Pharmaceuticals Pricing

Medicines account for 20-60% of health spending in low- and middle-income countries (LMICs), compared with 18% in countries of the Organisation for Economic Cooperation and Development (OECD). Up to 90% of the population in developing countries purchase medicines through out-of-pocket payments, making medicines the largest family expenditure item after food. As a result, medicines, particularly those with higher prices, may be unaffordable for large sections of the global population and are a major burden on government budgets.[1] The pricing of pharmaceuticals is therefore of utmost concern in LMICs.

HOW DRUGS ARE PRICED

Pharmaceutical companies concern themselves with a variety of factors when pricing drugs.[2]

1) The research and development (R&D) costs relating to each drug is a very important issue with regard to pricing. The amount of time, effort, and money that a pharmaceutical company invests in the R&D for each drug must be considered when the drug is priced. This often leads to higher prices in order to ensure that the revenue generated will exceed the expenditures behind the drug's development.

2) The uniqueness of the drug must also be considered. That is, how many other drugs are already available that treat the same condition. If the market is heavily saturated with drugs to treat a certain condition, new drugs for the same condition will likely be priced lower.

3) Competition is another factor that affects pricing. Drug companies must consider the popularity and success of the drug’s competition, and they must determine if new drugs have added benefits over competing drugs. Additional benefits lead to premium prices.

4) Effectiveness. Drug companies must consider whether new drugs have the potential (or have proven through clinical trials) to change the current practice of medicine used to treat the conditions the drugs target. The companies must also consider whether their drugs can prevent the need for certain medical treatments or the necessity for surgeries or other procedures. Drugs that can cut down on expensive surgeries, hospital trips, and doctor visits are often priced higher because of the savings they offer customers. Drug companies also issue higher prices to drugs that can extend or even save lives. The medicines are priced according to the value that they achieve.

Ultimately, the main objective of pharmaceutical companies when pricing drugs is to generate maximum revenue and profit. Competition serves to drive prices lower. However, drug companies often balance this by pitching low to gain business at marginal profit levels and then increasing the price at steady intervals to recoup profitability in the longer term.

Pricing a drug incorrectly is one of the biggest mistakes a drug company can make. Pricing a drug too low or too high has a great impact on its potential for success. If, for example, a drug is priced too high, payers may be unwilling to pay or physicians may be disinclined to prescribe it. They may believe the drug is not worth the high cost if it is likely that it will offer too little benefit to warrant the cost. On the other hand, if a drug is priced too low, physicians may conclude that it offers a discounted form of therapy, less effective than a more expensive drug that already exists.

PRICING ISSUES

A report by the Centre for Global Development (CGD) in 2019 provided some key insights into the pricing issues related to the procurement of essential health products in LMICs.[3]

1) The prices paid for basic generic medicines like omeprazole, used to treat heartburn, or paracetamol, a common pain reliever, were as much as 20 to 30 times the minimum international reference price.

A study in 2020 found that, if LMICs were to achieve the lowest reference price, then savings of $10.7bn were possible. Perhaps more realistically, achieving the median reference price would generate $2.9bn in savings. These are recurring annual savings.[4]

2) Branded generics, which command a price premium, made up about two-thirds of the market by volume and value. Unbranded generics, usually the least expensive option, were a tiny sliver: only 5% of the market by volume and 3% by value. In contrast, in the USA and UK, unbranded quality-assured generics account for 85% of the pharmaceutical market by volume, but only about a third by cost.

3) 80% of healthcare products were procured through the private sector, where individuals pay directly for medicines out-of-pocket. LMIC governments did not yet account for a large share of total purchasing in their countries for medicines and other health products. This leads to fragmented demand and thus higher prices.

The move towards universal health coverage will address this issue. The establishment of universal health insurance is one the priorities on the health agenda of many African countries. While some countries have made more progress than others, such as Rwanda which covers more than 80% of its population, all African states seek to establish a health insurance system, an objective which is included among the UN’s Sustainable Development Goals.[5]

4: The essential medicines markets were dominated by a single or a small number of suppliers. In some LMICs, the largest seller of certain therapy and product classes accounts for upwards of 85% of all sales. Examples include: contraceptives in Zambia and Senegal; cancer medicines in Zambia; diabetes medicines in Zambia; and antiparasitics in Zambia, Tunisia, and South Africa. Lack of competition is a driver of high prices.

PROCESS ISSUES

The process that a country uses to buy drugs can also have a significant impact on their price and quality. The procurement processes used by three African countries (Nigeria, Seychelles, and South Africa) were examined in a comparative case study by the Collaborative Africa Budget Reform Initiative (CABRI), also in 2019.[6]

For Seychelles, the direct purchase of drugs guaranteed their quality, but it left the country vulnerable to exploitation by international drug companies, especially if medicines were still under patent protection. Seychelles chose to join the cross-country SADC Procurement Pool as a solution in order to consolidate its spend with other nations and thus increase buyer power.

Nigeria should be able to use its large size to procure drugs cost-effectively. However, procurement was found to take place at three different levels and there were no standard treatment guidelines for many common conditions, resulting in different drugs being prescribed. Both of these factors resulted in uncoordinated, fragmented and unplanned demand, thus leading to higher prices. Nigeria should be able to achieve lower prices by centralising procurement through a single-buyer arrangement and limiting the types of drugs procured to those on the essential medicines list.

South Africa has been able to achieve lower medicine prices through its centralised buying and competitive tendering process. A case study of best practice is indicated below.

South Africa concluded a successful antiretroviral tender process in 2019. The tender was notable for the low price that was achieved, as well as the rapid introduction of newly developed drugs. The tender was valued at R14 bn and winning bidders supply medication for a three-year period. The price being paid for the new triple cocktail of dolutegravir, lamivudine and tenofovir was about one seventh of the price paid for the same drugs in the private sector.

The government was assisted by a coalition of NGOs, which negotiated an agreement with generic drug manufacturers to manufacture the three-drug cocktail for $75 per person per year in return for a guaranteed level of minimum sales. This effectively put a ceiling on the price that other producers would be able to tender. The Kenyan government also played a role in this agreement.

The South African government called on the help of various experts. In particular, a group of epidemiologists from the University of the Witwatersrand and Boston University modelled the cost and health implications of adopting the WHO standards on antiretrovirals. One reason the team of academics was able to have such a positive impact was due to the high level of technical skill held by individuals in both the Department of Health and the National Treasury.

The Minister of Health estimated that South Africa would save R11 bn over six years due to the impact of generic manufacturers producing antiretrovirals in bulk.

LOCAL PRODUCTION

Local production of medicines in Africa remains particularly low as the region accounts for only 3% of global pharmaceutical production. This is a weakness that leads to an extremely high dependence on imports. In Cote d’Ivoire, for example, 96% of pharmaceutical products are imported, which leads to higher prices.[7]

To help the local pharmaceutical industry grow, some African states, particularly in North Africa, have relied on measures to protect the pharmaceutical market such as import taxes, tax incentives and facilitated funding for local producers. In practice, only South Africa and North African countries have managed to develop local pharmaceutical production, as well as Kenya and Senegal to some extent. For example, Morocco has succeeded in covering 70 to 80% of the pharmaceutical needs of its population.

Local production will enable distribution channels to be rationalised. Because of their current complexity, logistics costs account for a large part of the price of medicine. There has been a proliferation of intermediaries in recent years which has increased the price of medication. In Kenya, for example, intermediaries’ margins account for an excessively high 50% of a pharmaceutical product’s final price, whereas the average in OECD countries varies between 2% to 24% of the final price.

[1] WHO Guideline on Country Pharmaceutical Pricing Policies, World Health Organisation, 2015

[2] https://www.investopedia.com/articles/investing/020316/how-pharmaceutical-companies-price-their-drugs.asp

[3] https://www.cgdev.org/better-health-procurement

[4] https://www.cgdev.org/sites/default/files/PP192-MK-Procurement-Savings

[5] https://www.euractiv.com/section/development-policy/news/africa-takes-steps-to-make-medicine-more-affordable/

[6] https://www.cabri-sbo.org/uploads/files/Documents/HBS-Report_English_Final-V3-Web

[7] https://www.euractiv.com/section/development-policy/news/africa-takes-steps-to-make-medicine-more-affordable/