Commodity cost reduction

This section examines how differential pricing, out-licensing, generics, buying commitments and pooled procurement have been used to reduce the costs of reproductive health commodities.

Differential pricing

When manufacturers agree to offer products at a lower cost in certain markets, this is termed ''differential pricing." The practice is now common particularly with expensive drugs. Most pharmaceutical companies now offer some drugs at lower prices in developing country markets, primarily anti-retrovirals and anti-malarials. Arguably, this trend began with contraceptives; the lower price that USAID and other large procurers have negotiated for contraceptives in developing countries for years is a form of differential pricing. The Morocco case study provides an example of contraceptive differential pricing.

For more on differential pricing see:

Out-licensing

Another product cost reduction strategy is to out-license a branded product, which may or may not still be on patent, to a generic manufacturer in developing countries. Organon has done this with oral contraceptives (OCs). For Cyclofem, the Concept Foundation is the master licensor to commercial companies and licenses the product to Pharmacia in the US and a generic Mexican licensee for manufacturing and sales in Latin America. Such out-licensing enables the pharmaceutical company to provide product at a lower price in developing country markets, while avoiding pressure to charge the same low price in developed country markets due to reference pricing.

Generics

As technology and intellectual property rights barriers decline for older contraceptives, emerging market generic companies have increased their presence as suppliers to programmes. To date, generics have been supplied to domestically based reproductive health programmes (Pakistan case study) , but the market share of developing country manufacturers in their own markets as well as in other countries is unknown at present.

Concept Foundation and others have suggested that non-indigenous manufacturers may never sell into some markets such as India and China, where the barriers to entry may be too high or the potential for profit too low. They also believe it may be unrealistic to expect generic manufacturers to enter developing country contraceptive markets without assistance, given the minimal prospects for revenue relative to other markets. However, strong presence of emerging market manufacturers in the EPI (Expanded Program on Immunization) vaccine business shows potential for interest in low-margin business.

We also know that 56 per cent of India's exports of active pharmaceutical ingredients and finished products went to developing country markets in 2003, so clearly these markets are of some overall commercial interest to Indian firms, at least in some product sectors. See The effect of changing intellectual property on pharmaceutical industry prospects in India and China: considerations for access to medicines.

Assistance to generic manufacturers (especially “southern” low-cost manufacturers) may expand the availability of low-cost generics by assisting with registration, market sizing and scoping, business planning support, marketing and policy issues as well as providing assurances of increased volume in particular markets. Direct incentives might also be possible in the form of a loan or cash grant.

For more on the role of generics and developing country production of medicines, see:

Partnership with generic manufacturers has recently emerged under the new label of “Tier 2,” though the concept of tapping into emerging market suppliers with their lower cost structures has existed for many years (it was planned for Egypt and India in 1998). Key Social Marketing in Pakistan ( Pakistan case study ), PSI in Nigeria, ICON in Romania, Honduras, Jordan and other “Tier 2” study countries and Concept Foundation in many countries are all existing or emerging “Tier 2” examples.

Buying commitments

Another MDA advocated by some is for donors, governments and/or implementers to make buying commitments for set quantities of products. The concept of long-term buying is already practiced by USAID using their contraceptive contracts with the R&D- (research and development) based industry and at least one social marketing organisation has signed 5-6 year buying agreements.

Pooled procurement

This is an MDA that could lower product costs by increasing the volume of purchases and thereby lower the price. Programmes or countries would join together to procure products. The logistical challenges of multi-programme and international procurement may add a prohibitive cost. Complexity and resulting costs were key factors in the DELIVER Project's assessment of the feasibility of a West Africa regional procurement, as they determined that the lack of standardisation of essential medicines lists, drug protocols, product registration and packaging increased the complexity of pooled procurement for the region to a prohibitive degree. Added complications (and potential costs) include the logistics of regional warehousing and transporting the products around several countries, communications and financing by each country. See The West Africa reproductive health commodity security study: summary of findings from phase one. Nevertheless, pooled procurement may be viable in some situations, and in fact essential for supply security in some product sectors, such as vaccines.