Thursday, May 13, 2010

Theory and Reality Part 2: The AMFm*

It’s been a while since I’ve written a health-/work-related entry, so here goes. Watch out for the weeds!

One of the most important lessons I’ve learned in my first six months here is the huge gap between theory and reality in terms of donor-funded development programs. Policies and initiatives that are dreamed up in Washington and Geneva can seem magical on paper, and then when they are implemented in the developing countries they are meant to help, magical is just about the last adjective anyone would use to describe the outcome. For me, the Affordable Medicines Facility for Malaria (AMFm) epitomizes this phenomenon. Obviously, this difference between theory and reality can be said of many things in life (A big one that Westerners like to joke about is Communism.), but I feel a very acute sense of it with the AMFm.

I have touched on the AMFm in previous entries, but I’ll give a quick overview here now. The WHO-recommended (World Health Organization), most effective drugs to treat uncomplicated malaria are called artemisinin-based combination therapies (ACTs). ACTs are highly efficacious, fast-acting and prescribed in easy-to-follow dosages. The main problem with ACTs is their prohibitively high cost. The majority of Ghanaians continue to patronize private sector pharmacies and other drug-selling shops to treat malaria, and if you were to walk into a Ghanaian pharmacy right now, brand-name ACTs are about $7-$10 a dose: quite out of reach for the average person. Even the local generic ACTs are around $3-$6. Most price-sensitive patients opt for the older, cheaper treatments – chloroquine, sulphadoxine-pyrimethamine (SP), and artemisinin monotherapy – that retail for about $.50. Now, this scenario would be perfectly fine, except that, for a variety of reasons, these alternative treatments suck. The drug resistance profiles for chloroquine and SP are unacceptably high, making them highly ineffective treatments, and continuing to consume artemisinin monotherapies greatly increases the likelihood of resistance developing, thereby completely undermining efforts to expand access to ACTs. For these reasons, the WHO has explicitly advised all countries to stop using these older drugs and to switch to ACTs. In fact, many countries have already made their dispensation illegal, as does Ghana’s new malaria drug policy (which has yet to be disseminated and rolled out); however, despite these measures, the older treatments still remain widely available.

So, in come the donors. They looked at the situation described above and decided to create a pool of money that would subsidize the price of ACTs, so that the cost to the end user would decrease enough to rival those older, less-effective treatments. The idea is that by strategically injecting funding, the natural market forces of supply and demand could be used to not only increase access to the most effective treatments but also drive out those less-desirable drugs from the market. In a nutshell, this is the AMFm, and in theory, it is hard to argue that providing the highest quality ACTs for a fraction of what they used to cost is not a great concept. Indeed, when I first heard about this initiative as a wide-eyed research analyst just a few years ago, I thought it was fantastic use of donor funds.

Before I go any further, it should also be noted that where we are now is years in the making. The AMFm concept was first conceived in the 2004 Institute of Medicine (IOM) report titled “Saving Lives, Buying Time.” From there it was shopped around for a while before landing with a consulting firm called Dahlberg & Associates. Dahlberg fleshed out the concept to really analyze what the scope of a fund like this would be and how the internal mechanisms would work. After that, it was a matter of raising the money. Understandably, it took a while to find financial backing, but the AMFm was eventually taken on by The Global Fund to Fight AIDS, TB and Malaria. (Less the ten years old, the Global Fund is a multilateral agency that pools donor health funding for the three priority diseases. Eligible countries submit project-specific applications, and the Global Fund dispenses the money directly to the local Ministry of Health, which then allocates it accordingly.) A few years ago, an early version of the AMFm was successfully piloted in Uganda and Tanzania. Backed by about $225 million, it is now being expanded to about a dozen other countries, including Ghana, with plans to expand it all over the world if this larger pilot is successful.

So there we are. Now that I’ve given adequate background, we can get into where the problems arise, causing the rift between theory and reality. For simplicity sake, I will narrow things down to the two major issues: the prequalification problem and the margins problem.

The prequalification problem refers to the fact that all ACTs being subsidized with AMFm funding have to be prequalified by the WHO. WHO prequalification is a process that started back in 2001 to provide a level of international standardization for good manufacturing practices and high product quality for multilateral procurement agencies like UNICEF. When it began, its mandate was to give the nod to the highest quality drugs against HIV, malaria and TB. Since then, the list has expanded to include antivirals for influenza and reproductive health products as well. And after a decade, WHO prequalification is now THE standard used by bilateral agencies, governments, NGOs and other bulk purchasers of drugs for the developing world.

The problem is that no local manufacturers have attained WHO prequalification.

For donors (like the US government or the Global Fund) that give money directly to developing country governments for drug procurement, it is a good quality control measure to stipulate that the products must be on the WHO prequalification list. For developing country governments, especially those with a large local pharmaceutical manufacturing sector like Ghana , it is bittersweet when donor funding cannot also benefit your local industry (but rather helps its competition). And for the local manufacturers themselves, it is an onslaught in their fight for survival.

Right now, many of the ACTs in the private sector are supplied by Ghanaian manufacturers whose products have been registered by Ghana’s regulatory agency: the Food and Drugs Board (FDB). (When the national malaria policy was changed to ACTs in 2004, the government even encouraged Ghana’s local pharmaceutical companies to increase production to meet the demand.) While the FDB is considered to be one of the best and most stringent drug regulators in Africa, that is not good enough for the donors. (And possibly rightly so. The WHO recently conducted a study of the quality of antimalarials available in the African private sector, and the results were, in a word, dismal.) But attaining WHO prequalification is a costly, time intensive process that requires the sorts of investment and sunk costs that local manufacturers cannot afford. (The manufacturers with WHO-prequalified ACTs are pharma giants like Novartis (Swiss) and Sanofi-Aventis (French), along with some emerging market behemoths from India and China like Cipla.)

So, here comes the AMFm, which says that the market will soon be flooded with the highest quality ACTs in the world, at prices so low that local companies cannot compete. And they also cannot benefit from the subsidy, because they are not prequalified. It has been hard to get a straight answer from local companies regarding what percentage of their current portfolios ACTs contribute, but it is safe to say that if the AMFm is successful, that percentage will eventually be right around zero. I have been privy to many an impashioned speech from the president of PMAG (Pharmaceutical Manufacturers of Ghana) and others denouncing the AMFm as the end of local manufacturers as we know it. While this is certainly an exaggeration, large scale job losses resulting from weakened companies may not be. To quell these complaints, the response du jour from Global Fund officials is that “resources are being made available” for those companies with a serious interest in becoming WHO prequalified. Needless to say, the prequalification process takes years, and I have not yet heard of any companies asking to access said “resources.” In summary, local manufacturers are not happy in the least, and this is the prequalification problem.

To explain the margin problem, I have to explain a little more about the specifics of the AMFm and of the private sector pharmaceutical supply chain. For simplicity sake, let’s say that the private sector supply chain looks like this:

manufacturer --> importer --> wholesaler --> dispensary --> patient

and that at each arrow (besides the first one, since it’ll just be the manufacturer’s fixed price), a 50% markup is taken as profit for that actor in the chain. As an example, let’s say that the manufacturer sells the ACT to the importer at $2/dose. The importer tacks on a mark-up of 50% to that, and sells it to the wholesaler at $3/dose, making a profit of $1/dose. The wholesaler puts a 50% mark-up on the $3, selling it at $4.50 to the dispensary (e.g. pharmacy, clinic, hospital) and making a profit of $1.50/dose. The dispensary adds 50% onto that, selling it to the patient at $6.75/dose and making a $2.25/dose profit.

How the AMFm works is that the Global Fund has already negotiated with the prequalified manufacturers to bring the price of ACTs down to (an average of) $1/dose. Then, whenever the manufacturer receives a purchase order from an importer under the AMFm, the manufacturer will ok the order with the Global Fund, and the Global Fund will then co-pay (an average of) $.95/dose to the manufacturer. This co-payment is the subsidy from the $225 million pot-o-money. This means that the manufacturer then sells the ACT to the importer at (an average of) $.05/dose (instead of the $2 that it was before). The Global Fund makes all importers sign an agreement saying that they will play nice when it comes to mark-ups, and the idea is that even with all the mark-ups along the way in the supply chain, the final price to consumers of co-paid ACTs will be around the Global Fund’s target price of $.50/dose.

Now, you don’t have to have an MBA to realize that some of the private sector distributors might have a problem with this. When there is only a total of $.45 to be made from manufacturer to consumer, and the profit margin that used to be $1, $1.50, or $2.25 per dose is now down to $.15 or $.20 cents per dose, some people are going to start to question the financial feasibility for all stakeholders to participate. This is the margin problem.

In Ghana, The Global Fund’s plan, with the help of Ghana's Ministry of Health (MoH) has been to hold a series of “private sector” engagement meetings, where these issues are discussed to get private sector buy-in. I have been to more than a few of these, and while they are good in theory, the politics of all the big players and the dynamics of large group meetings mean that things devolve quickly and nothing of consequence is ever achieved. The Global Fund then looks to the MoH for support, but their requests often fall on deaf ears. See, like all things the Global Fund does, it was the MoH that submitted the application. Ostensibly, that means they were the ones who wanted the AMFm to come to Ghana in the first place. However, because of all of the resistance from the manufacturers and others in the private sector, the Ministry is often less than fully supportive in public forums, deciding to play innocent and let the blame fall elsewhere. (One goal that the international development community likes to talk a lot about is “country ownership” of programs. This means that the countries themselves throw their full support behind projects and willingly take responsibility for the success or failure of programs, instead of having them feel like this is the donor’s agenda and they are just along for the ride. Let’s just say that in terms of country ownership, Ghana's MoH would be getting a failing grade right now.) This was the song and dance we were all doing for the first 5 months I was here. But, luckily, the Global Fund’s portfolio manager for West Africa is keenly perceptive and decided to make a move.

His move was to call on the Clinton Foundation to set up several one-on-one meetings with the country’s biggest importers and wholesalers to better explain the initiative and to assuage any fears they had. Since the outset, the Clinton Foundation has been supporting the AMFm implementation, and with its unwritten policy of only hiring ex-management consultants, this was the perfect time for them to step up to the plate. There is only one full time Clinton Foundation employee in Ghana, and his entire job is private sector engagement for the AMFm. He immediately created a hypothetical pricing model in Excel and called me. See, the vast majority of private sector stakeholders in Ghana, be it manufacturers, importers, wholesalers, or distributors, are pharmacists. Pharmacists who belong to PSGH. So, I was able to rope Dennis in, and we were able to set up several one-on-one meetings for when the portfolio manager was flying in from Geneva.

So, two weeks ago, the 4 of us went around meeting with these guys individually, with laptop in hand to run through the numbers. Then we would have a discussion about how feasible they thought the whole thing was. This was private sector engagement. And this was probably the most useful thing I’ve been able to do since I arrived. It was understood and agreed that with the lower per-dose profit, the private sector distributors would have to up volumes a lot: anywhere from 4 to 20 times as many, depending on which actor in the supply chain you were. The good news is that most of the people we met with thought that these higher volumes could be achieved through the increased demand. (i.e. When a good that was $6.75 is suddenly $.50, a lot more people are going to buy it.) We assured them that the $.50 figure is an ideal target set by the Global Fund, but it is certainly not set in stone. This meant that in the short term, there was a lot more flexibility on margins, but that in the longer term, with ample competition, the price should approach the target. Some also discussed the appeal of the much lower cost of capital (amount of money needed to procure the ACTs), and everyone nodded their concurrence. We were able to get through to many of them, and a few have already started the process to become registered buyers with the Global Fund. The co-paid ACTs should start arriving in August, and there should be enough buy-in from importers and other private sector distributors to give Ghana a good shot at success.

When I first learned about the AMFm as a doe-eyed research analyst in Washington fresh out of college, I thought it was a fantastic idea. On the other side of the pond, all you hear about is how this will revolutionize malaria treatment by vastly increasing access to the most effective treatments. But you don’t hear about the local manufacturers who will have to lay off workers and might be run out of business. You don’t hear about the corrupt customs officials who will undoubtedly help leak these newly-affordable antimalarials across Africa’s notoriously porous borders.

Don’t get me wrong, I still think it’s a fantastic idea, but its development and implementation could be much better. Firstly, for an initiative that is SPECIFICALLY-INTENDED for the private sector, that engagement has been atrocious. Nothing substantial is ever achieved in large conference rooms. This is nothing new. (Need I remind everyone of the C5?) Inviting a handful of stakeholders and holding a few lunch meetings so that everyone can collect their per diem, while probably necessary, is not engagement; it is lip service. I hate to think about what AMFm adoption in Ghana might be if the Global Fund's portfolio manager was less perceptive, or if the Clinton Foundation was not involved, or if I was not acquainted with that sole Foundation employee, or if Dennis cared more about profit than public health. Secondly, how about consulting those parties that will be affected by a policy WHILE the policy is being developed so that they can provide input to better shape it, instead of just informing them that it is coming and there is nothing they can do about it? A novel idea, I know. The sad thing is that this can be said for almost all development programs. The AMFm was conceived in Washington, fleshed out in Washington, and funded in Geneva over a period of years before anyone in the local private sector, whose livelihood would be directly affected, was ever consulted. This model needs to change. (I know BTE was talking about the lack of country ownership when they penned their hit, “Desperately Wanting.”) Thirdly, I have not even mentioned the sustainability aspect of this initiative, for which there is no satisfying answer. The pilot phase will go for about 2 years, after which time the numbers will be analyzed and a decision will be made to either discontinue it, or to expand it possibly to all malarial countries worldwide. In the meantime, it is a big question mark. The local manufacturers will stop manufacturing, and the importers will cut ties with long-held business relationships. All the while, there are no guarantees of anything.

The AMFm is a great initiative with enormous potential, and I really hope it enjoys wide success. If it does, then I hope this pilot phase can teach us a lot about what needs to be improved for the next phase. If nothing else, then at least it has taught me the big difference between theory and reality. And I’ve already learned that I like dealing with reality a lot more than theory. Masters – 1, PhD – 0.

* Some names have been changed (or deleted) to protect the innocent. They asked me to do it. And, no, I am not kidding.


  1. Thanks for posting this, Scott! I'd heard a little about the margins issue, but all of the glossy reports made it sound like they'd already "solved" that problem. And I hadn't even begun to connect the dots on the prequalification problem, although it seems obvious in retrospect. Your perspective is hugely enlightening.

  2. Hi Jessica!

    Great to hear from you! Yes, the margins issue has not been solved. Obviously, all distributors are different, but once you run the numbers it becomes a question of whether they believe that the increase in volumes can match the decrease in margins. Many people that we met with seemed to think that the answer to the "If Coartem was suddenly .$50, do you think you could you move 5, 10, or 15 times as much as you do right now?" question was "probably", or "yes." It takes some convincing, but we have found some success.

    As far as prequalification goes, the size of the problem certainly correlates to the scale of local manufacturing. Ghana has one of the largest local manufacturing sectors in all of sub-Saharan Africa, so the outcry is that much worse. I understand that it hasn't been as big of a problem is some of the other pilot countries. That being said, the local pharma lobby is strong here, and it noticeably affects the country ownership aspect when MoH reps won't use supportive language in public forums.

    Also, the Global Fund needs to have a better response than their current "resources are being made available" one. While this might be true, it seems very superficial, and I really have not heard of any local companies expresing interest. I think the GF and WHO need to be more proactive about it, so that, in the future, they can have concrete things to point to in their defense, because this will certainly not be the last time prequalification is an issue with donor-funded health programs (Especially if you think about the epidemiological shift towards chronic diseases and all the statins that are coming off patent soon. In some years time, I could forsee donors funding those procurements, and the prequalification list expaniding to include them.)

    On a related note, I am becoming more and more interested in thinking about these issues form a business opportunity angle, and thinking about how targeted investments and resource mobilization could actually help local industry over the prequalification hurdle, so that they can reap the rewards of future public sector procurement (i.e. something IFC or Acumen might be interested in). But that is another story for another blog, and I am giving away too much of my grad school essays!

    Thanks again for the great comments!

  3. Scott, you rock! This is a great post and extremely informative. I think you would be just as comfortable at the front of the classroom teaching this material as you would be in a seat learning. I'm proud of you. Keep making this world better :)


  4. Hi Dave (and Chelsey),

    Thanks for those very kind words. I'll keep trying to do my best. I'm certainly much more of a learner at this point (that was, after all, the main point of this year), but hopefully some day I'll be a do-er as well. (And a more informed, well-rounded one at that!)

  5. Just wanted to thank you for your great blog from Ghana. My wife and I will be relocating to Ghana in the middle of June and your posts have been very informative and entertaining. If I get up the courage, I'll give the giant snails a go. I've taken a job with a company in the IVD industry with a company I have been working with from the US for 10 years. We are really excited. Maybe I'll see you over there.

  6. Sorry for the poor editing of my post, trying to to too many things at once. Cheers.

  7. Hi Mark,

    Thanks for the nice comments and for reading the blog! And no worries at all about the editing. Best of luck with the move, and it'd be great if you did want to look me up when you get here. Cheers!

  8. Hi Scott. I just found your blog. Your posts on malaria and especially this post on the challenges of the AMFm have been extremely interesting and have taught me a lot. Thanks, and keep up the good work!

  9. Hi, Christopher. It's funny that I am "teaching" some people, since I am doing so much of the learning over here, and then, merely passing it on in blog form. Thanks for the kind words, and I'll try to keep it up.

  10. I came to this place by chance, but I found very interesting. Greetings to all the people who visit this page.