Our analysis suggests that this change in capacity utilization stems from a combination of the effects of the increase in volume of chemotherapy drugs used, the expansion of products available for generic manufacturing because of patent expiration, and the complexity of manufacture and requirements for Current Good Manufacturing Practices. Entry cannot occur quickly in the sterile injectables industry because of the high fixed costs of specialized production and regulatory protections. Furthermore, because shortages are uncommon and occur in drugs for which capacity is highly specialized, and because there are few penalties for failing to supply contracted drugs, there is no financial return to investing in excess capacity — that is, capacity that is not used outside a supply shortage, and thus earns no revenue except during a supply shortage.
Generic drug manufacturers must make strategic decisions about how to deploy existing production capacity among products, based on their conjectures about what choices their competitors will make and what demand will be. In general, manufacturers will prefer to concentrate on markets with fewer competitors, where they are likely to face less price competition. Conversely, purchasers, such as GPOs, will prefer that multiple competitors produce each product. If manufacturers misjudge their competitors’ choices, there may be excess supply and depressed prices for some drugs and insufficient supply and shortages of others. When markets are small, like those for sterile injectable oncology drugs, which have 2 or 3 participants, one competitor more or less producing a drug can make the difference between profit and loss. By contrast, larger markets for solid dosages may often have 10 or more manufacturers, so that the decision of one firm has less impact on the profitability of others.