NSP REVIEW COMMENT:

The National Strategic Plan for HIV/AIDS STIs and TB has set as a target that 80% of people living with HIV must be on antiretrovirals by 2016. This equates to about 4.8 million people. In his latest Budget speech, the Minister of Health confirmed that just over 3 million people are accessing HIV treatment. As South Africa adds more people living with HIV to what is already the largest antiretroviral programme in the world, the price of these drugs is going to be key in terms of sustainability. We commend the Department of Health for improving the systems to procure the drugs and drive prices down. However, as the following story illustrates, our ability to add even more people to the treatment programme in future, as well as more expensive second- and third-line regimens, will depend on the factors such as the foreign currency exchange rate.

The cost to South Africa of antiretroviral (ARV) medication looks set to escalate if the Rand does not strengthen significantly in the coming months.

Most of the prices that the Department of Health (DoH) pays for ARV medication have gone up in the most recent tender, despite the dramatically increased quantities (at least of the first-line regimen) to be supplied.

At present, the cost of the overall tender covering the three-year period from 1 April 2015 to 31 March 2018 is over R14.2 billion – the lion’s share of which (R10+ billion) is earmarked for the first-line fixed-dose combination (FDC) of efavirenz/tenofovir/emtricitabine.

Nevertheless, the South African Department of Health’s ARV tender process, as described in a May 2013 article in the NSP Review, continues to secure the drugs used in first-, second- and third-line regimens at the lowest prices available in the world. In addition, DoH have continued to refine the procurement process, taking new steps to ensure a consistent supply of ARVs needed to increase the number of South Africans living with HIV on treatment to 4.6 million by the end of 2016 (and to prevent stock outs).

And yet, even though most of the increased cost for the individual drugs in the tender is due to the unfavourable exchange rates, there are signs that the trend of ever-decreasing prices for ARVs may be at an end. In fact, there is little change in the dollar price of the first-line FDC.

According to Gavin Steel, who is the Chief Director of Sector-Wide Procurement for DoH, “We most probably have bottomed out in terms of price within the current environment, and so we have to look at different interventions and market-shaping going forward.”

The ARV tender process

Ever since 2011, when DoH took over management of the tenders from the National Treasury, the price of ARVs purchased in the public sector has been dropping steadily. DoH made significant reforms to the tender process (transparency, setting benchmarks based on international prices, etc.)

Now, the DoH advertises whenever it publishes tender guidelines (every two or three years) and indicates which medicines they wish to purchase, or which alternative drugs for the same use (e.g. alternatives for first- or second-line regimens) they might consider if the bids are more competitive. Companies can then bid against each other to provide different ARVs to the public sector. However, it must be noted that the use of therapeutic group tendering is quite limited in the ARV space (as opposed to other areas, where interchangeable options are more common – e.g. in the statins, or ACE-inhibitors). The only way in which the DoH could ask for alternatives was with 3TC or FTC, as part of the first-line combinations. The WHO advised that the two ARVs could be considered to be interchangeable. Other options are not so easy – the DOH cannot, for instance, put ZDV up against TDF, as an alternative first-line NRTI.

Winners and losers in this tender

Under the previous tender, 13 companies supplied ARVs to the public sector – and though 13 companies entered bids for the current tender, only eight companies had winning bids.

As has been reported by the mainstream media, the contract to supply the critical first-line FDC was split four ways: Sonke was awarded a R3 billion share, while Mylan won a contract worth R2.8 billion; Aspen Pharmacare got R2.5 billion, and Cipla R2 billion. However, when all the other components of the overall tender of R14.2 billion are taken into consideration, Mylan – an international generics pharmaceutical company producing ARVs out of India – comes out as the big winner. (In addition, Mylan also profits by supplying many of the active pharmaceutical ingredients (APIs) for the ARVs produced by South African generics companies.

Changes in cost per regimen

It is difficult to directly compare the prices for the ARVs in this tender to those in previous tenders or to international benchmarks, because 14% VAT and shipping are included in the price. Plus, a change in this tender is that delivery is now directly to, or as close as possible to, the dispensing site – in contrast to the old model of delivery to centralised provincial depots and departments such as Correctional Services, which in turn had to distribute the drugs to the various facilities under the depot’s jurisdiction. This transfers the logistical and distribution costs to the suppliers – and also removes an intermediate step in the supply chain management where DoH could be at least partially faulted for stock outs.

When averaged out across the four suppliers, the cost of the first-line FDC is now R111.93 for a 30-day month. In US dollars (calculated at the exchange rate of R10.74 to the dollar that was used in the tender), that is $10.42 per month, or roughly $125 per year. That is less than the lowest international price, $143, listed in the 17th edition of MSF’s Untangling the Web of Antiretroviral Price Reductions – particularly when one takes VAT and delivery costs into account; but it is not as low as the R73 benchmark that DoH had set.

Issues, caveats and potential innovations

Price Adjustments

As noted earlier, given the Rand’s continued fall, the price of the tender is likely to go up – because the tender allows suppliers to re-negotiate prices for drugs if they can show that the cost of their imported content has increased.

This has already happened; because the APIs, which contribute roughly seventy per cent or so to the price of ARVs, are all produced abroad – in India, in the case of the ARVs in this tender – and the Rand has fallen against both the dollar and the rupee.

“The first price adjustment is scheduled for 1 October 2015,” said Jaco de Wet, Business Unit Head of Public Healthcare for Aspen Pharmacare. In previous tenders, Aspen have complained that their bottom lines were being squeezed by exchange-rate-related risks – and that at times, they were actually selling DoH ARVs at a loss.

According to De Wet, in October the price adjustment will use the average exchange rate (per item quoted) for the period of 1 March to 21 August as a measure (versus the base exchange rate of R10.7444:US1$ that was used in the tender).

And if the rand strengthens? Unfortunately, the price adjustments only go in one direction.

“The way we look at it is that we go into a risk-sharing agreement,” Steel told us. “So the company carries the risk for the first six months. As the Rand is depreciating, the company is carrying the risk; and as the Rand appreciates, we carry the risk. So what we anticipate is that they take sufficient forward cover to get them through the first hurdle, and I guess that many of them also factor it into the price.”

Price adjustments will be reviewed every six months; so if the rand continues to fall, the cost for ARVs could go higher and higher.

Reliable supplies/Stock outs

Sonke’s large share of the critical first-line FDC raised some eyebrows, given their track record. In the last tender, Sonke Pharmaceuticals was allocated only 1.49% of the total expenditure – which was rumoured to be because of their inability to supply promised quantities of tenofovir in the first DoH tender. Some activists have questioned what will happen if Sonke, or one of the other companies, has difficulty supplying the drugs being ordered.

According to Steel, new measures have been put in place to mitigate that risk.

“We have introduced fairly stringent contract management,” he said.

The procurement team meets and discusses forecasts with suppliers on performance on a monthly basis. Each month, the suppliers are scored (either green or red). If a supplier scores red in three consecutive assessments, DoH will terminate their contract and remove them from the tender.

In addition, Steel said, they evaluate stockholding at the depot on a fortnightly basis, and if they pick up a signal that the contracted suppliers are having difficulty, they publish that information on the SA Department of Health website.

“What we do then is seek alternative supply from other suppliers, and inform the provinces to buy from them.

When that happens, if there is a price difference in the alternative supply, the contracted supplier is liable for the difference between what we’ve managed to procure and their contract price.”

Oral ritonavir-solution

One of the downsides to needing a boosted protease inhibitor for third-line treatment (or an alternative second-line, for those with problems on lopinavir) is that the tender is only for oral ritonavir-solution – which is infamously unpalatable. In addition, the solution isn’t heat stable, which can cause logistical problems storing it – particularly with load-shedding of electricity.

Unfortunately, the heat-stable oral ritonavir capsules are not registered by the MCC.

“The current status, obviously, is not desirable; because obviously, we also can’t buy medicines that aren’t registered, and so we are eagerly awaiting the registration of the product.  The minute that it is registered, I will do a new tender,” said Steel.

Inability to change the second-line regimen

When the tender was first announced, the DoH had listed a large quantity of ritonavir-boosted atazanavir as a possible alternative to lopinavir/r as the second-line regimen, if a supplier had offered a lower price. But AbbVie has made it their strategy to undercut any generic competition for lopinavir/r,  including boosted protease inhibitor regimens. So people on second-line are likely to have to use lopinavir/r for the foreseeable future.

“The AbbVie prices are very, very favourable at the moment,” Steel said. “When sitting down with the generic manufacturers, they’re just all looking at us and saying, ‘We can’t equal that.’

“The success story is that we have a lot fewer patients on second-line than we ever anticipated – it’s half of what, if you’d asked me, my modelling was for two years ago. So at the moment, we still don’t have the economies of scale to get the leverage we’d like to – and obviously, third-line is even worse than that.”

This does lead to the question whether having fewer patients on second-line is really a success; or are we missing a lot of resistant cases, and failing to put them on second-line treatment early enough?

Steel said the department is looking into ways to try to shape the market and propel it towards more competition.  At the moment, this means monitoring the price of intermediates and of APIs.

“We also look at patents – process patents – because that is also usually a good indicator that there are now production efficiencies, and that the price of APIs can shift,” he said.

Why exchange rates matter

Most of the ingredients (called active pharmaceutical ingredients, or API) that go into ARVs are imported from other countries.

Pharmaceutical companies that provide ARVs in South Africa thus have to buy API in United States dollars or other currencies, and not in Rands.

In recent years the Rand has weakened substantially against the dollar. This means that we now have to pay more Rands to get one dollar. It used to be that R8 could buy $1. Now $1 costs over R12. In a similar way, an API that cost $1 a few years back and still costs $1 now would in Rand terms have gone from R8 to over R12 over that same period.