Time to leave the Hall of Mirrors
How misperceptions of the manufacturing sector do no favours for contraceptive access
By Brian McKenna, Deputy Director, RHSC
The contraceptive procurement space is not in the best of health. In recent months, we witnessed the impact of COVID-19 on virtually all aspects of supply chains. But even before that, for various reasons, demand was far outstripping supply for key contraceptive products. Over at least the next two years, supply shortfalls are expected to continue across many low- and middle-income countries (LMICs).
All is not well, but why?
While a variety of reasons may exist, scratch beneath the surface and it becomes evident that, even prior to the pandemic, the business case was becoming increasingly less sound for sustained engagement by those who rely on access pricing (the reduced prices offered for the purpose of significantly expanding contraceptive access in LMICs). The opportunity costs of investing in these sectors are growing, and the rules of engagement are becoming more burdensome. The return on investment, compared to other investments a company might make, are becoming less certain. All of this is occurring in a dynamic environment in which pharmaceutical manufacturers are shifting strategically and operationally to thrive in the competitive twenty-first century landscape.
Many in our community see the manufacturing sector as a collection of corporate giants, focused on long-term profitability and glued to the global marketplace, immune from the day-to-day ups and downs that affect it. In addition, news reports of large corporate profits and high executive salaries in the industry paint an unsympathetic image.
This image has led some to assume that the wealth of the manufacturing sector, and its capacity to cross-subsidize profits and losses, means it can easily afford — or at best tolerate — the lower profit margins resulting from lower access pricing (e.g., from tenders that are largely focused on lowest price) and/or higher costs (as a result perhaps of pursuit of global quality assurance standards and engagement in multiple procurer initiatives). Another assumption is that there is overcapacity in the contraceptive space — that it is a buyer’s market. Most manufacturers who resist accepting increased procurer requirements at the same selling price can be easily supplanted by other competitors clamoring in the wings, can they not?
Are these accurate portrayals of reality? Not really.
With (1) the significant costs incurred in pursuing and maintaining global quality assurance standards (WHO-prequalification, or approval by a Stringent Regulatory Authority [SRA]), (2) a growing list of requirements of various types in order to conduct business with international procurers, and (3) the continuing drive for the lowest price, manufacturers are not all eagerly trying to enter these sectors of the family planning market. The list of manufacturers who are WHO-prequalified or SRA-approved for family planning products and who are interested in selling to the procurers for LMICs is not growing by leaps and bounds.
While many manufacturing corporations are indeed very wealthy, that wealth is not spread evenly across their units and product lines. Each product line demands its own, solid business case. Similarly, while a “cost of goods” analysis might reveal high mark-ups on a single product, at the end of the day, what drives action is actually the opportunity-cost of every dollar invested. If there are alternative investment opportunities that promise a greater return for a production line, a business unit, or indeed a corporation, then the pressure will be on to pursue it.
Additionally, some of the manufacturers in our community are not very wealthy, and their business model requires them to continually operate with low profit margins. Such companies may be especially hard pressed to provide premium services (services not included in a basic service model) at access pricing.
Can anything be done about all this?
We have got ourselves into this situation — not out of anyone’s ill will — but at least in part because of a desire to serve the needs of women and girls in LMICs. Procurers want to react to changing regulatory requirements in countries, make maximum and efficient use of technology, and strengthen supply chains. And they want to do this while maintaining the lowest prices possible, thus enabling countries to procure more product. Manufacturers also want to serve the needs of women and girls in LMICs, while satisfying their core business objectives and serving the needs of their various constituencies. Additionally, pressures have increased on all parties in 2020 due to the pandemic and its impacts.
We must assume that no one enters the health field for ill intentions. However, as manufacturers are called upon to offer more and more premium services at access prices, business decisions might be made that serve neither the interests of the overall community, nor the longer-term health of markets.
That being said, we are seeing a willingness on both sides to find a middle ground. No one claims to have all the answers. At the Coalition’s Executive Committee meeting in October 2019, there was an awareness of the current untenable situation and of the need to work for real change. Changes can be best achieved through meaningful dialogue collectively between procurers and manufacturers.
There may be contractual solutions to mitigate the growing expectation of premium services at access pricing, and there may be opportunities for greater information sharing and/or streamlining of procurers’ supply chain and data initiatives. Meaningful dialogue between procurers and manufacturers represent the most effective means for delivering change that everyone can live with, and serving the needs of women and girls for years to come.