Disclaimer

All opinions are my own.

Monday, November 19, 2007

Things we know about drug prices but are afraid to ask.

Recently an article presented a perspective titled “Cost per day/Cost per kilogram: What’s the right price for an API? That depends whether you see things like a pharma company – or like a CMO.”

This article illustrates why the drug prices are high. Drugs are competitively priced with similar molecules. I do not believe anyone has asked the customer what can she/he pay or should pay. Customer wants to live and she/he is going to pay whatever is the demanded price.

Due to large price differences of medicines in US and many other countries, people explored alternate sources for their medicines. Internet made that easier. This led to import of drugs that could also be counterfeit and illicit. Hopefully, Wal-Mart’s offer of $4.00 for a month’s supply generics will reduce these imports and counterfeits.

The referenced article suggests that the Wal-Mart’s prices are lower due to shorter supply chain. Is Wal-Mart not making any “enough” money? I believe they are making their targeted profit margin, as their goal is to make money for their shareholders.

Wal-Mart has done its homework at $4.00 price level. It might be worth looking at the price of formulated drug. The following is an illustrative case and has no similarity to any drug.

I have assumed an active (API) cost price is $50.00 per kilo. It is also assumed that the combined cost of excipients is $25.00 per kilo. The API to excipient ratio in the tablet is 1 to 9. Based on these assumptions, component cost of API and excipient for a 100-milligram tablet is 0.5 cent and 2.25 cents respectively. I have assumed that the cost to formulate and package is 2 cents per tablet. This brings the total cost of finished tablet to 4.75 cents.

At $4.00 for a 30-day supply, per tablet price to the customer is 13.33 cents. Thus, there is a profit margin of 8.58 cents (about ~60%) per tablet between the formulator, distributor, and Wal-Mart. 8.58 cents might look a small number but when you sell millions of tablets, dollars add up.

Cost of the API is about 3.75% of the Wal-Mart selling price. It is a low number. The API producer has made their desired profit margin. If Wal-Mart, CVS, Target, Walgreens, and other major drug sellers along with the API producer want to increase further their margin, they can do that by having the API supplier and the formulator to reduce their costs by implementing improved manufacturing technologies. In addition to improving their margin, the API producer and formulator will have fewer toxins to treat for safe waste disposal i.e. reduced cost and will also reduce environmental impact. Besides making higher profit though innovation, we have an obligation to “our planet earth.” We have to do our best to preserve its serenity and grandeur. We owe this to ourselves and for the generations to come. Thus, technology innovation is necessary.

It is conjectured that the cost of API component of a tablet is small compared to the selling price and for that reason; there is no incentive to develop and implement better technologies. This to me is a morbid thinking. It is like saying why improve our business practices if the business can make significant money because the customer would pay sellers price as she/he want to live. Complacency and lack of desire to improve invites competition and we are seeing that in the Pharma world.

Girish Malhotra

Thursday, November 15, 2007

Environmentalism, Technology and Human Life

Environmental conservation became a way of life in early seventies. Every manufacturing industry had to comply with appropriate effluent standards. Conservation technologies were developed and implemented to meet necessary regulations. Chemical industry used either of the following options to comply with the regulations.
  • Improve processes to maximize conversion of the raw materials to finished goods so that the waste treatment load is minimized.
  • Develop and use technologies to treat and dispose the unconverted raw materials and intermediates.

Commodity, specialty, and fine chemicals, due to their competitive pressures maximized their efforts to improve the raw material conversion and relied on option #1. However, the Brahmin cousins of chemicals “pharmaceuticals,” who have a disease curing and life extension value due to their toxicity to bacteria have mostly relied on the second option. This has been possible as pharmaceuticals have been able to achieve their profit margins due to relatively low competitive pressures and their ability to charge their demanded price. Customers have paid for the low conversion of raw materials in useful products as well as disposal of the undesirable reaction byproducts.

Since 2005, the global pharmaceutical playing field has suddenly seen many players challenging their big brothers. With about $100 billion dollars of ethical drugs coming off-patents and pressure from their generic brethren, major players are under considerable pressure to meet stock market and shareholder expectations. Lack of blockbuster drugs in the pipeline is also adding to their woes.

Brahmins who until recently were “untouchables” have become vulnerable and are scrambling to retain their profit margins. It is surprising that they are following the same road that has been unsuccessfully travelled by many in the chemical and other industries. Recently we have seen layoffs, plant closures and they are accelerating. Research is moving offshore. I guess the Brahmins are no longer the “untouchables.”

Short term with the current strategy the Pharmaceuticals might be able to retain their profits. However, there is a downside and it is disappearance of the knowledge base while the generics becoming stronger competitors. Generics are taking advantage of this situation and expanding as they have a growing customer base, (almost everyone in the world wants lower cost drugs).

Is there a way out of this dilemma? There is and it is through manufacturing technology improvements. Companies need to develop processes where they do not have a double jeopardy, which they currently have. Double jeopardy is low raw material conversion to finished goods and then spending monies to convert the toxic materials to products, which can be properly and safely disposed to meet the necessary environmental regulations.

Pharmaceutical manufacturing plants may meet the established environmental standards but the small percentage of chemicals in the effluent could still be toxic to the plant and aquatic life. Thus to prevent damage to the life, pharmaceutical companies might have to meet an “ecotoxic” standard.

Ecotoxic definitions and control limits would have to be developed for most of the pharma raw materials, their intermediates, and actives. This can be a prolonged and expensive process. This will be resisted by the industry. It is difficult to conjecture the implementation costs but would be high. All this could raise costs and potentially make drugs more expensive.

Is there a choice and can we reduce the cost of drugs rather than raising them to achieve a certain eco-balance? Life extension also becomes a part of the economic equation. These issues can be discussed and I am not sure of the “correct” answer. However, while all this is debated, the pharmaceuticals will still be needed. Is there an economic interim solution? There is, and it is “need to improve the active pharmaceutical manufacturing and formulation processes.” Some could say that in the overall scheme of things, such an exercise is not worth the effort. Such efforts will not only reduce pharma costs but will also reduce the toxic load on the effluent wastewater treatment and soil. And finally, if some one says or believes that in total scheme of things technology improvement and cost reductions are not important and they have “NO” impact on our planet’s environment, then we need to think about the legacy we will leave behind for the next generation and the generations to come.

Girish Malhotra

Saturday, November 3, 2007

What is India?

I just returned from India and the changes I see in the last 18 months are enormous. It begs a question "What is India?"

India
is a complex mix of every imaginable culture, color, creed, religion, caste, and social structure. In 2007, India celebrated its 60th Independence anniversary. This is a milestone but I do not look at India as a 60 year old but a 16-year-old youngster who has a “can-do” attitude. Why the 16 year old?

Even though India became independent in 1947, it was shackled by its stringent policies, which suppressed economic growth and bread every ailment that goes with it. In 1991, by stroke of crisis, luck, quirk, and/or their combination, then Prime Minister Mr. P. V. Narasimha Rao changed the course of India on advice of the current Prime Minister, Dr. Manmohan Singh, Finance Minister P. Chidambaram and others. Thus, a sixteen year.

Any visitor can be awed by India when they land at any of its gateway airports. Traffic, people, vehicles, and chaos at any road intersection overwhelm many visitors from “the developed countries.” For some strange reason this chaos teaches India tolerance and desire to get ahead. This chaos also lets an Indian look at multiple scenarios simultaneously and come up with a solution.

I look at India as a runaway train with its 20-40 year old having a time of their life. This is evident by their totally blue-sky goals and objectives. Can they make it?

My answer is yes. Majority of the 16 year old grow up to be a fine young person. They do stumble but with societal support, they quickly recover, grow stronger, and move forward. This is how I see India.

Star date 2025 will give us an interesting picture.
Signs are there.

India's stock exchange index has gone from 10, 000 to 20,000 in twenty months. Bill Gates used to be the richest person on the planet. Last week Mr. Mukesh Ambani became Numero Uno.

Girish Malhotra