Mayo Clinic, other hospitals launching generic drug maker Civica Rx

The Mayo Clinic is joining a group of large hospital systems across the country that are so tired of chronic shortages of critical generic drugs that they are starting their own not-for-profit drug company to make them.

The new generic drug company, Civica Rx, will include a spectrum of governing members including Minnesota's Mayo Clinic health system, several Catholic and secular nonprofit hospital systems, and national for-profit hospital chain HCA. The seven initial health system members collectively own or operate more than 10 percent of the community hospitals in the U.S.

"We are trying to create a societal asset," said Martin Van Trieste, a pharmacist and longtime pharma executive who is serving without compensation as the inaugural CEO of Civica Rx, headquartered in Utah. "Rather than giving [profits] to shareholders or financial institutions that have equity in the company, we can put that money back into the business and keep prices as low as possible for our generic drugs."

Van Trieste and observers inside and outside the group said Civica Rx's not-for-profit model appears to be unique in the industry. The company will focus on making drugs used in hospital and outpatient care, primarily by hiring outside manufacturers under contract, and then locking in guaranteed purchase levels to smooth out disruptive bumps in demand. The first drugs are expected to be available in 2019.

Generic drugs contain the same chemical components as more expensive brand-name drugs, but they can only be sold after patent periods expire on the branded versions. Exposing off-patent drugs to free market forces is supposed to bring down prices, but in practice, the lower profit margins on generics tamps down the financial incentives to compete, leading to shortages and higher prices, U assistant pharmacy professor Jason Varin said.

"These are for-profit organizations, and their fiduciary responsibility is to their shareholders, not to improve the country's public health," he said.

David Gaugh, senior vice president of sciences and regulatory affairs for the Washington trade group the Association for Accessible Medicines, said critics of the generic-drug industry may not appreciate the complexity of manufacturing dozens of generic drugs on the same precision production line while meeting FDA good manufacturing practices, which can cause production delays and shortages.

"It is multi-faceted," Gaugh said. "It could be ... that you can't get raw material. It could be that you have a manufacturing line that breaks down in the middle of manufacturing, and so it takes time. These are not things you run down to your local Ace hardware store and put it back together... Depending upon the magnitude of that breakdown, you may have to have the FDA [review] and approve what you've fixed. All that takes time."

As of Wednesday, the Food and Drug Administration was tracking current shortages of 109 different drugs, including everything from injectable calcium chloride used for CPR and acute heart problems to sterile water that is mixed with drug powders to create liquid medicines.

The FDA has been blamed by some in the pharmaceutical industry for disrupting factory production schedules by issuing negative inspection reports that keep production lines idle. However, the Government Accountability Office reported in 2016 that the percentage of drug-factory inspections that led to warning letters "remained relatively small," even as the number of inspections increased in the preceding years.

Van Trieste said doesn't buy the explanation that the FDA is to blame for drug shortages.

"It's a complex set of events and situations that cause drug shortages, but the primary reasons are financial," he said. "We have these older drugs that people feel are not generating enough of a profit for a company, and they need to focus their resources in something else." And when competitors drop out of the market, the remaining players have the freedom to swiftly increase prices, sometimes making them inaccessible.

That price-accessibility problem can be particularly acute at smaller hospitals, like the ones in Minnesota, Wisconsin and Iowa operated by Catholic Health Initiatives (CHI), one of the governing members of Civica Rx.

Craig Frost, vice president of pharmacy operations at CHI, acknowledged that private drug companies with shareholders and investors have the right to ramp up the prices of generic drugs when other factors in the market drive out their competitors. But doing so makes it more difficult for hospitals to care for their patients adequately, especially smaller hospitals with lower patient volumes.

"Certainly the [drug] companies have the right to do the pricing changes. But these medications are also lifesaving and necessary for public health. Civica is going to address those access and pricing issues," Frost said.

In a news release, Mayo Clinic CEO John Noseworthy said shortages of essential generic drugs calls for a "mission-driven" collaboration among health systems like Civica Rx.

Civica Rx is not disclosing the founding members' financial contributions to the new company, but Van Trieste acknowledged that it is a "significant" amount. The drugs produced will be available at the same price to all members in the organization, but sales volumes will be locked in under contract, even if they order too much. Nonmember hospitals will be able to buy the drugs only if there's an excess supply.

New health systems will be allowed in as members over time — more than 120 have expressed interest so far, according to the announcement.

Van Trieste said the company is not going to poach high-value generics from established manufacturers.

"A lot of these drugs are 50 years old," Van Trieste said. "There's not a lot of profit in making these drugs, if the marketplace is working properly. And they might be happy that we're here, at the end of the day."

Joe Carlson • 612-673-4779