Cipla’s management in its recent investor call indicated that the global tender business sales could be lower by $100-120m in FY19 led by funding crunch and competition.
"What’s the use of developing life-saving medicines if you can’t make them affordable to the patient?" famously quipped Dr YK Hamied, Chairman of Cipla, referring to high cost of HIV/AIDS treatment.
Hamied backed his words with action. In 2001, Cipla introduced the world’s first ever three-in-one fixed-dose combination of Stavudine, Lamivudine and Nevirapine to fight AIDS.
The triple combination tablet was offered to global non-governmental organisation Médecins Sans Frontières (MSF) for distribution at $350 per patient per year (or less than one dollar a day), compared to $12,000 per patient per year prevailing individual drugs cost in those days sold by MNCs.
Now the same treatment is offered as low as $75 per patient per year.
Cipla’s move lifted the death sentence of millions across the developing world, especially in Africa, making AIDS treatment affordable and accessible.
In the process, Cipla not just won laurels globally but secured multi-million dollar contracts to supply antiretroviral (ARV) drugs to low and middle-income countries.
But Cipla isn’t kicked about this business anymore.
Cipla generated $400 million or 17 percent of its revenues in FY18 from tenders in FY2018, more than half of which were in ARV tenders.
A little over one-third of those tender revenues came from South Africa alone, the rest from sub-Saharan Africa and Cipla Global Access.
Cipla’s management in its recent investor call indicated that the global tender business sales could be lower by $100-120 million in FY19 led by funding crunch and competition.Funding squeeze
Most of the low and middle-income countries depend on generous funding support from multilateral agencies like Global Fund, Untaid, and President’s Emergency Plan for AIDS Relief (PEPFAR) of US government to buy ARVs, Tuberculosis and Malaria drugs.
These countries do it either individually or through group purchasing that offers them affordable prices due to high-volume orders and multiple competing suppliers.
But that funding is slowly drying up, as donors tighten their purse strings. For instance, early this year, the largest donor the US, had proposed $1 billion in funding cuts.
For instance, every $1 that the US contributes to the Global Fund, other donors invest $2. In its budget proposal for FY18, the Donald Trump administration proposed some $425 million in cuts to the Global Fund.
Global Fund is a partnership between governments, civil society, the private sector and people affected by the three diseases. It raises and invests nearly $4 billion a year to support programmes run by local experts in countries and communities most in need.
Even PEPFAR, which was started under the regime of former US President George W Bush in 2003, will get $800 million less.
Under PEPFAR – the US proposed a cut of over 30 percent for three countries -- South Africa, India, and Mozambique -- with some of the highest HIV/AIDS disease burdens in the world.
The donor countries argue that as these countries grow economically, they are expected to increase spending on health from their own resources, progressively moving away from donor financing toward domestically funded health systems.
Lower tender offtake
With lesser funds at disposal, countries were floating tenders for smaller volumes, even as the competition is fierce, impacting the margins.
The ARV segment has become crowded with drug makers such as Mylan, Hetero, Aurobindo Pharma, Lupin, Sun Pharma and Strides are competing aggressively, Chinese drug makers too have jumped into the fray.
The rising prices of key starting materials for ARV drugs supplied by Chinese producers are pushing the costs.
“The South African tender that constitutes about 35-40 percent of our business, this is the first year we have seen that being impacted and again that is a funded tender by the government. So, what happens is I think when there is a liquidity issue or the funding environment changes, those tenders get impacted,” told Umang Vohra, Global Chief Executive Officer and Managing Director of Cipla to analysts.
Cipla estimates about 50 percent cut in South Africa tenders from FY2019.
“We have an internal threshold for margins, anything below the threshold we may not participate,” said Kedar Upadhye, Cipla’s Global Chief Financial Officer in an interview to Moneycontrol early this month, referring to low margins that these tenders are offering.Upadhye said to compensate for the loss of tender business, the company will be focusing on private market segments in India, South Africa and emerging markets.