Intervening in global markets to improve access to HIV/AIDS treatment: an analysis of international policies and the dynamics of global antiretroviral medicines markets

1. Remarkably efficient ARV markets evolved shortly after the 2002 establishment of the GFATM for the most commonly used first-line ARVs

The entry of many manufacturers producing quality-assured generic ARVs, dramatic price reductions, and the development of innovative FDCs all indicate a largely decentralized and efficient market by conventional measures. Purchase arrangements likely contributed to fierce competition among producers of older ARVs, as GFATM funding was distributed to more than 100 countries that each made independent purchase decisions. Disaggregated purchasing promoted competition for products and geographic market niches among producers. The absence of blocking patents in India, where most of the generic ARVs are produced, and efforts by importing governments to overcome patent barriers also contributed to a competitive, efficient global market for older ARVs.

2. The roles of WHO and the FDA have had mixed effects on development and uptake of new ARV formulations

Quality Certification: WHO Prequal and the FDA maintained a level playing field by assuring that producers were competing on ARVs of similar quality, and corrected information asymmetries around quality for purchasers. However, delays in quality certification can also create delays in country uptake of products, as demonstrated by the three-year wait to use PEPFAR funds for the most commonly-used FDC (3TC/NVP/d4T). These programs must perform at optimal efficiency to support the timely maturation of global ARV markets.

Treatment Guidelines: WHO also exerted substantial leverage in dictating demand for certain ARVs through its HIV/AIDS treatment guidelines. The 2003 guidelines consolidated demand around four first-line regimens, which covered 94% of people on ART as of 2006; 80% were on regimens available as generic FDCs [33]. Such consolidation of demand created incentives for manufacturers to enter the generic ARV market and develop innovative FDC products to support these regimens. In contrast, WHO's 2006 guidelines listed more than 20 first-line regimens. This increase in treatment options, among other factors, may have created disincentives for manufacturers to develop FDCs of the newer regimens. The 2009 WHO Guidelines have now come full circle, reducing the number of recommended first-line regimens to six, which may again facilitate the consolidation of demand around a few ARVs and encourage manufacturers to produce and develop FDCs of the newly recommended regimens.

3. Newly recommended WHO ARVs are much more expensive due to patent status and/or immature generic markets, creating concern for countries' abilities to adopt new guidelines

Generics markets for newer ARV regimens have not yet matured, as demonstrated by high prices, low demand, small numbers of manufacturers, and only a few three-in-one FDCs. Of particular concern are regimens that include newer ARVs such as tenofovir, which are priced at least 3 times more than older regimens. In the absence of measures to decrease drug prices and/or increase funding, countries may be forced to choose between treating fewer people with newer and "better" regimens or treating more people with older and "less desirable" regimens.

To date, generic competition has been the only proven method to promote sustained and substantial price reduction. However, increasing implementation of the TRIPS Agreement in developing countries means that medicines patents are becoming more widespread and severely restricting or eliminating generic competition for newer ARVs.

Such patents could severely restrict or eliminate generic competition. Least developed countries, however, have a waiver from TRIPS obligations on pharmaceutical patents and data protection until 2016.

Gilead has offered voluntary licenses to multiple firms to produce tenofovir, which has enabled competition in production. Many of these licenses include restrictions - for example, regarding API sources and eligible export markets [34]. It is too soon to evaluate any impacts of theses restrictions.

For those ARVs which are widely patented, additional interventions beyond voluntary licensing will be needed to address intellectual property barriers in both importing and exporting countries. TRIPS flexibilities such as compulsory licensing, non-observation of pharmaceutical patents (allowed for least-developed country WTO members until at least 2016), application of high standards of patentability in national law, and patent pools will be needed to promote market efficiency, reduce prices, and facilitate the use of new FDCs. Such measures have been employed with success in a growing number of countries, but still remain under-utilized relative to need [9, 34]. Particularly for essential medicines such as those included in the WHO guidelines, governments, international organizations and other relevant actors should ensure that patent barriers do not stand in the way of widespread, equitable access.

4. Fixed-dose combinations may have been determinants of market prices for their component ARVs

Generic three-in-one FDCs -- strongly recommended by WHO -- were introduced in 2003 at prices much lower than the sum of their generic ARV component prices the previous year. It is possible that manufacturers priced some FDCs aggressively to gain market share and, therefore, created new benchmarks for pricing the component medicines (in addition to other factors such as volume, economies of scale, and robust competition). If so, FDCs may exert a positive influence on ARV markets, above and beyond their public health or logistical advantages.

5. Large-scale purchasing initiatives, including pooled procurement, have transformed some disaggregated markets into consolidated markets comprised of a few key purchasers and the manufacturers they choose to supply their ARVs

PEPFAR and UNITAID have increasingly used pooled procurement, whereby Western third-party organizations purchase medicines on behalf of funding recipients, pooling ARV volumes of several countries into larger, fewer transactions. In 2008, UNITAID and PEPFAR together accounted for 84% of the global market for FTC and 77% for TDF (Figure 7). Meanwhile, both PEPFAR and UNITAID have usually contracted with two or three manufacturers and awarded the majority of their purchases to one or two. The chosen manufacturers then typically dominate the market. These procurement policies may discourage other producers from incurring the costs to develop and produce quality-assured ARVs, thereby decreasing the number of competitors in the market.

The GFATM's Voluntary Pooled Procurement (VPP) program will introduce yet another large-scale purchaser that will further consolidate the number of buyers. Whereas the original design of the GFATM placed medicine procurement in the hands of national principal recipients, VPP will encourage them to pool ARV volumes through third-party procurement. To date, third-party operators involved in VPP include the Supply Chain Management System (SCMS), which conducts pooled procurement for PEPFAR, and CHAI, which handles pooled procurement for UNITAID. If these arrangements persist, SCMS and CHAI will be purchasing on behalf of all the major donors. In this case, the market will no longer be a disaggregated and heterogeneous "open" market of more than one hundred national-level buyers, but instead will be concentrated around a few large-scale purchasers.

Pooled procurement is attractive to donor organizations and governments for a number of reasons. Some organizations may have superior information about supplier costs, the benefits of which (e.g. lower prices), can be shared with others through pooling. Pooled procurement may also reduce overall transaction costs, since fewer transactions occur. If economies of scale are very important at the transaction level, these are more likely to be realized through a few very large transactions rather than many small ones. Pooled procurement might be especially attractive to governments of smaller countries with minimal procurement capacity and limited powers to negotiate with suppliers; it might also be viewed as a solution in countries with documented corruption in procurement.

In practice, however, these benefits may not be realized. Pooled procurement requires the harmonization of registration, intellectual property policies, ARV selection, and demand forecasting across countries and organizations, which can entail substantial coordination costs. Other transaction costs are associated with financial transfers and currency fluctuations. In addition, because pooled procurement is usually handled by staff in developed countries, with higher salaries and overhead, administrative costs may not be lower. Pooled procurement may also lead to dependence by low- and middle-income countries on outside parties, detracting from efforts to strengthen country health systems and build capacity.

The ultimate goal of all these programs is to improve public health. While impossible to determine from this analysis, it is likely that the market approach that best serves public health is a mixture of several different procurement strategies as observed with earlier WHO-recommended 1^st line ARVs. In this scenario, the large purchasers such as PEPFAR could drive global prices lower but there was still sufficient purchase power remaining in Global Fund countries to facilitate competition among manufacturers who did not win the larger PEPFAR contracts. A completely disaggregated market may not yield the lowest possible prices while a completely pooled market will likely reduce the number of producers in the long term.

6. For efficient ARV markets, short-term gains must be balanced with long term goals

Global health initiatives are under considerable pressure to document their impact and success. However, for organizations charged with intervening in markets, the indicators for success are not necessarily clear. Examples of short-term goals for market-based initiatives might include ARV price reduction and the development of improved formulations; however, reaching these goals is not necessarily synonymous with building efficient global ARV markets.

In addition, a focus on short-term gains may prove detrimental to market evolution in the long run. The global market is evolving towards greater concentration on the demand side, with the emergence of a few large-scale purchasers, who in turn are encouraging greater concentration on the supply side, by granting tenders to only a few dominant manufacturers. While the immediate effect of lower ARV prices obtained through initiatives such as pooled procurement is attractive, the long-term impact on market efficiency remains a concern. Generally speaking, markets with only a few buyers and suppliers are characterized by both monopoly and monopsony power, and generally function less efficiently. For example, manufacturers may try to offset the discounts they offer large-scale purchasers by increasing prices charged to countries not included in these large-purchase schemes. Demand outside of the large-purchase schemes may be too low to sustain the existing manufacturers and may discourage new ones. Markets dominated by a few manufacturers are more vulnerable to price-fixing and collusion.

7. Conventional market analysis tools may be inadequate for assessing markets and the effects of interventions on ARV markets because these markets are complex and changing rapidly

Systematically identifying market failures and assessing market competition are themselves complex tasks. In theory, perfectly competitive markets exhibit a sufficient number of suppliers and purchasers with perfect information on products; comparable product quality across suppliers; and, freedom from barriers to market entry or exit. In this theoretical scenario, resources are allocated efficiently and competition between suppliers results in lower costs [35]. In practice, however, there is no consensus on definitions or characteristics of a well-functioning market, even by the international community now committed to improving global markets as a means of increasing access to treatment. As noted by the National Academies' Committee on the Economics of Antimalarial Drugs in 2004, "[t]here are no firm rules for judging 'good' prices, or 'healthy' competition." [36].

In addition, standard tools to assess competitive markets are inappropriate in contexts where it is crucial to have dynamic efficiency - i.e., to maintain incentives for continued innovation, quality improvements and development of new treatments. In the short run, perfect competition between suppliers that results in prices close to marginal cost creates static, not dynamic, efficiency; in this case, no supplier expects to profit from additional investment in research and development for new medicines or formulations. Sustainable prices, on the other hand, are those that exceed the marginal cost of production, allowing suppliers to earn a return on research and development investments and creating incentives for additional innovation.

A truly efficient ARV market might, therefore, offer not the lowest prices per se, but the lowest prices possible while at the same time ensuring continued innovation of quality products in optimum formulations. Price is undeniably an important factor in access, and lower prices enable greater access for the same level of funding. However, a narrow focus on price alone may drive prices to lowest acceptable levels for manufacturers and leave no additional funds to invest in the development of pediatric formulations, FDCs, heat-stable ARVs, and other formulation improvements. Driving prices too low could also create disincentives for manufacturers to enter or remain in the market, especially smaller manufacturers who are unable to shift costs across multiple product lines. Lastly, a focus on price without consideration for supplier performance (e.g., ability to provide the desired amount of medicines in a timely manner, may result in lower prices but increased stock-outs due to sub-par distribution services. Similarly, effective quality assurance systems must be in place in order for ARV markets to deliver the desired health outcomes.