“The measure of success will be that drug shortages become rare events and quality essential medicines are consistently available at fair and sustainable prices.” That is the belief of Allan Coukell, senior vice president for public policy at Utah nonprofit generic drug manufacturer Civica. He describes Civica as “a partnership between hospitals and the drug maker.” They seek to fill a void in the generic drug market caused by the incentives surrounding generic drug production.

“In today’s market, the public benefits from low prices for generic drugs, but not from the resulting instability of supply,” says Coukell. Civica’s strategy to find a better balance on low prices and stable supplies of critical medicines includes sourcing drugs from the United States and Europe whenever possible, maintaining several months’ safety stock of drugs, investing in backup suppliers, and using long-term purchasing and supply contracts. “We hope that over time, some of these approaches will become widely adopted,” says Coukell.

Coukell believes that state lawmakers can take policy action to help make that happen. Such policies include enabling the state to pursue long-term drug contracts and structuring state drug policy to encourage the use of biosimilar drugs.

These are just a few of the insights that we gained from our interview with Coukell. Read the full interview below.

Derek Monson, Sutherland Institute vice president of policy: Civica Rx has a new and innovative business model for drug manufacturing. What positive market disruptions do you expect Civica Rx to generate over time, and how do you measure the success of such a model?

Allan Coukell: Civica was established to address persistent shortages of numerous essential drugs. As a nonprofit, our guiding principle is “do what is in the best interest of patients.” Many different factors contribute to drug shortages – quality problems, inelasticity in the market, consolidation of upstream supply – but most can be linked back to a generic drug market that treats drugs as commodities and drives toward ever-lower prices. Under this system, manufacturers can’t predict future demand for their products and have little incentive to invest in quality systems or supply chain redundancy. When there are few manufacturers of a given product, or only a single producer, they tend to raise prices, stressing previously planned hospital budgets.

In contrast, Civica is a partnership between hospitals and the drug maker. Our drugs come from the United States or Europe, whenever possible. We invest in backup suppliers, maintain reserve stocks equivalent to several months’ supply and, crucially, enter long-term purchase agreements that allow us to invest in quality and deliver favorable pricing. We also offer a single, standard price (except for certain discounts mandated by law) to all our customers from a tiny rural hospital to a major health system operating dozens of facilities.

We hope that over time, some of these approaches will become widely adopted. The measure of success will be that drug shortages become rare events and quality essential medicines are consistently available at fair and sustainable prices.

Monson: As a prescription drug supplier and manufacturer focusing on generics, how are the market and business pressures that you face similar to and different from manufacturers that research and bring to market new brand-name drugs?

Coukell: For a pharmaceutical company developing new brand-name drugs, the largest costs and greatest risk are in the cost to discover and test new medicines. Hundreds of millions of dollars are routinely spent developing drugs that ultimately don’t prove to be safe or effective. When an innovator drug does reach market, companies enjoy a period of exclusivity to recoup their costs and make a profit, during which no other company can directly copy their drug.

Generic drug companies (and companies making “biosimilar” competitors to innovator biologic drugs) exist to create competition when relevant patents and exclusivity periods have expired. While there are still significant upstream expenses to bring a generic or biosimilar to market, success depends on obtaining sufficient market share in a competitive marketplace.

Monson: In your experience, what are the biggest hurdles faced by innovators and entrepreneurs in the prescription drug market to making prescription drugs more affordable and accessible?

Coukell: We can speak to the challenge in the generic drug market. A race to the bottom in pricing leads to razor-thin margins, especially for older products. Purchasing has become consolidated among a few very large players. The public benefits from resulting low prices, but not from the resulting instability of supply. And this price pressure has helped to drive production of drugs out of the United States and other developed economies to countries such as India and China, which have lower labor and other costs, but have also been responsible for well documented quality problems. Right now, when a drug is FDA-approved, purchasers have no way to know where the drug ingredients are manufactured or how reliable a company’s quality systems are.

Monson: What policy changes would you recommend to state policymakers to help make prescription drugs more affordable and/or accessible for patients?

Coukell: California recently enacted legislation to enable the state to use its purchasing power to enter long-term contracts for drugs that can result in savings to the state or consumers. Other states are considering similar approaches. Recognizing that much of the growth in pharmaceutical spending is associated with biologic drugs, states must also ensure that they adopt policies that will foster uptake of “biosimilar” drugs, including biosimilar insulins when they become available.