E-drug: Economics of antiretroviral manufacturing
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My earlier request for information regarding costs to manufacture of
antiretroviral (ARV) drugs has, perhaps not surprisingly, generated
little response. But it's still a pity, because as other activists have
noted, if we are to discuss such matters on equal terms with the drug
companies, we must first understand their business, their finances and
what constitutes a reasonable profit margin. This is not to defend
them; some will see it in terms of 'knowing your enemy'.
That said, I have major doubts about the benefits of manufacture of
these drugs in developing countries. I have no experience of
manufacture of drugs, but I base this at least in part upon almost 20
years of experience of managing a manufacturing operation in a
developing country.
There are two elements which impact: comparative manufacturing cost
and global capacity. Elements like royalties and profit margins should
not enter into this, since they can be addressed regardless of
source-let me come back later to these.
First as to the costs. In general, developing countries have only two
advantages compared with industrialized countries in this regard: lower
labor cost and reduced local distribution cost. Sometimes raw materials
are produced locally, and sometimes--not always--this can also provide
cost advantage. Some of the raw materials for pharmaceuticals may be
locally produced, but I suspect this is not the norm; my understanding
is that in Indonesia, with a 200 million market, most materials for drug
production are still imported.
Lower labor costs only provide real advantage if there is significant
labor input into the product. Perhaps some elements of drug
production are labor intensive, but my guess is these are few. My
understanding is that most modern drug production is in highly
automated plants with minimal human involvement--only in this way can
quality be assured. (Please someone correct me if I'm wrong!)
Lower local distribution costs arise from elimination of the freight and
associated costs to import the finished product from the traditional
source. I would doubt if these amount to a very significant proportion
of total costs of a drug in a developed country--again, please correct
me if I'm wrong.
On the other side of the balance sheet, manufacturing in a developing
country generates comparative cost disadvantage in several areas.
Costs of capital are often higher so the investment becomes greater.
Anyone who has operated in a developing country is aware that there
are often 'hidden' costs connected with obtaining required approvals
and permits--and these can amount to a very significant ongoing cost
premium. And production efficiency is frequently lower, again adding
to costs. Only if the aggregate benefit of lower labor cost plus lower
local distribution cost exceeds these additional costs will local
production result in a lower product cost.
I mentioned that the decision is also impacted by global capacity. If
capacity already exists elsewhere in the world to produce the required
drugs without additional investment, this is clearly a more
cost-effective solution than adding additional capacity
elsewhere--unless the cost of shipping to the market from the existing
source offsets the benefit of better utilization. But if (as I suspect is
the case if sufficient of these ARV drugs must be produced to satisfy
the total potential market), global capacity is insufficient, it may make
sense for other reasons to add capacity closer to the potential market.
If this is the case, we still need someone to put up the capital cost--in
hope of a return on that investment--shareholders the world over have
shown little stomach for philanthropy! In doing so, they will assess the
risks involved, among them the risk that the product will become
obsolete before the investment has been written off. In today's world,
with new ARV drugs being developed at a record rate, most would
want to see a payback well within five years--many investors in
developing countries look for no more than three for any investment. A
longer payback is often acceptable in more developed economies with
less uncertainty and more options for reallocation of manufacturing
capacity. The longer the payback, the lower the cost of the product.
(Again, remember I'm still talking cost, not price!)
This is the economist's view of the 'ideal world,' with no 'distortions'
resulting from tariff or non-tariff barriers, or incentives provided for
local production. But if such exist, these distortions still effectively
add to costs, and instead could just as easily be applied to subsidy
with equal benefit to the consumer.
Finally to get to my point: if it costs more to produce the drug in a
developing country, as activists we should not be advocating this
approach. Surely the lowest total cost solution offers the best answer
for our 'clients'. It seems that we are convinced (perhaps reasonably,
perhaps even correctly) that the drug companies are making an
unreasonable profit. We feel that if other companies were able to
produce the same drug in competition, this would result in a lower
price. This may be true, but not by a huge amount--local drug firms
making 'pirate' copies of AZT generally sell for around 80% of the price
of the genuine--and they are not having to pay development costs. No,
don't lets expect drug companies in developing countries to be any
more philanthropic than the multinationals! In addition, there is now
competition between rival ARV drugs--a report just out says d4T is
better than AZT. Has that reduced the cost of AZT? Not by a very
much.
I honestly believe that our best bet is to understand the economics of
drug production, and use this knowledge to exert greater pressure on
the pharmaceutical companies. But I think we also need to be realistic:
there is little hope that we will succeed in persuading anyone to
supply ARV drugs at an affordable price to all--or even most--of the
25+ million positive people in the developing world--this would be a
fast track to bankruptcy. And we'd still need trained doctors to
supervise the treatment and large sums spent on viral load and other
testing to support them. And we still wouldn't have clean water for
most of them to wash the pills down with...
Chris
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Chris W. Green (chrisg@rad.net.id)
Jakarta, Indonesia
Tel: +62-21 846-3029 Fax: +62-21 846-1247
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