Deadly Economic Anomalies

Most people naturally associate hard times with softening demand and growing surpluses. During a garden-variety recession, that makes sense. But during a more calamitous downturn, when market mechanisms are under strain and many industries are in serious trouble, we might see curious anomalies. One example includes shortages where logistical disruptions and businesses failures cause available supplies to fall at a faster rate than buyer appetites. In some cases, as the Blown Mortgage blog reveals in "’It’ is Happening Already," [by MG Dungan], the imbalance may well be a matter of life or death.

“It” is shortages of critical commodities, a worrisome example of which is the raw materials used to prepare pharmaceutical drugs. Last week a Wegmans pharmacy in upstate New York ran out of OxyContin® and several other prescription medicines. Customers were told that Wegmans’ supplier did not have the ingredients to make several medicines and did not know when they would have them. Wegmans isn’t a mom-and-pop corner store with no buying power. It’s a 71-store chain on the east coast, is one of the largest private companies in the US and had sales of $4.8 billion in 2008.

Tasmania and India are the largest producers of thebaine, the active ingredient of OxyContin®, which is one of 20 alkaloid compounds derived from the opium poppy. Alkaloids cannot be stored by law, so each year’s crop size is limited by the expected sales. However, it’s only February so the shortage in the US is not due to exporters’ supplies having run out.

There is a worldwide shortage of acetonitrile, a critical chemical ingredient used in the purification of pharmaceutical compounds. Acetonitrile is a by-product of the automotive industry and is in short supply due to the worldwide slowdown in that industry, which, in turn, has caused chemical production facilities to close.

Another drug in critical short supply is leucovorin, a generic used in the treatment of colon cancer. Its shortage, too, is due to “manufacturing” delays, according to the suppliers. In an interview with Forbes, Michael Katz, chair of a committee of patients that advises the Eastern Cooperative Oncology Group, said, “I’ve never heard of anything like it.” The ECOG group of doctors, who have played a key role in testing new cancer medicines, recently started hearing from hospitals that they were almost out of leucovorin. There is a fear that shortages will occur more frequently with generic drugs because the margins are so thin. Even worse, many of the most important cancer drugs have gone off patent, according to Katz. Further, he wonders why there is no system to catch these shortages before they harm patients or halt clinical trials. The shortage is so acute in Florida that many cancer patients are receiving lower-than-prescribed dosages or none at all.

Going forward, a number of factors will influence the availability of life-saving medicines and other critical commodities.

Supply disruptions: The majority of growers and producers of the raw materials for drugs are in Asia. You remember the cliff dive of the Baltic Dry Index last year. It was a reflection of severe disruptions in international trade, which, in large part, was caused by the unwillingness of banks to accept letters of credit. This could be the reason for the shortages of opium distillates, which are showing up in US pharmacies now.

Profitability and production stoppages: Indian pharmaceutical companies have stopped manufacturing some unprofitable drugs and they threaten to cut back on more. Their profits have been eroded by the fall in value of the rupee, which has raised their procurement costs for both packaging materials and bulk purchases of raw materials from China.

Distribution: Trucking companies across the country are both cutting back on routes and closing due less business and higher costs. This reached crisis proportions during the gas price spike last spring and summer and is continuing due to reduced demand for hauling. Bankruptcies were up more than 118% by the second half of 2008. In a Reuter’s interview, industry consultant Fred Crawford said he expects the acceleration of bankruptcies seen in the second half of 2008 to continue this year.

If demand for medicine decreases in a depression, it’s not because people aren’t sick. In fact, more people are sick, but they can’t afford medical care. If you’ve come across the crisis-preparedness list of 100 Things that Disappear First, you know that drugs are at the top of the list. Well, we are in a crisis and, sure enough, medicines are disappearing.