Processes and Issues for Improving Access to Medicines- The evidence base for domestic production and greater access to medicines

Publication date: 2004

Issues paper - Access to medicines Processes and Issues for Improving Access to Medicines The evidence base for domestic production and greater access to medicines Robert Lewis-Lettington Jean-Marc Guimier Evan Lee Michel Grupper September 2004 Processes and Issues for Improving Access to Medicines The evidence base for domestic production and greater access to medicines Jean-Marc Guimier Evan Lee Michel Grupper September 2004 The DFID Health Systems Resource Centre (HSRC) provides technical assistance and information to the British Government’s Department for International Development (DFID) and its partners in support of pro-poor health policies, financing and services. The HSRC is based at the Institute for Health Sector Development’s (IHSD) London offices and is managed by an international consortium of seven organisations: Aga Khan Health Services Community Health Department, Kenya; CREDES-International, France; Curatio International Foundation, Georgia; IDS (Institute of Development Studies, University of Sussex, UK); IHSD Limited, UK; IHSG (International Health Systems Group, Harvard School of Public Health, USA); and the Institute of Policy Studies, Sri Lanka. This report was produced by the Health Systems Resource Centre on behalf of the Department for International Development, and does not necessarily represent the views or the policy of DFID. Title: Processes and issues for improving access to medicines: the evidence base for domestic production and greater access to medicines Authors: This report was written by Jean-Marc Guimier, Evan Lee and Michel Grupper of Management Sciences for Health Europe, as part of a series of studies commissioned by the Access to Medicines team at DFID, and with technical oversight provided by the HSRC. DFID Health Systems Resource Centre 27 Old Street London EC1V 9HL Tel: +44 (0) 20 7251 9555 Fax: +44 (0) 20 7251 9552 E-mail: enquiries@healthsystemsrc.org www.healthsystemsrc.org Copyright: © 2004 by HSRC Designed by: Adkins Design Printed by: Fretwells Ltd DFID Heal th Systems Resource Centre 2004 3 List of acronyms 5 1. Foreword 6 2. Executive Summary 7 3. Introduction 11 3.1. What is access to medicines? 11 3.2. Promotion of domestic production in the 1970s and 1980s 12 3.3. Revisiting the issues of domestic production 13 3.4. What is the current level of affordability of drugs in sub-Sarahan Africa (SSA)? 14 3.5. How will the criteria of bulk purchasers of drugs differ from that of an individual who buys in the private sector? 15 4. Analyzing the potential impact of domestic production on access 18 4.1. What factors affect the operations of a going concern in SSA? 18 4.2. What firms are doing now 20 4.3. Use of a simulation tool 21 4.4. Simulation methodology 21 5. Results and sensitivity analysis 28 5.1. Financial indicators 28 5.2. Potential to reduce ex works selling prices 31 6. Contribution of domestic production to improving access 33 6.1. Conclusion 33 6.2. Directions for further research 38 Annex 1: List of persons encountered 41 Annex 2: Summary of data on pharmaceuticals production in selected sub-Saharan African countries 43 Annex 3: Value chain flowchart 51 Annex 4: Patent situation of ARV produced 52 Annex 5: Flowchart of tablet manufacturing 53 Annex 6: Business environment 54 Annex 7: Membership in trading blocs and risk ratings 57 Annex 8: List of products chosen quantities and ex works price 58 Contents Annex 9: Number of cases per country and per diseases and quantities of drugs produced in the three scenarios 59 Annex 10: Simulation assumptions 60 Annex 11a: Financial results scenario 1 (greenfield) 71 Annex 11b: Financial results scenario 1 (extension) 72 Annex 11c: Financial results scenario 2 (greenfield) 73 Annex 11d: Financial results scenario 2 (extension) 74 Annex 11e: Financial results scenario 3 (greenfield) 75 Annex 11f: Financial results scenario 3 (extension) 76 Annex 11g: Comparison of key financial requirements and results of different scenarios 77 Annex 12: Profit & loss per product 78 Annex 13: Variation of the proportion of the API in the selling price incoterms 79 Annex 14: Incoterms 81 Annex 15: Drug distribution system flow chart 84 Annex 16: Sensitivity analysis 85 Annex 17: API purchase prices used in simulation 89 Notes 90 This study report (from May 1 to June 30, 2004) was prepared by an MSH EUROPE team including Jean-Marc Guimier (jmguimier@msh.org), Dr. Evan Lee (elee@msh.org), and Dr. Michel Grupper (mgrupper@bluewin.ch), with contributions from Prof. Anglade Malan Kla and Dr. Julie Milstien. Opinions and interpretations which are expressed here are only those of the authors. They do not reflect the positions of DFID or those of their affiliated institutions, or persons acting for their account. 4 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 ACT Artemesinin-based Combination Therapy API Active Pharmaceutical Ingredient ARV Anti-retroviral drug ECOWAS Economic Community of West African States EMCCA Economic and Monetary Community of Central Africa FDC Fixed-Dose Combination (of drugs) GDP Gross Domestic Product GMP Good Manufacturing Practices ICH International Conference on Harmonization (for drug development and approval – includes the US, Europe, and Japan) NPV Net Present Value OHADA Organization pour l’harmonisation du Droit des Affaires en Afrique (Organization for Business Law in Africa) OTC Over The Counter (self medication drug) PICS Pharmaceutical Inspection Cooperation Scheme SS+ Smear-positive tuberculosis case SSA Sub-Saharan Africa TB Tuberculosis TRIPs Trade-Related Aspects of Intellectual Property Rights UNICEF United Nations Children’s Fund UNIDO United Nations Industrial Development Organization WAEMU West African Economic and Monetary Union WHO World Health Organization 5 List of acronyms 6 DFID Heal th Systems Resource Centre 2004 MSH EUROPE has been commissioned by the UK Department for International Development to examine “whether and how, in what circumstances and time-frames, the domestic production of quality medicines can improve their availability and affordability for the poor in developing countries”, with a focus on sub-Saharan Africa (SSA). This study was carried out by a team of consultants using data available through interviews with experts and through field visits to Ghana and Côte d’Ivoire in April and May of 2004 (Annex 1). For the purposes of the study, South Africa was not included because its industrial capacity places it in a category apart from the other 47 countries generally included in the definition of SSA, where industrial capacity is much less developed. The authors of the study would like to extend their thanks and acknowledgement to Cheri Grace of IHSD who provided helpful feedback throughout the study, and to Krisana Kraisintu, Carlos Morel, and Catriona Waddington for their thorough reviews of the draft. 1 Foreword DFID Heal th Systems Resource Centre 2004 7 The issue of domestic production of drugs in developing countries has provoked lively discussion since the end of the 1970s. During this time period, several international organizations, including the United Nations Industrial Development Organization (UNIDO), supported efforts to establish pharmaceutical industries in these countries in order to reduce dependence on imported drugs, create employment, and earn foreign exchange as well as improve access to drugs. However, few of these efforts were successful, and international interest in supporting drug production in these countries waned. The concept of access to drugs has continued to evolve, and is often defined in terms of four dimensions relative to access to quality drugs, i.e. those that are manufactured in plants that meet Good Manufacturing Practice (GMP) standards, are properly registered, and that reach the end-user through distribution systems that include quality assurance systems. These four dimensions include: geographical accessibility, physical availability, acceptability, and affordability. Of these, the first two are largely dependent on functioning distribution systems rather than the location of drug manufacturing and the third is often dependent on marketing, as end-users in developing countries may need to be persuaded to choose domestically produced drugs over imports. This leaves affordability as the primary opportunity for domestic production to have an impact on access to drugs. The recent focus on ensuring access to the drugs used to treat HIV/AIDS, tuberculosis (TB), and malaria, diseases which disproportionately affect the populations of SSA, and to ensure their quality, has raised the question of whether the production of these drugs in the region can improve affordability while meeting quality standards. As of June 2004, no enterprise within SSA had been prequalified by the World Health Organization (WHO) for drugs related to these diseases. However, within the past year, several initiatives to start up production, especially of anti-retrovirals (ARVs), have been launched in SSA in order to increase their affordability. This study seeks to contribute to the discussion of domestic production by analyzing, from a business context, whether or not such production of drugs in SSA is sufficiently profitable to enable an enterprise that produces drugs to be a going concern1 while at the same time enabling increased access to drugs by providing them at prices lower than those available from international sources. When the factors that affect the operations of a going concern in SSA are examined, including those related to the country environment, government strategy and policy, and potential market size, a few countries appear to offer a moderately favourable climate 2 Executive Summary for pharmaceutical production in terms of political risk and human resource availability, but throughout the region drug manufacturers face obstacles in terms of access to financial capital, technical know-how, purchasing and maintaining equipment, and obtaining spare parts. Furthermore, domestic producers face several challenges in the market place. First, institutions and governments will be major buyers of the currently recommended drugs to treat HIV/AIDS, TB, and malaria and will be obliged to respect the procurement guidelines of major donors. For domestic producers, this means that the drugs they manufacture for these buyers have to meet international quality standards, such as those of WHO prequalification, as well as be competitive in price with drugs that are produced on a large scale by international competitors. Second, most national markets in SSA are too small alone to absorb the production of drugs to treat these three diseases. This requires domestic manufacturers to develop an export strategy, which will require registering their products in each of the countries they export to as well as negotiating and obtaining licences, where necessary, for the right to export drugs still under patent to countries that are signatories to the Trade-Related Aspects of Intellectual Property Rights (TRIPs) agreement. To examine the potential for a going concern that manufactures drugs to operate under these conditions, this study uses a model to simulate the cost structure of an imaginary enterprise manufacturing quality drugs, based in West Africa and serving a market covering 236 million people (i.e. 35% of the entire population of SSA) in 12 countries. This region was chosen because the proximity of countries belonging to different economic trading blocs and different language zones presents opportunities as well as constraints. Three scenarios were tested: (1) a baseline public health-oriented scenario for the production of 13 drugs to treat HIV/AIDS, TB, and malaria; (2) the production of these same drugs along with the production of eight ethical drugs used to treat diabetes, hypertension, and gastrointestinal ailments, which are currently less of a focus for public health programmes in SSA; and (3) the production of the baseline drugs along with two over the counter (OTC) drugs which do not contribute to public health priorities. For each scenario, two cases were developed: a “greenfield” case simulating the establishment of a new pharmaceutical production plant and an “extension” case simulating the addition of these drugs to the output of an existing enterprise. The results of the simulation indicate that for all three scenarios, and for both the greenfield and extension cases, the imaginary enterprise can be profitable by the third year of production or earlier. As expected, the extension case is always more profitable than the greenfield case for two reasons: first, less capital investment is required and second, production is at full capacity in the first year. By product type, the ethical drugs are the most profitable, the ARVs and one of the anti-malarial drugs are intermediately profitable while drugs for TB, the antibiotics, and a second commonly-used anti-malarial drug are unprofitable. 8 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 The presentation of net present value (NPV) and financing needs demonstrates that all of the scenarios have a positive NPV except the scenario 1 greenfield case. As could be expected, the greenfield cases have much higher requirements (>$10 million) for external financing. This indicates that investment in domestic pharmaceutical production under the conditions outlined in the study can pay off as long as investors choose either to invest in the extension of an existing pharmaceutical plant or in a new enterprise which produces drugs to treat other diseases and conditions as well as HIV/AIDS, TB, and malaria. A minimum of $4 million to $6.2 million, or roughly half of that required for the greenfield case, will still be needed for investing in the extension of an existing pharmaceutical plant, but it may be easier to meet GMP standards with a plant that is built from scratch. If the available free cash flow generated by the enterprise is used to reduce ex works prices, it appears that the potential for reducing prices from the baseline ranges from 11% to 26%. However, a sensitivity analysis shows that the ability of the enterprise to provide these price reductions is dependent on stable prices for active pharmaceutical ingredient (API) and on achieving sufficient market share. In conclusion, it appears that under certain conditions (i.e. at prices that are competitive with those of imported drugs, with significant market share, a stable political context, and the production of drugs to treat both priority diseases and conditions of lesser public health importance etc.) domestic production in SSA has the potential to be financially viable as well as to offer the possibility of a modest reduction in the ex works prices of quality drugs. However, there is no guarantee that all of the drugs produced will necessarily meet widely accepted international quality standards, because the WHO prequalification only covers a limited set of drugs. The financial viability of the enterprise appears fragile because it depends on two significant factors which it cannot totally control: the price of API and market share. The inability to obtain favourable prices for API from suppliers, or failure to obtain needed market share would threaten the ability of the enterprise to continue as a going concern. In addition, the enterprise will: (i) have to ensure that the products which it will sell through international and national tendering procedures are prequalified by the WHO (or registered in a country that is a member of either the International Conference on Harmonization, ICH, or the Pharmaceutical Inspection Cooperation Scheme, PICS); (ii) successfully register all of its products in each country it exports to; and (iii) obtain compulsory licences and voluntary licences as needed to produce patented drugs for both domestic consumption and export requirements. Lastly, the logistics for supplying API, equipment, spare parts, and ensuring maintenance will have to be assured in order to avoid costly delays and interruption of production. Further research is needed in several areas, particularly those related to manufacturing and quality, distribution, and intellectual property. • To reinforce manufacturing quality, operational research could help better define Executive Summar y 9 the human resource needs and additional costs that current manufacturers would incur in order to consistently meet GMP standards and to prepare comprehensive dossiers for their products. • Exploring the possibility of subsidizing API. Just as the prices of products which are considered vital are subsidized in many countries, this intervention could help make essential drugs more affordable, whether or not they are made domestically. • Drug regulatory authorities and quality assurance systems need to be reinforced to ensure that only quality drugs reach the end-user through distribution systems. • Distribution needs to be made efficient, so that the large mark-ups that are commonly added in both public and private distribution systems do not outweigh or even negate the impact of lower ex works prices for manufactured drugs. • Lastly, research is needed to further explore how the compulsory licensing provisions provided for in TRIPs might affect the potential for domestic manufacturing to provide increased access to existing drugs patented before 2005 as well as the new drugs which will be patented after 2005. 10 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 11 3.1. What is access to medicines? The concept of access to medicines must be defined in terms of access to quality medicines. The notion of quality encompasses issues related to production, such as proper registration and manufacturing according to GMP, the systems that assure and control quality within the distribution system, and national regulatory systems that are able to control and monitor quality. According to the literature, access can be defined using various frameworks, such as that below which was developed at a recent conference2: • Geographical accessibility, which includes the concept of the distance between the end-user and a drug outlet which has the needed items. • Physical availability, which can be measured in terms that include indicators related to the stock levels of needed items as well as the availability of drug information for both providers and consumers. • Acceptability, which concerns the relationship between products and services provided and end-user satisfaction with these products and services. • Affordability, which can be understood by relating the price of drugs to the capacity of populations to pay for them. This refers to the price of drugs at the point of distribution where they are paid for by the end-user. This study does not question the indisputable benefit of better access to medicines for improving health and enabling social and economic development. It addresses the question of whether access to medicines can be improved in SSA by producing them locally. For this production to be sustainable, it must be both economically viable while meeting quality standards, and result in the improvement of access along one or more of the dimensions outlined above. For the purposes of this study, quality drugs are defined as those that meet internationally recognized standards. These include those of the WHO Prequalification Project3 or those of countries participating in either the Pharmaceutical Inspection Cooperation Scheme and/or the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use4. Currently few, if any, domestically produced drugs within SSA meet these standards. For example, a recent study5 showed that a significant percentage of commonly-used anti- 3 Introduction malarials (those not covered by the WHO Prequalification Project) distributed in several SSA countries failed to meet test standards for content and dissolution. No drug produced by an enterprise within SSA6 had met the requirements of the WHO Prequalification Project covering drugs for HIV/AIDS, TB, and malaria as of June 2004. Therefore, it was not feasible to gather data on domestically produced drugs to evaluate their effect on access, and the decision was made to use a simulation that covers different production scenarios to test if the production of high quality drugs in SSA can result in an improvement in access. 3.2. Promotion of domestic production in the 1970s and 1980s As the topic of domestic production of drugs in developing countries has been debated and discussed for many years, and continues to be a subject of ongoing discussion7, it is worthwhile to review other perspectives on domestic production before analyzing the current impact of domestic production on access, and developing the simulation. It should also be noted here that this study does not consider in-depth the impact of domestic production on industrial development. However, pharmaceutical production is capital intensive, and employs relatively few people. This consideration, along with the fact that almost all of the inputs for pharmaceutical production, including raw materials and equipment, have to be imported, suggests that the impact of domestic production on industrial development in SSA is likely to be minimal. During the 1970s and 1980s the creation of domestic capacity for producing drugs was strongly promoted by certain international organizations and governments. UNIDO provided help to many countries in an effort to create pharmaceutical industries8. The assumptions underlying these initiatives were reviewed and analyzed by Foster in 19869 and 199910. These assumptions included several principal arguments to justify support to the pharmaceutical industry: • The country will become self-sufficient in drug supply, thereby reducing the importation of drugs and the subsequent loss of foreign exchange; • Drug quality will be improved; • Domestically manufactured drugs will earn foreign exchange through exports; • Domestic production will create new jobs; • National prestige will be enhanced both internally and internationally (through discovery of new drugs), and among other developing countries (potential customers). 12 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 Foster’s papers included reviews of the status of worldwide pharmaceutical production and discussions of the impact of macroeconomic changes over time, changes in the trade environment, the developing country environment, and the priorities of partners such as UNIDO and the World Bank. One key development that she highlights in her second paper is the increase in the market for generic drugs. The increased purchase of generics combined with increased price competition, in turn, led to significant decreases in the prices of many essential drugs. This market shift started in the 1980s as information on drug prices from suppliers around the world became more available, through efforts such as that of the UNICEF Supply Division, which began publishing a list of indicative prices. While this increase was favourable for consumers, Foster notes that it worked against domestic manufacturers who were unable to produce drugs at prices that were competitive with those of large-scale international drug producers. Her conclusions about the difficulties of establishing viable domestic production of pharmaceuticals were borne out by the disappointing results from several initiatives to establish pharmaceutical production in developing countries. By the mid to late 1980s UNIDO had reconsidered its policy on pharmaceutical production, and had shifted to concentrating on quality control and procurement issues. Two other recent papers have also examined the potential role of domestic production11,12: • Kaplan’s study analyzes domestic production from a global viewpoint, using indicators based on macroeconomic indices such as gross domestic product (GDP), balance of trade figures, and industrial competitiveness. The case studies that are included appear to be mostly market reviews of the pharmaceutical sector in several countries but do not include either a detailed review of the activities of specific enterprises or a grounds-up business analysis of the costs, opportunities and constraints that would face a drug manufacturer who is establishing an operation in a developing country. According to Kaplan’s indicators, only a few developing countries have the potential to become global suppliers of pharmaceuticals because the majoritydo not meet the criteria in terms of GDP, population size, educational status, industrial competitiveness and positive balance of trade in pharmaceuticals. • Webber’s paper also takes a global perspective, looking more directly at the processes of manufacture and supply, including capacity issues. His paper concludes that the most efficient way to ensure the supply of quality drugs for the entire world would be via their large-scale production in a limited number of plants, located where there is a sufficient industrial infrastructure and available human resources to support them. However, it does not address the crucial question of whether the cost efficiencies realized by such large-scale production would be passed on to the consumer and result in lower prices for drugs. Both of these papers are unfavourable for domestic production, particularly so when Introduct ion 13 considering the status of SSA countries relative to their conclusions. However, despite this pessimism, and the current lack of support for domestic pharmaceutical production in SSA by international institutions, there are today several examples of successful pharmaceutical enterprises operating in SSA13 (Annex 2). Although none of them have been prequalified by the WHO for the production of drugs to treat HIV/AIDS, TB, and malaria, the WHO is currently analyzing dossiers which have been submitted by a number of these firms. 3.3. Revisiting the issues of domestic production HIV/AIDS, TB, and malaria have emerged as three priority diseases of public health importance over the past few years. Therefore, this study pays particular attention to the potential for domestic production of drugs to treat these diseases and the simulation includes them in all of the scenarios for the following reasons. First, there is increased momentum in the international community to combat these diseases, which disproportionately affect the populations of SSA. This has resulted in the creation of high-profile global partnerships such as the WHO “3 x 5” initiative14, Stop TB15, and Roll Back Malaria16, and the establishment of funding mechanisms such as The Global Fund17, the Multi-Country HIV/AIDS Programme of the World Bank18, and other scaled-up efforts by bilateral and multilateral institutions as well as governments. As a result, significant public funding is available to buy drugs on behalf of the people who need them for these three diseases. Second, countries such as India and China, which have been supplying the bulk of generic forms of these drugs, will be required to respect the patent protections outlined in the TRIPs agreement as of 200519. While the 2001 Doha Declaration20 and subsequent Decision of 30 August 200321 have some provisions to allow the continued export of these drugs from India and China to the least developed countries, these have yet to be tested. A more clearly established route would be the use of the compulsory licensing options, authorized in the original TRIPs agreement, by SSA countries to enable domestic manufacturing of the drugs needed for treating HIV/AIDS, TB, and malaria. Third, there is a rapidly increasing number of initiatives to begin domestic production, particularly of ARVs, but also of artemesinin-based combination therapies (ACTs), in sub-Saharan Africa.22,23,24 Taking into consideration the new focus in public health priorities, the changes in intellectual property regimes, and the increasingly widespread use of generics, all of which have occurred since the earlier discussions of domestic production, it is possible to reassess the relationship of domestic production in SSA to quality and access. 14 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 • Quality. Domestic production does not guarantee better quality because: - Both imported and domestically produced drugs to treat HIV/AIDS, TB, and malaria will be required to meet internationally recognized quality standards under donor-funded initiatives. - National regulatory systems should control the quality of all drugs sold and distributed in the country, whether they are imported or made domestically. • Geographical accessibility. This is not linked with where drugs are manufactured, but depends on the existence of distribution networks and points of distribution in the public and private sectors where drugs are sold. • Physical Availability. Contrary to what is commonly thought, domestic manufacturing does not improve availability because it depends on a fully functioning distribution network which can be supplied by either imported drugs or domestically produced drugs. Domestic production could ensure physical availability if there is a breakdown in the supply chain for imported drugs but only if the missing drugs correspond to those that are produced locally. However, proper forecasting of drug needs and logistical management should avoid disruptions in supply. • Acceptability. In some cases, domestically produced drugs may improve acceptability because packaging conforms with local tastes and because labelling may be in the local language, but in other cases, end-users often perceive drugs imported from developed countries to be of better quality than those made locally and will prefer to buy them if given a choice. Therefore, it is not clear that domestic production will lead to improvement in this dimension of access. • Affordability. Both domestically produced and imported drugs have to pass through either a public or private distribution system before they reach the end- user. The use of subsidies that will be required for drugs such as ARVs and ACTs means that both the downstream perspective of the end-user who obtains the drug at the end of the distribution system and the upstream perspective of the government or other institution that is purchasing the drug in bulk need to be considered: - For the end-user, the price of a drug can increase dramatically as it passes through multiple layers within the distribution system (Annex 15) and mark-ups are added. It is not uncommon to see the total of mark-ups add 50-100% to the ex works price of a drug by the time it reaches the end-user, or consumer (Annex 3). Domestic production can improve affordability for the end-user only if drugs can be both produced domestically at lower cost and if these savings are passed on to the end-user through the systems of distribution, whether via Introduct ion 15 private retail distribution channels or via subsidized and/or regulated distribution mechanisms. - For bulk purchasers, if domestic production reduces the cost of drugs, these savings could allow the purchase of increased quantities of drugs for the same expenditures, thus enabling public health programmes to expand their coverage. On the other hand, cost-recovery mechanisms and subsidies will still have to be designed in a way to ensure that drugs are affordable to the end-user. Of these elements related to access, it appears that domestic production could most impact affordability, and for this reason, this study focuses on whether it is possible to lower drug prices through domestic pharmaceutical production in SSA. 3.4. What is the current level of affordability of drugs in SSA? Generic versions of many essential drugs are currently available in most SSA countries, yet one recent study25 has shown that paying the full out of pocket price for a complete treatment for a disease episode is out of the reach of as much as 40-70% of the population once this price is over $1. Although prices of the drugs to treat HIV/AIDS26 have dropped over the past few years, and the availability of component drugs for ACTs in generic form could enable lower prices for anti-malarials, large segments of the population will be unable to afford these drugs without a distribution system which includes a financing mechanism, such as a subsidy, to absorb most of the cost. In the case of ACTs, no country in SSA has adopted them as first-line treatment without first having secured external funding – funding that will be channelled into large-scale procurements. In TB programmes, anti-TB drugs are typically distributed for free through vertically managed programmes. With HIV/AIDS, funding and procurement are managed at country level. These factors mean that institutions or governments are likely to be bulk purchasers of the majority of the drugs that will be used to treat these three diseases, thus creating a large demand that is different from the type of demand which exists for drugs which are sold through private distribution channels. 3.5. How will the criteria of bulk purchasers of drugs differ from that of an individual who buys in the private sector? End-users who purchase essential drugs in the private sector pay the full retail price, but in return often have the choice between multiple brands of the same drug at different prices. This choice can be influenced by advertising and promotional activities on the part of the drug manufacturer, and these efforts will often enable a drug manufacturer to 16 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 earn a higher profit per unit on the drugs they sell in the private sector. On the other hand, given the public health urgency of making treatment available on a large scale for HIV/AIDS, TB, and malaria, and the high cost of the currently recommended treatment regimens, institutional and government buyers will be the major purchasers of drugs to treat these priority diseases and will be buying them in large volumes following the procurement guidelines required either by the donors who fund these purchases or by national law. These guidelines27,28 typically require that the drugs purchased meet international quality standards and that the lowest cost drug be selected for purchase. Profit margins per unit sold will be lower but sales volumes will be large and payment more certain for drug manufacturers. The contrast between these purchasing criteria and those of individuals buying drugs through the private sector is shown below (Figure 1) although the risk that decisions involving the purchase of large quantities of drugs could be subject to “undue influences” must be acknowledged. Figure 1: Relationship of end-user to drug manufacturer In conclusion, domestic manufacturers who wish to enter the growing market for drugs to treat HIV/AIDS, TB, and malaria must produce quality drugs which respect internationally recognized quality standards at competitive prices. As of 2005, The Global Fund will only allow procurement of drugs at the lowest possible prices29 that have either been prequalified by the WHO or registered in a PICS or ICH country. Manufacturers who wish to succeed in this market will have to focus on quality and production efficiency rather than in advertising and promotion. In addition, because of the wide publicity given to procurement prices in several countries, they will have to consider these prices as a ceiling for their production. Introduct ion 17 Out of pocket purchasing of essential drugs Producer Distribution system(s)* End-user Purchasing decision influenced by: • Perceived quality - Geographical origin - marketing • Price • Objective quality • Price • Supplier reliability Producer Institutional / govt. buyer End-user Institutional/gov’t purchases of drugs for HIV/AIDS, TB, and malaria 18 DFID Heal th Systems Resource Centre 2004 First, a discussion is presented of the factors that affect the operating and business environment of a pharmaceutical enterprise based in SSA, second, the current activities of a few firms that were visited in West Africa are presented, and lastly, the simulation is developed. 4.1. What factors affect the operations of a going concern in SSA? An enterprise that is producing pharmaceuticals in SSA is affected by country environment, government policy and strategy, and the market (Annex 6). These are summarized below. Country Environment Factors that need to be considered here include: • Political and business risk: only Botswana, Namibia, Mauritius, and Swaziland out of the 47 SSA countries have established a sufficient track record to be rated within the “A” classification by the Coface Group30,31 while the rest are rated “B” or lower. While a rating less than “A” does not rule out investment opportunities (for example, Brazil has a “B” rating) it is an element that potential investors are likely to take into consideration and which will have an impact on interest rates. • Availability of trained personnel: in some countries the presence of universities and training institutions assures an adequate supply of human resources for the pharmaceutical industry, while in others it is difficult to find trained personnel. • Access to financial capital, which is often difficult, because of high interest rates32 and short payback periods of commercial bank loans. Private funds in Europe and the US and foreign direct investment are potential other sources of funds but may be difficult to access. • Technical know-how, such as that needed to meet GMP standards or to manufacture fixed-dose combinations (FDCs), which has to be imported or licensed from elsewhere. 4 Analyzing the potential impact of domestic production on access DFID Heal th Systems Resource Centre 2004 • Lack of local availability of the raw materials, equipment, and spare parts, which have to be mostly imported from countries with established pharmaceutical industries. Government strategy and policy Many SSA governments have adopted fiscal policies in order to favour local industrial development and investment, and several trading blocs have been created with the goal of harmonizing tariffs. Progress in this area is variable: some blocs have already engaged in implementing a common drug registration process33, common tariffs and common currency, and for others these achievements are several years off (Annex 7). Pharmaceutical-related policies have made some progress in facilitating domestic production but harmonized standard treatment guidelines, which could inform drug manufacturers on which drugs and dosage forms should be widely used, have not been fully implemented. Therefore drug manufacturers still have to produce many different dosage forms for each drug. Lastly, labour regulations, environmental protection requirements, and the presence of organized labour generally do not pose obstacles to the establishment of pharmaceutical plants, with the exception of a very small number of selected drugs such as steroids which are not included in the simulation. Market Apart from large countries like Nigeria, the national market of SSA countries is too small to absorb all of the production of a domestic enterprise. A drug manufacturer producing drugs for HIV/AIDS, TB, and malaria will therefore be impelled to look beyond national borders in order to sell its products. This requires building a sales and distribution network if the private retail sector is targeted, in addition to participating in international tenders where there will be many competitors. For patented drugs, compulsory licences need to be obtained both in the producing country for domestic consumption and in countries where the drugs will be exported. Alternatively, a voluntary licence from the patent holder must be obtained. Conclusion Although a few countries currently offer a moderately favourable climate for pharmaceutical production in terms of political risk and human resource availability, generally drug manufacturers still face obstacles throughout SSA in terms of access to financial capital, technical know-how, and equipment and spare parts, and have to develop an export strategy in order to sell drugs to treat the three priority diseases, including obtaining both compulsory licences and authorization of the patent holders. Analyzing the potential impact of domestic production on access 19 Some of the factors discussed above, such as the lack of availability of raw materials and equipment, are beyond the control of SSA countries, but there are others, such as the availability of trained personnel, or procedures for the regional registration of drugs, where government policies could have a positive impact. Training programmes in industrial pharmacy could be established or reinforced, which could serve the needs of both the local pharmaceutical industry and the regulatory authorities who have to enforce these standards. Regional registration procedures could make new drug products more widely available while at the same time enabling countries to pool resources for more thorough evaluation of new product dossiers and more comprehensive plant inspections than is possible through the resources of the national regulatory authority in any one country. 4.2. What firms are doing now Within the limitations of the study, it was only possible to visit three different pharmaceutical enterprises, all located in West Africa. Further research should be considered to evaluate the situation in East Africa. However, these visits, which covered firms located within two different economic zones, are illustrative of the different ways in which such enterprises can be structured. Firm A is an owner-operated firm that grew from a four-man operation to an enterprise that now employs over 300 people with production lines for tablets, liquids, capsules, syrups and powders. Private sector sales comprise the large majority of its business, but the firm also sells to the public sector. The firm does not export at this time, but has developed a large sales and distribution network that covers the entire country. Financing for expansion came from internally generated profits, supplemented by loans from commercial banks. As the company already has significant domestic market share, it is looking for new markets and new products, including drugs to treat HIV/AIDS and malaria, in order to keep growing. Its status as an owner-operated and controlled firm has probably helped with keeping overhead costs low, but if the owners seek to maintain full control, this could deter the recruitment of talented individuals from outside the firm whose expertise may be needed to help the firm make the transition into an international player. Firm B is majority-owned by large European multinational pharmaceutical companies and produces products under licence agreements with them and other international partners. Its structure enables the enterprise to benefit from both the financial support and technical expertise of well-established companies. However, procurement of API may not be cost-effective because the majority of API is bought through these parent companies at high transfer prices, rather than through open international procurement. In turn, this makes it difficult for the firm’s drug products to be price competitive with imports from Asia. The firm does not intend to produce ARVs, TB drugs, or ACTs. Firm C is privately owned but run by professional expatriate managers who were 20 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 brought in by the principal investors. These investors are based outside of the country. The benefits to this company include facilitated access to international financing and management expertise. The international outlook of the firm is reflected in its current efforts to reach export markets throughout West Africa. The disadvantages faced by this structure include the added costs of an expatriate management team. Plans are underway for the production of an ACT. Each of these firms has different advantages and disadvantages with respect to the production of pharmaceuticals in SSA. However, firms A and C are better positioned to choose which generic drugs they will produce, although meeting WHO prequalification requirements is likely to be challenging for both firms. 4.3. Use of a simulation tool To measure the impact of domestic production on access, a simulation tool is used to evaluate whether an imaginary enterprise based in SSA could produce drugs at prices which are competitive with imports while permitting it to function as a going concern. The purpose of the simulation is to be able to answer the following question: Is the domestic production of essential medicines in SSA in a plant which meets GMP standards compatible with the operation of a going concern and with getting these medicines to a suitable market at prices which are competitive with or lower than the same medicines which are imported? 4.4. Simulation methodology Choice of scenarios and cases The simulation covers three different scenarios corresponding to three different market strategies: • Scenario 1. An enterprise that is exclusively oriented towards HIV/AIDS, TB, and malaria and only sells to institutions and governments; • Scenario 2. An enterprise that manufactures the same drugs and in addition provides drugs to treat diseases such as hypertension, gastrointestinal ailments, and diabetes, which are currently less of a public health priority in SSA and for which there is a limited market in the private and public sectors; • Scenario 3. An enterprise that manufactures the same drugs and in addition provides OTC drugs such as vitamins and analgesics which are not of public health importance and which are sold only in the private sector. The distinction between the three scenarios makes it possible to separately calculate the Analyzing the potential impact of domestic production on access 21 effect of choosing strategies with differing degrees of orientation towards public health priorities. For each of these scenarios two cases are considered: • “Greenfield”, which corresponds to the creation of the new plant from scratch. • “Extension”, corresponding to the addition of new products to drug production by an existing enterprise. It was decided not to develop a scenario including the production of other widely used essential generic drugs because these drugs, such as paracetamol34, are readily available from many suppliers and profit margins are very low, making it difficult to justify investment in the domestic production of these drugs in SSA when worldwide supply is already adequate. Assumptions included in simulation The simulation models the operation of an imaginary pharmaceutical enterprise operating under the constraints of SSA. It allows the adjustment of inputs such as the price of raw materials and sales volumes to evaluate if the domestic production of quality drugs can be done at a lower cost. The simulation is based on several assumptions - • Intellectual property considerations will not pose a barrier to the production and export of drugs for the following reasons: - The basic patents for all of the drugs used to treat HIV/AIDS in the simulation were issued before 1995, the start date for the TRIPs obligations35 (Annex 4). - The API for these drugs is available from multiple sources as of 200436. - If needed, a compulsory licence will be issued both in the country where the drugs are produced and in the countries that comprise the export market to allow trade. The possibility of a voluntary licence being offered to a firm which meets GMP standards would offer another alternative to obtaining the necessary know-how. - A fee of 5% of sales is added to the FDC formulations to cover the costs of licensing and technology transfer. • It is limited to SSA, excluding North Africa as well as South Africa, where the issues facing pharmaceutical production differ. • It focuses on secondary manufacturing, that is, the formulation and packaging of 22 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 the API into a packaged product (Annex 5), ready for shipping and distribution. These steps represent approximately half of the ex works price and one-fourth of the retail price paid by end-users (Annex 3). • Re-packaging of bulk finished product is not considered, as the value added by packaging alone is very low, and cost-savings in this step of the drug manufacturing process would not contribute significantly to improving drug affordability. • The production plant conforms to GMP, and that appropriate studies of safety and bioequivalence are carried out for those drugs which are covered by the WHO prequalification project37, 38. • The imaginary pharmaceutical production enterprise is a “going concern”. • It takes into account the factors that determine the ability of a pharmaceutical plant to continue as a going concern, including sales volumes, ex works prices for the finished products, and the cost of raw materials. Product selection Priority diseases 13 products, including monotherapies and FDCs, were selected: six ARVs (zidovudine, didanosine, lamivudine, nevirapine, stavudine, and the FDC of lamivudine + zidovudine), two antibiotics (ciprofloxacin and doxycycline) needed for treating sexually transmitted illnesses, three anti-TB drugs (pyrazinamide, ethambutol, and isoniazid + rifampicin), and two anti-malarial drugs (artesunate and amodiaquine) (Annex 8). This selection is justified as these drugs are included in the recommendations of the WHO, and are likely to be among the most commonly used as public health interventions scale up for the three diseases39,40,41. Although the use of FDCs is recommended by the WHO for the priority diseases because it promotes better adherence and can potentially limit the emergence of drug resistance, there are many different combinations possible, particularly for ARVs42. Furthermore, the lack of harmonization among different treatment guidelines compounds the difficulty of estimating potential sales with any degree of confidence. Therefore, only two FDCs are used in the simulation: for ARVs, a generic FDC which is already in use in an SSA country, and for TB, an FDC which is likely to be widely used according to the WHO treatment guidelines. Ethical Drugs Eight drugs were chosen in three different therapeutic classes to treat chronic diseases: Analyzing the potential impact of domestic production on access 23 three anti-hypertension drugs (amlodipine, captopril, and hydrochlorothiazide), two anti- ulcer drugs (ranitidine and omeprazole), and three drugs to treat diabetes (metformin, gliclazide, and glibenclamide). These drugs were chosen because their sales are among the highest (by value) within their respective therapeutic classes (Annex 8). Over The Counter Drugs Two OTC drugs were selected (ascorbic acid in effervescent form, and aspirin combined with codeine): one very commonly used vitamin and one painkiller. These were also chosen because they correspond to the highest sales levels in their therapeutic class (Annex 8). Determination of sales revenues Country selection 12 countries have been selected across three trading or economic blocs located in West Africa: 10 within the Economic Community of West African States (ECOWAS), seven within the West African Economic and Monetary Union (WAEMU), and two within the Economic and Monetary Community of Central Africa (EMCCA), (Annex 7). This selection was chosen for several reasons: • Easy access is possible to the majority of the populations of these countries via ports and coastal roads, such as the Abidjan-Lagos corridor. • Three different economic zones are covered, two francophone (WAEMU and EMCCA), and one which has both francophone and anglophone countries (ECOWAS). This diversity creates opportunities as well as obstacles, as the WAEMU and EMCCA share a common currency and a common tariff schedule. On the other hand, the ECOWAS states that are not part of either WAEMU or EMCCA have made less progress towards economic integration, although there is discussion of establishing a free trade and customs union and a common currency with a central bank located in Accra by 200743. • This region covers a significant proportion (35% of the entire population) of SSA, with an estimated population of close to 235 million. • 10 of the 13 countries are members of the Organization for Business Law in Africa (OHADA), which is a non-institutional organization that aims to harmonize business regulation in Africa. Market share and sales volume Within the defined market, sales volumes for the drugs (scenarios 1-3) to treat the three priority diseases were determined in four steps (Annex 9). 24 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 • The need for drugs to treat the three diseases is derived from epidemiological information available from WHO and UNICEF, and population size information was taken from the UN Population Division44. • Public health goals45 are taken into consideration for estimating the demand for anti-TB and anti-malarial drugs: 100% of smear-positive (SS+) TB patients will be treated and 60% of malaria episodes. For calculating ARV and antibiotic sales, a combination of the 3 x 5 treatment targets and actual purchases by a central medical store were used to project required quantities for the population of the 12 selected countries. • The enterprise’s market share of all these drugs is semi-empirically chosen to be 10%. It is obvious that market conditions vary from one product to another, and that the market share will not be the same across all products in reality, but the use of one figure avoids adding undue complexity to the model. • Full production capacity (100%) is reached by year 3 for the greenfield case and starts at 100% in year 1 for the extension case – meaning the 10% market share is achieved in these years. Once full production capacity is reached, sales increases are set at 10 points per year thereafter and capital investment in plant and equipment is adjusted accordingly. Based on this market size estimate, which in turn is based on public health goals and an optimistic assumption of market share, the production of slightly more than 100 million tablets per year will satisfy expected sales of drugs to treat HIV/AIDS, TB, and malaria. For a modern enterprise producing pharmaceuticals on an industrial scale, this quantity corresponds to a single production line46. The aggregate sales for the chosen ethical drugs (scenario 2) total less than 18 million additional tablets and their production does not require an increase in production capacity or investment in equipment. However, production of these drugs complicates the manufacturing process, lowering the productivity of the production line because of the time needed to change equipment and for cleaning between manufacturing lots. For the OTC drugs (scenario 3), expected sales volumes of an additional 58 million tablets and specific manufacturing requirements (Vitamin C will be produced in an effervescent form) do require an increase in production capacity (from one to two lines). Sales unit prices Sales unit price for each product is set at the lowest purchase price found between two sources: supplier prices in the 2003 edition of the MSH/WHO International Drug Price Indicator Guide47 and the results of a procurement cycle in 2003 by a central medical store in an SSA country. Analyzing the potential impact of domestic production on access 25 Capital expenditures and operating expenses Costs of setting up production For the greenfield cases, these include the costs needed to set up a new manufacturing enterprise, including the costs of plant, property and equipment, taxes and tariffs, royalties, and research and development, but for the extension cases, costs did not include those for buildings and land (Annex 10). Because GMP is not specific about items such as building materials or equipment but notes that “…premises must be located, designed, constructed, adapted, and maintained to suit the operations to be carried out.” and that “…equipment must be located, designed, constructed, adapted, and maintained to suit the operations to be carried out…48” costs for building and equipment were based on actual information from a confidential source and adjusted to take into account the estimated additional investment required to upgrade to meet GMP. In addition, the following adjustments were made for the three scenarios: • Scenario 1, which is based on drugs for HIV/AIDS, TB, and malaria only, requires the establishment of one production line. • Scenario 2, which includes ethical drugs to treat chronic diseases, requires more frequent line changes, cleaning cycles, and additional maintenance. This is accounted for by adding in $500,000 per year in additional indirect costs. • Scenario 3, which includes OTC drugs, requires additional production capacity estimated at $2 million to set up an additional production line. • The calculations take into account one year to set up the company, five years of operations for the greenfield case and immediate production for the extension case. API costs Costs of API were based on median values taken from publicly available reports49. Other costs For the purposes of analysis, the rest of the unit cost of production is divided into direct and indirect costs. Direct costs include raw materials, direct labour, utilities, and quality control. Indirect costs include depreciation and amortization, indirect labour (such as sales and administration), and overhead expenses. The choice of how to allocate indirect costs is generally done for various internal accounting purposes such as determining the profitability of each product. In this simulation, indirect costs were calculated on a per tablet basis; alternative choices could include the allocation of these costs as a percentage of sales of each product, or by batch size. While the alternatives 26 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 will not affect the calculations of profit or loss for the company as a whole, they could affect other internally calculated results, such as the profitability of each product. However, information on batch size was unavailable and it was felt that allocating these costs by tablet would be the most accurate way to reflect the resources actually used in the production of each drug. Capital Structure There are a number of ways that a pharmaceutical enterprise could be financed, including the use of investor capital, commercial bank loans, other sources of loans (such as the International Finance Corporation), and grants. There are choices that have to be made about the relative proportions of equity and debt that are used for financing. It is not possible within the context of this study to explore all the possible options, and therefore a mix of financing was chosen, including investor equity, grants, commercial bank loans, and a loan from an organization such as the International Finance Corporation.50 The details of these assumptions, as well as an explanation of the other costs factored into the simulation, can be found in Annex 10, along with an explanation of how the discount rate was derived in order to calculate NPV. Analyzing the potential impact of domestic production on access 27 28 DFID Heal th Systems Resource Centre 2004 This section is divided into two parts: first, a presentation of the main financial indicators, including a sensitivity analysis of how net income would be affected by changes in API prices and by changes in market share; and second, an examination of the possibility for the imaginary enterprise to contribute to improving access through a reduction in the ex works prices, also using a sensitivity analysis of how this potential reduction would be affected by the changes in API prices and market share. The sensitivity analysis is only performed on the greenfield cases because of the difficulty of applying this analysis in the extension cases when the size of the existing production is unknown. The rationale and methodology of the sensitivity analysis is detailed in Annex 16. 5.1. Financial Indicators Sales and Income In each of the six cases, the enterprise appears profitable, with a positive net income by the end of the third year (Figure 2). Two other results stand out: first, the extension cases are more profitable than the greenfield cases for all the scenarios; second, among the three scenarios, scenario 1, the baseline scenario which focuses on drugs for HIV/AIDS, TB, and malaria only, is always the least profitable, whether as a greenfield or extension case. In other words, adding production capacity to an existing facility is more profitable than building a new one. Also, manufacturing a wider range of products is more profitable, as the profit margins for priority disease drugs are relatively low because of their specific procurement requirements. These requirements lead to market conditions that are characterized by intense price competition among many internationally-based drug manufacturers who are trying to win large orders. A breakdown of profitability by drug product51 (Annex 12, 13) shows that: • the ethical drugs are the most profitable; • ARVs and anti-malarial drugs are intermediately profitable; • drugs for TB, antibiotics, OTC drugs and a second commonly used anti-malarial drug can only be produced by the imaginary enterprise at a loss. While these conclusions are partly dependent on the fact that indirect costs were allocated on a per tablet basis, they would not significantly change even if indirect costs 5 Results and sensitivity analysis DFID Heal th Systems Resource Centre 2004 were allocated differently, i.e. by batch size or as a percentage of sales. This conclusion can best be understood by comparing net income per product (the calculation of which depends on an internal accounting decision of how to allocate indirect costs) with the proportion of the cost of API in each product (an external cost which is independent of internal accounting decisions), (Annex 13). There is an inverse correlation between the proportion of API represented in the ex works selling price and the profitability of each product. In particular, for the ethical drugs the cost of API is less than 5% of the selling price. Therefore, it appears that even if indirect costs were allocated differently, this category of drugs would still be highly profitable when compared to the other two categories of drugs. Furthermore, this analysis suggests that prices for ethical drugs are relatively high when compared to the prices of either the drugs to treat the priority diseases or OTC drugs, especially considering the much smaller sales volumes of the ethical drugs. Figure 2: Comparison of financial results Notes: Sales figures differ between the greenfield and extension cases for each scenario because it is assumed that in the case of the extension, production is at 100% capacity in year 1 and grows by 10% per year, while in the greenfield case, production ramps up during years 1 and 2, reaching 100% only by year 3. Q represents the number of tablets per year produced for each category. Results and sensitivity analysis 29 Greenfield Sales (millions $) Net income (million $) Net income (% of sales) Extension Sales (millions $) Net income (million $) Net income (% of sales) Scenario 1 HIV/AIDS TB Malaria Q = 108 million None 10,5 1,2 11,6 12,2 4,3 35,3 Extension Scenario 2 HIV/AIDS TB Malaria Q = 108 million Ethical drugs 3 Anti-hypertensive 2 Anti-ulcer 3 Anti-diabetic Q = 18 million 14,0 6,2 44,4 16,4 7,7 47,0 Extension + + Scenario 3 HIV/AIDS TB Malaria Q = 108 million OTC 1 Analgesic 1Vitamin Q = 58 million 13,2 4,1 30,9 15,4 5,5 35,9 Extension + Results at the end of year 3 Return on investment and financing needs To understand the simulation from the perspective of a potential investor, NPV, external financing needs, and profitability index were calculated (Figure 3, Annex 11g). These calculations show that the different scenarios can be categorized in two different ways: • those cases which have a positive NPV – all except for one greenfield case; • those cases which have high external financing needs (>$10 million) – all of the greenfield cases. Nevertheless, external financing needs are considerable across all scenarios and for both cases. This favours investment in the extension of an existing pharmaceutical plant with the production of either ethical drugs or OTC drugs, along with drugs to treat the priority diseases. A minimum of $4 million to $6.2 million of external financing will still be required, that is to say roughly half of that required for the greenfield cases. Figure 3: Comparison of NPV and financing needs 30 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines NPV Rank External financing Rank Equity investment (capital + grants) Rank Profitability index Rank S2 Extension 13.03 1 5.5 2 3.0 2 4.3 1 S1 Extension 3.16 4 4.0 1 2.0 1 1.6 3 S3 Extension 7.77 2 6.2 3 3.7 3 2.1 2 S2 Greenfield 6.04 3 10.5 4 4.0 4 1.5 4 S3 Greenfield 1.77 5 14.3 6 5.5 6 0.3 5 S1 Greenfield -0.07 6 11.0 5 5.0 5 0.0 6 Relationship between the value of NPV and the external financing required S1 Greenfield S3 Greenfield S2 Greenfield S3 Extension S1 Extension S2 Extension -1.0 1.0 3.0 5.0 7.0 9.0 11.0 13.0 15.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 Total external financing required N P V in $ m ill io n ( d is co u n t ra te 3 5% ) DFID Heal th Systems Resource Centre 2004 In summary, domestic production appears to be potentially profitable across all three scenarios for both the greenfield and extension cases. However, the latter case is cheaper for investors in all three scenarios, but still requires significant funding. 5.2. Potential to reduce ex works selling prices If the enterprise decides to use available free cash to enable a reduction in ex works prices (see sensitivity analysis methodology in Annex 16), it appears that the potential for price reductions ranges from 11%-14% (scenarios 1 and 3) to 26% (scenario 2). This difference is due to the much higher profitability of the ethical drugs included in scenario 2. Figure 4: Effect of change in API price and market share on ex works selling prices Results and sensitivity analysis 31 C h an g e in s el lin g p ri ce Effect of change in market share on ex works prices -50% -40% -30% -20% -10% 0% 14% 13% 12% 11% 10% 9% 8% 7% 6% Market share Scenario 1 Scenario 2 Scenario 3 Effect of change in price of raw material on ex works prices -50% -40% -30% -20% -10% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% Change in raw material price S el lin g p ri ce s Scenario 1 Scenario 2 Scenario 3 However, an increase in API prices or a loss of (or failure to reach) market share could easily make these price reductions unfeasible. This is quite possible, as typically API prices vary, depending not only on general market demand, but also on the choice of supplier and the ability of an enterprise to negotiate favourable prices. For example, the highest quoted price for zidovudine API from a Brazilian supplier is 45% above the lowest quoted price from an Indian supplier (Annex 17). As for market share, this depends on the ability of the enterprise to succeed in getting prequalified by the WHO for the drugs to treat HIV/AIDS, TB, and malaria. It must also complete registration of all of its drugs both nationally and within each country that it exports to and establish distribution networks, accompanied by marketing efforts, for those drugs which will be sold through the private sector. In quantitative terms, an increase of 25% in the price of API would make it impossible to offer any price reductions in scenario 1, almost none in scenario 3, and only 17% (down from 26%) for scenario 2. Similarly, if the enterprise only reaches 6.5% of expected market share, it would be also impossible to offer any price reduction in scenarios 1 and 3, and only 8% in scenario 2. In conclusion, the imaginary enterprise that is set up as a greenfield offers the potential for a modest reduction in the ex works selling prices of the drugs that are produced, but this reduction is vulnerable to factors that are beyond its direct control. 32 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 33 6.1. Conclusion This study shows that under certain conditions (i.e. at prices that are competitive with those of imported drugs, with significant market share, a stable political context, and the production of drugs to treat the three priority diseases and other conditions), domestic production in SSA has the potential to be financially viable as well as offering the possibility of producing quality drugs that are cheaper than imported products. Financial viability The financial viability of an enterprise functioning in these conditions appears fragile because it depends primarily on two significant factors, which it cannot totally control: the price of API and market share. The inability to obtain favourable prices for API from suppliers, or failure to obtain the necessary market share, would threaten the ability of the enterprise to continue as a going concern. An enterprise operating in SSA also has to contend with the other difficulties encountered in the business environment discussed earlier. In addition, the potential for competitors, such as the large-scale generic producers located in China or India, to undercut prices has to be considered. This would be especially problematic if the prices for ethical drugs were to decrease, as much of the potential profitability of a domestic producer might depend on this category of products if it chose to produce drugs other than those used to treat HIV/AIDS, TB, and malaria52. Moreover, several other conditions need to be fulfilled. These conditions fall into two categories: Technical and Administrative: • Failure to obtain or significant delays in obtaining: • WHO prequalification for the drugs to treat HIV/AIDS, TB, and malaria; • drug registration for all of its products; 6 Contribution of domestic production to improving access • the licensing and other conditions required under TRIPs both for the production of certain patented drugs and for their export to a regional market, which could require negotiations within each of these countries These delays would require continued external funding to the enterprise until it reached sufficient market share to be financially independent. • Availability of sufficient numbers of qualified personnel Financial: • Investors have to be willing to forego the repayment of their equity for several years; • Commercial credit is available; • No tariffs and VAT are paid on raw materials, including API; • Corporate income tax is set at zero for the life of the pharmaceutical enterprise; • Other products with higher profit margins besides those used to treat HIV/AIDS, TB, and malaria must be produced if investors in a greenfield plant demand an adequate rate of return; • International financing, especially from The Global Fund, for the purchase of drugs to treat the three priority diseases must be sustained. The likelihood that these conditions could be fulfilled is difficult to predict. Some are within the control of governments, such as the levels of taxes and tariffs, while others are within the control of the company, such as the choice of drugs produced, but most of these are both external and critical, such as the possibility of sustained international financing to buy large volumes of drugs to treat priority diseases. Reducing ex works prices For drugs that are unsubsidized, the reduction in ex works prices will only lead to increased affordability of drugs if part of the savings are passed on to the end-user through the distribution system. While this study has focused on domestic production, these steps cover only roughly one-fourth of the overall cost of a drug to the consumer (Figure 5, Annex 3). The size of the mark-ups that are subsequently added during distribution in both the public and private sectors is likely to outweigh the reduction in ex works prices in a large proportion of SSA countries. This could diminish the primary contribution of domestic production to access if the distribution system does not pass on the savings. This may be less of a risk in the case when drugs bought by the government are distributed by the public networks, but nevertheless mark-ups added in the public sector still add significantly to drug prices. 34 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 Figure 5: Value Chain Flowchart of pharmaceutical production Notes: Based on a drug in which API represents 50% of the ex works price. For the drugs used in this study, with the exception of the ethical drugs, the median and mean costs of API in the ex works price are 47% and 51%, respectively. For subsidized drugs, the reduction in ex works prices could enable either expanded coverage or reduction in the cost of subsidies. Drug quality Access to drugs is defined in terms of access to quality drugs. For domestic production in SSA under the conditions of the simulation, it is assumed that the plant will be built or modified and operated in accordance with GMP. However, there is no internationally accepted standard mechanism for evaluating all of the drugs produced in terms of quality, safety, and efficacy. This is because the WHO Prequalification Project only covers drugs to treat HIV/AIDS, TB, and malaria. For the other drugs (i.e. the ethical and the OTC drugs), this kind of stringent evaluation would require registration of the drugs in a country that is either a member of PICS or ICH. The administrative burden imposed by this, particularly for an application in an ICH country, might be difficult to justify for a small production volume of these medicines, and is likely to require technical and administrative know-how that would be hard to find in SSA. Therefore, alternative processes for evaluation may have to be developed to ensure that the other drugs also meet acceptable standards for quality, safety, and efficacy. On the other hand, the domestic production of quality drugs at reasonable prices could help reduce the amount of substandard and counterfeit drugs in circulation, particularly if accompanied by a campaign to educate the public about the dangers of substandard and counterfeit drugs. Contribution of domestic production to improving access 35 Raw Material Blending Granulation Compressi on Blistering Cartoning Domestic ProductionProduced abroad Wholesaler Retailer Local Distribution 27 % 27 % 46 %+ + = 100 % 54 % 46 % All manufacturing ( components of ex works pri ce) Distribution + = 100 % Intellectual Property Issues The domestic production of patented drugs, in particular ARVs, is likely to be affected after 2005 when all non-least developed country member states of the World Trade Organization will be required to grant product patent protection. This will affect the supply of drugs patented after 2005, and possibly some drugs patented before that date, to importing developing countries. TRIPs does provide some mechanisms, such as compulsory licensing, which could permit the domestic production of patented drugs in SSA. However, there can be many legal, political, practical and economic constraints in using these mechanisms53,54, in which case the developing country will be dependent on branded versions, and will have little leverage over prices. In selected circumstances, the capacity for local production in least developed countries could help overcome the practical difficulties in using TRIPs flexibilities, and the following possibilities emerge: • A compulsory licence may be issued for production of a patented drug for domestic use only. While this would enable domestic producers to manufacture these drugs, the small size of the national market may make it difficult for a domestic producer to justify the investment in bioequivalence studies and validation of production processes that would be necessary to ensure the highest quality of the drug produced. Furthermore, if the API is also under patent protection, then this could require a compulsory licence to be issued by the country where the API is manufactured in order to allow export. Although a possible route around this would be to import the intermediates (which are not patent protected), and then produce the API and finished product domestically, this was not considered in this study and would require a careful evaluation of technological capacity and the availability of the expertise in pharmaceutical chemistry that would be required. • A compulsory licence may be issued for the domestic production and consumption of a patented drug and corresponding steps taken to enable its export to non-producing countries. This could require separate negotiations with each of these countries and completing the necessary procedures is likely to be time-consuming. The possibility of being able to reach an export market may justify this investment in time and costs for a domestic producer and it was assumed that this occurred in the simulation. • A voluntary licence may be issued for the domestic producer, contingent on meeting GMP standards. This is likely to require an independent assessment and inspection of the plant, either by the WHO, or by the grantor of the licence, if it was felt that the national drug regulatory authority was not fully competent to do a comprehensive inspection. This option could offer the opportunity both to meet domestic needs and to export the drug product. The main drawback of this option is that separate licences would have to be obtained for each branded drug, and that the effort involved to obtain a voluntary licence for just one product may not 36 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 justify the time and cost involved. For example, drawing on the results of the simulation, the number of tablets of any single ARV needed to serve 10% of the West African market is less than two million; this represents less than two days worth of output for a single tabletting machine, which would not represent the efficient use of equipment, especially when the added downtime for cleaning and changeover is factored in. As the TRIPs mechanisms have yet to be tested, it is likely that other options will emerge over the next few years. At this point, it is highly speculative to predict how this will affect the business decisions of domestic producers. In the simulation, selling prices were set using international reference prices to test the financial viability of the imaginary enterprise. If the supply of generic versions of patented drugs is restricted once the TRIPs obligations are applied, this could dramatically alter the market potential if there is no established reference price for patented drugs. It is difficult to predict how the manufacturers of innovator products will respond to the public health needs of developing countries. Several years ago, a year’s treatment with an ARV cost thousands of dollars; few people would have predicted that this cost would fall to the current level of a few hundred dollars a year. While the availability of generic forms of ARVs from countries such as India and Brazil contributed to the pressure that eventually led to lower prices, political and humanitarian concerns also played a role. Lastly, it should be noted that the production in SSA of the relatively older ARVs used in the simulation, along with the vast majority of essential drugs, is not likely to be affected by the application of TRIPs although the possibilities of exporting them have to be evaluated. Certainly, given the dire need to scale up access to existing ARVs in SSA, the decision of whether or not to invest in the domestic production of the current generation of ARVs that are recommended within the WHO guidelines should not hinge on untested considerations of what might happen with respect to newer drugs. Rather, this decision should take into account the other elements of the analysis above, such as country environment, potential market, price trends, and the availability of the trained personnel and technical know-how that will be required to get WHO prequalification etc. Local Production vs. Drug Donation Without engaging in a full discussion of the pros and cons of drug donation, which has been offered on a large-scale55,56 as a solution to access to medicines, there are sound reasons why exploring the feasibility of domestic production is preferable to promoting drug donation as a solution to the problem of access to medicines. These include the notions of sustainability and reliability which are included in the WHO framework for equitable access57. It is evident that a pharmaceutical enterprise is vulnerable to business and financial risk. However, from any one country’s standpoint, there is more opportunity to play an active role with respect to a domestic enterprise than there is with a large multinational Contribution of domestic production to improving access 37 company located in another continent, for whom a drug donation programme is likely to be of low priority. Conclusion Given the overall need to improve access to drugs, which includes many issues related to drug management and rational use, stakeholders may have to consider whether resources should be focused on supporting the domestic production of drugs, or used to support other areas, such as improving distribution systems, strengthening drug regulatory systems, or subsidizing API prices to reduce upstream costs of production. This study shows that domestic production could have a modest impact on drug affordability. It is not clear whether domestic production could improve the other dimensions of access - geographical accessibility, physical availability, and acceptability. 6.2. Directions for further research This study of the issues involved in the domestic production of drugs in SSA reveals a number of areas where further research and/or technical assistance could help improve access to medicines. • Meeting GMP standards and WHO Prequalification. A number of enterprises producing drugs for their national market exist already in SSA, mostly run by private entrepreneurs. Many of them have expressed interest in contributing to the fight against HIV/AIDS, TB, and malaria, but they do not have production plants that meet GMP and they find the documentation requirements of the WHO Prequalification Project difficult to meet. Operational research in understanding how much it costs to reach GMP requirements and the human resource needs in terms of training could help address this gap. • Finding ways to verify the quality, safety, and efficacy of drugs. Other than the WHO Prequalification Project, which covers only a few categories of drugs, there is no internationally accepted way to verify drug quality other than the registration processes of individual countries within PICS or ICH. Exploring ways to either expand the coverage of the WHO Prequalification Project or to develop an alternative pathway to verify drug quality, safety, and efficacy could help cover this gap. • Reducing the quantity of substandard and counterfeit drugs. If, in the near future, a domestic pharmaceutical enterprise in SSA does become prequalified by the WHO for any of the drugs to treat HIV/AIDS, TB, or malaria, follow-up research should be done to find out if this reduces the circulation of substandard and counterfeit drugs. Perhaps well-designed public education campaigns for “buying domestic” could persuade end-users to buy high-quality domestically made products and dissuade them from buying bad drugs. 38 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 • Reinforcing quality. This study has alluded to quality issues; strengthening drug regulatory authorities and the associated systems in SSA countries could ensure quality throughout the drug distribution system and would be a valuable use of resources, as access to drugs can only have meaning in terms of access to quality drugs. • Exploring the current status of manufacturing capacity in other countries within SSA. Within the limitations of this study, it was only possible to visit West Africa. However, there is active pharmaceutical production within East Africa, and the prevalence of HIV/AIDS is higher. This could translate into a greater demand for drugs as well as offer the opportunity of partnership with an established enterprise for expanding production. Confirmation would require visits to drug manufacturers in the region and an analysis of the elements (tariffs, patent status) that could affect the market. • Role of public-private partnerships (PPPs). At a global level, PPPs such as Medicines for Malaria Venture and The Global Alliance for TB Drug Development have been successful in mobilizing funding for drug development. The possibility of mobilizing money at regional or local levels to enable the financing of drug production at favourable interest rates should be explored. • Improving the efficiency of drug distribution. Better knowledge of the flow of drugs through distribution systems in both the public and private sectors could help find ways to lower the cost of mark-ups – which can comprise up to 50% more of the price paid by the end-user – and improve geographic availability. • Establishing a mechanism to stabilize or subsidize raw material (API). As noted above, the price of API can be as high as 27% of the end-user price of a drug, but these prices are subject to considerable variability, which in turn will have an impact not only on the sustainability of a pharmaceutical enterprise, but on the prices ultimately paid by the end-user. Just as the prices of vital products are subsidized in many countries, it could be worthwhile to explore whether the same could be done for API in order to make essential drugs more affordable, whether or not they are produced domestically, given their importance to public health. • Establishing regional drug registration. Work on regional registration procedures is already underway in at least one trading bloc. Success in this endeavour would enable countries to pool their resources together to enable the thorough examination of the registration dossier, testing of drug samples, and full inspections of pharmaceutical production plants. External technical assistance could support this work. • Examining how the application of TRIPs provisions could affect the role of domestic production. The ability of an enterprise to obtain a voluntary licence Contribution of domestic production to improving access 39 from the patent holder or to use compulsory licences, first within the country to produce for the domestic market, and secondly, within exporting countries in order to sell internationally, could determine both the size of its market as well as the prices of competing products (if these are only branded drugs). Further research could be undertaken to determine the patent status of the different drugs in SSA countries as well as exploring the conditions under which patent holders would be willing to issue voluntary licences. 40 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 41 List of persons encountered Dr. Clive Ondari, Technical Officer, Policy and Rational Use team, Essential Drugs and Medicines Policy, WHO Dr. David Webber, Director, World Self Medication Industry Dr. Denis Broun, Director, MSH Europe Dr. Lembit Rago, Team Coordinator, Quality Assurance & Safety: Medicines team (QSM), Essential Drugs and Medicines Policy, WHO Dr. Louis Teulières, Director of International Affairs, National Pharmaceutical Industry Association – France Dr. Patrick Choay, President of Choay Laboratories, France Dr. Paul Lalvani, Procurement Officer, The Global Fund Dr. Philippe Baetz, Senior Vice President, Corporate Affairs, “Access to Medicines” Mission, Sanofi-Synthelabo Mr. Bill Haddad, CEO, Biogenerics Mr. Francis Adiasani, Senior consultant, tax and legal services, and Lydia Pwadura, assistant consultant, tax services, Price Waterhouse Coopers, Accra, Ghana Mr. Kofi Nsiah-Poku, Managing Director, Kinapharma, Accra, Ghana Mr. Lee Yerkes, Senior Technical Officer, IMPACT Project, FHI Institute for HIV/AIDS Mr. Malcolm Clark, Principal Program Associate, MSH Mr. Michael Van Vleck, CEO; Mr. Mitchell Fenster, CFO; Mr. Bruce Brown, COO Herbal Division, Phyto-Ryker Pharmaceuticals Ltd., Accra, Ghana Mr. Tom Moore and Mr. Hugo Vrakking, Stop TB department, WHO Annex 1 Ms. Kristen Fenster and Mr. Samuel Dzotefe, Investment Officers, International Finance Corporation, Accra, Ghana Dr. Pierre Guillet, Communicable Diseases Control, Prevention and Eradication, World Health Organization Mr Alassane N’Diaye, Projects Officer, IFC, Abidjan, Cote d’Ivoire Mr Assane Coulibaly, Directeur Industriel, Cipharm, Abidjan, Cote d’Ivoire Mr Vincent Valabregue, Directeur Général, Cotecna, Abidjan, Cote d’Ivoire Mr Guillaume Kokora, Directeur Commercial, Laborex, Abidjan, Cote d’Ivoire Mr Jean Serge Adjepone, DDSP, Ministère de l’Industrie, Abidjan, Cote d’Ivoire Confidential source #1, drug manufacturer, sub-Saharan Africa Confidential source #2, drug manufacturer, sub-Saharan Africa 42 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 43 Annex 2 S u m m ar y o f d at a o n p h ar m ac eu ti ca ls p ro d u ct io n in s el ec te d s u b -S ah ar an A fr ic an c o u n tr ie s (B as ed o n in fo rm at io n th at is r ea di ly a cc es si bl e. L is t n ot in te nd ed to b e ex ha us tiv e. ) C o u n tr y M fr , C o n ta ct In fo M ar ke t si ze N R A /D R A S ta tu s P ro d u ct s A P Is C ap ac it y O w n er sh ip K n o w n q u al it y p ro b le m s A ng ol a A N G O M E D IC A U E E 58 R ue do S an ito rio B ar rio P al an ca P O B ox 2 64 8 Lu an da , P re s C oi m br a A da o M an ue l 13 .1 M N o in fo rm at io n C hl or oq ui ne an tib io tic s -- O nl y 20 % in us e S ta te -- C E N A M E , C en tr e N at io na l d ’A pp ro vi si on ne m en t d e M éd ic am en ts E ss en tie ls 59 c am e in to b ei ng in 1 99 6 w ith s up po rt fr om IM F ( E nh an ce d S tr uc tu ra l A dj us tm en t F ac ili ty ), 60 n ow g et s lo w es t a va ila bl e pr ic es in te rn at io na lly o n an tir et ro vi ra ls ( A R V s) o f g oo d qu al ity 61 a nd tu be rc ul os is (T B ) dr ug s. 62 It is s ai d th at th e pr iv at e se ct or p ha rm ac eu tic al m an uf ac tu re rs a re n o lo ng er c om pe tit iv e. C am er oo n P la nt ec am 63 (n ow c lo se d) E xp or t N o in fo rm at io n H er ba l b ar k fo r ex po rt -- C lo se d P riv at e (F re nc h) P ro bl em w ith m ee tin g C IT E S st an da rd s 44 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines C o u n tr y M fr , C o n ta ct In fo M ar ke t si ze N R A /D R A S ta tu s P ro d u ct s A P Is C ap ac it y O w n er sh ip K n o w n q u al it y p ro b le m s C IN P H A R M D r Ju le s N ga nd un , P ro du ct io n M an ag er , cr ea te d in 19 88 b y R hô ne - P ou le nc a nd bo ug ht in 1 99 5 by E ur ap ar T ab le ts , c ap su le s, o ra l l iq ui ds , an d st er ile p ow de rs u nd er li ce nc e fo r R hô ne P ou le nc R or er a nd P fiz er 64 4 B F C F A in 20 01 P riv at e -- U ni te C am er ou na is e P ha m ac eu tiq u e S A ( U C - P ha rm )6 5 15 .8 M M ai nl y im po rt s ph ar m ac eu tic al s at co m pe tit iv e co st -- -- P riv at e, IF C - su pp or te d -- C ha d S oc ie te In du st rie lle P ha rm ac eu tiq u e de T ch ad , cr ea te d M ay 19 94 8. 34 M N o in fo rm at io n T ab le ts , P ar en te ra l so lu tio ns , a nd O R S 66 -- 14 0 M ta bl et s pe r ye ar , 1 40 M F C F A P riv at e -- C ôt e d’ Iv oi re P ha rm iv oi re N ou ve lle ,6 7 Z on e In du st rie lle d e Y op ou go n, B P 93 0, C id ex , A bi dj an , t el 22 5 23 5 14 28 5, fo un de d 19 91 , cl os ed a nd th en r eo pe ne d re ce nt ly 16 .5 M N ot fu lly fu nc tio na l, bu t G M P a nd G D P en fo rc ed P ar en te ra l so lu tio ns -- 26 .5 0 st af f P riv at e -- DFID Heal th Systems Resource Centre 2004 Annex 2 45 C o u n tr y M fr , C o n ta ct In fo M ar ke t si ze N R A /D R A S ta tu s P ro d u ct s A P Is C ap ac it y O w n er sh ip K n o w n q u al it y p ro b le m s C IP H A R M ,6 8 B P 0 6/ 22 6, A bi dj an 0 1, te l 22 43 03 94 , sz y@ af ric ao nl i ne .c o. ci D ire ct or G en er al M D id ie r M ar in ,6 9 cr ea te d in 19 88 70 16 .5 M , s om e ex po rt 71 T ab le ts , ca ps ul es , sy ru ps , s te ril e po w de rs , es se nt ia l m ed ic in es , fin is hi ng – an tib io tic s, IV sa ck s, h er ba l pr od uc ts T ec hn ol og y tr an sf er pl an ne d 9% o f l oc al m ar ke t, $8 M U S – 1 99 7- 20 02 ,7 2 3M ta bl et s pe r ye ar P riv at e -- B et hl eh em P ha rm ac eu tic a ls , A dd is A ba ba , C hi ef E xe cu tiv e Y or da no s T ad es e7 3 A nt im al ar ia ls an d an tib io tic s, w ith fr om D A C A P re pa rin g to pr od uc e A R V s un de r lic en ce , w or ki ng w ith S A fr ic an N G O , In iti at iv e fo r P ha rm ac eu tic a l T ec hn ol og y T ra ns fe r 40 0M ta bl et s an d 28 0 M ca ps ul es P riv at e -- E th io pi a E th io pi an P ha rm ac eu tic a ls M an uf ac tu rin g (E P H A R M ), A dd is A ba ba , W or ed a 23 , Je be le 1 57 4 67 .2 M D ru g A dm in is tr at io n an d C on tr ol A ut ho rit y (D A C A ), g av e C er tif ic at e of C om pe te nc y of D ru g M an uf ac tu rin g P la nt to B et hl eh em 42 e ss en tia l dr ug s in ca ps ul es , ta bl et s, s m al l an d la rg e vo lu m e in je ct ab le s, oi nt m en ts , sy ru p an d lo tio ns , po w de rs -- -- P ub lic en te rp ris e -- 46 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines C o u n tr y M fr , C o n ta ct In fo M ar ke t si ze N R A /D R A S ta tu s P ro d u ct s A P Is C ap ac it y O w n er sh ip K n o w n q u al it y p ro b le m s K in ap ha rm a, D 36 0/ 3 D er by A ve , P 0 B ox 1 43 68 , A cc ra C en tr al T el : 6 66 - 11 8/ 66 2- 79 6 20 .3 M G ha na F oo d an d D ru g B oa rd G lib en cl am id e, om ep ra zo le ,7 5 ch lo ro qu in e, su lfa do xi ne + py rim et ha m in e -- ? P riv at e? 3/ 6 ch lo ro qu in e ta bl et s am pl es an d 0/ 2 su lfa do xi ne /p yr im et ha m in e ta bl et s fa ile d te st in g7 6 D an ne x Lt d, P O B ox 5 25 8, A cc ra -N or th , 22 83 41 77 O R S , re se rp in e, 52 su lfa do xi ne + py rim et ha m in e ch lo ro qu in e -- ? P riv at e? 3/ 3 ch lo ro qu in e ta bl et s am pl es an d 3/ 6 su lfa do xi ne /p yr im et ha m in e ta bl et s am pl es fa ile d te st in g 19 H ea lth ca re (P Z ) 20 .3 M C hl or oq ui ne -- ? ? 0/ 1 ch lo ro qu in e sa m pl e fa ile d te st in g1 9 P hy to -R ik er , M ile 7 , o ff N sa w am R oa d, P O B ox A N 5 26 6, D om e – A cc ra N or th , C E O M ic ha el V an V le ck 78 R eg is te re d in 25 c ou nt rie s, pl us G ha na ia n m ar ke t G ha na F oo d an d D ru g B oa rd E ss en tia l m ed ic in es in cl ud in g an tib io tic s, an tim al ar ia ls , 30 p ro du ct s; B rin gi ng in te ch no lo gy fo r pe ni ci lli n, 6 ne w p ro du ct s de ve lo pe d in - ho us e P hy to -L ar ia , an tim al ar ia l he rb al m ed ic in e, a ls o he rb al a nt i- as th m at ic 4B ta bl et s pe r ye ar in 2 s hi fts P riv at e -- G ha na N ot e: T he re a re a t l ea st 1 3 In di an p ha rm ac eu tic al c om pa ni es d oi ng b us in es s in G ha na ,7 9 th at a re n ot in cl ud ed h er e DFID Heal th Systems Resource Centre 2004 Annex 2 47 C o u n tr y M fr , C o n ta ct In fo M ar ke t si ze N R A /D R A S ta tu s P ro d u ct s A P Is C ap ac it y O w n er sh ip K n o w n q u al it y p ro b le m s E ly s C he m ic al In du st rie s, P O B ox 4 04 11 , N ai ro bi , t el 54 04 15 , el ys @ ne t2 00 0 ke .c om 31 .3 M P ha rm ac y an d P oi so ns B oa rd of K en ya , p lu s a N at io na l D ru g Q ua lit y C on tr ol La bo ra to ry 80 S ev er al pr od uc ts in cl ud in g an tib io tic s, an tim al ar ia ls -- ? P riv at e 0/ 2 sa m pl es su lfa do xi ne /p yr im et ha m in e ta bl et s te st ed fa ile d1 9 C os m os L td , P O B ox 41 43 3, N ai ro bi 31 .3 M P ha rm ac y an d P oi so ns B oa rd of K en ya S ev er al p ro du ct s in cl ud in g an tib io tic s, a nt im al ar ia ls A pp ro ve d by P oi so ns B oa rd fo r 3 of a to ta l o f 6 A R V s, n ot y et pr od uc in g as a w ai tin g go ve rn m en t a pp ro va l f or co m pu ls or y lic en si ng 81 ? P riv at e 0/ 1 sa m pl e of ch lo ro qu in e sy ru p, 1 /2 sa m pl es o f ch lo ro qu in e ta bl et s, a nd 0 /2 sa m pl es o f su lfa do xi ne /p yr im et ha m in e ta bl et s fa ile d te st in g1 9 K en ya N ot e: th er e ar e 37 lo ca l d ru g m an uf ac tu re rs r eg is te re d w ith th e P ha rm ac y an d P oi so ns B oa rd o f K en ya .8 2 O nl y tw o w er e se le ct ed . I n th e W H O st ud y, 19 0 /1 2 sa m pl es o f s ul fa do xi ne /p yr im et ha m in e ta bl et s fr om th es e ot he r m an uf ac tu re rs , 2 /5 s am pl es o f c hl or oq ui ne ta bl et s, a nd 2 /6 sa m pl es o f c hl or oq ui ne s yr up te st ed fa ile d M al i U si ne M al ie nn e de P ro du its P ha rm ac eu tiq u es , R ou te d e S ot ub a Z I, B P 22 86 , B am ak o, 22 3- 21 51 61 . D ir G en M C he n X ue ry i, D G en A dj un ct , M B ak ar y N an a C ou lib al y 11 .4 M T he re is a na tio na l c on tr ol la bo ra to ry , b ut in sp ec tio n se rv ic e is li ttl e de ve lo pe d 83 P ro du ce 5 fo rm ul at io ns , 33 p ro du ct s, 2 8 on E ss en tia l D ru gs L is t: ch lo ro qu in e, pa ra ce ta m ol , as pi rin , an tib io tic s N o A R V s, n o te ch no lo gy 20 01 8% o f $ U S 40 M m ar ke t8 4 S ta te , c re at ed in 1 98 3, fr om a S in o- M al ga ch e co op er at io n 0/ 2 sa m pl es o f su lp ha do xi ne /p yr im et ha m in e ta bl et s, 3 / 4 sa m pl es o f ch lo ro qu in e sy ru p, a nd 8 /1 2 sa m pl es o f ch lo ro qu in e ta bl et s fa ile d in W H O te st in g 19 48 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines C o u n tr y M fr , C o n ta ct In fo M ar ke t si ze N R A /D R A S ta tu s P ro d u ct s A P Is C ap ac it y O w n er sh ip K n o w n q u al it y p ro b le m s N ig er ia N ig er ia n- G er m an C he m ic al s P LC 85 13 2. 9 M N A F D A C , w el l de ve lo pe d re gu la to ry au th or ity , h as re ce nt ly th re at en ed to w ith dr aw lic en ce s of m ul tin at io na l dr ug m an uf ac tu re rs w ho fa il to es ta bl is h lo ca l dr ug pr od uc tio n ou tfi ts a fte r a m in im um o f 1 0 ye ar s of im po rt at io n of dr ug s in to th e co un tr y8 6 Li qu id s an d ta bl et s of it s ow n br an d In te rn at io na l br an ds u nd er lic en ce . S om e co nt ra ct m an uf ac tu rin g 10 M b ot tle s liq ui d an d 1 bi lli on ta bl et s pe r ye ar P riv at e -- S IP O A af fil ia te d w ith R hô ne P ou le nc R or er , no w A ve nt is , R ou te d e R uf is qu e, 83 40 16 3 A bo ut 9 0 ge ne ric pr od uc ts , in cl ud in g an tim al ar ia ls , an al ge si cs , an tiT B d ru gs , vi ta m in s M ak es u nd er lic en ce a bo ut 40 s pe ci al ty ph ar m ac eu tic al pr od uc ts -- P riv at e 0/ 1 sa m pl es o f ch lo ro qu in e sy ru p, a nd 1 / 2 sa m pl es o f ch lo ro qu in e ta bl et s fa ile d in W H O te st in g 19 P ar ke D av is G en er ic s in fo rm o f ca ps ul es , sy ru ps , cr ea m s, a nd in je ct io ns S pe ci al ty pr od uc ts u nd er lic en ce ? P riv at e -- S en eg al 87 88 V al da fr iq ue W es t A fr ic a F un ct io ni ng au th or ity : S en eg al h as ye llo w fe ve r va cc in e pr od uc tio n an d its p ro du ce r is pr eq ua lif ie d fo r sa le to U N ag en ci es , a pr er eq ui si te o f w hi ch is th at th e N R A is fu nc tio na l E xt er na l u se -- ? ? -- DFID Heal th Systems Resource Centre 2004 Annex 2 49 In fo S ta tu s A sp en P ha rm ac ar e, 2 pl an ts , D ur ba n an d P or t E liz ab et h8 9 T he la rg es t m an uf ac tu re r in A fr ic a, it ex po rt s al l o ve r th e w or ld 90 M ed ic in es C on tr ol C ou nc il, fu lly fu nc tio na l N R A w ith c on tr ol la bo ra to rie s fo r bo th d ru gs a nd va cc in es G en er ic s an d pr od uc ts u nd er lic en ce , 1 20 0 re gi st er ed tr ad em ar ks V ol un ta ry lic en si ng o f S ta vu di ne fr om B ris to l-M ye rs S qu ib b, a nd de ve lo pi ng ge ne ric ve rs io ns o f ot he r A R V s an d tr ip le th er ap y9 1 S ev er al to ns o f pr od uc t p er da y, s et to do ub le in 2 00 4 P riv at e -- S ou th A fr ic a S ou th A fr ic a ha s 14 8 co m pa ni es r eg is te re d to p ro du ce o r di st rib ut e ph ar m ac eu tic al p ro du ct s. 92 T an za ni a P ha rm ac eu tic a ls In du st rie s, P O B ox 40 16 4, D ar e s S al aa m , + 25 5- 22 -2 86 62 37 , di oc ar e@ tw ig a .c om 93 35 .2 M , n o ex po rt N o in fo rm at io n P en ic ill in , in fu si on s, in je ct ib le s -- 50 0M ta bl et s an d 8 M ca ps ul es p er ye ar ; i ns ta lle d ca pa ci ty is 1 B ; IP P N p ro je ct to ex pa nd ca pa ci ty 94 P riv at e (6 0% D io ca re , 4 0% go ve rn m en t) -- K ek o C o u n tr y M fr , C o n ta ct M ar ke t si ze N R A /D R A P ro d u ct s A P Is C ap ac it y O w n er sh ip K n o w n q u al it y p ro b le m s 50 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines Z am bi a 5 m an uf ac tu re rs in Z am bi a bu t o nl y 1 co nt rib ut es to lo ca l m ar ke t9 5 10 .2 M P ha rm ac y, M ed ic in es , a nd P oi so n B oa rd (P M P B ), n ot w el l e qu ip pe d an d co ns tr uc tin g a ne w te st in g fa ci lit y3 8 ? E xp lo rin g JV w ith G P O T ha ila nd to pr od uc e di da no si ne in ne w p la nt 96 ? ? S us pe ct ed su bs ta nd ar d dr ug s th ro ug h la ck o f t es tin g by P M P B 38 P ha rm an ov a (P V T ) LT D , H ig hf ie ld R oa d 93 , S ou th er to n, H ar ar e -- ? P riv at e 1/ 20 s am pl es of su lfa do xi ne /p yr ei m et ha m in e ta bl et s an d 0/ 1 sa m pl es o f ch lo ro qu in e ta bl et s fa ile d W H O te st in g 19 C A P S , H ar ar e ? ? 1/ 13 s am pl es of c hl or oq ui ne sy ru p an d 4/ 4 of c hl or oq ui ne ta bl et s fa ile d W H O te st in g 19 Z im ba bw e V ar ic he m 13 M F un ct io na l w ith w el l- fu nc tio ni ng co nt ro l la bo ra to ry A nt im al ar ia ls , et c -- ? ? 3/ 7 sa m pl es o f ch lo ro qu in e ta bl et s fa ile d W H O te st in g 19 C o u n tr y M fr , C o n ta ct M ar ke t si ze N R A /D R A P ro d u ct s A P Is C ap ac it y O w n er sh ip K n o w n q u al it y p ro b le m s R ec ei ve d W H O G M P c er tif ic at e fr om IT C 99 DFID Heal th Systems Resource Centre 2004 51 Annex 3 V A L U E C H A IN F L O W C H A R T (e xa m p le f o r a d ru g i n w h ic h A P I re p re se n t 5 0 % o f th e e xw o rk s p ri ce ). P e rc e n ta g e s e q u a l va lu e a d d e d i n e a ch o f th e co rr es po nd in g st ep s to a rr iv e at 1 00 % w hi ch r ep re se nt s th e fin al p ric e pa id b y a co ns um er . R aw M at er ia l B le nd in g G ra nu la tio n C om pr es si on B lis te rin g C ar to ni ng D om es tic P ro du ct io n P ro du ce d ab ro ad W ho le sa le r R et ai le r Lo ca l D is tr ib ut io n 27 % 27 % 46 % + + = 10 0 % 54 % 46 % A ll m an uf ac tu rin g ( co m po ne nt s of e x w or ks p ric e) D is tr ib ut io n + = 10 0 % 52 DFID Heal th Systems Resource Centre 2004 PATENT SITUATION OF ARV PRODUCED Information in this table is relevant to the filing dates for the basic patent of the ARVs used in the simulation. All of them are pre-1995. The reader is also referred to the discussion in: Boulet, P, Garrison, C and ‘t Hoen, E. 2003. “Drug patents under the spotlight: Sharing practical knowledge about pharmaceutical patents.” Médecins Sans Frontières. Annex 4 Drug (INN) Patent owner Basic Patent priority date (origin) Max. 20 years patent protection US patent expirydate French or Europ. patent expiry date Countries where similar patents have been filed or granted Wellcome Found 15 May 1985 15 May 2006 EP 14 May 2006 Australia, Canada , Denmark, EP (AT, BE, CH, DE, FR, GB, IT, LI, LU, NL, SE) , Finland, Greece, Hungary, Japan , New Zealand, Portugal, South Africa , Spain, US US Gov. 26 Aug 1985 26 Aug 2006 29 Aug 2006 (17 years) EP 21 Aug 2006 Fr ext. until 4 May 2009 Australia, Canada , Cyprus, EP (AT, BE, CH, DE, FR, GB, IT, LI, LU, NL, SE), Hong Kong, Ireland , Israel, Japan , Mexico, New Zealand, Singapore, US lamivudine IAF Biochem. 8 Feb 1989 8 Feb 2010 8 Feb 2009 EP 8 Feb 2010 Fr ext. until 7 Aug 2011 (15 years after MA) ARIPO, Australia, Brazil, Canada , China, Croatia, Cyprus, Czech Rep. , EP (AT, BE, CH, DE, DK, ES, FR, GB, GR, IT, LI, LU, NL, SE) , Finland , Hong Kong, Hungary , Ireland , Israel, Japan , Korea , Mexico, Norway , New Zealand , OAPI , Portugal, Russia , Singapore, Slovakia , Slovenia, South Africa , US , Yugoslavia nevirapine Boehringer 17 Nov 1989 17 Nov 2010 22 Nov 2011 (17 years) EP 16 Nov 2010 Australia, ARIPO, Canada , EP (AT, BE, CH, DE, DK, ES, FR, GB, GR, IT, LI, LU, NL, SE) , Finland , Hungary, Israel, Ireland , Japan , Mexico , New Zealand , Norway , OAPI, Portugal, Russia , Singapore, US, South Africa stavudine Yale University 17 Dec 1986 17 Dec 2007 25 Jun 2008 (ext. /MA) EP 11 Dec 2007 Fr ext. until 8 May 2011 (15 years from MA) Australia, Canada , Denmark, Egypt, EP (AT, BE, CH, DE, ES, FR, GB, GR, IT, LI, LU, NL, SE) , Finland, Hong Kong, Ireland, Israel, Japan , Korea , New Zealand, Philippines , Portugal, US , South Africa zidovudine Glaxo 16 Mar 1985 16 Mar 2006 17 Sept 2005 (20 years) EP 14 Mar 2006 ARIPO, Australia, Canada , Cyprus, Czechoslovakia, Denmark , EP (AT, BE, CH, DE, FR, GB, IT, LI, LU, NL, SE) , Finland , Hong Kong, Hungary, Ireland , Israel, Japan , Korea , Latvia, Monaco, New Zealand, Philippines , Portugal, Singapore, South Africa , US didanosine source: OMS/UNAIDS 2000 : Patent situation of HIV/AIDS-related drugs in 80 countries DFID Heal th Systems Resource Centre 2004 53 FLOWCHART OF TABLET MANUFACTURING Annex 5 Raw material store Weighting Blending Granulation Drying Compression Coating Packaging store Blistering Packaging store Cartoning - packaging Quarantine Finished product store In p ro ce ss q ua lit y co nt ro l Final quality control 54 DFID Heal th Systems Resource Centre 2004 BUSINESS ENVIRONMENT Country Environment Political Risk The risk of political instability must be considered. Only 40% of countries have a “B” risk rating or higher. Human Resources Quality and availability are variable among countries. Access to financial capital 1. Difficult because commercial bank interest rates are high, with a short payback period. 2. Investment in pharmaceutical production is not a priority for international financial institutions for development. 3. Private funds exist in Europe and USA which can help with private sector projects but it may be difficult to access these funds. Access to know-how (FDC) Must be imported from countries where pharmaceutical industry is well-established Availability of raw materials Lack of industrial infrastructure means that: and spare parts 1. Raw materials and spare parts have to be imported 2. Possible delays in production 3. Higher maintenance costs Government strategy and policy Economic and fiscal Most governments have adopted fiscal policies in order to promote industrial development Trade (tax and tariffs) 1. Harmonization of tariffs and a single currency facilitates trade within WAEMU and EMCCA. 2. Lack of harmonization and lack of a common currency within ECOWAS handicaps exchange of goods even though ECOWAS is planning to have a common currency by 2007 with a central bank based in Accra. Annex 6 DFID Heal th Systems Resource Centre 2004 3. Tariffs and customs duties vary among inputs needed for pharmaceutical manufacturing. Pharmaceutical 1. Harmonization of standard treatment guidelines could lead to a reduction in the number of dosage forms being used but current practices require manufacturers to produce a large number of dosages and forms for the same drug. 2. WAEMU developing procedures for harmonizing registration procedures throughout the zone. 3. Regulatory authorities and quality assurance systems do not enforce internationally recognized GMP standards and may not recognize drugs registered in neighbouring countries. 4. Registration can be delayed because of a lack of capacity of the national regulatory authorities. 5. In some WAEMU countries the mark-ups in distribution are set to promote domestic production. Health financing Low purchasing power of populations means that external funding and the public sector will play an important role in purchasing these drugs. Purchase of these drugs by institutions and governments will mean internationally recognized quality standards, such as WHO prequalification, will be required, and prices will be competitive Labour Labour market is flexible and without difficulty hiring and firing in the majority of countries. Labour regulations and unions are not a problem Environmental regulation Environmental assessments required, but standard. Trade guarantee The absence of financial institutions which issue trade guarantees means that political risk is not covered for exporting countries in these zones. Market Size The small size of domestic markets necessitates that drug manufacturers export to regional market: 1. The West African market covers over 200 million people, which potentially represents a sufficient size for investment in pharmaceutical manufacturing. Annex 6 55 2. Choice of a regional market is justified by the regional scope of activities of multilateral and bilateral institutions such as the World Bank and USAID, and the existence of economic and trading blocks such as ECOWAS and WAEMU. Acceptability to end-user If the end-user can afford drugs which are imported from developed countries, these are often preferred over locally made products, when bought in the retail sector. Larger domestic drug producers realize that perception of quality can be improved if international GMP certified and/or WHO prequalified. Competition The type of products chosen will mostly be bought by institutional and government purchases. The solvency of these buyers and the large volumes purchased make this market attractive to drug manufacturers. There is intense competition on price and quality. 56 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 57 MEMBERSHIP IN TRADING BLOCS AND RISK RATINGS Annex 7 ECOWAS OHADA EMCCA WAEMU Benin B X X X Burkina Faso B X X X Mali B X X X Senegal B X X X Niger C X X X Togo C X X X Côte d'Ivoire D X X X Ghana C X Guinea D X X Nigeria X Cameroon B X X Chad C X X Guinea-Bissau D X X X Cape Verde C X Gambia D X Liberia D X Sierra Leone D X Gabon C X X Equatorial Guinea D X X République Centrafricaine D X X République du Congo X X CFA Franc Monetary Zone C ou nt rie s of th e sa m pl e O th er C ou nt rie s Risk rating Notes : ECOWAS : Economic Community of West African States EMCCA: Economic and Monetary Community of Central Africa WAEMU: West Africa Economic and Monetary Union OHADA: Organisation pour l’Harmonisation du Droit des Affaires en Afrique (Organization of business law in Africa) D B B B B C C D C D D B C D C D D D C D D D Central African Republic Democratic Republic of Congo 58 DFID Heal th Systems Resource Centre 2004 LIST OF PRODUCTS CHOSEN QUANTITIES AND EX WORKS PRICE Annex 8 International Non- Dosage form Ex works Proprietary Name (mg) Quantity price Antimalarial Artesunate HCl Tablet 100 43 000 000 0,1143 Amodiaquine HCl Tablet 200 43 000 000 0,0114 Antibiotics Ciprofloxacin HCl Tablet 500 1 600 000 0,0268 Doxycycline HCl Tablet 100 1 900 000 0,0110 Antituberculosis Pyrazinamide Tablet 400 1 800 000 0,0191 Ethambutol Tablet 400 1 400 000 0,0153 Isoniazid + Rifampicin Tablet 150/3002 800 000 0,0270 Antiretroviral Zidovudine Tablet 100 177 634 0,2133 Didanosine Tablet 100 1 603 340 0,2776 Lamivudine + Zidovudine Tablet 300/150 4 302 836 0,4127 Lamivudine Tablet 150 2 936 435 0,1222 Nevirapine Tablet 200 1 325 787 0,2691 Stavudine Tablet 30 1 808 518 0,0760 Anti-ulcer Ranitidine Tablet 150 1 887 339 0,6352 Omeprazole Tablet 20 98 834 1,8970 Antidiabetic Metformin Tablet 850 1 254 057 0,0889 Gliclazide Tablet 80 447 236 0,2432 Glibenclamide 1 156 369 0,1023 Antihypertensive Amlodipine Tablet 5 941 546 0,5422 Captopril Tablet 5 1 326 084 0,2817 Hydrochlorothiazide Tablet 25 1 374 068 0,2688 OTC Acid ascorbic Tablet 1000 7 155 520 0,1613 Aspirin + cafein Tablet 500/50 21 802 215 0,0516 DFID Heal th Systems Resource Centre 2004 59 NUMBER OF CASES PER COUNTRY AND PER DISEASES AND QUANTITIES OF DRUGS PRODUCED IN THE THREE SCENARIOS Annex 9 Countries Total Malaria (2) Population (1) HIV (3) Tuberculosis (4) Population Population under 5 more than 5 Countries of the sample Ghana 19 593 000 5 593 288 4 907 465 52 697 7 732 Togo 4 562 000 1 533 144 1 128 12 021 957 1 203 Benin 6 222 000 2 210 587 1 545 232 17 566 2 415 Côte d'Ivoire 15 827 000 4 842 600 4 077 510 112 714 9 667 Burkina Faso 11 905 000 4 419 610 2 797 580 64 408 1 544 Mali 11 904 000 4 251 032 2 740 712 16 102 2 757 Niger 10 742 000 4 422 282 2 481 780 9 380 9 940 Cameroon 15 117 000 4 962 719 3 504 608 134 671 7 921 Chad 7 861 000 2 886 106 1 856 109 21 957 3 591 Other countries Nigeria 114 746 000 39 362 791 28 250 773 512 3352 1 936 Senegal 9 393 000 3 184 666 2 348 456 3 952 5 796 Guinea 8 117 000 2 895 758 2 011 916 20 020 4 300 Total 235 989 000 80 564 584 57 650 261 987 760 78 802 Number of tablets Artesunate HCl Tablet 100mg 43 000 000 Amodiaquine HCl Tablet 200mg 43 000 000 Zidovudine Tablet 100mg 177 634 Didanosine Tablet 100mg 1 603 340 Lamivudine Tablet 150mg 2 936 435 Stavudine Tablet 30mg 1 808 518 Nevirapine Tablet 200mg 1 325 787 Zidovudine + lamivudine Tablet 300/150mg 4 302 836 Ciprofloxacin HCl Tablet 500mg 1 600 000 Doxycycline HCl Tablet 100mg 1 900 000 Pyrazinamide Tablet 400mg 1 800 000 Ethambutol Tablet 400mg 1 400 000 Isoniazid + Rifampicin Tablet 150/300mg 2 800 000 Ranitidine Tablet150mg 1 887 339 Omeprazole Tablet20mg 98 834 Metformin Tablet850mg 1 254 057 Gliclazide Tablet80mg 447 236 Glibenclamide Tablet mg 1 156 369 Amlodipine Tablet5mg 941 546 Captopril Tablet5mg 1 326 084 Hydrochlorothiazide Tablet25mg 1 374 068 Acid ascorbic Tablet1000mg 7 155 520 Aspirin + cafein Tablet '500/50mg 21 802 215 Sources : (1) United Nations Population Division. "World Propulation Prospects: The 2002 Revision Population Database." (2003). http://esa.un.org/unpp/. (Accessed 5/30/2004) ; (2) Roll Back Malaria Project, World Health Organization. 2000. "The African Summit on Roll Back Malaria." The African Summit on Roll Back Malaria Abuja, Nigeria ; (3) Purchases by the CMS of the Cote dÕIvoire for 2003 projected for the population of the 12 selected countries 60 DFID Heal th Systems Resource Centre 2004 SIMULATION ASSUMPTIONS Structure of the enterprise The management and the board are private. Equity is divided among different shareholders but any public shareholder should not have the majority of votes and/or of equity. No dividends are distributed and all earnings will go back into the line: Retained Earnings. 1 - Scenario n° 1 (green field) Capital expenditures The total investment is set at $4,055,000, broken down as follows: • Equipment: $2,000,000 (straight line depreciation over 4 years). It includes one complete production line for tablets, a complete laboratory for QA, storages with shelves, and furniture. The fifth year equipment is replaced. In order to have a valid figure to use for the CAPEX component of the NPV calculation, a quarter of its value is taken into account. • Building: $1,500,000 (straight line depreciation over 20 years). The surface is based on a 1000 meter square base. • Land: $100,000 (straight line depreciation over 50 years). The building is calculated on a 5000 meter square base. • Research & development: $455,000 corresponding to $35,000 for each of the 13 drugs produced. • Increase in production capacity: based on the annual increase in production, every 7 years investment is required in a new production line. The NPV calculation is adjusted accordingly. Working Capital • Supplier: payment at 30 days (this can vary according to the relationship with the raw material supplier: the more that there is confidence in the relationship the more the time of delay payment will be long). For the first year suppliers are paid cash. Annex 10 DFID Heal th Systems Resource Centre 2004 • Buffer stock: finished goods: 30 days; raw materials: 45 days; • Client: payment at 90 days. This takes into account the fact that institutions or governments will be buying the largest portion of the production while individual clients who pay cash directly will be buying only a small portion of the production. • Total working capital at the end of the year 5: $3,729,000 Financing The financing is split between capital, grant and loans as follows: (i) the amount of the capital stock is set at $3,000,000, (ii) the grant ($2,000,000) is defined as a bilateral organization grant or a grant from a foundation, (iii) the loan is split between a commercial bank loan ($2,100,000; 3 years; 18 %) and an IFC loan ($2,600,000; 3 years; 15 %); IFC in this exercise will not take any equity. Production An average of 108 million tablets per year will be produced at Year 3. This correspond (i) to a market share of 10 % and (ii) to one unit of production line and one shift of production (the first year’s production is set at 30% of capacity, thereafter Year 2, 70% and Year 3, 100%). Ex works prices Reference price for ex-works is based on the cheapest price found between the supplier prices in the International Drug Price Indicator guide, 2003 edition, MSH and the CMS from Cote d’Ivoire 2003. Raw materials • Reference prices for raw materials are based on the international Trade Centre UNCTAD/WTO April 2004. • FOB to DDP: 15%, including WAEMU intra-community taxes (see Annex 15) • All RM have a drug master file. • Production waste is estimated to 2%. Income tax In accordance with national regulations, a start-up company is exempted on income tax for a minimum of 5 years with possible extension to 8 years. Annex 10 61 2 - Scenario n° 1 (expansion plant) Capital expenditures The total investment is set at $1,455,000, broken down as follows: • Equipment: $1,000,000 (straight line depreciation over 4 years). It includes one complete production line for tablets, a complete laboratory for QA, storages with shelves, and furniture. • Research & development: $455,000 corresponding to $35,000 for each of the 13 drugs produced. Working Capital • Supplier: payment at 30 days (this can vary according to the relationship with the raw material supplier: the more that there is confidence in the relationship the more the time of delay payment will be long). For the first year suppliers are paid cash. • Buffer stock: finished goods: 30 days; raw materials: 45 days; • Client: payment at 90 days. This takes into account the fact that institutions or governments will be buying the largest portion of the production while individual clients who pay cash directly will be buying only a small portion of the production. • Total working capital at the end of the year 5: $4,371,000 • Increase in production capacity: based on the annual increase in production, every 7 years investment is required in a new production line. The NPV calculation is adjusted accordingly. Financing The financing is split between capital, grant and loans as follows: (i) the amount of the capital stock is set at $2,000,000, (ii) the loan is split between a commercial bank loan ($500,000; 3 years; 18 %) and an IFC loan ($1,500,000; 3 years; 15 %); IFC in this exercise will not take any equity. Production An average of 108 million tablets per year will be produced at Year 3. This correspond (i) to a market share of 10 % and (ii) to one unit of production line and one shift of production (the first year’s production is set at 100% of capacity, thereafter Year 2, 110% and Year 3, 120%). 62 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 Ex works prices Unchanged Raw materials Unchanged Income tax Unchanged 3 - Scenario n° 2 (green field) Capital expenditures The total investment is set at $4,300,000, broken down as follows: • Equipment: $2,000,000 (straight line depreciation over 4 years). It includes one complete production line for tablets, a complete laboratory for QA, storages with shelves, and furniture. The fifth year equipment is replaced. In order to have a valid figure to use for the CAPEX component of the NPV calculation, a quarter of its value is taken into account. • Building: $1,500,000 (straight line depreciation over 20 years). The surface is based on a 1000 meter square base. • Land: $100,000 (straight line depreciation over 50 years). The building is calculated on a 5000 meter square base. • Research & development: $700,000 corresponding to $35,000 for each of the 20 drugs produced. • Increase in production capacity: based on the annual increase in production, every 7 years investment is required in a new production line. The NPV calculation is adjusted accordingly. Working Capital • Supplier: payment at 30 days (this can vary according to the relationship with the raw material supplier: the more that there is confidence in the relationship the more the time of delay payment will be long). For the first year suppliers are paid cash. Annex 10 63 • Buffer stock: finished goods: 30 days; raw materials: 45 days; • Client: payment at 90 days. This takes into account the fact that institutions or governments will be buying the largest portion of the production while individual clients who pay cash directly will be buying only a small portion of the production. • Total working capital at the end of the year 5: $4,921,000 Financing The financing is split between capital, grant and loans as follows: (i) the amount of the capital stock is set at $2,000,000, (ii) the grant ($2,000,000) is defined as a bilateral organization grant or a grant from a foundation, (iii) the loan is split between a commercial bank loan ($2,000,000; 3 years; 18 %) and an IFC loan ($3,000,000; 3 years; 15 %); IFC in this exercise will not take any equity. Production An average of 126 million tablets per year will be produced at Year 3 (108 million + 18 million). This correspond (i) to a market share of 10 % and (ii) to one unit of production line and one shift of production (the first year’s production is set at 30% of capacity, thereafter Year 2, 70% and Year 3, 100%). Ex works prices Reference price for ex-works is based on the cheapest price found between the supplier prices in the International Drug Price Indicator guide, 2003 edition, MSH and the CMS from Cote d’Ivoire 2003. Raw materials • Reference prices for raw materials are based on the international Trade Centre UNCTAD/WTO April 2004. • FOB to DDP: 15%, including WAEMU intra-community taxes (see Annex 15) • All RM have a drug master file. • Production waste is estimated to 2%. Income tax In accordance with national regulations, a start-up company is exempted on income tax for a minimum of 5 years with possible extension to 8 years. 64 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 4 - Scenario n° 2 (expansion plant) Capital expenditures The total investment is set at $1,700,000, broken down as follows: • Equipment: $1,000,000 (straight line depreciation over 4 years). It includes one complete production line for tablets, a complete laboratory for QA, storages with shelves, and furniture. The fifth year equipment is replaced. In order to have a valid figure to use for the CAPEX component of the NPV calculation, a quarter of its value is taken into account. • Research & development: $700,000 corresponding to $35,000 for each of the 20 drugs produced. • Increase in production capacity: based on the annual increase in production, every 7 years investment is required in a new production line. The NPV calculation is adjusted accordingly. Working Capital • Supplier: payment at 30 days (this can vary according to the relationship with the raw material supplier: the more that there is confidence in the relationship the more the time of delay payment will be long). For the first year suppliers are paid cash. • Buffer stock: finished goods: 30 days; raw materials: 45 days; • Client: payment at 90 days. This takes into account the fact that institutions or governments will be buying the largest portion of the production while individual clients who pay cash directly will be buying only a small portion of the production. • Total working capital at the end of the year 5: $5,759,000 Financing The financing is split between capital, grant and loans as follows: (i) the amount of the capital stock is set at $1,000,000, (ii) the grant ($1,000,000) is defined as a bilateral organization grant or a grant from a foundation, (iii) the loan is split between a commercial bank loan ($1,000,000; 3 years; 18 %) and an IFC loan ($1,500,000; 3 years; 15 %); IFC in this exercise will not take any equity. Annex 10 65 Production An average of 126 million tablets per year will be produced at Year 3 (108 million + 18 million). This correspond (i) to a market share of 10 % and (ii) to one unit of production line and one shift of production (the first year’s production is set at 100% of capacity, thereafter Year 2, 110% and Year 3, 120%). Ex works prices Unchanged Raw materials Unchanged Income tax Unchanged 5 - Scenario n° 3 (green field) Capital expenditures The total investment is set at $6,125,000, broken down as follows: • Equipment: $2,000,000 (straight line depreciation over 4 years). It includes one complete production line for tablets, a complete laboratory for QA, storages with shelves, and furniture. The fifth year equipment is replaced. In order to have a valid figure to use for the CAPEX component of the NPV calculation, a quarter of its value is taken into account. • Building: $1,500,000 (straight line depreciation over 20 years). The surface is based on a 1000 meter square base. • Land: $100,000 (straight line depreciation over 50 years). The building is calculated on a 5000 meter square base. • Research & development: $525,000 corresponding to $35,000 for each of the 15 drugs produced. • Increase in production capacity: based on the annual increase in production, every 7 years investment is required in a new production line. The NPV calculation is adjusted accordingly. 66 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 Working Capital • Supplier: payment at 30 days (this can vary according to the relationship with the raw material supplier: the more that there is confidence in the relationship the more the time of delay payment will be long). For the first year suppliers are paid cash. • Buffer stock: finished goods: 30 days; raw materials: 45 days; • Client: payment at 90 days. This takes into account the fact that institutions or governments will be buying the largest portion of the production while individual clients who pay cash directly will be buying only a small portion of the production. • Total working capital at the end of the year 5: $4,667,000 Financing The financing is split between capital, grant and loans as follows: (i) the amount of the capital stock is set at $3,500,000, (ii) the grant ($2,000,000) is defined as a bilateral organization grant or a grant from a foundation, (iii) the loan is split between a commercial bank loan ($2,500,000; 3 years; 18 %) and an IFC loan ($2,800,000; 3 years; 15 %); IFC in this exercise will not take any equity. Production An average of 166 million tablets per year will be produced at Year 3 (108 million + 58 million). This correspond (i) to a market share of 10 % and (ii) to one unit of production line and one shift of production (the first year’s production is set at 30% of capacity, thereafter Year 2, 70% and Year 3, 100%). Ex works prices Reference price for ex-works is based on the cheapest price found between the supplier prices in the International Drug Price Indicator guide, 2003 edition, MSH and the CMS from Cote d’Ivoire 2003. Raw materials • Reference prices for raw materials are based on the international Trade Centre UNCTAD/WTO April 2004. • FOB to DDP: 15%, including WAEMU intra-community taxes (see Annex 15) • All RM have a drug master file. Annex 10 67 • Production waste is estimated to 2%. Income tax In accordance with national regulations, a start-up company is exempted on income tax for a minimum of 5 years with possible extension to 8 years. 6 - Scenario n° 3 (expansion plant) Capital expenditures The total investment is set at $2,525,000, broken down as follows: • Equipment: $2,000,000 (straight line depreciation over 5 years). It includes one complete production line for tablets, a complete laboratory for QA, storages with shelves, and furniture. The fifth year equipment is replaced. In order to have a valid figure to use for the CAPEX component of the NPV calculation, a quarter of its value is taken into account. • Research & development: $525,000 corresponding to $35,000 for each of the 15 drugs produced. • Increase in production capacity: based on the annual increase in production, every 7 years investment is required in a new production line. The NPV calculation is adjusted accordingly. Working Capital • Supplier: payment at 30 days (this can vary according to the relationship with the raw material supplier: the more that there is confidence in the relationship the more the time of delay payment will be long). For the first year suppliers are paid cash. • Buffer stock: finished goods: 30 days; raw materials: 45 days; • Client: payment at 90 days. This takes into account the fact that institutions or governments will be buying the largest portion of the production while individual clients who pay cash directly will be buying only a small portion of the production. • Total working capital at the end of the year 5: $5,445,000 Financing The financing is split between capital, grant and loans as follows: (i) the amount of the 68 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 capital stock is set at $2,700,000, (ii) the grant ($1,000,000) is defined as a bilateral organization grant or a grant from a foundation, (iii) the loan is split between a commercial bank loan ($1,000,000; 3 years; 18 %) and an IFC loan ($1,500,000; 3 years; 15 %); IFC in this exercise will not take any equity. Production An average of 166 million tablets per year will be produced at Year 3 (108 million + 58 million). This correspond (i) to a market share of 10 % and (ii) to one unit of production line and one shift of production (the first year’s production is set at 100% of capacity, thereafter Year 2, 110% and Year 3, 120%). Ex works prices Unchanged Raw materials Unchanged Income tax Unchanged 7 - Discount Rate (Weighted Average Cost of Capital) used for calculating NPV Generally, calculating NPV requires knowing the cost of capital to use for discounting the cash flows. Calculation of the cost of capital, in turn, requires several intermediate steps: • The cost of both equity and the cost of debt must be determined. - Cost of equity is typically calculated using the Capital Asset Pricing Model. This formula sets the cost of equity equal to the risk-free rate added to the calculated beta times the market risk premium. In SSA, this calculation is difficult because: (i) there is little or not data to guide the estimates for choosing a beta; and (ii) country risk premium must be factored in. - Cost of debt also has to take into account both the risk of company default as well as country spread. • The capital structure of the hypothetical enterprise must be determined, based on Annex 10 69 market values. While the starting capital structure is described above, it is difficult to subsequently determine the market valuation of the equity component without data from comparable enterprises. • Weighting the costs of both equity and debt is done to determine the final weighted average cost of capital. Without a strong degree of confidence in the results of steps 1 and 2, this step is impossible to do. Therefore, for the simulation tool, two elements were considered to estimate a discount rate: typical commercial bank rates100 and expectations of international investment fund managers101, resulting in the use of 35% for the discount rate in order to calculate NPV. In the presentation of financial results, IRR was included to provide an alternative viewpoint. 70 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines Annex 10 NPV according to discount rates by scenario (million $) 0 20 40 60 80 15% 20% 25% 30% 35% 40% Discount rate NPV S1 Greenfield S1 Extension S2 Greenfield S2 Extension S3 Greenfield S3 Extension DFID Heal th Systems Resource Centre 2004 71 Financial results SCENARIO 1 (Greenfield) Annex 11a Working capital Period / day Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Raw material 45 194 938 454 854 649 466 714 770 779 749 Finish Good 30 217 789 508 175 725 965 798 561 871 158 Clients 90 653 368 1 524 526 2 177 894 2 395 683 2 613 473 Supplier 30 -312 333 -445 966 -490 809 -535 428 Working capital 1 066 095 2 175 222 3 107 358 3 418 206 3 728 951 Change in Working Capital 1 066 095 1 109 127 932 136 310 848 310 746 Sources and Uses of cash Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Uses of cash Capital expenditures 3 600 000 785 714 Change in Working Capital 1 066 095 1 109 127 932 136 310 848 310 746 310 746 Bank Loan 18% Repayment 671 533 671 533 671 533 671 533 IFC Loan 15% Repayment 775 620 775 620 775 620 775 620 775 620 R&D 455 000 Total 5 121 095 1 884 747 2 379 290 1 758 002 1 757 900 2 543 614 Sources of cash Bank Loan 2 100 000 IFC Loan 2 600 000 Equity 3 000 000 Grant 2 000 000 Advance account 256 785 236 399 756 156 Cash Flow -500 828 430 527 1 256 649 1 521 501 1 787 458 Total 7 600 000 1 599 172 430 527 1 513 435 1 757 900 2 543 614 Changes in cash 2 478 905 -285 575 -1 948 763 -244 567 Cumulative cash balance 2 478 905 2 193 330 244 567 Net Present Value Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Earnings before Interest & Taxes (1) -302 208 1 300 681 2 126 803 2 391 655 2 657 612 Taxes (2) Depreciation (3) 577 000 577 000 577 000 577 000 577 000 Capital expenditures (4) 4 055 000 785 714 Change in working capital (5) 1 066 095 1 109 127 932 136 310 848 310 746 310 746 Free cash flow (1 - 2 + 3 - 4 - 5) -5 121 095 -834 334 945 545 2 392 955 2 657 909 2 138 152 Cumulative free cash flow -5 121 095 -5 955 429 111 211 3 338 501 5 050 864 4 796 061 Internal rate of return 9,2% Pay back period 4 years and 5 months Discount rate 35,0% Net Present Value -68 256 (1) Including R&D Profit & loss Year 1 Year 2 Year 3 Year 4 Year 5 Total Sales 2 613 473 6 098 103 8 711 575 9 582 733 10 453 890 % change 133% 43% 10% 9% Cost of Good Sold 1 637 846 3 821 640 5 456 883 6 005 434 6 551 383 % sales 63% 63% 63% 63% 63% Gross Margin 975 627 2 276 463 3 254 693 3 577 299 3 902 508 Contribution Margin 37% 37% 37% 37% 37% Indirect cost 2 053 455 2 422 936 2 575 043 2 632 798 2 692 050 % sales 79% 40% 30% 27% 26% Taxes Net Income -1 077 828 -146 473 679 649 944 501 1 210 458 % sales 41% 2% 8% 10% 12% 72 DFID Heal th Systems Resource Centre 2004 Financial results SCENARIO 1 (Extension) Working capital Period / day Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Raw material 45 196 735 459 048 655 782 721 360 786 939 Finish Good 30 725 965 798 561 871 158 943 754 1 016 350 Clients 90 2 177 894 2 395 683 2 613 473 2 831 262 3 049 051 Supplier 30 -131 156 -306 032 -437 188 -480 907 Working capital 3 100 593 3 522 135 3 834 381 4 059 188 4 371 434 Change in Working Capital 3 100 593 421 542 312 245 224 808 312 245 Sources and Uses of cash Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Uses of cash Capital expenditures 1 000 000 392 857 Change in Working Capital 3 100 593 421 542 312 245 224 808 312 245 312 245 Bank Loan 18% Repayment 229 962 229 962 229 962 IFC Loan 15% Repayment 656 965 656 965 656 965 R&D 455 000 Total 4 555 593 1 308 470 1 199 173 1 111 735 312 245 705 102 Sources of cash Bank Loan 500 000 IFC Loan 1 500 000 Equity 2 000 000 Grant Advance account Cash Flow 765 647 2 463 640 3 332 504 3 765 400 4 219 993 4 559 403 Total 4 765 647 2 463 640 3 332 504 3 765 400 4 219 993 4 559 403 Changes in cash 210 054 1 155 170 2 133 332 2 653 665 3 907 748 3 854 300 Cumulative cash balance 210 054 1 365 224 3 498 556 6 152 220 10 059 968 13 914 269 Net Present Value Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Earnings before Interest & Taxes (1) Taxes (2) 2 528 637 3 307 514 3 636 167 3 969 993 4 309 402 Depreciation (3) Capital expenditures (4) 500 000 500 000 500 000 500 000 500 000 Change in working capital (5) 1 455 000 392 857 Free cash flow (1 - 2 + 3 - 4 - 5) 3 100 593 421 542 312 245 224 808 312 245 312 245 Cumulative free cash flow -4 555 593 2 607 095 3 495 269 3 911 360 4 157 747 4 104 300 Internal rate of return 66,2% Pay back period 2 years and 5 months Discount rate 35,0% Net Present Value 3 155 223 (1) Including R&D Profit & loss Year 1 Year 2 Year 3 Year 4 Year 5 Total Sales 8 711 575 9 582 733 10 453 890 11 325 048 12 196 206 % change 43% 10% 9% 8% 8% Cost of Good Sold 5 459 485 6 005 434 6 551 383 7 097 331 7 643 280 % sales 63% 63% 63% 63% 63% Gross Margin 3 252 090 3 577 299 3 902 508 4 227 717 4 552 926 Contribution Margin 37% 37% 37% 37% 37% Indirect cost 2 076 027 1 668 924 1 716 701 877 501 925 278 % sales 24% 17% 16% 8% 8% Taxes Net Income 1 641 710 2 420 587 2 749 240 3 969 993 4 309 402 % sales 19% 25% 26% 35% 35% Annex 11b DFID Heal th Systems Resource Centre 2004 73 Financial results SCENARIO 2 (Greenfield) Annex 11c Working capital Period / day Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Raw material 45 195 580 456 353 651 607 717 125 782 319 Finish Good 30 292 247 681 909 974 156 1 071 572 1 168 987 Clients 90 876 740 2 045 727 2 922 468 3 214 715 3 506 961 Supplier 30 -313 362 -447 437 -492 426 -537 192 Working capital 1 364 567 2 870 627 4 100 794 4 510 985 4 921 075 Change in Working Capital 1 364 567 1 506 060 1 230 167 410 192 410 090 Sources and Uses of cash Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Uses of cash Capital expenditures 3 600 000 785 714 Change in Working Capital 1 364 567 1 506 060 1 230 167 410 192 410 090 410 090 Bank Loan 18% Repayment 919 848 919 848 919 848 IFC Loan 15% Repayment 1 313 931 1 313 931 1 313 931 R&D 700 000 Total 5 664 567 2 819 991 3 463 945 2 643 970 1 329 937 1 195 804 Sources of cash Bank Loan 2 000 000 IFC Loan 3 000 000 Equity 2 000 000 Grant 2 000 000 Advance account 1 541 187 Cash Flow -320 298 1 727 615 3 434 458 5 318 566 6 812 055 Total 7 000 000 1 679 702 3 268 801 3 434 458 5 318 566 6 812 055 Changes in cash 1 335 433 -1 140 289 -195 144 790 488 3 988 629 5 616 251 Cumulative cash balance 1 335 433 195 144 790 488 4 779 117 10 395 368 Net Present Value Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Earnings before Interest & Taxes (1) 416 633 3 384 393 5 091 237 5 661 414 6 235 055 Taxes (2) Depreciation (3) 577 000 577 000 577 000 577 000 577 000 Capital expenditures (4) 4 300 000 785 714 Change in working capital (5) 1 364 567 1 506 060 1 230 167 410 192 410 090 410 090 Free cash flow (1 - 2 + 3 - 4 - 5) -5 664 567 -512 428 2 731 226 5 258 045 5 828 325 5 616 251 Cumulative free cash flow -5 664 567 -6 176 994 2 218 799 7 989 271 11 086 370 11 444 575 Internal rate of return 38,9% Pay back period 3 years and 4 months Discount rate 35,0% Net Present Value 6 044 242 (1) Including R&D Profit & loss Year 1 Year 2 Year 3 Year 4 Year 5 Total Sales 3 506 961 8 182 910 11 689 871 12 858 858 14 027 845 % change 133% 43% 10% 9% Cost of Good Sold 1 648 597 3 846 726 5 492 720 6 044 855 6 594 387 % sales 47% 47% 47% 47% 47% Gross Margin 1 858 365 4 336 184 6 197 151 6 814 004 7 433 459 Contribution Margin 53% 53% 53% 53% 53% Indirect cost 2 755 663 3 185 569 3 339 693 2 072 437 1 198 404 % sales 79% 39% 29% 16% 9% Taxes 74 DFID Heal th Systems Resource Centre 2004 Financial results SCENARIO 2 (extension) Annex 11d Working capital Period / day Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Raw material 45 651 932 717 125 781 928 847 512 912 705 Finish Good 30 974 156 1 071 572 1 168 987 1 266 403 1 363 818 Clients 90 2 922 468 3 214 715 3 506 961 3 799 208 4 091 455 Supplier 30 -478 084 -521 286 -565 008 -608 470 Working capital 4 548 556 4 525 328 4 936 591 5 348 115 5 759 508 Change in Working Capital 4 548 556 -23 228 411 263 411 524 411 393 Sources and Uses of cash Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Uses of cash Capital expenditures 1 000 000 392 857 Change in Working Capital 4 548 556 -23 228 411 263 411 524 411 393 411 393 Bank Loan 18% Repayment 459 924 459 924 459 924 IFC Loan 15% Repayment 656 965 656 965 656 965 R&D 700 000 Total 6 248 556 1 093 661 1 528 153 1 528 413 411 393 804 251 Sources of cash Bank Loan 1 000 000 IFC Loan 1 500 000 Equity 2 000 000 Grant 1 000 000 Advance account Cash Flow 765 647 5 281 264 6 708 488 7 461 760 8 246 108 8 194 412 Total 6 265 647 5 281 264 6 708 488 7 461 760 8 246 108 8 194 412 Changes in cash 17 091 4 187 603 5 180 335 5 933 347 7 834 714 7 390 161 Cumulative cash balance 17 091 4 204 694 9 385 029 15 318 376 23 153 090 30 543 251 Net Present Value Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Earnings before Interest & Taxes (1) 5 186 258 6 498 301 7 117 602 7 746 106 7 694 410 Taxes (2) Depreciation (3) 250 000 250 000 250 000 250 000 250 000 Capital expenditures (4) 1 700 000 392 857 Change in working capital (5) 4 548 556 -23 228 411 263 411 524 411 393 411 393 Free cash flow (1 - 2 + 3 - 4 - 5) -6 248 556 5 459 486 6 337 037 6 956 078 7 584 712 7 140 159 Cumulative free cash flow -6 248 556 -789 070 11 796 524 13 293 116 14 540 791 14 724 871 Internal rate of return 94,0% Pay back period 2 years and 2 months Discount rate 35,0% Net Present Value 13 028 333 (1) Including R&D Profit & loss Year 1 Year 2 Year 3 Year 4 Year 5 Total Sales 11 689 871 12 858 858 14 027 845 15 196 833 16 365 820 % change 43% 10% 9% 8% 8% Cost of Good Sold 5 495 322 6 044 855 6 591 264 7 143 919 7 693 451 % sales 47% 47% 47% 47% 47% Gross Margin 6 197 151 6 814 004 7 433 459 8 052 913 8 672 368 Contribution Margin 53% 53% 53% 53% 53% Indirect cost 2 593 429 1 944 804 1 996 179 926 584 977 959 % sales 29% 16% 9% 6% 6% Taxes DFID Heal th Systems Resource Centre 2004 75 Financial results SCENARIO 3 (Greenfield) Annex 11e Working capital Period / day Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Raw material 45 216 295 504 687 720 656 793 080 865 178 Finish Good 30 274 777 641 145 915 922 1 007 514 1 099 106 Clients 90 824 330 1 923 436 2 747 765 3 022 542 3 297 318 Supplier 30 -346 552 -494 851 -544 582 -594 089 Working capital 1 315 401 2 722 716 3 889 493 4 278 554 4 667 513 Change in Working Capital 1 315 401 1 407 315 1 166 776 389 061 388 959 Sources and Uses of cash Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Uses of cash Capital expenditures 5 600 000 685 714 Change in Working Capital 1 315 401 1 407 315 1 166 776 389 061 388 959 388 959 Bank Loan 18% Repayment 1 149 810 1 149 810 1 149 810 IFC Loan 15% Repayment 1 226 335 1 226 335 1 226 335 R&D 525 000 Total 7 440 401 2 633 651 3 542 922 2 765 207 1 538 769 1 074 674 Sources of cash Bank Loan 2 500 000 IFC Loan 2 800 000 Equity 3 500 000 Grant 2 000 000 Advance account 2 650 816 841 012 Cash Flow -464 474 630 631 1 924 195 3 578 282 5 158 445 Total 8 300 000 2 035 526 3 281 447 2 765 207 3 578 282 5 158 445 Changes in cash 859 599 -598 125 -261 474 2 039 512 4 083 771 Cumulative cash balance 859 599 261 474 0 0 2 039 512 6 123 284 Net Present Value Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Earnings before Interest & Taxes (1) -315 139 1 929 776 3 223 340 3 651 091 4 081 445 Taxes (2) Depreciation (3) 1 077 000 1 077 000 1 077 000 1 077 000 1 077 000 Capital expenditures (4) 6 125 000 685 714 Change in working capital (5) 1 315 401 1 407 315 1 166 776 389 061 388 959 388 959 Free cash flow (1 - 2 + 3 - 4 - 5) -7 440 401 -645 454 1 840 000 3 911 279 4 339 132 4 083 771 Cumulative free cash flow -7 440 401 -8 085 855 1 194 546 5 751 278 8 250 410 8 422 903 Internal rate of return 16,9% Pay back period 4 years and 2 months Discount rate 35,0% Net Present Value 1 774 613 (1) Including R&D Profit & loss Year 1 Year 2 Year 3 Year 4 Year 5 Total Sales 3 297 318 7 693 743 10 991 061 12 090 167 13 189 273 % change 133% 43% 10% 9% Cost of Good Sold 1 829 779 4 269 483 6 096 659 6 709 188 7 319 114 % sales 55% 55% 55% 55% 55% Gross Margin 1 467 540 3 424 259 4 894 402 5 380 979 5 870 159 Contribution Margin 45% 45% 45% 45% 45% Indirect cost 3 009 014 3 870 628 4 047 207 2 879 697 1 788 714 % sales 91% 50% 37% 24% 14% Taxes 76 DFID Heal th Systems Resource Centre 2004 Financial results SCENARIO 3 (Extension) Annex 11f Working capital Period / day Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Raw material 45 720 982 793 080 865 178 937 276 1 009 374 Finish Good 30 915 922 1 007 514 1 099 106 1 190 698 1 282 290 Clients 90 2 747 765 3 022 542 3 297 318 3 572 095 3 846 871 Supplier 30 -544 582 -594 089 -643 596 -693 104 Working capital 4 384 669 4 278 554 4 667 513 5 056 473 5 445 432 Change in Working Capital 4 384 669 -106 115 388 959 388 959 388 959 Sources and Uses of cash Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Uses of cash Capital expenditures 2 000 000 785 714 Change in Working Capital 4 384 669 -106 115 388 959 388 959 388 959 388 959 Bank Loan 18% Repayment 459 924 459 924 459 924 IFC Loan 15% Repayment 656 965 656 965 656 965 R&D 525 000 Total 6 909 669 1 010 775 1 505 849 1 505 849 388 959 1 174 674 Sources of cash Bank Loan 1 000 000 IFC Loan 1 500 000 Equity 2 700 000 Grant 1 000 000 Advance account Cash Flow 765 647 4 334 990 5 449 487 6 065 032 6 707 676 6 518 154 Total 6 965 647 4 334 990 5 449 487 6 065 032 6 707 676 6 518 154 Changes in cash 55 978 3 324 216 3 943 638 4 559 183 6 318 717 5 343 480 Cumulative cash balance 55 978 3 380 194 7 323 832 11 883 016 18 201 732 23 545 212 Net Present Value Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Earnings before Interest & Taxes (1) 3 739 987 4 739 303 5 220 878 5 707 675 5 518 152 Taxes (2) Depreciation (3) 500 000 500 000 500 000 500 000 500 000 Capital expenditures (4) 2 525 000 785 714 Change in working capital (5) 4 384 669 -106 115 388 959 388 959 388 959 388 959 Free cash flow (1 - 2 + 3 - 4 - 5) -6 909 669 4 346 102 4 850 343 5 331 918 5 818 715 4 843 479 Cumulative free cash flow -6 909 669 -2 563 567 9 196 445 10 182 262 11 150 634 10 662 194 Internal rate of return 63,6% Pay back period 2 years and 5 months Discount rate 35,0% Net Present Value 7 770 910 (1) Including R&D Profit & loss Year 1 Year 2 Year 3 Year 4 Year 5 Total Sales 10 991 061 12 090 167 13 189 273 14 288 379 15 387 485 % change 43% 10% 9% 8% 8% Cost of Good Sold 6 099 262 6 709 188 7 319 114 7 929 040 8 538 966 % sales 55% 55% 55% 55% 55% Gross Margin 4 894 402 5 380 979 5 870 159 6 359 339 6 848 519 Contribution Margin 45% 45% 45% 45% 45% Indirect cost 2 736 951 2 270 777 2 329 603 1 271 440 1 330 366 % sales 25% 19% 18% 9% 9% Taxes DFID Heal th Systems Resource Centre 2004 77 COMPARISON OF KEY FINANCIAL REQUIREMENTS AND RESULTS OF DIFFERENT SCENARIOS Annex 11g Annual free cash flows by scenario -6 000 000 -4 000 000 -2 000 000 0 2 000 000 4 000 000 1 2 3 4 5 6 S1 Greenfield S1 Extension S2 Greenfield S2 Extension S3 Greenfield S3 Extension A n n u a l d is c o u n te d c a s h f lo w s Scenario 2 Scenario 3 Scenario 1 Scenario 2 Scenario 3 Scenario 1 Public health Public health Public health Public health includes includes Public health includes includes Public health Ethical drugs OTC Ethical drugs OTC (Extension) (Extension) (Extension) (Greenfield) (Greenfield) (Greenfield) Working capital 5 759 508 5 445 432 4 371 434 4 921 075 4 667 513 3 728 951 Loans 2 500 000 2 500 000 2 000 000 5 000 000 5 300 000 4 700 000 Equity and grants 3 000 000 3 700 000 2 000 000 4 000 000 5 500 000 5 000 000 Capital expenditures 1 700 000 2 525 000 1 455 000 4 300 000 6 125 000 4 055 000 Sales 16 365 820 15 387 485 12 196 206 14 027 845 13 189 273 10 453 890 Net income 7 694 410 5 518 152 4 309 402 6 235 055 4 081 445 1 210 458 Net Present Value at a 35 % discount rate 13 028 333 7 770 910 3 155 223 6 044 242 1 774 613 -68 256 Pofitability index 7,7 3,1 2,2 1,4 0,3 0,0 Payback period (in months) 26 29 29 40 50 53 All values for the end of the year 5 Scenario 1 Scenario 2 Scenario 3 Public health Public health Public health Public health Public health Public health includes includes includes includes Ethical drugs Ethical drugs OTC OTC (Greenfield) (Extension) (Greenfield) (Extension) (Greenfield) (Extension) Working capital 3 728 951 4 371 434 4 921 075 5 759 508 4 667 513 5 445 432 Loans 4 700 000 2 000 000 5 000 000 2 500 000 5 300 000 2 500 000 Equity and grants 5 000 000 2 000 000 4 000 000 3 000 000 5 500 000 3 700 000 Capital expenditures 4 055 000 1 455 000 4 300 000 1 700 000 6 125 000 2 525 000 Sales 10 453 890 12 196 206 14 027 845 16 365 820 13 189 273 15 387 485 Net income 1 210 458 4 309 402 6 235 055 7 694 410 4 081 445 5 518 152 Net Present Value at a 35 % discount rate -68 256 3 155 223 6 044 242 13 028 333 1 774 613 7 770 910 Pofitability index 0,0 2,2 1,4 7,7 0,3 3,1 Payback period (in months) 53 29 40 26 50 29 All values for the end of the year 5 78 DFID Heal th Systems Resource Centre 2004 Annex 12 -1000 000 0 1000 000 2000 000 3000 000 4000 000 5000 000 Total Sales Net income A rte su na te La m iv ud in e + Zi do vu di ne R an iti di ne A ci d A sc or bi c A m lo di pi ne D id an os in e C ap to pr il H yd ro ch lo ro th ia zi de La m iv ud in e N ev ira pi ne O m ep ra zo le S ta vu di ne G ly be nc la m id e M et fo rm in G lic la zi de Zi do vu di ne A ss + C af ei n A m od ia qu in e Is on ia zi de + R ifa m pi ci ne C ip ro flo xa ci ne P yr az in am id e E th am bu to l D ox yc yc lin e Total Sales COGS % sales Gross Margin Contribution Margin Indirect cost % sales Net income % sales Artesunate 4 914 900 2 989 427 61% 1 925 473 39% 1 167 718 24% 757 755 15% Lamivudine + Zidovudine 1 775 780 1 283 090 72% 492 690 28% 184 749 10% 307 942 17% Ranitidine 1 198 838 9 650 1% 1 189 188 99% 54 349 5% 1 134 839 95% Acid Ascorbic 1 153 828 93 739 8% 1 060 088 92% 197 697 17% 862 391 75% Amlodipine 510 533 2 591 1% 507 942 99% 26 990 5% 480 952 94% Didanosine 445 103 149 645 34% 295 458 66% 43 541 10% 251 917 57% Captopril 373 538 5 373 1% 368 165 99% 38 109 10% 330 056 88% Hydrochlorothiazide 369 355 3 781 1% 365 574 99% 39 389 11% 326 185 88% Lamivudine 358 964 246 598 69% 112 366 31% 79 742 22% 32 624 9% Nevirapine 356 769 220 937 62% 135 832 38% 36 003 10% 99 829 28% Omeprazole 187 489 371 0% 187 118 100% 2 839 2% 184 279 98% Stavudine 137 447 55 301 40% 82 147 60% 49 113 36% 33 034 24% Glybenclamide 118 339 2 974 3% 115 365 97% 33 137 28% 82 228 69% Metformin 111 434 6 828 6% 104 606 94% 36 136 32% 68 470 61% Gliclazide 108 771 4 270 4% 104 500 96% 12 988 12% 91 512 84% Zidovudine 37 894 13 115 35% 24 779 65% 4 824 13% 19 955 53% Ass + Cafein 1 125 658 546 037 49% 579 621 51% 602 365 54% -22 744 -2% Amodiaquine 489 555 389 302 80% 100 253 20% 1 167 718 239% -1 067 465 -218% Isoniazide + Rifampicine 75 600 32 682 43% 42 918 57% 80 037 106% -37 120 -49% Ciprofloxacine 42 880 22 631 53% 20 249 47% 43 450 101% -23 201 -54% Pyrazinamide 34 362 21 258 62% 13 104 38% 48 881 142% -35 777 -104% Ethambutol 21 420 20 475 96% 945 4% 38 019 177% -37 074 -173% Doxycycline 20 900 12 421 59% 8 479 41% 51 597 247% -43 118 -206% DFID Heal th Systems Resource Centre 2004 79 VARIATION OF THE PROPORTION OF THE API IN THE SELLING PRICE Annex 13 Proportion of the production cost in the ex works price 0.000 0.400 0.800 1.200 1.600 2.000 Va lu e pe r u ni t Selling price per unit ($) Production price per unit ($) International Non- Proprietary Name Dosage form Size (mg.) API per unit ($) Rate of net income % API in the ex works price Production price per unit ($) Ex Works Price per unit ($) Omeprazole 20 0.0015 98% 0.1% 0.0311 1.8970 Ranitidine 150 0.0030 95% 0.5% 0.0325 0.6352 Amlodipine 5 0.0005 94% 0.1% 0.0301 0.5422 Lamivudine + Zidovudine 300/150 0.2958 17% 71.7% 0.3411 0.4127 Captopril 25 0.0018 89% 0.7% 0.0314 0.2817 Didanosine 100 0.0909 57% 32.7% 0.1205 0.2776 Nevirapine 200 0.1642 28% 61.0% 0.1938 0.2691 Hydrochlorothiazide 50 0.0005 89% 0.2% 0.0301 0.2688 Gliclazide 80 0.0076 85% 3.1% 0.0372 0.2432 Zidovudine 100 0.0714 53% 33.5% 0.1010 0.2133 Ascorbic acid 1000 0.0107 75% 6.6% 0.0407 0.1613 Lavmivudine 150 0.0816 9% 66.7% 0.1111 0.1222 Artesunate 100 0.0671 15% 58.7% 0.0967 0.1143 Glybenclamide 5 0.0003 71% 0.3% 0.0299 0.1023 Metformin 500 0.0033 63% 3.7% 0.0329 0.0889 Stavudine 30 0.0282 24% 37.0% 0.0577 0.0760 ASS + caffeine 500/50 0.0226 -2% 43.8% 0.0527 0.0516 Isonizaid + Rifampicin 150/300 0.0092 -49% 34.2% 0.0403 0.0270 Ciprofloxacin 500 0.0117 -54% 43.7% 0.0413 0.0268 Pyrazinamide 400 0.0094 -104% 49.2% 0.0390 0.0191 Ethambutol 400 0.0122 -173% 79.7% 0.0418 0.0153 Amodaquine 200 0.0066 -218% 58.2% 0.0362 0.0114 Doxycycline 100 0.0041 -206% 37.4% 0.0337 0.0110 O m ep ra zo le R an iti di ne A m lo di pi ne La m iv ud in e + Z id ov ud in e C ap to pr il D id an os in e N ev ira pi ne H yd ro ch lo ro th ia zi de G lic la zi de Z id ov ud in e A sc or bi c ac id La vm iv ud in e A rt es un at e G ly be nc la m id e M et fo rm in S ta vu di ne A S S + c af fe in e Is on iz ai d + R ifa m pi ci n C ip ro flo xa ci n P yr az in am id e E th am bu to l A m od aq ui ne D ox yc yc lin e PROFIT & LOSS PER PRODUCT 80 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines Relationship between profitability per product and the proportion of API in the ex works price Doxycyline Amodiaquine Ethambutol Pyrazinamide Ciprofloxacin Isoniazid + Rifampicin ASS + caffeine Stavudine Metformin Glybenclamide Artesunate Lamivudine Ascorbic acid Zidovudine Gliclazide Hydrochlorothiazide Nevirapine Didanosine Captopril Lamivudine + Zidovudine Amolodipine Ranitidne Omeprazole -10% 10% 30% 50% 70% 90% -220% -170% -120% -70% -20% 30% 80% Net Income as a percentage of ex works price (Profitability) ARV drugs Ethical drugs (+ 1 OTC drug) DFID Heal th Systems Resource Centre 2004 81 INCOTERMS102 EXW Ex Works (named place). EXW applies to goods available only at the seller’s premises. Buyer is responsible for loading the goods on truck or container at the seller’s premises, and for the subsequent costs and risks. The risk is transferred when the seller places the goods at the disposal of the buyer as provided in the contract. (Any means of transport). FCA Free Carrier (named place). The delivery of goods on truck, rail car or container at the specified point (depot) of departure, which is usually the seller’s premises, or a named railroad station or a named cargo terminal or into the custody of the carrier, at seller’s expense. The point (depot) at origin may or may not be a customs clearance centre. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks. The risk is transferred when the seller delivers the goods into the custody of the carrier named by the buyer at the named place. (Any means of transport). FAS Free Alongside Ship (named port of shipment). Goods are placed in the dock shed or at the side of the ship, on the dock or lighter, within reach of its loading equipment so that they can be loaded aboard the ship, at seller’s expense. Buyer is responsible for the loading fee, main carriage/freight, cargo insurance, and other costs and risks. The risk is transferred when the seller delivers the goods alongside the vessel at the loading berth named by the buyer at the named port of shipment. (Ship). FOB Free On Board (named port of shipment). The delivery of goods on board the vessel at the named port of origin (loading), at seller’s expense. Buyer is responsible for the main carriage/freight, cargo insurance and other costs and risks. The risk is transferred when the goods have effectively passed the ship’s rail at the named port of shipment. (Ship). CFR Cost And Freight (named port of destination). The delivery of goods to the named port of destination (discharge) at the seller’s expense. Buyer is responsible for the cargo insurance and other costs and risks. The Annex 14 risk is transferred like FOB when the goods have effectively passed the ship’s rail at the named port of shipment. (The term CFR was formerly written as C&F. Many importers and exporters worldwide still use the term C&F.) (Ship). CIF Cost Insurance and Freight (named port of destination). The cargo insurance and delivery of goods to the named port of destination (discharge) at the seller’s expense. Buyer is responsible for the import customs clearance and other costs and risks. The risk is transferred like FOB when the goods have effectively passed the ship’s rail at the named port of shipment. The seller must provide a policy of marine insurance in accordance with minimum cover of Institute Cargo Clauses or any similar set of clauses, covering from transfer of risk until unloading at the port of destination. (Ship). CPT Carriage Paid To… (named point of destination). The delivery of goods to the named place of destination (discharge) at seller’s expense. Buyer assumes the cargo insurance, import customs clearance, payment of customs duties and taxes, and other costs and risks. The risk is transferred when the seller has delivered the goods into the custody of the first carrier. (Any means of transport). CIP Carriage and Insurance Paid to… (named point of destination). The delivery of goods and the cargo insurance to the named place of destination (discharge) at seller’s expense. Buyer assumes the import customs clearance, payment of customs duties and taxes, and other costs and risks. The risk is transferred like CPT when the seller has delivered the goods into the custody of the first carrier. The seller must provide a policy of marine insurance in accordance with minimum cover of Institute Cargo Clauses or any similar set of clauses, covering from transfer of risk until the named point of destination. (Any means of transport). DAF Delivered At Frontier (named point). The delivery of goods to the specified point at the frontier at seller’s expense. Buyer is responsible for the import customs clearance, payment of customs duties and taxes, and other costs and risks. The risk is transferred when the seller places the goods at the disposal of the buyer at the named place of delivery at the frontier (duty unpaid). (Lorry/railway). DES Delivered Ex Ship (named port of destination). The delivery of goods on board the vessel at the named port of destination (discharge), at seller’s expense. Buyer assumes the unloading fee, import customs clearance, payment of customs duties and taxes, cargo insurance, and other costs 82 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 and risks. The risk is transferred when the seller places the goods effectively at the disposal of the buyer on board the vessel at the named port of unloading. (Ship). DEQ Delivered Ex Quay (named port of destination). The delivery of goods to the quay (the port) at destination at seller’s expense. Seller is responsible for the import customs clearance and payment of customs duties and taxes at the buyer’s end. Buyer assumes the cargo insurance and other costs and risks. The risk is transferred when the goods are placed to the disposal of the buyer on the quay at the port of destination (duty unpaid). (Ship). DDU Delivered Duty Unpaid (named point). The delivery of goods and the cargo insurance to the final point at destination, which is often the project site or buyer’s premises, at seller’s expense. Buyer assumes the import customs clearance and payment of customs duties and taxes. The seller may opt not to insure the goods at his/her own risks. The risk is transferred when the seller places the goods at the disposal of the buyer at the named place of destination (duty unpaid). (Any means of transport). DDP Delivered Duty Unpaid (named point). The seller is responsible for most of the expenses, which include the cargo insurance, import customs clearance, and payment of customs duties and taxes at the buyer’s end, and the delivery of goods to the final point at destination, which is often the project site or buyer’s premises. The seller may opt not to insure the goods at his/her own risks. The risk is transferred when the seller places the goods at the disposal of the buyer at the named place of destination (duty paid). (Any means of transport). Annex 14 83 84 DFID Heal th Systems Resource Centre 2004 DRUG DISTRIBUTION SYSTEM FLOW CHART Annex 15 Local Producers Private Wholesalers Public Wholesaler Hospitals District Drug stores Private Pharmacies Health care Centres and Health Posts Private Chemists Pharmaceutical raw materials International non-proprietary name Generic Drugs Patented Drugs & Brand name Generics Drugs Population purchase Population Manufacturers and Exporters Public networkPrivate network DFID Heal th Systems Resource Centre 2004 85 SENSITIVITY ANALYSIS Rationale The sensitivity analysis examines the impact on net income and drug selling prices of changes in two factors: raw material prices which affect costs; and market share which affects sales. The effect of changes in drug selling prices were not included in the sensitivity analysis, because the market for drugs to treat HIV/AIDS, TB, and malaria is price competitive for the reasons mentioned earlier, and because gross margins are already quite high on the ethical drugs for hypertension, gastrointestinal ailments, and diabetes – increasing the already high profits on these drugs could require a considerable investment in advertising and promotion. The sensitivity analysis is applied to the greenfield cases in order to provide a more coherent picture of what could occur when parameters are changed. Applying it to the extension cases would require making additional assumptions about what existing investors might choose to do and how cost savings would be spread among a product line that included those added in the extension case as well as those that are already manufactured in the existing plant. Methodology • The raw material price of API is an external factor that is beyond the direct control of the enterprise. For drugs such as antiretroviral drugs or ACTs, there are relatively few suppliers of API. Although benchmark prices are available, actual prices paid depend on negotiations between a drug manufacturer and its suppliers. The imaginary enterprise is thus vulnerable to fluctuations in these prices. A decrease in the price of API can lead directly to an increase in net income, which in turn can be used to benefit the shareholders, while a decrease could affect financial viability. • Market share is a factor which is under the partial control of the enterprise: increased promotion of products sold in private market or increased lobbying with institutions and governments could have an effect on increasing market share. However, unlike changes in the price of API, corresponding increases or decreases in the need for working capital must be considered when re-allocating net income, i.e. an increase in net income resulting from increased sales will also mean that the need for working capital will increase in order to purchase additional raw material, etc. Annex 16 • Changes in the prices of other inputs, such as electricity, water, etc. were also not included because these changes would be too small to have a significant effect on profitability. • The analysis of the effect on selling price considers that available cash that could be used to reduce drug prices103 is equal to annual free cash flow as of year 3 less bank loan repayments. This amount is applied to a reduction in the selling prices of all the drugs produced. The analysis of the effect on net income concerns the effect on profitability of changes in raw material prices and market share. A minimum threshold for net income is applied in order to see whether it was possible to guarantee the repayment of a startup grant and capital (calculated per year, based on a 5 year repayment period). 86 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 Results Annex 16 87 Effect of changes in price of raw material on Net Income 0,50 1,50 2,50 3,50 4,50 5,50 -40% -30% -20% -10% 0% 10% 20% 30% 40% Change of raw material price N e t In c o m e ( m il li o n $ ) Scenario 1 Scenar io 2 Scenario 3 Effect of change in market share on Net Income 0,50 1,50 2,50 3,50 4,50 5,50 14% 13% 12% 11% 10% 9% 8% 7% 6% Total market share N e t In c o m e ( m il li o n $ ) Scenario 1 Scenario 2 Scenario 3 Change in price of RM Scenario 1 Scenario 2 Scenario 3 -40% 2,76 4,94 3,15 -35% 2,50 4,68 2,87 -30% 2,24 4,42 2,58 -25% 1,98 4,16 2,29 -20% 1,72 3,90 2,00 -15% 1,46 3,64 1,71 -10% 1,20 3,38 1,42 -5% 0,94 3,12 1,14 0% 2,86 5% 2,60 10% 2,34 15% 2,08 20% 1,81 25% 1,55 30% 1,29 35% 1,03 40% 0,77 Ratio Max/Min 2,9 6,4 2,8 Market share Scenario 1 Scenario 2 Scenario 3 14,0% 1,82 5,16 2,60 13,5% 1,68 4,87 2,38 13,0% 1,53 4,58 2,16 12,5% 1,39 4,30 1,94 12,0% 1,25 4,01 1,72 11,5% 1,11 3,72 1,50 11,0% 0,96 3,43 1,28 10,5% 3,14 1,07 10,0% 2,86 9,5% 2,57 9,0% 2,28 8,5% 1,99 8,0% 1,71 7,5% 1,42 6,5% 1,13 6,5% 0,84 6,0% Ratio Max/Min 1,9 6,1 2,4 88 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines Change in price of RM Scenario 1 Scenario 2 Scenario 3 -40% -34% -43% -34% -35% -31% -41% -32% -30% -28% -39% -29% -25% -25% -37% -27% -20% -22% -34% -24% -15% -19% -32% -22% -10% -17% -30% -19% -5% -14% -28% -16% 0% -11% -26% -14% 5% -8% -24% -11% 10% -5% -22% -9% 15% -2% -19% -6% 20% -17% -4% 25% -15% -1% 30% -13% 35% -11% 40% -9% Ratio Min/Max 14,9 4,9 25,0 Market share Scenario 1 Scenario 2 Scenario 3 14,0% -22% -44% -28% 13,5% -21% -42% -27% 13,0% -20% -40% -25% 12,5% -18% -37% -23% 12,0% -17% -35% -21% 11,5% -15% -33% -19% 11,0% -14% -30% -18% 10,5% -12% -28% -16% 10,0% -11% -26% -14% 9,5% -9% -24% -12% 9,0% -8% -21% -10% 8,5% -6% -19% -9% 8,0% -5% -17% -7% 7,5% -4% -14% -5% 6,5% -2% -12% -3% 6,5% -1% -10% -1% 6,0% -8% Ratio Max/Min 33,1 5,8 22,2 Effect of change in price of raw material on ex works prices -50% -40% -30% -20% -10% 0% -40% -30% -20% -10% 0% 10% 20% 30% 40% Change in raw material price C h an g e in s el lin g p ri ce Scenario 1 Scenario 2 Scenario 3 Effect of change in market share on ex works prices -50% -40% -30% -20% -10% 0% 14% 13% 12% 11% 10% 9% 8% 7% 6% Market share S el lin g p ri ce s Scenario 1 Scenario 2 Scenario 3 DFID Heal th Systems Resource Centre 2004 89 API purchase prices used in simulation Annex 17 International FOB unit Country International FOB unit Country International FOB unit Country Non-Proprietary price per kg. of origin Non-Proprietary price per kg. of origin Non-Proprietary price per kg. of origin Name (us$) Name (us$) Name (us$) Name (us$) Acetylsalicylic acid 2 China Didanosine 950 India Lamivudine 500 India Amlodipine besylate 80.2 India 600 Brazil 427 Brazil Amodiaquine HCl 22.3 India Median price 775 Median price 463.5 21.4 India Doxycycline HCl 45.5 China Metformin 5.2 China Median price 21.85 43.6 China 5.1 India Artesunate HCl 572 Spain 43.3 India 5 USA Ascorbic Acid 9.7 India Median price 43.6 5 India 8.5 China Ethambutol HCL 28 India 4.3 India 8 China 27 India 3.4 India 5.3 China 26 India 3.2 India 12.5 China 26 India 3.2 India 10 China 25 India 2.2 India Median price 9.1 22 India Median price 4.3 Cafeine anhydrous 7 China 18.5 India Nevirapine 700 Brazil 6 India Median price 26 Omeprazole 64.9 India 5.6 India Glibenclamide 60 India Pyrazinamide 29 India 5.4 China 52 India 24.2 India 5.5 China 48 India 22 India Median price 5.6 45 India 20 India Captopril 70.6 China 37.4 India 18 India 70 Malaysia Median price 48 17.8 India 66 India Gliclazide 90 India 17 India 59.4 India 72.4 China Median price 20 50 China 65 China Ranitidine 21.7 China 45 China 115.5 India 16.8 India 40 China Median price 81.2 10.8 India 140 India Hydrochlorothiazide 8.8 China Median price 16.8 Median price 62.7 8.3 India Rifampicin 67.7 India Ciprofloxacin HCl 24.2 India 7.8 India 44.9 India 21.5 China 7.6 China 41.5 China 18.5 China Median price 8.05 39.5 China 18.15 India Isoniazid 9 India Median price 43.2 Median price 21.5 8.5 India Stavudine 800 Brazil Codeine phosphate 700 USA 8.4 China Zidovudine 700 Brazil 530 * 8.3 India 617.5 Brazil 1100 India 8.1 China 600 Brazil 1098 China 7.9 India 480 India Median price 899 7.7 India Median price 608.75 7.5 India Median price 8.2 "Source : International Trade Center in collaboration with the World Health Organization, Essential Drugs and Medicines Policy. April 2004. ""Pharmaceutical Starting Materials Essential Drugs Report (monthly)."" UNCTAD/WTO. " 90 DFID Heal th Systems Resource Centre 2004 1 The concept of a going concern means that the company “will continue to operate indefinitely, and will not go out of business and liquidate its assets. For this to happen, the company must be able to generate and/or raise enough resources to stay operational.” It covers both for-profit and non-profit entities. Definition found at: www.investorwords.com (Accessed 5/26/2004) 2 Strategies for Enhancing Access to Medicines Program. 2003. “Defining and Measuring Access to Essential Drugs, Vaccines, and Health Commodities: Report of the WHO-MSH Consultative Meeting, Ferney-Voltaire, France, December 11-13, 2000.” Ferney Voltaire, France 3 World Health Organization Essential Medicines and Policy Department (EDM). “Prequalification Project.” (2004). http://mednet3.who.int/prequal/default.htm. (Accessed 6/3/2004) 4 ISO 9000, which relates to good management practices, is also considered a benchmark when evaluating the quality of a pharmaceutical production enterprise 5 C., Maponga and C., Ondari. 2003. “The quality of antimalarials: A study in selected African countries.” World Health Organization. WHO/EDM/PAR/2003.4 6 SSA does not include South Africa as noted earlier. 7 Organization, World Health. 2004. “Executive Board, 114th Session, Provisional agenda item 4.8: Manufacture of antiretrovirals in developing countries for the future.” World Health Organization. EB114/15 8 S, Foster. “Drug production in low- and middle-income countries: an issues paper.” Department of International Health, Boston University School of Public Health. 9 Foster, S. 1986. “Some Issues Relating to Domestic Production of Pharmaceuticals in Developing Countries.” Geneva, Switzerland: Action Programme on Essential Drugs, World Health Organization. 10 Foster S. 1999. “Drug production in low- and middle-income countries: an issues paper.” Department of International Health, Boston University School of Public Health. 11 Kaplan, W.A., Laing, R., Waning, B. et al. 2003. “Is Local Production of Pharmaceuticals A Way to Improve Pharmaceutical Access in Developing and Notes and references DFID Heal th Systems Resource Centre 2004 Transitional Countries? Setting a Research Agenda.” Boston University School of Public Health. Available at http://www1.worldbank.org/hnp/hsd/documents/LOCALPRODUCTION.pdf 12 Webber, D. 2001. “Pharmaceutical Manufacture and Supply to the World.” DRAFT. With permission of the author. 13 M, Ngoulla. 1999. “Étude sur: (I) La Mise en Oeuvre de la Politique de Promotion des Médicaments Essentiels Génériques, (II) L’Évaluation des Capacités des Unités de Fabrication des Médicaments, et (III) Le Contrôle de la Qualité des Médicaments.” West Africa Economic and Monetary Union. 14 World Health Organization. “The 3 by 5 Initiative.” (2003). http://www.who.int/3by5/about/en/. (Accessed 5/26/2004) 15 The Stop TB Partnership. “The Stop TB Partnership.” (2001). http://www.stoptb.org/stop.tb.initiative/default.asp. (Accessed 5/25/2004) 16The RBM Partnership. “Roll Back Malaria, A Global Partnership.” (2004). http://rbm.who.int/cgi-bin/rbm/rbmportal/custom/rbm/home.do. (Accessed 5/26/2004) 17 The Global Fund to Fight AIDS, Tuberculosis and Malaria. “The Road to the Fund.” (2004). http://www.theglobalfund.org/en/about/road/. (Accessed 5/25/2004) 18 Sewdie, Debrework. 2002. “Multi-Country HIV/AIDS Program (MAP) for Africa.” Effective Partnerships to Accelerate the Implementation of Reproductive Health Programs, A Joint World Bank-WHO and UNFPA Training Workshop Washington, D.C. January 7-11, 2002 Available at http://www1.worldbank.org/hnp/PartnersMeeting/MAP%20Presentation,%20Jan%207. pdf. 19 Correa, CM. 2002. “Implications of the Doha Declaration on the TRIPS Agreement and Public Health.” Essential Drugs and Medicines Policy, World Health Organization. WHO/EDM/PAR/2002.3 20 World Trade Organization. 2001. “Declaration on the TRIPS Agreement and Public Health.” Ministerial Conference, Fourth Session, Doha, 9-14 November 2001 Doha 21 Organization, World Trade. “Implementation of paragraph 6 of the Doha Declaration on the TRIPS Agreement and public health.” (2003). http://www.wto.org/english/tratop_e/trips_e/implem_para6_e.htm. (Accessed 9/10/2004) 22 AIDS Therapeutic Treatment Now. “ATTN News.” (2004). http://www.attn.info/newsletter/031504.htm. (Accessed 7/12/2004) Notes and references 91 23 IRIN. “Ethiopia: Focus on local manufacture of anti-retroviral drugs.” (2004). http://www.irinnews.org/report.asp?ReportID=39951&SelectRegion=Horn_of_Africa&S electCountry=ETHIOPIA. (Accessed 7/12/2004) 24 News, BBC. “Mozambique to get AIDS drug plant.” (2003). http://news.bbc.co.uk/2/hi/africa/3245505.stm. (Accessed 7/11/2004) 25 In Senegal, thresholds for ability to pay were: $0.25 for the poorest 20% of the population, $0.60 for the next 20%, and $1.1 for the middle 20% of the population, as measured by one month’s worth of household expenditures on non-essential items. Candau, D and JM, Guimier. 2001. “Etude sur l’Accesibilite au Medicament.” Syndicat National de l’Industrie Pharmaceutique de France and Ministere de la Sante du Senegal. 26 Campaign for Access to Essential Medicines. 2004. “Untangling the web of price reductions: a pricing guide for the purchase of ARVs for developing countries.” Geneva, Switzerland: Médecins Sans Frontières. Available at www.accessmed- msf.org 27 Yolanda Tayler (EDITOR). 2004. “Battling HIV/AIDS: A Decision Maker’s Guide to the Procurement of Medicines and Related Supplies.” The World Bank. 28 The Global Fund. 2004. “Guide to the Global Fund’s Policies on Procurement and Supply Management;.” Geneva, Switzerland: The Global Fund To Fight AIDS, Tuberculosis and Malaria. 29 Some donors have allowed a regional or national preference, ranging from 5 to 15%; however, there is no mention of an allowance for regional preference in the latest Global Fund guidelines, available at http://www.theglobalfund.org/pdf/guidelines/pp_guidelines_procurement_supplymanag ement_en.pdf 30 The Coface Group “ facilitates, partners and secures trade throughout the world”, serving thousands of private companies. Among the services Coface provides is a country rating which indicates the risk of payment default, and is based on indicators including political factors, currency risk, etc. Ratings run from A (lowest risk) to D (highest risk). A rating from A1 to A4 is defined to mean the probability of a default ranges from very low to acceptable, B is defined as “an unsteady political and economic environment is likely to affect further an already poor payment record” while C and D refer to “bad” and “very bad” payment records. http://www.cofacerating.com/en/index.html 31 Coface is highly regarded in this area. (www.countryrisk.com). Moody’s ratings are only accessible by subscription, and neither Standard & Poors nor Fitch appear to cover the topic of overall investment risks in developing countries. 92 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 32 Average commercial lending rates in SSA were 22%,20.7%, and 18.7% respectively for the years 2000-2002. Source: World Bank. 2004. African Development Indicators 33 The WAEMU has been working on these issues for several years and there have been discussions within SADC. 34 For example, the median supplier price for paracetamol 500 mg is $0.0029, and for aspirin 300 mg is $0.0016 (MSH/WHO International Drug Price Indicator Guide, 2003). These low prices can be explained by the large number of suppliers; they are also so low that manufacturing profits will be very small unless the drugs are produced on a very large scale. 35 Boulet P, Perriens J, Renaud-Théry. 2000. “Patent situation of HIV/AIDS-related drugs in 80 countries.” Geneva, Switzerland: UNAIDS/WHO. The reader is also referred to Boulet, P, Garrison, C and ‘t Hoen, E. 2003. “Drug patents under the spotlight: Sharing practical knowledge about pharmaceutical patents.” Médecins Sans Frontières. 36 International Trade Center in collaboration with the World Health Organization, Essential Drugs and Medicines Policy. 2004. “Pharmaceutical Starting Materials Essential Drugs Report (monthly).” UNCTAD/WTO. 37 World Health Organization Essential Medicines and Policy Department (EDM). “Prequalification Project.” (2004). http://mednet3.who.int/prequal/default.htm. (Accessed 6/3/2004) 38 GMP are “performance standards for pharmaceutical manufacturers … they include criteria for personnel, facilities, equipment, materials, manufacturing operations, labeling, packaging, quality control, and, in most cases, stability testing.” These standards may differ between countries, but these differences are minor. Sources: Management Sciences for Health and World Health Organization Managing Drug Supply: The Selection, Procurement, Distribution, and Use of Pharmaceuticals. 2d., rev. and exp. West Hartford, CT: Kumarian Press, 1997 . LearningPlus, Inc. and LearnWrite, Inc. “Current Good Manufacturing Practices.” (2004). http://www.cgmp.com/index.htm. (Accessed 5/26/2004) 39 World Health Organization. 2003. “Scaling up Antiretroviral Therapy in Resource- Limited Settings: Treatment Guidelines for a Public Health Approach.” Geneva, Switzerland: World Health Organization. 40 World Health Organization. 2003. “Treatment of Tuberculosis: Guidelines for National Programmes.” World Health Organization. WHO/CDS/TB 2003.313 41 World Health Organization. 2001. “Antimalarial Drug Therapy: Report of a WHO Technical Consultation.” World Health Organization. WHO/CDS/RBM/2001.35 Notes and references 93 42 Over 25 potential two and three drug combinations are possible. Source: US Department of Health and Human Services, Food and Drug Administration, Center for Drug Evaluation and Research (CDER). “Guicance for Industry, Fixed Dose Combination and Co-Packaged Drug Products for Treatment of HIV. Draft Guidance.” (2004). http://www.fda.gov/oc/initiatives/hiv/hivguidance.html. (Accessed 9/21/2004) 43 Afrol news. “West Africa enhances economic integration.” (2004). http://www.afrol.com/articles/11940. (Accessed 5/30/2004) 44 United Nations Population Division. “World Propulation Prospects: The 2002 Revision Population Database.” (2003). http://esa.un.org/unpp/. (Accessed 5/30/2004) 45 Roll Back Malaria Project, World Health Organization. 2000. “The African Summit on Roll Back Malaria.” The African Summit on Roll Back Malaria Abuja, Nigeria 46 This is the minimum amount needed to justify setting up a production line. Estimated from capacity of a single tabletting machine with an output of 200,000 tablets per hour operating at 1 shift a day, and including downtime for cleaning and line changes which are required when the API is changed to produce a different drug. 47 Management Sciences for Health in collaboration with the World Health Organization. “International Price Indicator Guide.” (2003). Accessible via Internet at: http://erc.msh.org/mainpage.cfm?file=1.0.htm&id=6119&temptitle=Introduction&module =dmp&language=English#top. (Accessed 5/11/2004) 48 World Health Organization. 2003. “Annex 4. Good Manufacturing Practices for pharmaceutical products: main principles.” Geneva, Switzerland: World Health Organization. Available at http://www.who.int/medicines/organization/qsm/activities/qualityassurance/gmp/gmpcov er.html 49 International Trade Center in collaboration with the World Health Organization, Essential Drugs and Medicines Policy. 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(Accessed 6/1/2004) 102 Incoterms 2000 ; Tryg-Baltica and 98 DFID Heal th Systems Resource Centre 2004 Processes and Issues for Improving Access to Medicines DFID Heal th Systems Resource Centre 2004 http://www.export911.com/e911/export/comTerm.htm#xDEQ 103 Setting net income to zero was considered but this would not allow the enterprise to remain a going concern because some income has to be retained to meet working capital needs for the following year. Notes and references 99

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