The Wall Street Journal
January 12, 2006

PAGE ONE

Margin of Safety
Just-in-Time Inventories Make U.S. Vulnerable in a Pandemic
Low Stockpiles at Hospitals Boost Efficiency but Leave No Extras for
Flu Outbreak
A Run on Protective Masks

By BERNARD WYSOCKI JR. and SARAH LUECK
Staff Reporters of THE WALL STREET JOURNAL
January 12, 2006; Page A1

Like many big hospitals, the University of Utah Hospital carries a
30-day supply of drugs, in part because it would be too costly or
wasteful to stockpile more. Some of its hepatitis vaccine supply has
been diverted to the hurricane-ravaged Gulf, leaving it vulnerable
should an outbreak occur closer to home. About 77 other drugs are in
short supply because of manufacturing and other glitches, such as a
drug maker shutting down a factory.

"The supply chain is horribly thin," says Erin Fox, a drug-information
specialist at the Salt Lake City hospital.

Last in a series.
- Drug Makers Get Money for Bioterror Research1
12/06/05
http://online.wsj.com/article/SB113383825463714813.html

- Bird Flu, Bioterror Push U.S. to Address Drug Gap2
11/09/05
http://online.wsj.com/article/SB113150492320991924.html

- U.S. Lacks Drugs to Preserve Public Health3
11/08/05
http://online.wsj.com/article/SB113141787830190837.html

In the event of a pandemic flu outbreak, that chain is almost certain
to break. Thousands of drug-company workers in the U.S. and elsewhere
could be sickened, prompting factories to close. Truck routes could be
blocked and borders may be closed, particularly perilous at a time when
80% of raw materials for U.S. drugs come from abroad. The likely
result: shortages of important medicines -- such as insulin, blood
products or the anesthetics used in surgery -- quite apart from any
shortages of medicine to treat the flu itself.

The very rules of capitalism that make the U.S. an ultra-efficient
marketplace also make it exceptionally vulnerable in a pandemic.
Near-empty warehouses are a sign of strong inventory management.
Production of drugs takes place offshore because that's cheaper. The
federal government doesn't intervene as a guaranteed buyer of flu
drugs, as it does with weapons. Investors and tax rules conspire to
eliminate redundancy and reserves. Antitrust rules prevent private
companies from collaborating to speed development of new drugs.

Most fundamentally, the widely embraced "just-in-time" business
practice -- which attempts to cut costs and improve quality by reducing
inventory stockpiles and delivering products as needed -- is at odds
with the logic of "just in case" that promotes stockpiling drugs,
government intervention and overall preparedness.

A report issued last month by the Trust for America's Health, a
public-health advocacy group in Washington, concluded that 40% of the
states lack enough backup medical supplies to cope with a pandemic flu
or other major disease outbreak.

"Most if not all of the medical products or protective-device companies
in this country are operating almost at full capacity," says Michael
Osterholm, director of the Center for Infectious Disease Research and
Policy at the University of Minnesota. "That's the reality of today's
economy: just-in-time delivery with no surge capacity."

The U.S. government says it is trying to address the problem, elevating
the possibility of a flu outbreak to a national security concern.
Rajeev Venkayya, a special assistant to President Bush for biodefense,
says the pandemic flu threat calls for a national response similar to a
"moonshot," alluding to the successful 1960s Apollo program.

President Bush has vowed to spend $2.8 billion to help jump-start
development of a next-generation cell-culture flu vaccine. Currently
flu vaccine production relies on a decades-old process of growing
viruses in individual fertilized chicken eggs. The viruses are
inactivated to make a vaccine.

Cell-culture technology means the viruses are grown in living cells --
often mammalian kidney cells -- that multiply on their own. The
technology is already used in producing vaccines against hepatitis,
chickenpox and shingles. In theory, cell-culture technology should
allow manufacturers to produce enough flu vaccine for every American
within six months of the start of a pandemic.

The Securities and Exchange Commission recently said it will allow
companies to book revenue on sales of vaccines or bioterrorism remedies
to the government, even if the companies hold onto the stockpile -- as
the U.S. government often prefers. Under current accounting rules,
companies must ship the product to record the revenue, a major
disincentive for vaccine manufacturers.

Yet those steps largely fail to address weaknesses in the supply chain.
The severe acute respiratory syndrome outbreak in 2003 in Canada offers
a case in point. When SARS hit, the country's largest nurses' union
complained about a shortage of N95 masks after much of the existing
supply was shipped to Asia, where the disease hit hardest.

These masks protect against contracting flu by filtering out at least
95% of certain airborne materials during normal breathing. Some nurses
in Canada had to use less-protective masks when caring for SARS
patients. Others were rationing the supply. In some cases, they were
told to save their masks in plastic bags and reuse them from one shift
to the next, Barbara Wahl, former president of the Ontario Nurses'
Association, told a Canadian commission investigating SARS in 2003.

The main companies that manufacture the masks -- 3M Co. and
Kimberly-Clark Corp. -- had to scramble to meet the sudden demand
because, like many companies, they didn't have an existing stockpile.

The outbreak was relatively brief and limited in location -- a minor
blip compared with what would likely happen with pandemic flu.

'Albertson's Syndrome'

Supply-chain breakdowns are one reason the economy could go into a
tailspin should there be a pandemic flu outbreak. A Congressional
Budget Office study of the economic impact of a severe pandemic,
released late last year, estimated a nearly $700 billion hit to the
U.S. economy, or about a 5% decline in economic output during a
one-year span, about equal to a medium-sized recession.

One significant concern is what Michael Leavitt, the secretary of
health and human services, described in an interview as the
"Albertson's syndrome," referring to the grocery-store chain. At the
first sign of panic, all supplies disappear from shelves, something
that routinely happens when there is the threat of even a modest storm.

The Grocery Manufacturers Association, which represents food retailers
and distributors, estimates that the time it takes for manufacturers
and wholesalers to deliver on a retailer's order has shortened to fewer
than four days from nearly eight days in 1999. Respondents to an
association survey "are targeting even shorter cycle times of three
days," the survey said. Rick Blasgen, a former ConAgra Inc. executive
and chief executive of the Council of Supply Chain Management
Professionals, says food retailers and producers "can't afford
just-in-case inventory."

The issue of stockpiling extends beyond food to vaccines. The U.S.
government has generally been reluctant to pay companies to produce
extra vaccines and create a reserve capacity. It's one reason so many
companies have dropped out of vaccine manufacturing. In the case of flu
vaccines, there is too much wasted medicine in "good" years, when the
flu season isn't severe and people choose not to get vaccinated.
Vaccines are tossed away at a loss for the corporations.

"Investors punish companies for having excess capacity they don't use,"
says Dr. Osterholm.

Today's worrisome flu strain, known as H5N1, has infected and killed
millions of poultry, and killed about 70 humans in Asia. Recently it
has spread to Turkey and infected at least 15 people there. Nobody
knows if the H5N1 virus will mutate in ways that promote human-to-human
transmission, which is what health officials fear would trigger a
pandemic. A vaccine produced by Sanofi-Aventis SA has proved effective
against H5N1 in early trials in humans, but the company hasn't scaled
up manufacturing of it. Food and Drug Administration-approved antiviral
medications, which could treat exposed individuals, are in short
supply.

To some former Pentagon officials working on biodefense on Capitol
Hill, the only way for the country to prepare for a possible pandemic
is to think of health-care preparedness in military terms. This means
moving away from a just-in-time system to planning for a just-in-case
scenario in the manner of national-security policy makers.

The Pentagon, for instance, goes through intense planning and pays for
reserves of everything from bullets to jet fuel. It even forces rivals
to collaborate on Pentagon projects and wields its clout as a buyer of
weapons.

Some steps are in motion to take pages out of the Pentagon playbook. A
bill introduced last fall by North Carolina Republican Sen. Richard
Burr would provide some relaxation of the antitrust laws. It would
allow the government to convene meetings with drug makers to discuss
manufacturing and distributing biodefense products including those
related to pandemic flu.

Current Law

Industry executives say they feel that under current law, companies
can't share basic knowledge that would be helpful in planning for an
outbreak. "What we're suggesting to the administration is something
discretionary and only under declaration of an emergency," says Billy
Tauzin, a former congressman from Louisiana who now heads the
pharmaceutical industry's leading trade organization.

Mr. Tauzin, though, also hinted at going a tad further, saying it would
be helpful if "the administration determines to allow two of our
companies to collaborate on a product -- an antiviral or vaccine or
similar product." Such proposals might raise worries about collusion in
an industry that already enjoys considerable pricing power and patent
protection on its products.

Some experts suggest the U.S. government should promise to purchase a
fixed amount of flu vaccine -- despite the cost and the likelihood that
some of the money would end up being wasted. Canada, for instance, has
contracts with vaccine makers to cover most of its population. The
largest contract is with ID Biomedical Corp. (recently acquired by
GlaxoSmithKline PLC) for about eight million flu vaccine doses per
year. That takes much of the risk out of the company's business, but
still lets it manufacture additional doses for the private market or
for other needy buyers.

Dr. Osterholm has called for a program of "critical product continuity"
to see the U.S. through the worst of pandemic disruption. He proposes
identifying items that are essential to people's health and safety and
then finding a way, possibly through government funding or tax
incentives, to create emergency stocks or extra production capacity for
them. High on his list of "critical products" are tools for fighting
flu itself, such as face masks, ventilators to help the sickest
patients survive and syringes to administer a vaccine if one becomes
available.

In a pandemic, Dr. Osterholm says, "if we don't sell automobiles or
jewelry...that wouldn't be the same as running out of critical
medicines." He likens his idea to the well-equipped fire departments at
international airports, which don't respond to many crises but are
ready if a plane crashes.

Dr. Osterholm, who also is associate director of the Department of
Homeland Security's National Center for Food Protection and Defense,
says the country also needs reliable supplies of food and water, the
ability to keep heat working in northern climates and medical products
for non-flu-related illnesses. The U.S. has 105,000 ventilators, most
of which at any given time are in use. The federal stockpile of medical
products has about 4,500 more. In a pandemic, tens of thousands more
would be needed.

The federal government has allocated grants worth $5 billion over three
years to states and hospitals to increase medical preparedness,
including surge capacity at hospitals. But the money was used for other
priorities as well, such as improving medical labs and disease
surveillance. Not all of it has been spent.

"You can't plan for a surge capacity in an emergency room of 500 or
1,000 patients from the 20 you see in a day," says Michael Bishop, a
Bloomington, Ind., emergency physician who used to be on the board of
directors for the national trade association for emergency physicians.
"Nobody could afford to do that. You can't have 10 doctors and 100
nurses sitting around waiting for something to happen."

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