February 14, 2006

1. Clinton Foundation HIV/AIDS InitiativePharmaceutical Services TeamEngaging the ARV Marketplace to Optimize Outcomes for Patients February 14, 2006

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 1st-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 2nd-line ARVs, cost and volume pressures on 1st-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 1st-line prices), to accelerate time to market for affordable 2nd-line generic ARVs, and to minimize any delay between supply of a product and its availability to patients

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

5. Drug and Diagnostic Costs to Countries National treatment budget (2003 data – illustrative) Percent 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) Management IEC Nutrition Physical Infrastructure Training Drugs (44%) Staff Labs (23%)

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. Develop operational plans Forecast demand Support purchasing Monitor consumption CHAI Engagement with Countries • Set national treatment targets • Quantify requisite resources • Plan for operations, oversight, milestones, etc. • 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 • Deploy tools to sites to monitor ongoing consumption • Use consumption data to update demand forecasts (pull not push)

8. CHAI Engagement with Suppliers Identify Potential Partners Due Diligence Model Product Cost Negotiate Price • WHO/FDA quality benchmark • Breadth of product selection • 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 • Develop transparent pricing formula • Establish scale curve for future cost/price reductions • Identify product development priorities • Continue to monitor costs

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

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

11. 3TC+d4T(40)+NVP October 2003 $562 $384 $290 $140 Branded Best Price1 Generic Purchase Price2 Generic List Price3 CHAI Ceiling Price ARV Price Comparison: 2003 • 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) • 1 As reported by the manufacturers and by Médecins Sans Frontières (MSF) in Untangling the Web of Price Reductions • $384 was the weighted average price being offered to CHAI purchasers in October 2003. • MSF’s May 2003 guide reported the best prices offered by Cipla, Hetero and Ranbaxy as $304, $281 and $285.

12. Operational Principles for Purchasers • 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) * These are explicitly specified in MOUs with purchasers in Procurement Consortium (with provision of order info)

13. Reach of Agreements After 2 Years Access to CHAI prices Number of countries People benefiting 000’s on ARVs purchased under CHAI agreements 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). 4x 8x 51 240 13 30 January 2004 January 2006 End Q2 2004 End Q4 2005

14. 3TC+d4T(40)+NVP January 2006 $562 $221 $192 $144 Branded Best Price1 Generic Purchase Price2 Generic List Price3 CHAI Purchase Price ARV Price Comparison: 2006 • 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 1 As reported by the manufacturers and by Médecins Sans Frontières (MSF) in Untangling the Web of Price Reductions 2 Weighted average of price being paid in middle and low-income countries, according to World Health Organization. 3 Average price, per MSF’s June 2005 guide, of three suppliers currently WHO prequalified (Cipla, Hetero, Ranbaxy).

15. 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

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

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

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

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

20. Cost Pressures on 1st-Line ARVs Production costs for 1st-line ARVs are rising, despite some efficiencies and savings. Continued work is needed to maintain or lower prices. Costs • 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. • 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 Savings • Better yields than expected • Cheaper routes of synthesis • Use of cheaper API for unregulated markets

21. 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 Projected 1st-Line Demand Increases 2010 goal: 6–8 million 2006/07: 3 million End 2005: 1–1.5 million

22. 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

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

24. 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

25. d4T - or - AZT 3TC - or - FTC NVP - or - EFV + + ABC - or - TDF Triple NRTI alternative Possible Revision to 1st-Line WHO Protocol or 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 1st line with NVP)

26. Likely Revised 1st-Line Regimens 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 2nd 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

27. LPV/r - or - SQV/r - or - ATV/r TDF - or - ddI ABC - or - AZT** + + Likely Revised 2nd-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. * These 12 possibilities are the most likely of 36 variations ** AZT can be used + or – 3TC

28. 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

29. Balance with NDRA Strengthening Need for Quick Access to ARVs Health Systems Strengthening • Expedite national registration based on WHO and/or FDA approval (and submission of identical dossier, with B/E data and same API-source) • 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)