Could a new business model be the next wonder drug?

Big pharma companies are facing stagnant markets in the developed world and are anticipating significant growth opportunities in the developing world. Photo by: Ravigopal Kesari / CC BY-NC-SA

Note from editor: This feature on big pharma and global health is produced and published by Devex Impact: a global initiative by Devex and USAID that focuses on the intersection of business and global development and connects companies, organizations and professionals to the practical information they need to make an impact.

International drug companies have long been demonized in the developing world. For a few decades now, critics have painted these global corporations – or big pharma as they are collectively and commonly known – for testing unsafe medicines and selling expired drugs in the least developed countries while at the same time blocking the sale of cheaper generics to the poor and sick. (The 2005 hit film The Constant Gardener neatly summed up the drug-company-as-villain view.) In part to counter the criticism, over the last few decades drug companies have made substantial donations of medicines to poor countries.

But big pharma’s philosophy has changed. Economic troubles in the West and growth in developing countries have prompted big pharma to transform its approach. Companies now consider poor countries as new markets for consumer sales. This has led many big pharma executives to radically change their engagement with the global health and development community. No longer are they simply donating medicine. Today, big pharma is partnering with aid organizations to develop medicines specifically for the developing world and to improve the healthcare infrastructure in the poorest countries. In a departure from an approach that focused solely on drug giveaways, big pharma is in the process of designing a new business model that marries improved health outcomes for the poorest with their own business survival.

“We’ve got a long-term horizon,” says Dr. Allan Pamba, director of public engagement and access initiatives for GlaxoSmithKline’s developing countries and market access unit. “These are some of the fastest growing countries in the world.”

In today’s global economy, pharmaceutical company needs parallel those of developing countries. Profit and productivity is falling in Europe, the United States and Japan, where regulatory pressures also threaten traditional pharma business plans. At the same time, many developing countries need medicines for both tropical diseases and more traditional pharmaceutical targets such as cancer.

Company earnings reflect these pressures. Six of the top ten global pharmaceutical companies by revenue reported declines in trading profits for 2011 and are expected to do so again at the end of 2012, according to an analysis by Peter McDougall, chief executive officer of

Conversely, the emerging market for treatments and vaccines is huge. Brazil, India, Russia, China and South Africa have a total population of 2.9 billion, with an additional 750 million people living in lesser developed countries, according to the Population Reference Bureau and the United Nations. As they search for new profits, pharma executives are now testing whether potentially high-volume product sales can justify investment in products whose prices must now be capped to remain affordable to developing country consumers.

“We review our programmes on an on-going basis, but believe that we are able to make the greatest contribution to increasing access to healthcare when our approach is commercially sustainable,” AstraZeneca spokesman Andrew Higgins told Devex in an email. “This underpins our continued business success which in turn generates the revenue we need to reward shareholders.”

Many question whether commercial motivations for providing vaccines at low costs to poor countries and treating neglected tropical diseases will be subject to the same market forces that helped to exclude poor countries and poor people out of pharmaceutical companies’ service areas to begin with.

“You can’t rely on the market to fund research and development,” said Michelle Childs, director of policy and advocacy for Medecins Sans Frontieres’ access campaign. “At the moment, most of the R&D is funded by donors. It’s ad hoc and fragile. We’ve seen this particularly in relation to tropical disease. If you are going to have a sustainable system, it is going to have to have an element of government funding.”

But overall, nongovernment organizations and foundations welcome the evolving approach.The Gates Foundation, for instance, has positioned itself as a key player in building alliances among pharmaceutical companies, donors and non-governmental organizations. The Foundation’s $2.5 billion in donations to the GAVI Alliance fund the purchase of vaccines for rotavirus, pneumonia and other diseases that kill children in developing countries. The program saves the lives of thousands; it also provides pharmaceutical companies guaranteed new markets for vaccines.

Hannah Kettler of the Gates Foundation says she’s observed overlap between revenue generation and philanthropy, making global health more attractive to pharmaceutical companies in business terms. But it’s still too early for financial gain to be the only motivation for companies to work in partnership with donors and NGOs.

“We’ve definitely seen a change over the last 10 years in product development partnerships,” says Kettler, senior program officer and team lead for multinational corporation partnerships in the Gates Foundation’s global health program. “Companies and partners are entering into very specific deals with work plans and milestones; they are sophisticated partnerships that have targeted goals, at least in the areas where there’s shared investment by donors in TB, HIV, tropical diseases and malaria.”

GSK makes plain its business approach to philanthropy. In August 2009, it combined operations for 50 lesser developed countries into its ”Developing Countries and Market Access Unit” and capped the prices of patented medicines and vaccines in those countries at no more than 25 percent of developed world costs.

The new approach has yielded increased revenue from developing country operations, GSK’s Pamba says. The company reduced prices of off-patent antibiotics Augmentin and Zinnat by about 25 percent in East Africa, for example, and saw a 100 percent increase in packs sold, he says.

The low selling prices in developing countries also help pharmaceutical companies negotiate pricing deals with developed-country government health authorities, McDougall, the industry analyst, says. “You roll all the philanthropic costs into your accounts, and then when you talk to the developed countries about prices and profits you thereby understate your true profitability in, say, the U.K., the U.S. or indeed the EU and Japan,” contends McDougall. “It’s a clever way to help keep prices up in your best markets.”

Developing drugs for the least developed

Big pharma’s flirtation with developing country health care comes amid fears that declining global health donations will be insufficient to fund neglected disease research and drug development. Industry contributions to neglected diseases increased 28.2 percent from $396.4 million in 2009 to $503.2 million in 2010, according to the most recent figures published by the British NGO Policy Cures. The bulk of the contributions, 87.9 percent, or around $442 million, came from multinational pharmaceutical companies. Since 2010, most analysts agree that big pharma companies have roughly maintained these contribution levels.

Big pharma has long been willing to fund the development of some medicines and vaccines. For instance, Merck & Co. Inc. was an early pioneer, delivering free treatments for onchocerciasis, or river blindness, starting in 1987 in what has become a recognized model for treating infectious tropical diseases. But programs from individual companies are dwarfed by today’s global collaborations, such as GAVI.  Officials there say its approach to relationships with pharmaceutical company partners can sustain vaccine programs long-term.

Under the GAVI program, called the “advance market commitment,” pharmaceutical companies have agreed to specific annual vaccine production levels for 10 years. That commitment means the program will continue even if company priorities change over the decade, says Jon Pearman, director of the accelerated vaccine introduction for GAVI. GSK and Pfizer provide pneumococcal serum. Crucell provides Quinvaxem – avaccine against several childhood diseases – while Sanofi Pasteur provides yellow fever vaccines and the Merck Foundation provides rotavirus and Hepatitis B vaccines.

Just recently, GAVI rolled out the pneumococcal vaccine program for infants in Zimbabwe, part of a worldwide project that aims to save the lives of 7 million children by 2030.  Concurrently, governments and donors pledged $4.3 million to vaccine development and rollout.

The pharmaceutical companies are paid $7 per dose for the first 20 percent of the vaccines they provide as a production incentive; the price is then reduced to $3.50 a dose. The incentive money comes from a $1.5 billion fund provided by donors, including governments and the Gates Foundation. The same vaccine sells for $90 in the U.S. market, according to GAVI.

“The capacity, demand and pricing, it’s kind of covered,” Pearman says. “The prices are covered in longer-term contracts with industry. We’re proud of those mechanisms.”

Gates Foundation’s Kettler says the AMC for pneumococcal vaccine was an attempt to “address market risk” for pharmaceutical companies, “to make a more predictable return for products sold.”

Companies need assurance they can run their plants at capacity to keep costs down, she says. GAVI’s price guarantees are one way to address risk, she says. Another approach is to guarantee volumes.

While vaccines have global markets, drugs for tropical diseases don’t always, and that creates obstacles for drug development, according to Kettler. Ensuring pharmaceutical companies have adequate market reach to justify investment in neglected tropical disease drug development is a continuing challenge, she says.

“Can they make enough money to do tiered pricing for some of these drugs for developing world and developed markets?” Kettler says. “Companies are looking for the global health community and WHO rather than markets to direct and guide them.”

The Drugs for Neglected Diseases initiative deliberately partners with pharmaceutical companies late in the product-development process, says Jean-Pierre Paccaud, DNDi’s business development director. DNDi was founded in 2003 by Medecins San Frontieres and seven organizations, including the Pasteur Institute, and developing country organizations such as the Kenya Medical Research Foundation in an effort to facilitate sustainable production of drugs for neglected diseases.

The NGO manages the vaccine or drug-product design and development stages, in partnership with academic institutions and biotech companies, Piccaud says. Close to the end of final clinical trials, DNDi signs agreements with pharmaceutical companies for scaling up production and distributing the drugs. DNDi and donors, rather than the pharmaceutical companies, take on the risks of early stage trials.

“A pharma engaging with the product-development partnership is engaging in a fully de-risked product when the product is well into Phase III, so most of the R&D costs are absorbed by then,” Paccaud says. “For the pharmaceutical companies, it’s not risky and they can do a good job.”

Still, both donors and drug companies recognize the importance of governments in neglected disease drug development, Kettler says.

Often patients carry what she terms a “mini-portfolio” of diseases, such as hook worm, round worm and whip worm, and traditionally public health services treat each disease separately, Kettler says.  Gates’ NTD initiative depends on direction from governments in creating the right formulas to address the diseases efficiently, she says.

“That’s work that can only be done with the countries,” Kettler says. Governments accept that the success of the treatments “depends on health policy change on their part. They are active partners – success or failure depends as much on them as anybody else.”

Drug companies and their partners in developing countries are still studying how to succeed in these new partnerships. For MSF and DNDi, involving countries in decision-making is only one part of what needs to change to build sustainable global production of drugs. The entire global system for drug production, dependent on recouping R&D costs through market exclusivity has to change, MSF’s Childs says.

More than medicine

Getting the partnership and pricing strategy right is only one part of the puzzle. Increasingly, drug companies operating in emerging markets recognize that achieving sustainability requires closing gaps in “health systems.” This is opening up new avenues for engagement with the donor community, development countries, and development partners.

In South Africa, AstraZeneca’s Phakamisa project helps women understand and self-test for breast cancer, which kills more women in that country than any other cancer. Phakamisa staff have trained more than 400 volunteers and 100 doctors and nurses in outreach and screening and held 435 meetings with 16,000 women. Three hundred women have received counselling and treatment for lumps identified through the program.

GSK has pledged to spend 20 percent of its earnings in lesser developed countries building healthcare infrastructure. The company’s chief executive, Andrew Witty, cites a shortage of medical staff in public service in emerging markets as a key health-system gap the company aims to close. GSK is helping AMREF, formerly the African Medical Research Foundation, train and deploy village healthcare workers in East and Southern Africa.

“Without better health care facilities and channels to reach the world’s poorest patients, new drugs and medicines are in danger of sitting unused on warehouse shelves or in boxes on loading docks—even if donated at no cost,” Witty wrote in a January 2011 article in Health Affairs.

The advantage of GSK’s approach compared with other corporate donations is that the cross-the-board financing is more sustainable, says Dr. Peter Ngatia, director of capacity building at AMREF. In line with the principles of country-led development which are being adopted by development donors, GSK also agreed to fund what AMREF and governments determined were priorities, rather than assert its own. For instance, AMREF plans to set up a network of data collecting by healthcare workers and GSK has offered technical assistance, Dr. Ngatia says.

GSK’s total commitment is small: just £3.8 million ($6.1 million) in 2011 for the 50 lesser developed countries, according to its annual report, but that amount will increase as the markets expand, according to the company.

“When you take a percentage of the profits and you say I’m going to get it back to those people who have given me profits,” Ngatia says. “That’s the way you grow your business; the healthier they become the more consumer oriented they will be.”

In Rwanda, GSK has agreed to help finance nurse-owned franchise clinics as part of the drug company’s 20 percent giving plan. In partnership with the Rwandan government and Minneapolis-based Healthstore Foundation, the GSK initiative allows nurses to buy clinics or stores for $5,000 and sell medicines while being monitored by Healthstore Foundation officers. To date, GSK has provided a £970,000 grant to set up 60 clinics in Rwanda and says it will scale up to 500 by 2020.

Big pharma companies are facing stagnant markets in the developed world and are anticipating significant growth opportunities in the developing world. In order to build a viable and sustainable business, the companies appear to understand that these new markets require a fundamentally different model – one that addresses the risks associated with researching, creating, selling, and administering cheap medicines in the developing world. New partnerships with donors and innovative financing mechanisms such as GAVI are helping enable this new model alongside big pharma’s own increased R&D spending for emerging markets. While these partnerships still have room to run, they hold some genuine promise for curing the afflictions of the pharma industry and simultaneously improving global health.

About the author

  • Paula Park

    Paula Park is a journalist with 25 years of experience who has worked for The Wall Street Journal and Bloomberg, as well as publishing articles in the New York Times. She started her career covering development and the arts in East Africa for the BBC World Service and wrote the Oxfam study "Lands of Plenty, Lands of Scarcity: Agricultural Policy and Peasant Farmers in East and Southern Africa.”