it is the responsibility of the federal government to make sure that we’re aware of slowdowns in production in time to actually prepare a response to that.”

But neither government has clearly acknowledged that one of the causes of the drug shortage can be found in any introductory economics textbook—when prices are pushed too low, suppliers reduce production and sometimes exit the market altogether. When there is just one supplier, a single event—like a fire at a single manufacturing plant—can trigger a major crisis.

Market concentration and the role of group purchasing organizations

Hospitals in Ontario purchase most of their drugs through group purchasing organizations (GPOs). The two largest GPOs in Ontario are Medbuy and HealthPRO. Both organizations are governed by their member organizations, which are mainly hospitals and other health care providers. GPOs were established to increase efficiency for member hospitals. Instead of each hospital signing its own contracts with multiple different pharmaceutical companies, GPOs deal with the pharmaceutical companies and the hospitals only have to deal with GPOs.

GPOs drive down prices by buying in bulk. But the downside of negotiating aggressively is that sometimes only one manufacturer remains willing to supply a particular drug at the negotiated price. And what appears to have occurred in Canada is that Sandoz was the only willing manufacturer not just for one important medication, but for dozens.

Helen Stevenson, a former Assistant Deputy Minister responsible for prescription drugs in Ontario says that “in an ideal world we’d have many manufacturers of every drug, but that’s not practical and there is not enough of a market for these products, so manufacturers specialize in certain types of drugs.” In Canada, Sandoz has become the manufacturer that specializes in drugs that are administered via injection.

Richard Jones, a Vice-President at Medbuy, says that “GPOs are complying with the procurement policies of governments – to reduce costs to the public purse. However, neither governments nor GPOs can control the business decisions of corporations affecting the product offerings they make available in Canada.  One unintended consequence is that the marketplace can be left with a single supplier for a key product leaving Canadians vulnerable to any production related issues.”

GPOs gather information from member hospitals about the amount of medications each hospital needs, and then ask pharmaceutical companies to make corresponding bids. The lowest bidder typically wins the entire contract. This can drive other producers out of the market, and with only one remaining supplier, prices can even increase. Alan Robinson, a pharmaceutical industry consultant in the United Kingdom, says, “When you get down to one supplier you run the risk of supply problems but there is also the point that you are also handing more pricing power to the monopoly supplier.”

The Competition Bureau, a federal agency, expressed similar concerns in a 2008 report. The authors of the report noted that “a frequently expressed concern regarding competitive tendering is that it could lead to shortages when winning bidders are unable to meet demand.” The report also suggested potential solutions to this problem, such as including penalty provisions and selecting more than one supplier.

Canadian GPOs do include penalty clauses in their contracts with drug companies.  But it appears that the other solution suggested by the Competition Bureau—that of selecting two or more suppliers—was not adopted by GPOs. In contrast, Robinson says that health authorities in Sweden “choose the three cheapest products in a monthly tender thereby giving greater security of supply.”

International markets – a small fish in a big pond

In order to participate in the Canadian market, drug manufacturers must comply with a strict set of regulations from Health Canada. These regulations are designed to ensure that medications are safe and effective. According to Health Canada, nearly 80% of drugs consumed by Canadians are manufactured outside our borders. However, most drug manufacturers around the world have not been approved to supply the Canadian market, and until the Sandoz crisis, neither the GPOs nor federal or provincial governments were actively encouraging foreign drug manufacturers to apply for approval.

Going forward

It seems unlikely that GPOs will rely on single suppliers in the future as heavily as they have relied on Sandoz in the past.  Alyssa Stuart, Director of Marketing and Communications at HealthPRO noted her organization is considering “multi-supplier awards” as a response to the Sandoz crisis. Broadening the supply base may result in higher prices, at least over the short term, and this may be the price we need to pay for a stable supply of vital prescription medications.

Some have suggested that Canadian provinces consider establishing crown corporations for manufacturing drugs. However, a Health Canada spokesperson says the federal government is not interested in interfering with the pharmaceutical industry. She noted that “industry is and will remain responsible for manufacturing and supplying drugs to the Canadian market.”

In a rare show of unanimity last month, federal MPs voted to work with the provinces, territories and the pharmaceutical industry to develop a strategy to better anticipate and manage medication shortages. Although federal politicians were unanimous about the need for a national strategy, there is much less agreement on what concrete steps should be taken next. Jackie Duffin, a medical historian and hematologist who has established a website resource on the Canadian drug shortage, notes that there is an unwillingness to accept responsibility even though in this context “responsibility isn’t equal to blame.” She also notes, somewhat ominously, that the recent shortage triggered by the fire at Sandoz may be “just the tip of the iceberg” and that we may suffer even worse medication shortages in the future. If she is correct, we urgently need to stop the blame game and collectively work toward finding solutions.