Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697632926275.pdf (Australia)
The role of the private sector in promoting economic growth and reducing poverty in the Indo-Pacific regionSubmission 68 Given this key relationship between health and economic growth, policy makers would be wise to consider how improving health delivery systems can be incorporated into development assistance and policy advice designed to increase economic growth rates.
The importance of private sector pharmaceutical markets While public health systems form the bedrock of delivering health care in developing countries, the private sector also plays a vital part, not least in relation to pharmaceuticals, as public health facilities often struggle to maintain consistent and comprehensive availability of medicines3.
When public resources are not available, therefore, many of the poorest patients have no choice but to use their limited resources to purchase medicines from the private sector.

This observation is borne out by WHO data on medicine expenditures where the 2004 WHO World Medicines Situation report indicated that of the $4.40 per capita per year spent on medicines, $3.20 is spent in the private sector4.
Though the private sector typically has better product availability than government facilities, prices for medicine in the private sector are disproportionately high compared to the public sector and are frequently either beyond the reach of those on low incomes or liable to cause family hardship.
For example, in its latest World Medicines Situation (WHO 2011) WHO reports that in more than half of the countries studied for the report, treatment of a respiratory infection with a 7 day course of a generic antibiotic5 bought in the private sector would cost more than 2 days’ wages6.

However, if generics are unavailable and an originator brand is used, then the cost would increase to 10 days’ wages in over half the countries studied7.
For people living with chronic illness the situation is even worse given that they must take their prescribed medication throughout their lives.

While the cost of treating an acute illness can cause hardship, there are often coping mechanisms in place that help the family overcome the short term financial consequences.

For sufferers of chronic illness, however, the cost is an on-going burden.
Hypertensive diabetics, for example, require a combination of an oral antidiabetic and an ACE inhibitor for their hypertension.

WHO reports that such a common combination would cost 5 to 6 days’ wages Pakistan, Mongolia and the Philippines and as much as 15 days’ wages in parts of Africa.

In all but two of the countries studied, WHO reported that this combination would cost more than 2 days’ wages8.
Part of the reason for higher prices in the private sector is the frequently uncompetitive nature of the private sector pharmaceutical supply model prevalent in many developing countries and the inefficiencies this creates.
3 The latest World Health Organisation (WHO) world medicines report, The World Medicines Situation 2011, states that across “all regions, public sector availability of generic medicines is, on average, less than 60%.” THE WORLD MEDICINES SITUATION 2011; MEDICINES PRICES, AVAILABILITY AND AFFORDABILITY (WHO 2011), Section 1.2.1, page 4. http://apps.who.int/medicinedocs/en/d/Js18065en/ 4 http://apps.who.int/medicinedocs/en/d/Js6160e/7.html#Js6160e.7 5 Ciprofloxacin 500 mg, twice a day for 7 days.
6 Based on the salary of the lowest paid government worker, which is the yard stick taken to indicate general affordability.

It should be borne in mind, however, that many people in low income countries earn less than this, which means that the standard indicator is likely to underestimate actual affordability.

7 World Medicines Report 2011, section 1.2.3, page 8.

8 World Medicines Report 2011, section 1.2.3, pages 9-11.
Page | 2 The role of the private sector in promoting economic growth and reducing poverty in the Indo-Pacific regionSubmission 68 In this brief overview the predominant current model will be discussed, as well as an alternative model that has been proven to utilize market competition to lower prices and improve product availability thereby expanding access to a larger proportion of the population.
Further exploration and adoption of this model would have a significant impact on the ability of the poorest to access essential medicines and remain healthy and active contributors to their country’s economy.

Pharmaceutical Supply Channels in Developed and Developing Economies In developed economies, pharmaceutical supply systems tend to be highly structured, with wholesaling and distribution concentrated in the hands of a few companies9.
In the US, for instance the three largest wholesalers10 distribute more than 90% of all pharmaceuticals sold.

The situation is very similar in Europe and Japan; in the UK, for example, three major wholesalers account for 65% of medicine supply while in Germany, four wholesalers account for 75%.

A similar situation is found in Australia where a 2007 study11 by the Centre for Strategic Economic Studies reported that 90% of the pharmaceutical wholesaling market is dominated by three companies12.
The economies of scale and tight competition amongst these wholesalers are able to ensure that patients are generally able to access the medicines through retail outlets and hospitals at affordable prices.

The situation in developing economies tends to be in sharp contrast to this and contributes enormously to high prices, limiting access to the poorest.
As in developed economies, pharmaceuticals in developing countries are distributed through a network of importers, wholesalers, hospitals, retail pharmacies and large networks of formal and informal drug shops.

However there are some key differences that limit their ability to provide the same prices and service levels as their counterparts in the developed world: 1.

Fragmentation These distribution networks tend to be small, often family owned, and market a narrow range of products.
They also have a tendency to have a limited geographical reach13.

China, for example, has 16,500 wholesalers serving 140,000 retail pharmacies, compared to 3 wholesalers in the United States who serve 50,000 outlets14.

Moreover, the three largest Chinese wholesalers have only 42% of the market compared to 90% in the US.
This type of fragmentation is common to the pharmaceutical 9 For further information related to this section see: Yadav P., and Smith L. Pharmaceutical Company Strategies and Distribution Systems in Emerging Markets.

In: Anthony J. Culyer (ed.

), Encyclopedia of Health Economics, Vol 3.

San Diego: Elsevier; 2014. pp.

1-8.

10Cardinal Health, McKesson and AmerisourceBergen.

11 The Pharmaceutical Industry in Australia, Working Paper No.
34, Kim Sweeny, Pharmaceutical Industry Project, Working Paper Series, September 2007; Centre for Strategic Economic Studies, Victoria University of Technology; Section 2.3, p8ff http://www.cfses.com/documents/pharma/34-Pharmaceutical Industry Aust Sweeny.pdf 12 API, Sigma, and Symbion Health 13 A 2003 study in Tanzania, for example, found that of 17 wholesalers studied, 4 had customers in fewer than 3 of the country’s 20 regions with 10 having turnovers of less than $2 million and 6 of those less than $1 million.
See: Management Sciences for Health, Center for Pharmaceutical Management.

2003.

Access to Essential Medicines: Tanzania, 2001.

Prepared for the Strategies for Enhancing Access to Medicines Program.

Arlington, VA: Management Sciences for Health 14 Zhou, E (2007).

China Pharma basking in its spotlight.

Genetic Engineering and Biotechnology News 27(5), 60- 64.

Quoted in Yadav and Smith (2014).


Page | 3 The role of the private sector in promoting economic growth and reducing poverty in the Indo-Pacific regionSubmission 68 distribution sector across all developing countries15 and prevents the economies of scale that are a key characteristic of those markets in developed economies.

2.
2.

Multiple Levels and Exclusivity The supply chains in developing economies are further characterized by having many intermediary levels between manufacturer and patient, each level of which adds cost to the final price the patient pays for the product.

Exclusive agency agreements between particular manufacturers and distributors are also often in place, which also acts to restrict competition and inflate prices.

Government taxes and duties can add another twist to this cost spiral.
The combination of these factors results in a heavily inflated final price when it reaches the end user, the patient.
WHO reports, for example, that private sector wholesale mark-ups range as high as 380% in the countries it studied for the 2011 World Medicines Situation report while retail mark-ups range from 10% to 552%16 The high mark-ups along the supply chain are also a constraint for manufacturers, especially those pursuing price-sensitive growth strategies that depend on a larger percentage of the population being able to access their products.
Furthermore, poor IT and information systems found in wholesalers and distributors, cloud knowledge of demand, further exacerbating this problem.

Policy makers and development agencies seeking to expand access to essential pharmaceutical products as part of their efforts to encourage economic growth should focus some attention on steps that will streamline the pharmaceutical supply chain by channelling supply through fewer, but larger distributors.
The ‘Pre-Wholesale’ Approach One promising way of achieving this is through the development of regional and national pre- wholesaler services.

The pre-wholesaler model enables manufacturers to aggregate their supply to a region or country through a single logistics service provider and distribute to multiple wholesalers/distributors.
While this may appear to add another layer to the supply chain, the benefits of consolidation flowing from this acts to streamline and simplify the distribution system, benefiting the manufacturer, the distributor(s) and the end user: For the Manufacturer • Consolidating their distribution channel extends their market reach and achieves higher sales For the Distributor(s) • Reduced lead times and investment in stock reduces costs and markups; • Better product selection and availability; • Access to better financing terms, interest rates and credit availability from the pre-wholesaler (compared to the 16% to 28% interest on capital distributors typically when importing directly from the manufacturer); 15 In many developing countries this is due to the historic dominance of the public sector, meaning volumes in the private sector were always relatively small, and also a legacy of the long standing exclusive arrangements importers tended to have with particular manufacturers.
16 World Medicines Report 2011, section 1.2.2, page 7 Page | 4 The role of the private sector in promoting economic growth and reducing poverty in the Indo-Pacific regionSubmission 68 For the Patient • Cost savings; • Better product selection and availability; • Better service (more geographies/outlets served).

The pre-wholesale distribution model is not just a theoretical concept; it has been implemented in low-resource settings with strong and consistent results.
Case Study 1: Multinational Manufacturer 1, Kenya The following example, based on the experience of a large multinational pharmaceutical manufacturer in Kenya, illustrates this case.

Original Distribution Model In line with the typical situation found in developing economies, the original distribution model had multiple levels in the supply chain, each adding cost to the final price paid by patients.

The following schematic illustrates this.


As can be seen in this simplified schematic, the price to the patient is more than three times the initial price when sold by the manufacturer.

The price relationships in the model are actual.

Exit Price to Patient 323 Phy Dr Pharm Phy Dr Pharm Exit Price to Phy/Dr./Pharm 215 Exit Price to sub-distr.
172 Sub-Dist Sub-Dist Sub-Dist Sub-Dist Distributor A Distributor B Exit Price to Distributors 100 Manufacturer Original Model Reformed Distribution Model In order to expand sales and reduce prices to the final patient, the manufacturer pursued a distribution strategy based on working with a trusted logistics partner as a pre-wholesaler.
As the following diagram illustrates, the pre-wholesaler became the manufacturer’s preferred channel to market, with the original distributors sourcing their stock from the pre-wholesaler instead of directly from the manufacturer.

The legacy status of the original distributors was honoured, however, as they were able to access stock at preferential prices, paid for by new sub-distributors paying a slightly higher price to the pre-wholesaler.
The removal of exclusive marketing arrangements generated competition and reduced market prices, thereby broadening the marketing/sales base for the products in question.

Importantly, the products in question now cover the whole country and the final price to the patient has been lowered by a third compared to those originally being charged.
Page | 5 The role of the private sector in promoting economic growth and reducing poverty in the Indo-Pacific regionSubmission 68 Exit Price to Patient 236 Phy Dr Pharm Phy Dr Pharm Phy Dr 236 Exit Price to Patient 158 Exit Price to Dr./Phy/ Exit Price Legacy Exit Price Exit Price 158 105 100 Sub-Dist Sub-Dist Sub-Dist Sub-Dist 117 Exit Price to Sub-dist Distributor A Distributor B Prewholesaler Prewholesaler Manufacturer 100 Exit Price to Prewho Restructured Model The end results of this have included: • Market price reductions • Multiple distributors and national sales representation for manufacturer • Market base broadened to cover a larger section of the population thereby improving access and health outcomes Case Study 2: Multinational Manufacturer 2, Kenya Another example from East Africa illustrating the impact of this kind of market restructuring comes from one of the world’s top 10 multinational manufacturers marketing its products in Kenya.
As in the first case study, this manufacturer worked with a pre-wholesaler to reduce the price to patient17.

By establishing a more efficient, pre-wholesaling distribution strategy with a trusted partner, the company was able to reduce the price to patient across a range of 6 lines of prescription and OTC products by between 44-55% and saw an increase in volume sales of 300% in the first and second years after making the change.
In addition, the original distributor saw its sales double over the same time period, thus increasing its profitability as well.

In this case, the cost savings achieved were used to improve incentives to different levels of the supply chain while at the same time reducing prices to the final patient by up to 55%.
The results of included the market being opened from one to seven distributors who were able to shift from quarterly to weekly orders, thereby reducing their outlay on working capital and associated costs and improving service levels to customers.
As a result, a larger section of the population was able to access the pharmaceuticals of the manufacturer, which is schematically illustrated in the following graphic where the Product Affordability Point was shifted so that a bigger slice of the population was able to afford and access the pharmaceuticals in question.

17 Africa: A Ripe Opportunity.

Understanding the pharmaceutical market opportunity and developing sustainable business models in Africa.
IMS Health, White Paper Page | 6 The role of the private sector in promoting economic growth and reducing poverty in the Indo-Pacific regionSubmission 68 The role of the private sector in promoting economic growth and reducing poverty in the Indo-Pacific regionSubmission 68