• Why is there a propofol shortage in a free market?

    A longtime reader (Austin says so) emails us:

    This NEJM article relates the sustained problem we have had obtaining a key drug, Propofol.  I can understand how we end up with drug companies not wanting to make orphan drugs. Even after reading this article, it remains unclear why someone would not want to produce such a highly used medication. The price should go up, and producers respond by making more. This is not happening. Why arent markets working?

    Well, I’m not an economist, but I think this is an example of a “perfect storm”.  Here is a small piece from the FDA-written NEJM piece:

    Recently, the supply of one drug — the sterile injectable drug propofol, a fast-onset, short-acting sedative–hypnotic agent used for the induction and maintenance of anesthesia or sedation — has become critically low. In 2009, there were three manufacturers making propofol: Teva Pharmaceuticals, Hospira, and APP Pharmaceuticals. In early October 2009, Hospira recalled multiple batches of its propofol owing to the presence of particulate matter in the vials. In late October 2009, Teva recalled multiple lots of its propofol owing to possible microbial contamination. As of May 2010, Hospira had not yet returned propofol to the market and had expanded its recall to capture all product that might currently be in customers’ inventories, and Teva recently announced that it would not be returning to the market. This confluence of events has left only one company to supply propofol to the entire U.S. market — an unrealistic expectation, given anesthesiologists’ reliance on the drug.

    Let’s recap.  Propofol is an excellent drug for anesthesia.  It starts working really fast, and its effects go away really fast when you stop adding it.  That’s exactly what you want.  But there are a number of factors that make it unappealing:

    • Propofol is relatively difficult to produce.
    • Propofol gets contaminated easily in use, as it has no preservatives.
    • Propofol is generic, and therefore the price is lower than on patent drugs.  So it’s hard to make money.

    In general, sterile injectables are especially prone to shortages because of these reasons.  As the NEJM piece notes:

    Although shortages can occur with any drug, sterile injectable drugs such as propofol are particularly susceptible. Data collected by the Drug Shortage Program of the Food and Drug Administration (FDA) show that of 110 shortages that occurred in 2008, 39 involved sterile injectables (35%), and in 2009, the proportion rose to 73 of 157 drug shortages (46%).

    Some time ago, three companies made propofol: Teva Pharmaceuticals, Hospira, and APP Pharmaceuticals.  But starting last October, the dominoes began to fall.  First, Hospira was forced to recall multiple batches of its drug because of contaminants in vials.  Soon after, Teva was forced to recall multiple batches of the drug because of  possible microbial contamination.  Instead of recovering, things got worse.  Six months later, Hospira was still recalling the drug and was not bringing any new propofol to market.

    And then, in May, a Jury awarded a $500 million verdict for the first (of many) civil cases concerning a Hepatitis C outbreak linked to propofol use in a Las Vegas GI endoscopy center.  Teva took the brunt of that that verdict.  Faced with that massive payout, and more likely on the way, Teva bowed out of the propofol market.  Baxter (which merges with Hospira distributed the propofol) was also slapped with a nine-figure verdict in that trial, so it’s unlikely they will be bringing propofol back soon either.

    That leaves only one company making all the propofol for the US.  That’s not enough.  We’ve got a shortage.

    Our reader asks why the market failed.  I’m not sure it’s possible it could succeed here.  Sure, the remaining company could charge a fortune for the drug, but that won’t end the shortage.  And other companies aren’t likely to enter the field because it’s so hard to make and they would be open to the same dangers that Teva and Hospira/Baxter faced.  It’s just not a risk that I can see pharmaceutical companies taking, when they can make money in much less risky areas.

    What should we do?  I don’t have a good answer.  I’ve seen the usual snark wondering how long it will be until “Obama determines that access to propofol is a right and forces Teva to initiate production”.  Teva is an Israeli company (many pharmaceutical companies are foreign corporations) so that’s not going to happen.  I expect that as we are forced to import replacement drugs from foreign markets we will hear the usual scare stories (ignoring that it was contamination in US-imported drugs that started all of this).  Some will blame the laywers, and some will blame the doctors, and some will blame the companies.

    But the truth of the matter is that these types of drugs are not going to get any more profitable or enticing to make.  So how should we move forward in a non-socialist solution?  I’m looking at you, free marketeers…

    UPDATE: Fixed sloppy language.

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    • OK, I’ll bite. This does seem like a money making opportunity. If there are shortages, why don’t other firms enter. Buyers ought to purchase even at a higher price due to the shortage. Competitors can’t undercut each other on price if demand isn’t totally satisfied.

      That is, if firm 1 charges a lower price than firm 2, p1 < p2, then it would sell out at p1 and buyers could only get the drug from firm 2 and would have to pay p2. There must be other barriers to entry that explain why this is not happening. What am I missing?

    • Exactly, Austin. Manufacturers should be jumping in, but they are not. This has been going on with Propofol for over a year. On top of that, as the NEJM article notes, we have been having shortages of other key drugs. This has become an ongoing problem.

      Steve

    • Emulsions are hard to make and most companies don’t own the equipment to do it. Installing equipment and figuring out how to use it will take time. Plus it takes about 2 years for the FDA to review and approve a generic drug application. In the case of a shortage, it would probably be quicker, but still…

      I question the accuracy of the Hospira/Baxter merger referenced in this article. When did that happen? They are two separate companies, and I don’t think Baxter ever made Propofol.

    • bb

      You are correct. The merger did not occur, although it was rumored, and I was mistaken. I’ll correct the piece.

      I don’t think it changes the point I was making, however.

      Thanks!

    • Can you say government regulation? Anytime the gov gets involved in regulating something it screws with the free market and problems lik these occur. Also lawsuits that punish the very companies that people expect to supply the drug will hamper production. We must limit lawsuits asn get the gov out of the way. Then there will be no shortages.

    • What are the liability issues involved with obtaining Propofol outside of the USA?

    • The problem with propofol is that it is too expensive to produce. Even if prices go higher due to a shortage, there is so much regulation and capital involved in getting a generic propofol to market that who knows if the demand for it will be there in a couple of years. Propofol is a generic drug so the profit margins are thin as it is.

      So what is the answer to this dilemma in a free market? Decreasing the cost to do business might help, lawsuit protection, decreasing regulation to allow quicker FDA approvals, as well as decreasing stringent product testing. However, all these measures puts the consumer at risk.

      I don’t see a solution without government interference, ahem, regulation. I liken this to the farming sector where we do not want wild swings in supply and demand like in the early 20th century, so the government has to subsidize a certain amount of farmers so they don’t all go out of business because of the free market.

      • Government price controls in Medicare and Medicaid are mostly responsible for the shortage of generic drugs. When producers cannot raise the price there is no capital investment in new production facilities or new technology and some will exit the market when profit margin is smaller than their core target.

    • Since a key issue is difficulty of manufacture, not necessarily of the API, but of the sterile injectable emulsion. If a propofol variant which is soluble in saline were available that avoids the current manufacturing complications and behaves just as propofol, (1) would anesthesiologists be open to switching? (2) would the market be willing to pay a premium? (2) would companies be interested in licensing this product for manufacture?
      If the answer is yes – I would like to speak with interested parties as I may have a solution to this problem.

    • There is no chronic shortage of propofol outside of the USA.There is only one reason for this problem here in the states and it is NOT thin profit margins nor difficulty with production; it is our government regulators. The regulators mission is increasing power and wealth for their own benefit and growth; making things simple is not in their best interests. These entities contrary to popular myth do NOT exist to protect us. In fact, threatening the producers and consumers is their sociopathic mission. They use liability laws,impossible regulations, price controls, price fixing. Propofol is not a controlled substance so the regulators had to find another way to control it. The DEA,FDA,HHS, Medicare BATFM, etc. exert control over propofol distribution by forbidding a free market. Surf for prop availability overseas. It is easy to come by but don’t try to import it. Only our drug regulators can do that. And they won’t.

    • I’ll second every comment regarding regulations–the reason why propofol isn’t manufactured more in the US is because of regulations. Some of these regulations are probably lobbied by the existing company to hold a monopoly, too.

      It is very difficult to build a barbiturate compound…refinery in the US. You have to deal with FDA, OSHA, DEA, HHS, CMS…

      Economics suggest that there is a tradeoffs between availability and quality control. You can allow a regulator skip due process and make it difficult for new market entrants, or you allow the free market help new entrants flourish, and afterwards let the fear and consequences of civil litigation do its work to weed out bad performers.