1. 1 Clinton Foundation HIV/AIDS Initiative Pharmaceutical Services Team Engaging the ARV Marketplace to Optimize Outcomes for Patients February 14, 2006

2. 2 Summary By engaging both the demand-side and the supply-side of the ARV market in 2003, CHAI was able to bring prices down. The approach affirmed the need for countries to access low prices and the need for suppliers to stay in business. Organizing the market with both transformed the business of 1 st -line ARVs to “low-margin, high-volume” and has contributed to wider access to ARVs around the world. The relative success of price reductions and expanded access in the last 2-3 years, however, must not mask challenges facing the market today. High prices for 2 nd -line ARVs, cost and volume pressures on 1 st -line ARVs, and price disparities between low and middle-income countries represent real constraints to patient access, and CHAI is working to address these with suppliers and purchasers. Critical to any effort to address these challenges – and keep the supply of ARVs sustainable for ever larger numbers of patients – is the actions of countries. National governments, by recognizing evolving market dynamics, can take action today to avoid potential bottlenecks (such as rising 1 st -line prices), to accelerate time to market for affordable 2 nd -line generic ARVs, and to minimize any delay between supply of a product and its availability to patients

3. 3 Content Approach and Outcomes of Original Pharmaceutical Agreements Current Challenges in the ARV Marketplace and CHAI’s Response Country-level Opportunities to Optimize Access for Patients

4. 4 State of Treatment in 2003 vs. 2005 End 2002 200 Africa Latin America People on antiretroviral (ARV) treatment Thousands 300 50 Mid 2005 1,000 300 200 500 Rest of World

5. 5 Drug and Diagnostic Costs to Countries National treatment budget (2003 data – illustrative) Percent Drugs (44%) Labs (23%) Staff Training Physical Infrastructure Nutrition IEC Management For new national treatment programs, the relatively high cost of drugs and diagnostics was a key determinant to the reach of available resources (Despite early Global Fund grants, the announcement of PEPFAR (Jan 2003) and the “3 by 5” target (Sep 2003), resources were not unlimited)

6. 6 Supply-side Perspective in 2003 Limited volume (70k outside LAC) compared to capacity Fragmented and unpredictable orders No credible forecasting of volumes increases over time Lack of prompt payment by purchasers Lack of standardized treatment guidelines Generic prices were low relative to branded products, but still reflected high production costs CHAI experience in the U.S. confirmed that better market dynamics drive lower costs to manufacturers, enabling lower prices over time

7. 7 Monitor consumption Support purchasing Forecast demand Develop operational plans CHAI Engagement with Countries Model scale-up of treatment over time Set national treatment guidelines Model product- specific demand over time Align policies for procurement Pool donor funds and sources of orders to create national demand outlook and purchasing process Set national treatment targets Quantify requisite resources Plan for operations, oversight, milestones, etc. Deploy tools to sites to monitor ongoing consumption Use consumption data to update demand forecasts (pull not push)

8. 8 Conduct site visits at multiple levels of value chain Understand company position in the marketplace Map production process Complete financial due diligence Un-bundle production costs Identify major cost drivers Identify process improvements at each level of value chain Analyze impact of increased volume on cost Identify potential for future cost savings Negotiate Price Model Product Cost Due Diligence Identify Potential Partners WHO/FDA quality benchmark Breadth of product selection Develop transparent pricing formula Establish scale curve for future cost/price reductions Identify product development priorities Continue to monitor costs CHAI Engagement with Suppliers

9. 9 Pharmaceutical Value Chain Cost of active pharmaceutical ingredient (API) Raw materials 41% 100% 4% Cost of Final Product 3% 26% Tax 7% Mnfctr 17% Overhead 2% Formulation production (excipients, mnfctr, packing) Corporate overhead, sales & marketing R&D Additional cost for formulation manufacturer

10. 10 Targets for Savings Large reductions at the API level: Sourcing to low-cost API suppliers, Driving efficiency through scale, Reducing gross margin Cost of active pharmaceutical ingredient (API) Raw materials 41% 100% 4% Cost of Final Product 3% 26% Tax 7% Mnfctr 17% Overhead 2% Formulation production (excipients, mnfctr, packing) Corporate overhead, sales & marketing R&D Additional cost for formulation manufacturer Reductions in formulation costs: Cross-subsidization of overhead Reductions in margin Scale-based savings (very small)

11. 11 Lower Production Costs Lower Overhead And Margin Description Manufacturing cost – direct (labor, power) and indirect (capital amortization) – per unit decreases with scale (volume). Production cost also falls with better chemistry and/or cheaper raw materials. F&A and S&M overheads can be reduced and/or cross- subsidized. Interest necessary can fall with prompt payment. And margin can be less while keeping business profitable/sustainable. Targets for Savings (DETAIL) Relevance These reductions are largely relevant for API manufacture/synthesis, which accounts for ~70% of total costs. These reductions can reduce API price but are the driver of reductions at the formulation level (e.g, overhead allocation fell from 30% to 10%). CHAI Role By modeling costs, CHAI consultants could agree with companies on cost curves that quantified savings based on anticipated volumes in partner countries. CHAI negotiation with executives encouraged a shift from regarding HIV/AIDS as “low- volume, high-margin” to “high-volume, low- margin” given that AIDS is an emergency.

12. 12 Impact of Volume on Cost (ILLUSTRATIVE)

13. 13 ARV Price Comparison: 2003 1As reported by the manufacturers and by Médecins Sans Frontières (MSF) in Untangling the Web of Price Reductions 2$384 was the weighted average price being offered to CHAI purchasers in October 2003. 3MSF’s May 2003 guide reported the best prices offered by Cipla, Hetero and Ranbaxy as $304, $281 and $285. Branded Best Price 1 Generic Purchase Price 2 $562 $384 Generic List Price 3 $290 3TC+d4T(40)+NVP October 2003 CHAI Ceiling Price $140 9 formulations of 4 first-line ARVs included in agreements Prices were a 75% reduction from patent-holders, and a 50% (or more) reduction from the market price of generics CHAI prices were FOB ceilings for national tenders CHAI partner formulators: Cipla, Ranbaxy, Hetero and Aspen Pharmacare (and Strides Arcolab as of 2006)

14. 14 Country tender process maintained –Member Purchasers issue tenders through traditional means –CHAI published price becomes ceiling –CHAI monitors suppliers costs to ensure consistent pricing Countries incorporate strategic sourcing practices* –Payment backed up by LC’s or other secure instruments –Regular and aggregated orders –Ongoing forecasting –Expedited registration –Use of international quality standard (WHO) –Move towards larger and/or multi-year tenders –Split bids per product, as appropriate Demonstration of secure distribution system and commitment to comply with international and national law (IPR) Operational Principles for Purchasers * These are explicitly specified in MOUs with purchasers in Procurement Consortium (with provision of order info)

15. 15 Reach of Agreements After 2 Years Access to CHAI prices Number of countries January 2004 January 2006 4x 13 51 People benefiting 000’s on ARVs purchased under CHAI agreements End Q2 2004 End Q4 2005 8x 30 240 In addition to benefit of lower prices through CHAI agreements, market prices around the world have fallen as other manufacturers compete with CHAI suppliers (and as purchasers expect better prices).

16. 16 3TC+d4T(40)+NVP January 2006 Branded Best Price 1 Generic Purchase Price 2 $562 $221 Generic List Price 3 $192 CHAI Purchase Price $144 ARV Price Comparison: 2006 1As reported by the manufacturers and by Médecins Sans Frontières (MSF) in Untangling the Web of Price Reductions 2Weighted average of price being paid in middle and low-income countries, according to World Health Organization. 3Average price, per MSF’s June 2005 guide, of three suppliers currently WHO prequalified (Cipla, Hetero, Ranbaxy). CHAI purchase prices have been within 2-3% of ceilings CHAI prices remain lowest for some – but not all – products On average, CHAI rates are 20-30% less than market in low-income countries Middle-income market rates are still 2.5 times higher CHAI prices are lower for pediatric formulations

17. 17 Content Approach and Outcomes of Original Pharmaceutical Agreements Current Challenges in the ARV Marketplace and CHAI’s Response Country-level Opportunities to Optimize Access for Patients

18. 18 Challenges in the ARV Marketplace High Price of 2nd-Line ARVs Pressures on Ongoing Supply of 1st-Line ARVs Price Disparity Across Markets

19. 19 Current Prices of 2 nd -Line ARVs Price of 2 nd -Line Treatment (Annual cost in US$) $6,000 $1,400 10x $140 40x 1 st Line (Africa) 2 nd Line (Africa) 2 nd Line (Middle Income) ABC$584$887 Supply of 2 nd -Line ARVs (Low cost source is highlighted) ProductGenericInnovator ddI$142$279 TDFN/A$204 LPV/r$1,500$500 SQV$1,022$989 IDV$217$400 RTV$196$83 NLF$1,217$978 ATVN/ATBD

20. 20 CHAI Activities to Lower 2 nd -Line Prices NeedDescriptionCHAI Response & Role Lower cost of production Current production cannot match innovator pricing due to poor chemistry, low yields and high price intermediates Build a team of experts who know the chemistry to assist suppliers; search for better intermediate sourcing Credible demand forecasts Toxicity and switch rates are not known, and suppliers do not have insight on what 2 nd -line drugs are being used Work with WHO/UNAIDS to estimate gross demand; with countries to improve estimates of 2 nd -line use Simplified national treatment guidelines New WHO guidelines will have 36 options for combinations without clear pros/cons in terms of cost, availability, etc. To assist countries and drive volumes to the most relevant products – CHAI will issue “guidelines to guidelines” Quick regulatory approval Once products are commercially available, WHO approval and national registration are additional prerequisites to wide access Support WHO prequalification program to increase capacity and efficiency; encourage prioritization of 2 nd -line products with FDA

21. 21 Initial 2 nd -Line Price Reductions Abacavir Middle Income Market Price Generic & Innovator Best List Price Innovator Best List Price Market Price $479 $347 $887 $705 Efavirenz CHAI Price $240 CHAI Price $447 – 50% – 31% – 50% – 37%

22. 22 Cost Pressures on 1 st -Line ARVs Rising intermediate prices (and limited supply) Rising solvent prices (due to increasing price of oil) Currency exchange fluctuations Cost of re-listings and double submissions (WHO & FDA) Increased R&D costs for second-line products Stock carrying costs, interest rate for late payments, etc. Costs Savings Better yields than expected Cheaper routes of synthesis Use of cheaper API for unregulated markets CHAI response Work on the supply side to control prices of solvents and intermediates Work on the demand side to encourage practices which control costs Production costs for 1 st -line ARVs are rising, despite some efficiencies and savings. Continued work is needed to maintain or lower prices.

23. 23 Projected 1 st -Line Demand Increases End 2005: 1–1.5 million 2006/07: 3 million 2010 goal: 6–8 million API supply has exceeded ART demand to date, but it is not known whether supply of API will keep pace with demand as ART access increases exponentially

24. 24 Content Approach and Outcomes of Original Pharmaceutical Agreements Current Challenges in the ARV Marketplace and CHAI’s Response Country-level Opportunities to Optimize Access for Patients

25. 25 Country-level Opportunities Help Control 1 st -Line ARV Costs Ensure Consistent 1 st and 2 nd -Line Protocols Expedite National Registration

26. 26 Country-level Actions to Control Costs Demand-side Action Prompt payment Larger and/or longer-term tenders Reliance on international quality standard and ongoing accountability on API sourcing Splitting awards to tenders for specific, high-volume products Conducting and sharing ongoing, consumption-based forecasting Supply-side Impact Avoids interest payments to minimize costs to formulators Allows suppliers to plan for production – achieving better pricing on intermediates and avoiding stock-carrying costs Avoids predatory pricing by suppliers who sell lower-quality products (cheaper to make) Ensures competition so a few products in a few high-volume countries do not determine market Enables API suppliers to plan for medium and long-term capacity needs

27. 27 Possible Revision to 1 st -Line WHO Protocol d4T - or - AZT 3TC - or - FTC NVP - or - EFV + + ABC - or - TDF Triple NRTI alternative Though this yields 24 choices of three-drug regimens, we do not anticipate consumption patterns to change because the 20 new variations are cost- prohibitive (averaging $570, or 2-4 times the price of current 1 st line with NVP) or

28. 28 Likely Revised 1 st -Line Regimens REGIMENPRICE (US$) d4T3TCNVP140 AZT3TCNVP240 d4T3TCEFV430 AZT3TCEFV540 TDFFTCEFV665 TDFFTCNVP375 ABC3TCNVP705 ABC3TCEFV995 TDF3TCNVP325 TDF3TCNVP325 AZTFTCNVP310 d4TFTCNVP210 ABCFTCNVP755 AZTFTCEFV600 d4TFTCEFV500 ABCFTCEFV1045 AZT3TCABC785 AZT3TCTDF405 AZTFTCABC835 AZTFTCTDF455 d4T3TCABC685 d4T3TCTDF305 d4TFTCABC735 d4TFTCTDF355 Current protocols will remain dominant, with more EFV for TB patients if the price comes down TDF+FTC+EFV FDC is possible and may be used as alternative ABC will be saved for 2 nd Line Many combinations combine once and twice daily dosing and will not be favored due to this reason as well as high prices Countries are unlikely to adopt triple NRTI regimens in the absence of specific toxicities or more attractive prices

29. 29 Likely Revised 2 nd -Line Regimens* The average best price of these 12 possibilities is $1,320 today (with a range from $780 to $1,860). LPV/r is cheaper than SQV/r and will remain so. ATV/r pricing has not yet been announced. Protease-inhibitors with ritonavir require cold-chain, but a heat-stable version of LPV/r will be available beginning in 2006. ABC, ddI, LPV/r and TDF will be dominant. Countries should revise protocols quickly to adjust demand forecasts. Also, the pace of registration of generic forms of these products will be critical to realizing lower prices, when available. TDF - or - ddI ABC - or - AZT** LPV/r - or - SQV/r - or - ATV/r ++ * These 12 possibilities are the most likely of 36 variations **AZT can be used + or – 3TC

30. 30 Steps to Expedite Product Availability Action 1.Supplier R&D should focus on key products, and regulatory submission made as soon as possible 2.International regulatory review should be quick and donor policy flexible to procure new products 3.Purchasers can expedite registration based on WHO or FDA approval and ensure national law leverages donor flexibility CHAI role CHAI is focusing supplier R&D on EFV, TDF, ABC, ddI, LPV/r and ATV/r and is providing assistance if possible to prepare submissions CHAI and WHO are working together to raise more resources for prequalification and begin prequalification for diagnostics; CHAI has worked with GFATM to develop and document its new procurement policy CHAI is encouraging suppliers to submit dossiers identical to WHO/FDA submission and pay registration fees

31. 31 Expedite national registration based on WHO and/or FDA approval (and submission of identical dossier, with B/E data and same API-source) Need for Quick Access to ARVs Health Systems Strengthening Continue to charge fee for product registration Seek donor funding for NDRA and NQCL strengthening Seek WHO support for NDRA strengthening (including participation in prequalification project) Balance with NDRA Strengthening

32. 32 BACK-UP SLIDES

33. 33 Pharmaceutical Production Process Intermediates Advanced chemical intermediates are synthesized for use in specific reactions, e.g. the production of AZT depends on beta-thymidine. These intermediates can be purchased externally or produced in-house. Active Pharmaceutical Ingredients (API) API manufacturers, such as Matrix and Hetero, use intermediates in multi-step chemical reactions (using other chemicals and solvents) to produce the active ingredient that is the cause of a drug’s effect in the body. Formulations Formulation production “packages” the API, e.g. as a tablet, by adding excipients (like starch), compressing and coating specific dosages into pills, and then bottling them (or making blister packs) with informational inserts. Raw Materials Commoditized raw materials (like acids, salts and sugars), which are widely available and used for common chemical reactions, must initially be sourced to produce specialty chemicals and pharmaceutical intermediates.

34. 34 January 2006 ARV Price Comparison: 3TC+d4T(40)+NVP Branded Best Price 1 Generic Purchase Price 2 Branded Best Price 1 Generic Purchase Price 4 $562 $384 Generic List Price 3 $290 $562 $221 Generic List Price 5 $192 October 2003 1As reported by the manufacturers and by Médecins Sans Frontières (MSF) in Untangling the Web of Price Reductions 2$384 was the weighted average price being offered to CHAI purchasers in October 2003. 3MSF’s May 2003 guide reported the best prices offered by Cipla, Hetero and Ranbaxy as $304, $281 and $285. 4Weighted average of price being paid in middle and low-income countries, according to World Health Organization. 5Average price, per MSF’s June 2005 guide, of three suppliers currently WHO prequalified (Cipla, Hetero, Ranbaxy). CHAI Ceiling Price $140 CHAI Purchase Price $144

35. 35 Top 10 Country-level “Best Practices” 1.Procurement should be pooled across donors and treatment providers to maximize the reach of the funding while still adhering to the donors’ individual policies and requirements. 2.Tenders should be issued for increasingly longer periods of time, preferably moving to 1-2 year tenders in 2006. 3.National registration should be expedited after WHO, FDA or PIC/S NDRA approval, with the submission of approved dossiers and payment of registration fees. 4.Minimum Quality Assurance (QA) standards should be used. QA and Quality Control (QC) should also reflect donor flexibility, i.e. WHO, FDA or PIC/S NDRA or Global Fund “criteria c”. 5.Tenders and contracts with suppliers should require supply of products as approved by WHO (or FDA or PIC/S NDRA), i.e. same API sources and same manufacturing sites. 6.Forecasting should be consumption-based and regularly updated to signal suppliers about required volumes. 7.Tenders should reflect membership in CHAI procurement consortium and bid prices should be checked against CHAI price lists before contracts. 8.Order information should be shared (with CHAI, also with WHO and Global Fund) to ensure transparency and competition. 9.Tenders should be conducted and orders made with sufficient time for manufacturers to supply products in 8-10 weeks (for meds; in 4-6 weeks for labs) 10.Payment to suppliers should be made promptly, i.e. upon delivery