This study demonstrates the utility of analyzing financial data obtained from pharmacies to predict costs of establishing new pharmacy businesses and determine reasonable medicine prices and mark-ups that are affordable but still ensure pharmacy viability. Information gained from this type of research can empower policy makers and advocates to develop strategic, evidence-based interventions appropriate for their local context, without jeopardizing sustainability of pharmacy enterprises and availability of medicines.
Medicine mark-ups needed to ensure non-profit viability were higher than expected and might be considered "excessive" when interpreted without consideration for the cost of business
The level of medicine mark-up needed to sustain the pharmacies was much greater than expected in the planning phase of the project. While the majority of medicines revealed mark-ups of less than 50% upon the initial establishment of the network, mark-ups increased steadily year after year, with few medicines marked-up below 50% and the vast majority marked-up well above 50% and 100% by the end of 2007.
High mark-ups were necessary even given the network's reliance on government subsidies for rent, overhead, and nurses' salaries, as well the in-kind contributions of others. The network's high operating costs for salaries and travel/transport, together with low inventory turnover, translated into high carrying costs for the pharmacy network. This is likely the case in many other rural regions.
The pharmacy network has few options to lower medicine prices without jeopardizing availability
In order to lower some mark-ups that may be considered "excessive" (e.g. >150%), the management would need to increase mark-ups on other medicines. The NGO could leverage medicine prices and mark-ups in an effort to drive demand of specific products. Mark-ups could be redistributed, applying low mark-ups to encourage the use of key essential medicines and high mark-ups to discourage the use of non essential medicines. Similarly, the NGO should increase mark-ups on sundries (e.g. creams, shampoos, etc.) to maximize revenues and cross-subsidize lower mark ups on medicines. The NGO could also conduct market surveys to identify additional sundries held in high demand by the local community.
While we have not presented the analysis in this paper, we found that profit at the individual pharmacy level varied, with some pharmacies performing better than others . Not surprisingly, pharmacies located in villages with larger populations enjoyed greater profits than those in less-populated villages. Distance from the warehouse in the district center was more closely related to profit, with the most remote pharmacies operating at a slight loss. In this mountainous region, remote pharmacies are located 45-66 kilometers (28-41 miles) from the warehouse. Roads to many of these villages are unpaved and in disrepair, making travel time-consuming and costly, especially during the region's long winters.
It is certainly possible to increase the operational efficiency of these pharmacies, but potential gains would be marginal and insufficient to reduce current medicine prices and mark-ups. Closing pharmacies or reducing the number and type of medicines stocked in villages operating at a loss would increase overall network profit, but at the expense of decreasing access to medicines in the villages most in need. This option would directly contradict the original intention of establishing the network to meet the needs of the least served. Nurse dispenser bonuses should be re-evaluated. Current compensation is based upon sales volume and creates perverse incentives for over-prescribing. These nurse dispenser bonuses account for costs nearly equal to product costs and could be reduced by revising compensation policies.
Results from analyses of not-for-profit pharmacies can be used to guide policy decisions in for-profit pharmacies
Medicine prices and mark-ups revealed in this study can be used as reliable benchmarks to assess those applied to medicines in for-profit pharmacies in similar regions of Kyrgyzstan. Private sector pharmacies in this region would need to apply even higher retail medicine mark-ups in order to remain profitable in the absence of subsidies. Private pharmacies need to recoup the costs of rent, utilities, and salaries in addition to the costs we included in our analysis of the subsidized, not-for-profit pharmacy network. In addition, the start-up costs in the Kyrgyz pharmacy network were paid up front by others, and therefore, no amortization of these costs was needed; however, private pharmacies would need to amortize these up-front costs over several years. After accounting for these additional costs, advocates can provide policy makers with realistic, evidence-based goals for medicine price determination that ensure the viability and sustainability of pharmacy businesses.
Medicine markets in rural regions are local, requiring additional localized research with improved methods to better inform decision makers
While these results can be extrapolated to similar rural regions in Kyrgyzstan, they cannot be extrapolated to large cities or more remote regions in Kyrgyzstan or to other low-resource countries. The supply and demand sides of pharmaceutical markets, as well as the business structures of pharmacies, vary dramatically within and across countries. Sound policy decisions can only be made after understanding the unique characteristics of local markets and pharmacy businesses. For example, a WHO/HAI survey in Syria reports a fixed price system whereby retail pharmacies apply maximum medicine mark-ups of 8% for more expensive medicines to 30% for less expensive medicines . If this pricing system was adopted by Kyrgyzstan, the rural pharmacies would fail to thrive and there would be no incentive to open new pharmacies in regions without them. Price controls are often a knee-jerk governmental reaction to high and unaffordable medicine prices; but without understanding local cost of business, imposing arbitrary price and mark-up limitations could jeopardize the availability of medicines and market growth, especially in rural regions.
Our study also revealed the importance of using sampling methods based upon local medicine use patterns. We based our selection of medicines in this study upon sales volume, rather than a pre-determined basket of medicines, to ensure we are measuring prices and mark-ups for medicines that are actually used in the local context. While several hundred items were purchased by the network over the study period, we chose the top selling 50 products because their sales represent more than 50% of all revenues. The top-selling 50 products in terms of profit and volume of sales are similar and represent those products in regular demand while the remaining products are typically purchased only a few times over the entire period. Researchers might consider replicating studies such as ours using volume-based sampling and the local not for profit prices as reference prices.
Research on medicine mark-ups often uses summary measures (such as the average mark-up) across all or a select basket of medicines. Our study found higher mark-ups applied to the more commonly purchased medicines, underscoring the importance of selecting medicines based upon local demand. In addition, we revealed dramatic and unpredictable variation in mark-ups applied across the top selling products, illustrating the limited utility of summary measures and the need to provide detailed results for the entire distribution of medicine mark-ups.
We recognize that it is difficult to obtain financial data on cost of doing business, given the proprietary nature of this information. But we believe this information is available, since most countries have pharmacy networks owned and operated by NGOs or other non profit entities. Typically, these organizations are in the pharmacy business in order to provide quality and affordable medicines to the poor and would likely share their financial information in the interest of national efforts to increase access to medicines. Projects such as the Medicines Transparency Alliance are in a good position to obtain and use this type of information to inform policy, given their multi stakeholder and country-led approaches .
Our study contributes to the growing body of literature on medicine prices, but it has limitations. We had full access to all financial data but expect we missed some unaccounted costs, such as "informal payments" to inspectors, as well as other undocumented revenues. We measure mark-ups at retail level only. The determination of cost of business and mark-up at manufacturer and wholesale level would provide a more comprehensive view of the market, but we had no access to such data.
Because pharmacies did not record medicine-specific sales or information on product losses (e.g., unpaid customer bills, theft, expiration, etc.), we were unable to assess product-specific revenues and costs associated with low turnover. In the absence of pharmacy-specific purchase information, we were unable to measure directly recurrent medicine costs at the pharmacy level. Instead, we estimated these costs as a function of individual pharmacy revenue.
There is no evidence to suggest wholesalers engaged in rebate and bundling practices that are common in developed countries [39, 40]. Finally, we present current medicine prices in lieu of adjusting prices for inflation after noting that most medicine prices outside the pharmacy network trended downward or remained unchanged over the four years [34, 36] and did not seem to follow the overall national inflation rate of 10% .