On October 1, as Prime Minister Scott Morrison announced funding to secure Australia’s supply chains, the Therapeutic Goods Administration (TGA) posted on its website the latest information about an increasing number of shortages of vital medicines.

Injection ampoules of adrenaline, used in cases of acute allergic reactions and cardiac arrest, had been in short supply, on and off, for two years. The shortage was critical, and a special access arrangement was in place that would allow the import of substitutes not normally approved in Australia. A single word was given as the reason for the shortage: “manufacturing”.

Since January last year, manufacturers have been obliged to report current and impending supply issues to the TGA, which regulates both drugs and therapeutic goods in Australia. But the reasons given are often short and opaque. The detail is closely guarded commercial information. Sometimes “other” is cited as the cause of these shortages that can have devastating impacts on patients. Manufacturers must also declare the date that supply is expected to be resumed, but this can be changed at any time by the drug companies. It often blows out.

Medical products were one of six priority areas identified in Morrison’s announcement of a $1.5 billion boost for Australia’s manufacturing industry, which includes $107 million for “supply chain resilience”. Beneath the announcement, though, lies a dangerous malaise, particularly when it comes to pharmaceuticals.

Australia imports more than 90 per cent of its medicines and sits at the end of long and complex pharmaceutical supply chains. While the Covid-19 pandemic has highlighted how this puts our safety at risk, it is not a new problem.

If the government wants to boost local pharmaceutical manufacturing, it will be playing catch-up. In the past decade, multinationals have made their investments elsewhere and drug manufacturing capabilities have moved offshore. Australia now has very little capacity to make active pharmaceutical ingredients – APIs – meaning even the manufacturing that is done here usually involves importing the ingredients, mostly from China and India. At the same time, while Australia grows almost half of the world’s raw pharmaceutical opium supply, most of it is shipped overseas to be made into medicines.

Significantly, in the time of Covid-19, Australia’s vaccine manufacturing capacity is less than it was a decade ago. And despite the new-found interest in boosting Australian manufacturing, the details released in the budget package are sparse. So far, there is little sign the government has a strategic plan to tackle the problems.

In 2019, there were 1797 new medicine shortages reported to the TGA, involving 1415 different products. Nine per cent of these had a “critical impact” on patients, meaning there were no substitute medicines available – or at best an insufficient amount – and the shortage was life threatening or a serious threat to health. This was before the pandemic.

In April this year, as the government scrambled to source and manufacture ventilators, the Society of Hospital Pharmacists of Australia warned that the sedative and neuromuscular drugs essential for ventilator use were in critical short supply in most Australian hospitals.

The society’s chief executive, Kristin Michaels, says that after a big effort, supplies of these drugs have returned to normal, but the ongoing issue of medicine shortages is “complex” and many layered. “As a small, sparsely populated and inconveniently located country, our market can be less prioritised and more challenged by logistical issues than some others,” she says.

Australia does have a National Medical Stockpile, but details of its contents are not released “for security reasons”, according to the Department of Health. State and territory governments are responsible for deploying it with advice from the Australian Health Protection Principal Committee (AHPPC). But that, in turn, depends on requests from individual health services, and evidence from public servants before the senate select committee on Covid-19 suggests this hasn’t worked smoothly – at least in the case of access to personal protective equipment.

At the beginning of the pandemic, the government announced funding of $1.1 billion to boost the stockpile, more than doubling the $900 million already invested. Even with the boost, though, the stockpile is designed only for short-term needs in an emergency, not to address the long-term shortages that plague Australia.

As of late this week, the TGA lists 480 medicines in short supply, 53 of which are critical. Shortages in the past 12 months have included antidepressants, hormone replacement therapies, the life-saving EpiPens used to treat severe allergic reactions and Sinemet, a drug used to treat Parkinson’s disease.

Increasingly, the TGA is approving the import of replacement, unregistered products to tackle shortages. But these substitutes are not listed on the Pharmaceutical Benefits Scheme (PBS), meaning patients can face prohibitive pricing.

Earlier this year, the agency announced the discontinuation in Australia of Nardil, an older-style antidepressant, “due to global issues with the manufacture of the active pharmaceutical ingredient”, phenelzine. Most of Nardil’s users are prescribed the drug because nothing else has worked. Withdrawal can be distressing and dangerous. Medical experts have warned of an increase in suicides because of this shortage. In June, Nine News reported on a Brisbane patient who flew to the United States to buy more, saying, “Without Nardil, I’ll die.”

But in an example of how opaque supply chains can be, the Melbourne company HL Pharma, which has built a business on sourcing pharmaceuticals that are not registered with the TGA, says it can provide phenelzine to patients, through their pharmacist, at a price – suggesting the discontinuation of Nardil is at least partly about money, and the thin profit margins drug companies earn for generic medicines compared with the latest, patented antidepressants.

In recent months, several brands of blood pressure and hypertension medication containing the same active ingredients – olmesartan medoxomil and amlodipine – have also been in short supply in Australia. Merck Sharp and Dohme sponsors the branded product, Sevikar. Merck and another six sponsors sell generic versions. The reasons given for these shortages range from “unexpected increase in demand” for Sevikar to “manufacturing” and “other”. The expected resupply dates range from later this month to February next year.

Supply chains are complex. Most medicines in Australia are imported from the US and Europe. The active pharmaceutical ingredient, however, is often made in India or China. Particularly for generic medicines – that is, drugs that are out of patent – the world’s entire supply of an API may come from a single factory.

In 2016, for example, there was an explosion at the Qilu Pharmaceutical Company in Jinan, China. “The powder that rained down onto the streets like snow dust was the entire global stock of [the antibiotic] piperacillin,” wrote Dr Simon Quilty, in a piece for the public health publication Croakey last year.

According to Quilty, a fellow of Canberra-based think tank the Institute for Integrated Economic Research, stocks of piperacillin have taken years to fully recover – and right now two medicines containing it are in critical short supply in Australia, with unregistered substitutes authorised by the TGA. The reason given for the shortage? “Other”.

The chief executive of industry peak body Medicines Australia, Elizabeth de Somer, pushes back on the idea Australia’s supply issues are due to the concentration of API manufacture in China. It may be true for generics, she says, where profit margins are razor thin, giving an incentive to centralise manufacture, but new and innovative medicine manufacturers take care to diversify their supply chains.

Shortages in drugs containing the same APIs most likely reflect a chain reaction, she says. One manufacturer has a problem with the API – perhaps a batch does not meet standards – so the remaining manufacturers have to meet the demand for a month or two. But then one of them has a problem with a delayed shipment. Suddenly, a single supplier is trying to supply the world market, and ramping up production can take six months. The problems ripple through the system until they reach small and geographically remote markets – such as Australia.

Australia’s exposure is not unique. Last year, the US government commissioned a review of the security implications of reliance on China, which included an extensive examination of pharmaceuticals.

It concluded the US government did not understand the supply chains. There was no central repository of information about pharmaceutical supply chains and API manufacturing sites. “Should Beijing opt to use US dependence on China as an economic weapon … it would have a serious effect on the health of US consumers,” the commission’s report warned. The report included concerns about patchy regulation of medicine manufacture in China and India, and past reports of contamination and failure to meet standards.

In Australia, de Somer concedes that only the drug companies hold supply chain information – although she says the TGA has the authority to ask for this information.

A spokesperson for the TGA said the agency holds only a single nominated country of manufacture and does not automatically collect the source of the materials used. Legally, companies importing medicines must retain records identifying all the steps and locations for the manufacture, but the spokesperson noted that “responses from sponsors about specific batches can take considerable time” because of the complexity of manufacturing.

Those in the industry say satisfying demands from an Australian regulator is not the top priority for large multinational pharmaceutical companies. But some also suggest even the drug companies have trouble unravelling their own supply chains. Most industry and independent assessments come to similar conclusions. Australia has a robust research capability, but low manufacturing capability. A Defence Science and Technology audit in 2017 noted that “capacity to upscale production is a major weakness”.

The audit restated recommendations first made in 2012 but not acted on. They included a strategic effort from all levels of government, special funding and more co-operation with the countries of our region, as well as increased incentives for research and development.

Some of the vulnerability of Australia’s medical supply is built in, due to our geography. But we are also self-sabotaging, according to industry representatives.

In a 2018 report, Medicines Australia identified nine domestic pharmaceutical manufacturing companies. Some, surprisingly, export generic medicines, albeit made with imported APIs. This suggests our high labour and energy costs – the reasons often given for the erosion of manufacturing – are not the whole reason our capacity is increasingly disappearing offshore.

The Pharmaceutical Benefits Scheme – “a blessing and a problem”, according to Medicines Australia’s de Somer – is part of the issue. The price the government pays to subsidise generic medicines on the PBS is based on a system of price disclosure, where suppliers declare what they charge wholesalers and chemists, including deep discounts designed to gain market share.

Every six months the government calculates a weighted average discount for the medicine, and the price reimbursed under the PBS is reduced as a result. Then the process starts again, with profit margins being constantly shaved. The older a drug, the lower the price the government pays, and there is no price stability.

Industry insiders speak, off the record, about price gouging. One notorious example from 2012 was the Indian company Ranbaxy, which gave away its generic cholesterol medicine to Australian pharmacists, giving them an incentive – some called it a bribe – to recommend the drug, rather than Pfizer’s rival product, Lipitor, which had come off patent.

Pfizer claimed some patients were being told that Lipitor was no longer available, and ran full-page ads to correct the rumours. Meanwhile, it also started making cut-price offers to chemists, which resulted in an Australian Competition and Consumer Commission court case alleging it had misused its market power. Pfizer was cleared by the courts.

Meanwhile, the price battle drove the PBS subsidy ever downwards. Some drugs containing the relevant active ingredient – atorvastatin – are still in short supply in Australia.

The result of the constant market referencing for the PBS subsidies, one manufacturer told The Saturday Paper, is that there is no price stability for PBS-listed generic medicines in Australia, making it impossible for companies to confidently invest in manufacturing.

This manufacturer makes a generic drug in Australia to treat diabetes – but exports it to China, where he can get a better price. “That drug will never be in short supply in China, but it might be in Australia, even though we are making it here,” he says. “Manufacturers will naturally prioritise the markets where they can get the best price.”

It is hard to imagine a more politically sensitive issue than the PBS. Any rise in drug prices risks blowing out the health budget. Yet critical shortages of common medicines pose an unacceptable risk. Manufacturers suggest that security of supply, as well as lowest price, be factored into PBS decisions.

Often, when a patent for a medicine has expired overseas, it will still be in force in Australia. And so as generic manufacturers scramble to make their own versions of the medicine, Australian manufacturers are locked out, even if they plan only to export and not to supply the local market. By the time the Australian patent expires, the investments have already been made offshore.

A 2013 review of the pharmaceutical patent system, commissioned by the government, described this outcome as “perverse” and recommended negotiation with manufacturers to allow Australian exports of generic medicines. Yet the problem persists.

CSL, one of Australia’s largest manufacturing companies, has what it boasts are the largest and most advanced biotech facilities in the southern hemisphere. With the onset of the pandemic the company struck a deal with the government to produce Oxford University’s Covid-19 vaccine.

But according to Dr Andrea Douglas, CSL’s senior vice-president of organisational transformation and external affairs, pharmaceutical manufacturing has progressively shut down in Australia, despite the country’s high-skilled workforce and world-class academic institutions. “Plans for new ventures have been shelved as multinational and Australian companies chose to make their long-term capital investments in other places,” she says. The trend is likely to continue.

It’s a concerning prediction, given Medicines Australia says the innovative pharmaceutical industry is responsible for 22,900 jobs and an estimated $2.3 billion of direct contributions to the Australian economy.

Douglas points to other developed countries that have introduced tax incentives on products that commercialise intellectual property to encourage local manufacturing. CSL would “encourage” the Australian government to introduce “specific policy settings” with the same aim, Douglas says.

Andre Vlok, chief executive of another local manufacturer, Phebra Pharmaceuticals, calls for a “focused, long-term strategy … Sporadic announcements of local investment tend to be around specific therapies or applications and not broad-front capability.”

Nobody is suggesting Australia will ever be able to make all the drugs we need. At the moment, though, the country lacks even a central repository of information about its existing capacity, where the gaps are and where it might be possible to surge in times of crisis.

The TGA has set up a Medicine Shortages Working Party, which has been meeting, sometimes weekly, since the Covid-19 pandemic began. It is working on improved forecasting of shortages in medicines used to treat Covid-19 patients in intensive care. A TGA spokesperson said the model being developed might be used, in the longer term, to manage other medicine shortages.

Representatives of the Australian medicine industry have been invited by the government to post-budget briefings. Even after the budget, though, the industry does not yet know details of what the government proposes to do to encourage onshore manufacturing and bolster supply chain security.

The budget papers talked of grants to “accelerate market-led investment”. The Supply Chain Resilience Initiative was said to form “part of the Government’s work to ensure access to essential goods and services in times of crisis by working with industry to identify potential vulnerabilities, improve supply chain resilience and build national manufacturing capability in areas of need”.

Those who spoke to The Saturday Paper saw little to suggest this is the kind of comprehensive strategy they believe is needed, including attention to pricing, patent law, better relationships in our region, research and development funding, and tax incentives.

While the government speaks of ramping up manufacturing, the first challenge, it seems, will be retaining the little we have.

This article is supported by the Judith Neilson Institute for Journalism and Ideas.

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