How Supply Chain Issues Lead to Drug Price Surges and Quality Concerns

In a video interview with Pharma Commerce, Geoffrey Joyce, PhD, director of health policy at the Leonard D. Schaeffer Center for Health Policy & Economics at the University of Southern California (USC, describes how the 10% tax on Chinese goods and a potential 25% tariff on pharmaceuticals could have notable effects on the price, quality, and safety of generic drugs. He explains that while branded and generic drug markets operate differently, the cost of generics is typically much lower, with intense competition driving prices down. A 10% tariff on generics might not significantly impact costs because most of the price is tied to distribution, not manufacturing. However, the COVID-19 pandemic highlighted the risks of relying on countries like China and India for essential generics, which has led to a push to bring production back to the U.S.

A 25% tariff would likely make domestic production more attractive, but generics are low-margin products, so this may result in higher consumer prices. Joyce suggests that tariffs could disrupt supply chains but not lead to significant changes in US production in the short term. Additionally, the low-profit nature of the business could encourage foreign manufacturers to cut corners, potentially reducing drug quality. California's failed attempt to create its own generic drug industry illustrates the challenges in stimulating domestic production for these low-margin drugs.

While tariffs might encourage some domestic production, it could come at the cost of higher prices and possibly lower drug quality. The overall impact on the drug supply chain remains uncertain, with concerns about reliability and safety, especially if foreign manufacturers face increased production costs.

Joyce also describes what makes the generic drug market susceptible to supply chain disruptions; how the tariffs can affect price or competition within the branded drug space; health policy developments that coming down the pike that the pharma supply chain should prepare for; and much more.

A transcript of his conversation with PC can be found below.

PC: What factors makes the generic drug market susceptible to supply chain disruptions?

Joyce: You may have four different labelers or manufacturers of these generic products, but they were all getting it sourced from the same supplier in China or India, and you realize, so if the FDA hypothetically shuts down a factory because of quality concerns in India or China, that can have enormous implications for the supply of that drug in the United States, because these four or five different companies selling it in the US are all getting their basic ingredients from the same supplier. It's a serious concern. I think the FDA has been a little reluctant to be too strict in policing these foreign production sites because of that dependency on one or two manufacturers.

I think there's real concern—margins are low. We've seen this in the past where, hypothetically, there are two or three manufacturers of a particular anti-hypertensive or anti-psychotic, and the margins get low, and one of them drops out of the market. Then the other guys realize, hey, we're the only game in town, or there's only two of us in town, we can raise prices.

We have seen—even though the generic market in the US is very competitive and prices are very low—we've seen plenty of cases in the last five years where we see 100, 200, 300% increases in the drug overnight, and their prices, because one supplier has dropped out of the market, leaving a monopoly for the remaining supplier. It's a delicate market with low margins. If you tinker with that marketplace, you could have exits. Firms can say, I’m not going to produce that drug. I can make more money in another generic product. Or again, they may cut corners to try and keep costs as low as possible. And cutting corners can be consequential.