All opinions are my own.

Thursday, June 16, 2011

Drug Prices: Food vs. Medicine - A Difficult Choice for Some

In my recent trip to India, during my discussion with physicians about the various drugs that are used for HIV and tuberculosis, I was informed that many times patients (lower and mid economic strata) do not complete their medication course in spite of the low drug prices. This is due to family has to make a choice between food for the family and medicines for an individual. I had to explore.

I was able to get the average prices of some of the drugs in India. Comparing the price of the same drugs in US was a shock. Yes compared to India the prices of the selected drugs are higher by multiples of 2 or 3 or more.

All this begs a question why we have multiple magnitude differences when many of the active ingredients are coming from India and China. There has to be a rationale for the drug pricing in different countries. My conjecture is that the drugs are priced based on local country economics rather than on competition. Since humans want to extend their life, the drug prices are set at their highest level the customer can afford. Even with the prices being set at levels so that the customers can afford the drugs to treat their illness, many at times have to make choice between drugs and food needs. Such situations exist across the world. A question needs to be asked and it is: how and what can be done to make drugs more affordable while the companies retain their profits.

Based on economic principles competition drives to lower prices and best of the technologies drive to retain profits. However, it seems that the drivers that work in every business do not work in pharmaceuticals. Best of the manufacturing technology is not needed to deliver profits. Pricing delivers profits.

Since I have not seen many articles published about setting drug prices, one would assume that there is minimal to no discussion in the public domain. Arguments have been put for prices being high due to monies needed for new product development and need to meet different regulatory and pharmacopeia standards. If so the prices should equalize across the board in every country but that is not the case.

There are ways to lower costs. If we have one global pharmacopeia standard instead of multiple standards, as we currently have, better manufacturing technologies through higher production volume will bring the production costs down. Global politics, disagreements and having controls of standards have prevented a single global standard.

Other factors that have prevented lower drug prices are lack of “economies of scale” and less than optimum technologies to manufacture the active pharmaceutical ingredients and their formulations. This is due to low volume of products being made at many sites. Some would disagree with my hypothesis but we all know as the production volume per site increases, manufacturing technologies improve and costs come down.  

Since the pharmaceutical dosage is in milligrams, the total volume of the active pharmaceutical ingredient needed to serve customer needs is low. Volume per site is further reduced when many different companies manufacture the API. Depending on the selling price, a billion dollar drug sale per year administered at 0.5 milligram level can have total API demand of less than 2,000 pounds per year. If this API is manufactured at multiple sites, economies of scale will not exist. Most likely the manufacturing process will be inefficient and asset utilization will be less than desirable. Due to these factors regulatory compliance needs pose additional challenges. Improving on these is not part of the pharmaceutical business model as the companies are able to pass inefficiency costs to the customer and are able to satisfy their stakeholders by meeting their profit objectives.

Some might argue that my views do not hold water. I would illustrate my point using a fluoroquinolone, (Levofloxacin), an antiretroviral (Tenofovir) and Isoniazid used for tuberculosis.

Levofloxacin is used to treat a number of infections including: respiratory tract infections, tuberculosis, cellulitis, urinary tract infections, prostatitis, anthrax, endocarditis, meningitis, pelvic inflammatory disease, and traveler's diarrhea (1).

Levofloxacin (750 mg) tablet can be purchased in India for about Rs. 10 per tablet (about $0.22 at Rs. 45 per dollar exchange rate) whereas the average wholesale price for the same dose tablet in US can range between $22-24.00 per tablet. At a local drug store an uninsured person would pay about $1343.00 for 30 tablets i.e. about $45.00 per tablet.

There are about 20 companies (12 are in India) on the Drug Master File that can manufacture levofloxacin. If the global sales were about $ 2.0 billion per year, the total API demand would be less than 200,000 pounds per year. If all of the 20 companies were manufacturing the API, there is a minimum possibility of taking advantage of economies of scale. Processes will be inefficient at best.

If the selling price of the levofloxacin API were about $100.00 per kilo then at 80% formulation efficiency the cost of API in each 750 milligram tablet would be about 9.5 cents. If the factory cost of the formulated and packaged shelf ready tablet were to be another 9.5 cents per tablet, the factory cost of the formulator would be about $0.19 cents per tablet. Considering the sale price of about 22 cents per tablet in India suggests that my API price assumption is high. It also suggests that huge profits are being made in the by the companies who are producing and selling Levaquin in US, the brand name for Levofloxacin.

Another fluoroquinolone API meeting US Pharmacopeia standards is sold at about $50.00 per kilo. Same API meeting Indian pharmacopeia is sold at about $30.00 per kilo. This suggests that we need a global pharmacopeia standard to remove price differential and gain on economies of scale.

In a recent paper the process yield of Tenofovir, a HIV drug, was increased to 24% from about 13%. This is significant improvement but the yield is still low. With this yield costs associated with waste treatment and process inefficiency are being passed to consumers. If Tenofovir were a specialty chemical, at the 24% yield, it would never be a commercial product. However, since it is a profitable drug, costs become irrelevant. Prices have come down by four folds (2). Clinton and Gates Foundations have helped to lower costs and distribute these drugs. If the yield could be improved from 24% to 65% or more and can capitalize on economies of scale and the costs would reduce drastically. However, there is no interest in reducing costs further as making drugs more affordable could possibly eliminate foundation funding.   

In India Isoniazid 300 mg tablet (for tuberculosis) wholesales for about 2.0 cents per tablet. Same drug in US wholesales for about 7.6 cents per tablet. Even at the low price many in India have to choose between food and medicine.

To retain profits companies are raising prices. Governments are slowly moving towards new drug and price controls (3). If this were to happen across the board, companies would be forced to change their business model. Since generics have come to play also, the new landscape will be interesting. 

Everyone would agree that competition improves quality and lowers costs. I wonder would a “subsidy-less” world bring real competition and innovation to the pharmaceutical world. Would the drug prices be lowered? I fully recognize that the healthcare programs are necessary for the masses but does that mean we have to live in the topsy-turvy world of drug price differentials and the drug prices could stay at their highest levels.

We have to recognize that the health insurance programs subsidize medicine prices for the consumers. Thus in the countries that have such programs an average consumer does not know or understand much about price of medicines. Even the physicians do not know the sale price of the medicines they prescribe. If there were no insurance programs, we all will have to pay for the medicines from our pockets. This could force many to choose between food and medicines. Should we accept the scenario of having to choose between food for the whole family and medicine for an individual? If this were to happen it would be a challenge and the ensuing debate would be of a kind that we have never imagined.

Girish Malhotra, PE
EPCOT International
  1.  http://www.drugs.com/monograph/levofloxacin.htm
  2.  http://utw.msfaccess.org/drugs/tenofovir-disoproxil-fumarate
  3. http://www.businessweek.com/magazine/content/11_24/b4232025180703.htm

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