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Thursday, January 18, 2018

Comparison of Drugs Prices: US vs. India; Their Manufacturing Costs & Opportunities to Improve Affordability

In recent years in the United States there has been news about ever increasing drug prices (1) and essentially ineffective calls/pressure and votes to lower them. Drugs are increasingly becoming unaffordable. Discussions and/or referendums to lower the drug prices are an ongoing attempt by the consumers, healthcare activists and even politicians but all efforts die a slow and silent death. 

All elected officials in spite of electorate’s need for lower drug prices and pressure have no say or influence in establishing price controls through legislative action or negotiations because their repeat electability depends on funding from pharma and other lobbies. Since repeat legislative terms are important to the legislators they succumb to the financial pressures of the vested interests. Patients in established healthcare systems or otherwise pay the demanded or the best negotiated prices. 

Since patients pay their required co-payments, actual drug prices do not matter to them till they cannot afford them. As the prices rise some slowly stop taking the needed drugs. In the developing countries prices are generally based on what patients can pay from their pocket. Prices in these countries are definitely lower than the developed country prices. Many in the developed countries complain about lower drug prices in the developing countries. This is not due to intellectual property being abused but more due to affordability and big pharma participate in these lower prices. 

We have to recognize that the pharmaceutical companies have no interest in lowering drug prices (2) and then we get to hear comical statements (3). Their expected goal is to increase revenue and profits. With not many drugs in the pipeline or having been approved in the recent years that are for masses (more than five million patients per disease) or more efficient than the current drugs for the same ailment and are affordable, only option for the companies is to increase revenue by raising prices. In the last two years pharma companies succumbed to the social and political pressure and some opted to keep their price increases below 10% per year (4,5). Orphan drugs do raise revenue and profits but these drugs are not the answer for pharma’s long-term survival. Unless pharma companies can offer affordable and better performance drugs the current model will have a short life. My perspective is that the current model is faltering and failing.

This is a review of comparative drug prices in the United States and India and a reaffirmation of price differences. It also discusses the API’s (active pharmaceutical ingredient) contribution in the prices. Analysis can be used by anyone to calculate profits being made at different points in the supply chain and how the mutually subsidized systems camouflage the real costs. 

Higher Affordability Higher Revenue:

It seems ironic that there is not much interest to increase revenue through higher drug affordability. Recent high priced pharmaceutical acquisitions are expected to deliver blockbuster drugs (over billion dollar sale per year) and improve revenues and profits. If the drugs are not affordable sustainability of recent acquisitions in my estimation will not have long-term value. Viability of certain companies could be in jeopardy. Survival of pharma companies necessitates consideration of alternate business model/s. We will have to see if companies will consider alternate business models. Economics 101 teaches that higher customer base even at lower than previous prices can increase the total revenue and profits. Improving affordability with larger patient base is one of the answers. 

In recent times pharma companies are justifying higher prices for drug efficacy but if most are unaffordable such drugs have limited financial value. This stance might be acceptable to some but with lower affordability improved drug efficacy might not matter. As discussed later companies have lowered prices in certain countries. I believe that if pharma can improve affordability and serve larger population, their overall revenue could be much higher than revenue increases under the current model.  

Forecasts of 6.5% CAGR global pharma revenue growth have been made. I am not sure of such growth. A detailed analysis suggests such numbers are not possible (6). Regulations come in the way to improve processes that lower costs, improve affordability, improve profits and revenues.

Background/Knowledge about Drug prices: 

Elements of drug prices are a secret. Majority of the people associated with pharma business either don’t understand or question how the prices are established. Pricing elements are not discussed openly. Patients can complain about drug prices but will pay the asked prices as the drugs cure ailments and extend life. 

Financial analysts during their company/analyst meetings generally do not ask pharma companies about their drug pricing. Generally pharma company prices and their offered explanations are accepted (6). They welcome news about pharma revenue and profitability rise whether it happens through higher priced drugs or price increases. Since profits in pharma are generally high, questions using better manufacturing technologies to improve profitability or affordability are not discussed. Financial analyst’s mission is to recommend buy and sell investments. To the Press quarterly results, new drugs and their prices are the story. Drug pricing methodology or improved affordability is not much of a story to either. 

In this review sale prices of few drugs are used to “reverse calculate” API price contribution. These prices are compared to the actual API prices. This gives us an approximate idea of price differential at different points in the chain. Randomly selected drugs are used. However, before we analyze the data some information about pricing set by the BIG pharma might be of interest. 

Pharma companies have been forced to change their pricing model when the drugs are sold at lower prices than in the developed countries through compulsory licensing. When WTO agreements were negotiated companies in the developed countries did not realize potency of compulsory licensing. Big drug companies learnt a lesson. Gilead got caught flat-footed and when Cipla sold AIDS drugs at extremely lower prices outside the United States. Gilead’s Sovaldi for HCV is an excellent example of different global pricing strategy. Gilead licensed manufacturing and distribution at significantly lower prices through selected developing country companies. Prices in the United States started at $1000.00 per day vs. about $10.00 in Egypt (7) vs. about $10.00 in India and $100.00 in China (8)

It has to be acknowledged that the drugs being sold at lower prices are not being sold at a loss or are of lower dosage. Table 1 shows API cost contribution. Through licensing profits are being made even at lower prices. Idea of licensing is to prevent circumvention of intellectual property.  

Januvia, a Merck diabetes drug, was initially offered in India at prices that were similar to US prices. Even with very high diabetes population and drug of high value, patients shrugged the new drug. Eventually Merck lowered its sell price (9) to make it affordable. 

Above references clearly state that the drug prices in the developed countries can also be lower even with participants in the supply chain making significant profits. Economies of scale and better manufacturing technologies can further lower API and formulation costs with every one in the supply chain making decent profits thus improving affordability. 

API cost in drug price:

Table 1 illustrates cost contribution of active pharmaceutical ingredients (API) at different dosages assuming 100% formulation efficiency. These numbers are theoretical numbers and are a good place to start. Sovaldi API price is approximated at $3,000.00 per kilo (10). Table 2 later shows imported API price vs. reverse calculated API contribution. Table 4 shows the pharmacy selling price. Assumptions are detailed later. 

API cost, $/kilogram
Drug dose, milligram
Number of tablets per kilogram
API cost contribution, $ per tablet
100
40
25,000
0.004
100
10
         100,000
0.001
10
40
25,000
              0.0004
10
20
50,000
              0.0002
125
        200
  5,000
0.025
3,000
        400
 2,500
1.2

Table 1
Drug prices: India vs. US

Table 2 is an illustration of few drugs sold in India. 35% margin is used between the manufacturer and the local pharmacy. This number is used after consultation with large Indian pharmacies. It is assumed that API cost contribution in each drug is 35% at the manufacturer level. Remaining is the cost of manufacturing, excipients, profits and sundries. These numbers are an approximation and used for illustration only. Readers can use different numbers of their choosing. 

Reverse calculated API prices in Table 2 when compared to the imported prices for the same drugs suggest that the formulation efficiencies of the formulation processes are significantly lower or the intermediaries are making high profits. Low conversions are opportunities. Having many suppliers of APIs also suggest that their manufacturing processes are not optimum and need considerable engineering and process help. Economies of scale can improve processes, lower prices and improve affordability. Very little or no effort is made to improve manufacturing.  



Drug
Dose, mg
Price per tablet, Rs
Ex-Mfg. price/tablet, Rupees
API cost @ 35%, Rs
API cost per kilo, Rs
API Cost, $/kilo
Apprx.
Import API price, $/kilo (Ref 11-17)
Lasix
40.00
0.50
0.33
 0.11 
 2,844 
 43.75 
       ~36.33
Metformin
500.00
4.00
2.60
 0.91 
 1,820 
 28.00 
8.00
Atorvastatin
10.00
5.50
3.58
 1.25 
 125,125 
 1,925.00 
320.00
Levothyroxine
0.112
1.65
1.07
 0.38 
 3,351,563 
 51,562.50 
 11,426.00 
Omeprazole
20.00
2.50
1.63
 0.57 
 28,438 
 437.50 
37.00
Nexium
40.00
9.90
6.44
 2.25 
 56,306 
 866.25 
444.00
Nexium
20.00
5.30
3.45
 1.21 
 60,288 
 927.50 
444.00
Ciprofloxacin
500.00
3.47
2.26
 0.79 
 1,579 
 24.29 
31.00
 * Nexium API price are considered to be same. 

                                                                  Table 2

Table 3 is comparison pricing of the drugs in Table 1 in the United States vs. India. Except for Nexium listed drugs have to bought by prescription and thus are part of mutually subsidized system. Real prices in the United States without prescription are much higher. 


Drug
Dose, mg
Price per tablet in India, Rupees
Price per tablet in India, USD: ~Rs. =65 to 1 USD
Price per tablet in US, USD **
Lasix
40
0.50
0.01
0.13
Metformin
500
4.00
0.06
0.07
Atorvastatin
10
5.50
0.08
0.43
Levothyroxine
0.112
1.65
0.03
0.13
Omeprazole
20
2.50
0.04
0.50
Nexium
40
9.90
0.15
1.33
Nexium
20
5.30
0.08
0.57
Ciprofloxacin
500
3.47
0.05
0.17
    ** US Prices are from Walmart, Costco, Walgreens and GoodRx.

Table 3
Hypothetical Drug Prices:

Table 4 illustrates approximate selling prices of drugs through formulation and various points in the supply chain. There are assumptions made for the costs of excipients, conversion costs. They are assumed to equal to the cost of API. Profits at factory, PBM and pharmacy are assumed to be about 33% for each entity. The selling price can be compared to the selling price in the US and India. 



API, $/kg
Mg. per tablet
# of tablets per kg.
API cost $ per tablet
Theoretical Sell price, $ per tablet
Closest drug from Tables 1 & 2
10
500
2,000
0.005
0.0216
Metformin
40
40
25,000
0.002
0.007
Lasix
300
10
100,000
0.003
0.0013
Atorvastatin
450
20
50,000
0.009
0.0389
Nexium
3,000
400
2,500
1.2
3.45
Sovaldi


Table 4

Purpose of this post is not to finger point any company or country but is to suggest that there is significant opportunity to adjust/lower sale prices in the countries, make drugs affordable, and improve revenues and profits.  


Girish Malhotra, PE
EPCOT International

  1. Drug Prices Soar, Prompting Calls for Justification, The New York Times, July 23, 2015, Accessed December 20, 2017 
  2. The drug industry is addicted to price increases, report shows, CNBC, April 20, 2017 Accessed      December 20, 2017
  3. Lilly CEO: With pharma friends in high places, it's 'time for action' to ease drug costs, FiercePharma.com January 10, 2018, Accessed January 11, 2018
  4. Several drug makers just raised their prices by nearly 10 percent, and buyers expect more price hikes, Statnews.com, Accessed January 3, 2018
  5. Pfizer, Novartis and more post price hikes on dozens of drugs, but AbbVie’s is worth the most, FiercePharma.com, Accessed January 5, 2018
  6. Malhotra, Girish: An Alternate Look At the Pharmaceutical World Revenues and Drug Affordability, Manufacturing Chemist, Volume 88, Number 10, October 2017 pg. 28-32
  7. Gilead prices hepatitis C giant Sovaldi in China at one-fifth the U.S. price: report, FiercePharma.com, Accessed January 12, 2018
  8. Gilead offers Egypt new hepatitis C drug at 99 percent discount, Reuters.com, Accessed January 12, 2018
  9. Merck prices diabetes drug at fifth of US rate http://www.livemint.com/Companies/bQMFNMPw2lUm49D0lOFEQI/Merck-prices-diabetes-drug-at-fifth-of-US-rate.html Accessed December 22, 2017 
  10. Hill, Andrew, Khoo, Saye, Fortunak, Joe, Simmons, Bryony Simmons,3 and Ford, Nathan: Minimum costs for producing hepatitis C direct-acting antivirals for use in large-scale treatment access programs in developing countries, Clin Infect Dis. 2014 Apr;58(7):928-36. doi: 10.1093/cid/ciu012. Epub 2014 Jan 6. Accessed January 16, 2018
  11. https://www.pharmacompass.com/price/furosemide, Accessed December 26, 2017
  12. https://www.pharmacompass.com/price/metformin, Accessed December 26, 2017
  13. https://www.pharmacompass.com/price/atorvastatin-calcium-trihydrate, Accessed December 26, 2017 
  14. https://www.pharmacompass.com/price/levothyroxine-sodium, Accessed December 26, 2017
  15. https://www.pharmacompass.com/price/omeprazole, Accessed December 26, 2017
  16. https://www.pharmacompass.com/price/esomeprazole, Accessed December 26, 2017
  17. https://www.pharmacompass.com/price/cipro, Accessed December 26, 2017
  18. Fed Up With Drug Companies, Hospitals Decide to Start Their Own, The New York Times, January 18, 2018, Accessed January 18, 2018

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