Ideas to Action:

Independent research for global prosperity

Consequences

The consequences of these core risks are both financial and human.

Inefficient use of financial resources: Firms may manage risk by keeping prices higher than they would be otherwise, to buffer the consequences of being left with unsold inventory or of encountering other situations with negative financial implications. Although suppliers tried to keep prices as low as possible for developing country markets--typically as part of a corporate social responsibility agenda--they are rarely able to operate in a money-losing position over the medium or long term. Thus, products may be supplied to developing country markets and supply chains at higher prices than would be the case if less risk were present, meaning that donor, national government and private funds do not go as far as they otherwise would.

Excess inventory: If estimates of short-run effective demand are incorrect--for example, if expected orders do not materialize or national programs' uptake of new products is slower than hoped--the supplier is left with excess inventory. For example, GAVI initially estimated the amount of hepatitis B vaccine required based on available funding and epidemiological projections without accounting for country willingness to adopt the monovalent vaccine rather than waiting for the DTP-HepB combination vaccine. Several manufacturers, particularly in India, scaled up production, and many more entered the market to accommodate this anticipated demand. But uptake of the vaccine was much slower than predicted, with initial supply exceeding actual demand; as a result, competition drove down the price by almost 80%, causing some developing country manufacturers to go out of business and making many others nervous about future investment.

Long-term overcapacity: If a supplier's estimates of long-run effective demand are incorrect--for example, if competing technologies are licensed earlier than anticipated and capture part of the demand--the supplier is left with excess manufacturing capacity and potentially costly supply agreements with the firms that provide key inputs. This has negative financial consequences for the supplier and affects prices and willingness to play in the market.

Shortages: If the supplier underestimates demand, has difficulty obtaining inputs or suffers batch failures, supply can undershoot demand. If the price is not fixed, it will rise, and only purchasers who can pay the higher price will be served. If the price is fixed, the shortage will be felt across the board as drug stockouts. This has negative financial implications for the purchaser and, more important, serious health consequences--unprotected populations and untreated individuals. This is of particular concern when interrupted treatment quickly worsens a disease process (as with antiretroviral drugs in the treatment of AIDS), or creates the risk of drug resistance (as with tuberculosis, malaria, AIDS and other viral and bacterial conditions). In addition, the supplier may suffer reputational damage from being unable to supply life-saving or life-extending medications.

Lack of investment in next generation products: The functioning of the value chain and the rewards that market engagement confers on both suppliers and donors strongly influence their interest in R&D. For example, if pharmaceutical firms face extremely high transaction costs in supplying developing countries and uncertainties around effective demand result in absolute or relative financial losses, their appetite for developing new products for that market will be weak. Inefficiencies in the existing value chain that result in higher prices or reduced access to products jeopardize the ability to consistently mobilize more funds over the long term. Moreover, investment in the public-private partnerships that are now seen as important to development of products for developing countries can be sustained only if current and near-term products are effectively moved into the market through well functioning distribution channels.

Mortality and morbidity: The most serious public health consequence of poorly managed risks is men, women and children dying or becoming incapacitated because they cannot access life-saving products. Inefficient resource allocation, shortages and insufficient R&D each constrain access in the short and long term, resulting in unnecessary illness and death.