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  • Pharmaceuticals Policy and Law 18 (2016) 5566 55DOI 10.3233/PPL-160432IOS Press

    Understanding the pharmaceutical value chain

    Murray AitkenIMS Institute for Healthcare Informatics, 100 IMS Drive, Parsippany, NJ 07054, USATel.: +1 973 316 4034; Fax: +1 973 541 3589; E-mail: maitken@theimsinstitute.org

    Understanding the pharmaceutical value chain requires the identification of each component from man-ufacturer to end consumer of medicines and to understand their interaction. In most cases, the manufac-turers selling price represents only a fraction of the retail price of a drug. More than half of the end userprice results from insurance, freight charges (CIF), import tariffs and charges, importer margin, distributormargin, retailer margin and taxes.

    The article describes the elements of the medicine value chain, outlines factors and costs that contributeto the difference between the net price a pharmaceutical manufacturer receives for a drug and the finalamount paid for the drug by the end user. It quantifies the price build-up for specific therapy areas andcountries and illustrates the diversity of approaches and costs associated with the value chain through casestudies.

    Keywords: Pharmaceutical value chain, pharmaceutical distribution and retail margins, pharmaceuticalcost analysis

    1. Introduction

    The growing role and use of medicines in healthcare systems globally, driven bothby innovative medicines emerging from research and development investments andthe expansion of access to meet the imperative of universal health coverage, bringsgreater importance to understanding the pharmaceutical value chain. This includesthe full set of activities that occurs between the point when a medicine is manufac-tured and shipped from a production or import facility until the time it is received bya patient in the course of their medical care and treatment.

    At each step, understanding the specific elements of the value chain, the contribu-tion to the health system that is provided, and the cost components that are incurredprovides important context and perspective to the full value that medicines can anddo play in advancing population health around the world. However, components ofthe value chain can and do differ both between and within markets depending on thetype of medicine, channel of distribution, reimbursement regulation, or geographicregion. Country comparisons underscore the extent to which health systems differ ina multitude of ways and for many reasons.

    Recent research on this topic focused on seven markets, representing a range of in-come levels, health system development and geographic regions, and comprised theNetherlands (a high income country with a rational approach to pricing and margins

    1389-2827/16/$35.00 c 2016 Network of Centres for Study of Pharmaceutical Law. All rights reserved

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    that is useful as an anchor country for comparison purposes), Brazil, India, Indone-sia, Kenya, Russia and South Africa [1]. The researchers also selected five therapyclasses representing a mix of chronic and acute disease areas, and comprised antibi-otics, diabetes, epilepsy, hypertension and respiratory. For each therapy area and ineach country, analysis of costs, margins and mark-ups was undertaken, indexed to100 and represented in a way that enables comparison.

    2. Major components of the pharmaceutical value chain

    In advancing the understanding of the pharmaceutical value chain, it is useful tolook at three major components:

    1. Manufacturing of the medicine: In order to produce a medicine, a number ofsteps are involved, from the initial research and development phase, to gainingregulatory approval which allows a medicine to be sold in a market, to thefinal commercialization phase. The specific steps and requirements will differbetween types of medicine, manufacturers and countries.

    2. Distribution to the dispensing point: This step includes the transportation andhandling of the medicine from the manufacturer to the end user, whether thisis a retail pharmacy (retailer), hospital or dispensing doctor. The complexityof this journey will differ depending on manufacturer location, the need forimportation of the medicine, the nature of special handling requirements, andthe geographic location of the end user which will vary between large urbancenters and remote rural villages.

    3. Dispensing to the end user: Providing the correct medicine dosage and form,to the right patient, in a convenient and timely manner is the final step in thevalue chain. This step can also involve a number of additional activities, in-cluding checking for potential interactions, providing advice, and processingreimbursement claims, each of which is intended to ensure the patient receivesthe full benefit and value from the medicines they receive.

    In each of these components of the value chain, a range of costs are incurred andvalue added, as summarized in Fig. 1.

    3. Activities, costs and value added in manufacturing medicines

    Broadly speaking, there are two categories of manufacturing required for drugproduction: active pharmaceutical ingredient (API) manufacturers which produce theraw ingredients used in medicine; and finished form manufacturers which producethe final product to be sold to market and consumed by the patient.

    Finished form manufacturers can also be categorized as innovators or generic com-panies. Innovator companies invest in research and development in order to discover

  • M. Aitken / Understanding the pharmaceutical value chain 57

    Fig. 1. Costs incurred and value added in components of the pharmaceutical value chain.

    and bring new medicines to market. Due to the large financial investment involved,these medicines receive a period of market exclusivity. At the point this expires,generic manufacturers are able to manufacture and bring to market generic versionsof the original brand molecule which contain the same active substance, producethe same therapeutic effect and are manufactured to the same quality as the originalproduct.

    For originators, the largest costs are associated with drug discovery, which identi-fies new chemical or biologic entities that have the potential to advance the currentstandard of disease treatment, and the costs of subjecting potential drug candidatesto rigorous testing through clinical trials, which many will fail to complete. Addi-tional costs are incurred in the submission of applications to regulatory agencies,and once approved, costs are incurred by manufacturers to promote and educate keystakeholders about the product and the benefits it can bring to patients. It is diffi-cult to put an exact figure on the cost involved in bringing a medicine to market, asthis will differ between the type of drug, level of innovation and magnitude of riskinvolved [2]. In contrast, generic manufacturers normally have relatively low devel-opment and manufacturing costs. Their main means of promotion is through tradeincentives, offering larger discounts to secure volume sales.

    The value added from the generation of a new medicine is first and foremost thatwhich directly relates to patient treatment. Such advances may tackle a new diseaseor indication, improve health outcomes, treatment safety, tolerability and/or side ef-fects and the ability to better treat specific patient sub-populations. In addition, thereare wider benefits to the health system such as decreasing the burden on other healthresources and overall societal benefits such as enabling people to return to work.

    The value added from generic manufacturers is that of introducing competitioninto the market, which in an efficient market can help payers achieve savings onolder treatments in order to invest in new ones or offer lower cost alternatives topatients in out-of-pocket markets.

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    Fig. 2. Net manufacturer selling price compared to end consumer price.

    Unlike prices for other products, medicine prices are determined by pricing poli-cies which are unique to each country. For example, in Russia the maximum ex-manufacturer price for drugs on the essential drugs list is based on product type andwhether the product is manufactured in Russia. In contrast, in Brazil, trade and enduser prices are regulated and the price at which the pharmacy purchases medicine(plus VAT) must not exceed this regulated trade price, leaving wholesalers to nego-tiate their discounts with the manufacturers. The official (regulated) or negotiatedprice however, is not always the price that the manufacturer receives. There are anumber of factors which impact the level of a manufacturers net price. One of thelargest is trade discounts which are offered by manufacturers to wholesalers or phar-macies and are negotiated in business to business transactions. These discounts varyin size depending on the purchasing power of the buyer and level of competition, butas a general rule of thumb generic manufacturers often offer much larger discountsin order to secure volume share. For example in Brazil generic manufacturers mayoffer discounts of over 50% from list prices, while originators may offer discountsin the range of 1015% [3].

    4. Manufacturer costs relative to end user price

    Manufacturer costs relative to end user price vary widely across the countries stud-ied, and range from 24% in Kenya, to over 64% in the Netherlands, as shown inFig. 2. At an individual therapy class level, the range was also significant in certaincountries. For example, in Brazil the average for antibiotics was 31% of end userprice, but 42% for respiratory drugs, while the Netherlands saw the widest variationwith 38% for antibiotics and 78% for respiratory. There can also be differences int