Promoting Local Production of Generic Medicines in Small African Countries

Similar documents
29.1 COST SHEET : MEANING AND ITS IMPORTANCE

Summary. Chapter Five. Cost Volume Relations & Break Even Analysis

Cost VOLUME RELATIONS & BREAK EVEN ANALYSIS

The term marginal cost refers to the additional costs incurred in providing a unit of

COST & BREAKEVEN ANALYSIS

CE2451 Engineering Economics & Cost Analysis. Objectives of this course

Sectors of the Indian Economy

- 1 - Cost Drivers. Product Diversity - Difference in product size, product complexity, size of batches and set-up times cause product diversity.

COST ACCOUNTING : AN INTRODUCTION

Review of Production and Cost Concepts

Glucophage 1000 Mg Twice Day

ICASL - Business School Programme

HUMAN RESOURCE MANAGEMENT

The University of Georgia

a. What is the total revenue Joe can earn in a year? b. What are the explicit costs Joe incurs while producing ten boats?

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

BASIC CONCEPTS AND FORMULAE

BUSINESS PLAN ON URBAN LEVEL HIGH QUALITY CASSAVA FLOUR PRODUCING ENTERPRISE

3 SYSTEMS DESIGN AND CAPACITY

Marginal and. this chapter covers...

P2 Performance Management November 2014 examination

PATENT ISSUES & LOCAL PHARMACEUTICAL PRODUCTION IN GHANA. By Kwasi Poku Boateng QUALITY MANAGEMENT CONSULTANT

6. FINANCIAL MANAGEMENT

Marginal and absorption costing

[TO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY, PART II, SECTION 3, SUB SECTION (i)] MINISTRY OF CORPORATE AFFAIRS.

Chapter 4 Job Order Costing. Job Costing vs. Process Costing Procedure of Job Costing Actual vs. normal Costs

CHAPTER 5 FINANCIAL BENEFIT-COST ANALYSIS

Absorption Costing - Overview

Sourcing and Contracts Chapter 13

Society of Certified Management Accountants of Sri Lanka

12 Marginal Costing Definitions

House Published on

The Circular Flow of Income and Expenditure

11 PERFECT COMPETITION. Chapter. Competition

Your business plan. helping you with your business planning and forecasting. Name of business. Date when completed

Technology, Production, and Costs

WORKING CAPITAL MANAGEMENT

MASTER OF HUMAN RESOURCE MANAGEMENT (MHRM) FIRST YEAR

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Unit Theory of the Firm Unit Overview

Unit 4: Measuring GDP and Prices

Poultry Broiler Farming

COMPUTER HARDWARE MAINTENANCE & NETWORKING SERVICE

Chapter. Break-even analysis (CVP analysis)

GCSE Business Studies Bowton Spice Bazaar Revision Guide

Implementation of BatchMaster ERP with SAP Business one (BME B1) software solution at Syncom Healthcare Limited

How To Understand Cost Volume Profit Analysis

(AA11) FINANCIAL ACCOUNTING BASICS

COST AND MANAGEMENT ACCOUNTING

elements of costs like material, labour and expenses can be classified into direct and indirect. They are mentioned below. i. Direct and Indirect

PREFACE TO COST ACCOUNTING STANDARD BOARD

Revision point: Fixed costs are those that do not change with changes in production levels, e.g. rent.

Variable Costs. Breakeven Analysis. Examples of Variable Costs. Variable Costs. Mixed

POULTRY HATCHERY UNIT

Five steps to valuing a business

TISSUE PAPER MANUFACTURING

Market for cream: P 1 P 2 D 1 D 2 Q 2 Q 1. Individual firm: W Market for labor: W, S MRP w 1 w 2 D 1 D 1 D 2 D 2

Anchor Institute (Engineering & Auto) (Promoted by Industries Commissionerate, Govt. of Gujarat) S V National Institute of Technology, Surat

Managerial Accounting Prof. Dr. Vardaraj Bapat Department of School of Management Indian Institute of Technology, Bombay

Market Failure. EC4004 Lecture 9

A. a change in demand. B. a change in quantity demanded. C. a change in quantity supplied. D. unit elasticity. E. a change in average variable cost.

Session 6: WHO Prequalification Programme. Key Process Steps WHO: Medicines UNFPA: Condoms and IUDs

Managerial Economics. 1 is the application of Economic theory to managerial practice.

CHAPTER 9: PURE COMPETITION

Institute of Certified Management Accountants of Sri Lanka. Operational Level November 2012 Examination

Externalities: Problems and Solutions. 131 Undergraduate Public Economics Emmanuel Saez UC Berkeley

Marginal Costing and Absorption Costing

Indemnity Basis of Settlement. Practical Problems in Adjusting Losses. By the CILA Property Special Interest Group

Quiz Chapter 7 - Solution

3.3 Applications of Linear Functions

7. PROFILE ON FATTENING FARM

Schedule to Regulation PR No. 30/53

Math 1314 Lesson 8 Business Applications: Break Even Analysis, Equilibrium Quantity/Price

WHAT IS ECONOMICS. MODULE - 1 Understanding Economics OBJECTIVES 1.1 MEANING OF ECONOMICS. Notes

Applying the Lessons to Practice. Jayaraman Vijayakumar Associate Professor of Accounting Virginia Commonwealth University. and

221. PROFILE ON PRODUCTION OF PAPER ENVELOPE

GCSE. Economics. Mark Scheme for June General Certificate of Secondary Education Unit A593: The UK Economy and Globalisation

Essential medicines supply chains and inequality

Demand, Supply, and Market Equilibrium

Pricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young

Learning Objectives. After reading Chapter 11 and working the problems for Chapter 11 in the textbook and in this Workbook, you should be able to:

GMP Pharma BV. Netherlands

Chapter 011 Project Analysis and Evaluation

1.1 Introduction. Chapter 1: Feasibility Studies: An Overview

FINANCIAL MANAGEMENT (PART-6) WORKING CAPITAL MANAGEMENT

Chapter 22 The Cost of Production Extra Multiple Choice Questions for Review

Professional Development Programme on Enriching Knowledge of the Business, Accounting and Financial Studies (BAFS) Curriculum

UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION INVESTMENT AND TECHNOLOGY PROMOTION BRANCH INDUSTRIAL INVESTMENT AND TECHNOLOGY PROJECT PROFILE

5 Long-term Mechanization Strategy at National Level Issues and Recommendations

Agricultural Machinery Custom Hiring Centres (CHC) Model Scheme

Chapter 6 Cost-Volume-Profit Relationships

Job, Batch and Process Costing

M. Com (1st Semester) Examination, 2013 Paper Code: AS * (Prepared by: Harish Khandelwal, Assistant Professor, Department of Commerce, GGV)

ACCOUNTING FOR NON-ACCOUNTANTS MARGINAL COSTING

Paper F5. Performance Management. Monday 2 December Fundamentals Level Skills Module. The Association of Chartered Certified Accountants

Demand, Supply and Elasticity

Activity 28.1 (page 509): Types of costs. Business Indirect cost Explanation. digger

Export Business Plan Guide

ECON 103, ANSWERS TO HOME WORK ASSIGNMENTS

BANK OF UGANDA. Good afternoon ladies and gentlemen, 1. Introduction

Transcription:

Promoting Local Production of Generic Medicines in Small African Countries Sudip Chaudhuri Indian Institute of Management Calcutta Africa IP Forum: Intellectual Property and Economic Growth and Development in Africa Midrand, South Africa 25 27 February, 2013

Context Low access to essential medicines in Africa High dependence on imports of medicines Hence, local lproduction of medicines: i a major political economic issue in Africa today

Local production: Industrial Policy Vs Health Policy? Economic benefits: Employment Balance of payments py Etc Access to medicines: More reliable supplies Better quality control Better marketing reach specially in rural areas But cost competitiveness and pricing?

Argument Many developing countries, for example in Many developing countries, for example in Africa trying to promote local production suffer from several cost disadvantages Small size of domestic markets is often cited as a reason why companies cannot exploit economies of scale and hence cannot be cost competitive More expensive local products negatively impact access

Our counter argument Higher costs may lead to neither higher prices nor unviable production The role of economies of scale is exaggerated Viable production is possible at much lower volume of production than is widely believed

Present status Local production already substantial in some African countries But some incentives such as import tariff, marketing preference, negative import list etc have helped Important question: Can local producers compete against imports after upgrading to GMP without further protection?

Scale of operations and viability The viability of a factory depends on the breakeven point Breakeven point is that sales volume (in units) where the total sales just cover the total costs and the company earns no profit. The company earns profits at any sales volume higher than the breakevenpointand and incurs loss below that Breakeven point depends on prices, average variable costs and fixed costs For given prices, if the average variable costs andfixed costs are higher for a firm, then the breakeven level of operations will also be higher If the markets that a company can access are not large enough, if the firm cannot sell more than the breakeven level lof output, the firm will not be viable Therefore it is important to find out how large the breakeven point is.

Breakeven point Q, where Profits = (P x Q) (AVC x Q) total fixed costs = 0, Or, Or, Q (P AVC) = total fixed costs Q = total fixed costs/(p AVC) Where, P = selling price AVC = variable cost per unit Q = quantity sold (P AVC) = contribution i per unit

Our Method Used India as the point of departure: A team consisting of a cost accountant, two production executives of an Indian formulations manufacturing company and an economist estimated the actual cost, production and profitability data. Simulation exercises in Ghana: Starting with the Indian situation and under alternative cost assumptions, estimate the breakeven and the level of viable operations in Ghana.

India It costs about Rs 92 million at Indian prices (2012) to set up in India a new Schedule M compliant formulations manufacturing plant with three compression machines 75% funded dthrough h loans at 12.5% interest trate 4 persons in quality control; 8 persons in production; 3 persons in administration and 3 persons in stores 12 workers 20 other casual workers Five types of tablets of different ingredient, strength and different sale prices manufactured amlodipine, 2.5 mg, ofloxacin, 200mg, ciprofloxacin, 500mg mg, amlodipine, 5 mg and metformin hcl, 500 mg

Costs higher in Ghana Dearth of technically qualified persons and skilled labour Higher raw materials costs Higher costs due to smaller batch sizes Higher costs of imported machinery Higher interest charges Higher electricity it charges Etc

Ghana scenario 1 Same five products manufactured as in the Indian case in same quantities and charging the same prices Same wage cost assuming that the impact of lower wage rate is neutralized by lower productivity All casual workers are permanent Ghana fixed capital investment to set up a WHO GMP compliant plant is double that of the Schedule M compliant plant in India Rate of interest in Ghana is considered to be 25% rather than 12.5% as in India All the other costs material costs, power and fuel, repairs and maintenance, other running costs are considered to be 50% higher inghana Ghana.

Ghana India scenario 1 Total sales revenue (Rs million) 181 181 Total variable costs (Rs million) 65 63 Total fixed costs (Rs million) 79 125 Total quantity produced and sold (million tablets) 107 107 Contribution (Rs million) 116 118 Contribution per tablet (Rs) 1.08 1.10 Breakeven quantity (million tablets) 73 113 Total profits (Rs million) 37-7 Profit margin (%) 20.3

Ghana scenario 2 Same cost structure as in scenario 1 but Volume of tablets manufactured is 50% more in Ghana for each of the five products

India Ghana scenario 1 Ghana scenario 2 Total sales revenue (Rs million) 181 181 271 Total variable costs (Rs million) 65 63 94 Total fixed costs (Rs million) 79 125 125 Total quantity produced and sold (million tablets) 107 107 161 Contribution (Rs million) 116 118 177 Contribution per tablet (Rs) 1.08 1.10 1.10 Breakeven quantity (million tablets) 73 113 113 Total profits (Rs million) 37-7 52 Profit margin (%) 20.3 19.2

Ghana scenario 3 Same as scenario 2 except the Ghana company is manufacturing only the lowest priced product amlodipine 2.5 mg and charging 20% less price compared to the Indian company

India Ghana scenario 1 Ghana scenario 2 Ghana scenario 3 Total sales revenue (Rs million) 181 181 271 245 Total variable costs (Rs million) 65 63 94 71 Total fixed costs (Rs million) 79 125 125 125 Total quantity produced and sold (million tablets) 107 107 161 472 Contribution (Rs million) 116 118 177 175 Contribution per tablet (Rs) 1.08 1.10 1.10.37 Breakeven quantity (million tablets) 73 113 113 337 Total profits (Rs million) 37-7 52 50 Profit margin (%) 20.3 19.2 20.3

Implications of the simulation exercise: The typical argument is that because of the small market size and other disadvantages, the costs are higher and hence prices are and hence access to medicines is negatively impacted But our study shows that even with higher costs, a firm can be viable without charging a higher price The lower profit margin can be compensated by a larger market to ensure viability

Even in a scenario with fixed costs 100% higher, rate of interest 100% higher, other costs 50% higher, production of only low priced products with prices 20% lower, a production level of about 472 million tablets can generate a profit margin of more than 20%.

Realizing the potential Incentive package: Ensure adequate market: Public procurement through tendering restricting to local manufacturers. technical evaluation restricted to local which are WHO GMP compliant and which have the manufacturing capacities to satisfy the procurement requirements financial bid international tendering for drugs for which adequate capacities ii have not yet been developed din the country Reduce fixed costs: Interest rate subsidy

Acknowledgements Benefitted from work done with Alastair West for UNIDO on local production of pharmaceuticals sudip@iimcal.ac.in