Managing Procurement and Pricing of HIV/AIDS Drugs

1. World Bank Training Program on Managing Procurement and Logistics of HIV/AIDS Drugs and Related SuppliesFinancing and Pricingbased on the World Bank documentBattling HIV/AIDS: A Decision Maker’s Guide to the Procurement of Medicines and Related Supplies World Bank, 2004Abuja, Nigeria: 31 May 2005

2. 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

3. 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

4. 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

5. 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

6. The Pharmaceutical Supply Chain • Introduction Prices - 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

7. The Pharmaceutical Supply Chain • Introduction • Perfect 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

8. The Pharmaceutical Supply Chain • Introduction • Perfect Competition • The price of a good is ascertained through regular interactions between demand and supply • Short-run • Long-run

9. The Pharmaceutical Supply Chain • Introduction • Monopolistic 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

10. The Pharmaceutical Supply Chain • 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

11. The Pharmaceutical Supply Chain Key Players • Manufactures • Innovative Pharmaceutical Firms • Generic Manufacturers • Wholesalers/Distributors • Retailers • Governmental & Non-Profit Sellers

12. 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

13. 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

14. Description of Current System Design Drug Production Manufacturer selling price, plus transport, insurance + taxes Manufacturer selling price, plus transport, insurance + taxes Wholesaler Wholesaler’s price + tax Public Purchaser (Health minister, public hospitals, etc.) Retail Pharmacy Retail price + sales tax Patient Source: World Bank Technical Guide: Training program on HIV/AIDS Drugs, 2003

15. 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

16. Pricing Price Discrimination • First degree – charging whatever the market will bear • Second degree – quantity or versioning • Third degree – separate markets and customer groups

17. Pricing Explanation of Pricing Differences Pricing Differences Within Countries • Patent protecting drug • Once patent expires, genericmanufacturers can enter market • Some companies produce only “Copy” molecules already developed (no R&D costs) • Prices 35% cheaper g

18. Pricing 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

19. 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

20. 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

21. Additional Strategies International 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

22. 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 Δ

23. Additional Strategies Legal 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

24. Additional Strategies 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

25. Additional Strategies Other Remedies Domestic Production • Local production of antiretroviral drugs • Examples: Brazil, India, Thailand

26. Additional Strategies Other 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 Optional Exercise #3 Optional Exercise #4

27. Additional Strategies Donations 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.

28. 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

29. 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 outweighthe costs of implementation by more than US $200 million

30. Illustrative Case Study: Brazil Factors that Contribute to Success • 1971 Law suspending intellectual property rights • Large scale experimentationwithout legal restrictions • Domestic national labs with the capacity to manufacture large quantities of antiretroviral drugs

31. IllustrativeCase Study: Brazil 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%

32. Antiretroviral Prices in 2002: The Impact of Increased Competition Source: Luchini et al. XIV International AIDS Conference, Barcelona, July 2002

33. IllustrativeCase Study: Brazil 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

34. IllustrativeCase Study: Brazil 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

35. 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

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

37. Competition is Highly Effective in Reducing Prices - The Example of Antiretrovirals No competition Competition (2 to 6 producers per product) Source = Samb, B., 2000 UNAIDS, in Levison, L., Boston University School of Public Health, 2003

38. Summary and Conclusions • Transparency For 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

39. 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 achal@access.org.za (Alternatively, the paper will be circulated on the conference list-serve)