financing and pricing - who

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World Bank Training Program on Managing Procurement and Logistics

of HIV/AIDS Drugs and Related

Supplies

Financing and Pricing

based on the World Bank documentBattling HIV/AIDS: A Decision Maker’s Guide to

the Procurement of Medicines and Related Supplies World Bank, 2004

Abuja, Nigeria: 31 May 2005

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Learning/Training Objectives

• To understand how the pharmaceutical supply chain works including comprehension of who the components and key players are

• To understand price discrimination and pricing differences both within and across countries

• To understand how international programs have sought to implement programs with the goal to allow countries with widespread access to antiretroviral medicines at the lowest possible prices

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Learning/Training Objectives

• To understand how legal remedies (including compulsory licensing, domestic production, and bulk purchases) and donations have contributed towards reduced drug prices

• To acquire an understanding on how to decode local pricing structures, where to find domestic drug pricing information, and on identifying important factors when conducting any international price comparisons

• To describe and understand how countries can contribute towards low drug prices

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Final/Ultimate Objectives

• To obtain the lowest possible prices with a standard quality for the HIV/AIDS related pharmaceuticals and medical products

• To ensure adequate financing of these products in order to improve the affordability and financial sustainability of the flow of products required by the HIV/AIDS programs

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The Pharmaceutical Supply Chain

Introduction

• How do markets work in general and how are prices formed?

• Here, we present a brief description of three types of markets¯ Perfect competition¯ Monopoly¯ Monopolistic competition

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IntroductionPrices - There is only one price for which

planned market demand is equal to planned market supply, which is known as equilibrium price or market clearing price • Shifts in demand and supply can

cause this equilibrium condition or price level to shift

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IntroductionPerfect Competition

• Multiple small buyers and sellers in the market - no one buyer or seller is large enough

• Freedom of entry and exit into the market

• Buyers and sellers have perfect knowledge about market prices and output

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Introduction Perfect Competition

• The price of a good is ascertained through regular interactions between demand and supply¯ Short-run¯ Long-run

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IntroductionMonopolistic Competition

• Same conditions hold as for perfect competition except that firms produce differentiated products with close substitutes

• Firms have a certain degree of market power as they can raise prices without losing all of their customers

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Introduction

Monopoly• There is only one firm in the industry

(the monopolist)• There are many barriers to entry• Monopolist maximizes profits in the

short-run

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Key Players

• Manufactures¯ Innovative Pharmaceutical Firms¯ Generic Manufacturers

• Wholesalers/Distributors• Retailers• Governmental & Non-Profit Sellers

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Innovative Pharmaceutical Firms

Multinational companies: brand name drugs

• Conduct their own R&D and own many patent portfolios: however, also typically spend more money on marketing and administration than research and development

• Bayer, Boehringer Ingleheim, Bristol-Myers Squibb, GlaxoSmithKine, Merck, Pfizer and Schering-Plough

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Generic Manufacturers

• Generic manufacturers that compete in the production of off-patent drugs

• Produce drugs that are marketed under approved non-proprietary and proprietary names

• Major generic producing nations include Brazil, China, India, South Africa and Thailand

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Description of Current System Design

Drug Production

Wholesaler

Retail PharmacyPublic Purchaser(Health minister, public hospitals, etc.)

Patient

Retail price + sales tax

Wholesaler’s price + tax

Manufacturer selling price, plus transport, insurance + taxesManufacturer selling

price, plus transport, insurance + taxes

Source: World Bank Technical Guide: Training program on HIV/AIDS Drugs, 2003

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Pricing

Equity Pricing

An equitable price structure may take the following form:

• ‘Market’ pricing by manufacturers in different markets, according to the ability to pay

• Voluntary out-licensing and generic competition

• Subsidization of drugs by international programs or donors

• Compulsory licensing and generic competition

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Pricing

Price Discrimination

• First degree – charging whatever the market will bear

• Second degree – quantity or versioning

• Third degree – separate markets and customer groups

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Pricing Explanation of Pricing Differences

Pricing Differences Within Countries

• Patent protecting drug– Once patent expires, generic manufacturers

can enter market

• Some companies produce only “Copy”molecules already developed (no R&D costs)– Prices 35% cheaper

γ

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Explanation of Pricing Differences- There are pricing differences within and

across countries

Pricing Differences Within Countries (cont.)

Amount of state intervention– Originator antiretroviral drugs and generic

locally manufactured drugs coexisting

• Marketing, sales, and volume– Companies can sell high volume of drugs at

discounted prices

Pricing

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Pricing

Explanation of Pricing Differences

Pricing Differences Across Countries

• Differences in living standards – Clear relationship between Gross National

Product and drug prices

• Regulatory systems and tax levels – Price differences not uniform due to federal

regulation– Over the counter price differences due to

regulation in pharmacy markets

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Pricing

Explanation of Pricing Differences

Pricing Differences Across Countries

• Differences in purchasing power – Comparison – Purchasing Power Parity based

on Gross Domestic Product and Health Purchasing Power Parity

Optional Exercise #1

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Additional StrategiesInternational Programs

Accelerating Access Initiative

• The Initiative was launched in 1997 between three

pharmaceutical companies, the United Nations and

health officials in Chile, Cote d’Ivoire, Uganda and

Vietnam

• In each country, clearing house for placing orders

and receiving antiretroviral drugs

• In 2001, Accelerating Access Initiative became

responsibility of World Health Organization

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Additional Strategies

Accelerating Access Initiative

• Despite reductions in drug prices, prices

offered by companies participating in the

Initiative are still more than double the prices

of generic companies

• As a result few patients are gaining access to

antiretroviral therapy – less than 1% of the

HIV-positive population is receiving

antiretroviral therapy

∆

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Additional StrategiesLegal Remedies

Compulsory Licensing

• Country may request patent holder permission to begin domestic manufacturing

• Local government could ask domestic firm to manufacture generic version of drug in domestic country

• Exporting firm could agree to manufacture drug in domestic country

• Decrease in drug prices• Case of India• Case of Brazil

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Legal Remedies

Compulsory Licensing

Examples of Voluntary Licensing

• Boehringer Ingelheim licensed Aspen Pharmacare to produce nevirapine and GlaxoSmithKline agreed to license three antiretroviral drugs to Aspen Pharmacare

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Other Remedies

Domestic Production

• Local production of antiretroviral drugs

• Examples: Brazil, India, Thailand

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Additional StrategiesOther Remedies

Bulk Purchases

• Bulk purchasing can lower drug prices

• Reduction in the risk of capital equipment investment

• Economies of scale

• Reduced market and distribution costs

• Improved production planning from better demand forecasting



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Additional StrategiesDonations

Two main types of donations

• Form of money

• Form of drugs

For example, in 2000, Pfizer announced it would provide Diflucan free of charge to AIDS patients diagnosed with cryptococcal meningitis

• However it is to be noted that there are several problems with drug donation, mainly from restrictions on type of use, and from strict reporting.

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Reducing Drug Prices

“Prices are an important factor, especially in developing countries, since while in developed countries pharmaceuticals are largely publicly funded through reimbursement and insurance schemes, in developing countries, typically 50%-95% of drugs are paid by the patients themselves. Thus in developing countries, prices of medicines have direct implications for access”(HIV/AIDS Antiretroviral Newsletter, December 2002, Issue No. 8, WHO) α β

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Illustrative Case Study:Brazil

Strategies Used

• Brazil is the first developing country to have implemented a large-scale universal antiretroviral therapy distribution program

• The public health system provides free antiretroviral therapy to approximately 125,000 patients

• The savings from out-patient and hospital costs outweigh the costs of implementation by more than US $200 million

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Illustrative Case Study: Brazil

Factors that Contribute to Success

• 1971 Law suspending intellectual property rights

• Large scale experimentation without legal restrictions

• Domestic national labs with the capacity to manufacture large quantities of antiretroviral drugs

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Factors that Contribute to Success

• Negotiation of drug prices with pharmaceutical companies that are exclusive producers

• Deals were made with Abbott, Merck and Roche cutting prices of four drugs by more than 50%

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Antiretroviral Prices in 2002: The Impact of Increased Competition

Price Per Pill

Accelerated Access Initiative

Brazil Lowest Generic

PriceZidovudine100mg

0.26 US$ 0.13 US$ 0.10 US$

Nevirapine200mg

0.60 US$ 0.34 US$ 0.28 US$

Lamivudine150mg

0.31 US$ 0.29 US$ 0.17 US$

Source: Luchini et al. XIV International AIDS Conference, Barcelona, July 2002

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Factors that Prevent Success

• Most developing countries lack manufacturing capacity building to produce local drugs under compulsory licensing

• Strengthening and capacity building require much funding

• Reduction of customs and tariffs over time – fierce competition

• High prices constitute necessary incentive for efficient R&D

• Still not perfectly universal system

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Take-Away Lessons

• Gather financial resources

• Confront cultural, religious, and legal barriers

• Compulsory licensing

• Local production by local laboratories

• Increased advantage in negotiating drug prices with patent holder pharmaceutical firms

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Summary and Conclusions

There are many ways in which drug prices can be reduced

• Stages of production¯ For countries that have the capability of

producing their own generic products, it is important to bear in mind the various stages of production¯ Production of raw materials and intermediates¯ Production of active principles

• Negotiations with patent holder firms

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• Once countries are able to produce generic drugs, they will have an advantage with regards to negotiations with patent holders

37Source = Samb, B., 2000 UNAIDS, in Levison, L., Boston University School of Public Health, 2003

Cost per capsule or tablet (US $)

2.001.31

2.90

1.55 1.851.721.04 0.83

0.080.51

0

1

2

3

4

5

Product A Product B Product C Product D Product E

1996 1997 1998 1999 2000

Competition (2 to 6 producers per product)No competition

Competition is Highly Effective in Reducing Prices - The Example of Antiretrovirals

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• TransparencyFor countries that receive a large percentage of funding from foreign donors, it is important that they that the funding be monitored and accounted for

• For countries for which a large percentage of health care revenue comes from out-of-pocket payments it is important for government subsidization programs, in effect, transferring funds from formal employment sectors of the economy to other sectors

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Resources

• MSF: Untangling the Web of Price Reductions Feb. 2005 is available at -www.accessmed-msf.org (Please look under Documents for HIV/AIDS)

• For the final version of the Oxfam study on the US-SACU FTA, please email me, Achal Prabhala, at [email protected] (Alternatively, the paper will be circulated on the conference list-serve)