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Independent research for global prosperity

Risks

Forecasting is fundamentally about risk - and improving demand forecasting is about managing that risk well. Without underlying uncertainties in the supply of global health products, in their demand and in the regulatory and distribution components of the value chain, it would be possible to know precisely the effective demand in the future. However, because the pharmaceutical market is risky - and because aspects of the global health environment greatly increase risk - forecasting represents a major challenge.On the supply side, risks are associated with the development and manufacture of the product, including;

  • R&D risk: The transition from investments in the basic scientific discovery process to the viable molecules or biological agents that merit clinical studies, and the survival of those products through multiple phases of clinical studies, is fraught with uncertainty. To some extent, public-private product development partnerships aim to reduce this risk through diversification: funding multiple scientific pathways to address a complex challenge, as in the search for vaccines, drugs, diagnostics and microbicides for malaria, TB or AIDS. Without public or charitable subsidies, individual manufacturers bear this risk alone.
  • Batch or production yield risk: A firm may produce batches of products that fail tests for effectiveness, uniformity or safety due to a failure in a process, component, system or because of personnel error. Products with relatively short production track records are particularly vulnerable to this type of risk, which is typically borne exclusively by the manufacturer.
  • Input risk: A firm may face an inelastic supply of inputs required for the finished product, such as raw materials or active pharmaceutical ingredients. This is a particularly acute concern for products like ACTs, whose production requires active ingredients from agricultural materials, which themselves are subject to a host of weather, market and other risks.

On the demand side, multiple risks exist related to the likelihood that a product will be wanted by those who might place orders, and the ability to translate a desire for the product into orders to suppliers. These include:

  • Competition risk: Some products benefit from a temporary period of exclusivity through intellectual property protection; others face little competition because of complex production or regulatory barriers. But where alternative products yield health benefits, the price and availability of those substitutes can make a significant difference to demand for the company's product.
  • Obsolescence risk: A long-term risk for some products is that they will be rendered obsolete. For example, a better alternative may be developed, or the need for a product may be eliminated or greatly reduced because of existence of entirely new class of products for the same condition or because underlying risk factors may change. For example, demand for treatment for diarrheal disease may be reduced by the introduction of an effective vaccine or by major improvements in water and sanitation. This is a particular problem if manufacturing assets are specific to a product that becomes obsolete.
  • Policy and preference risks: Adoption and post-regulatory approval of medical technologies frequently depend on a range of uncertainties, such as the availability of data about the burden of disease, public attitudes to the disease, understanding of the range of interventions, and stigma and understanding about a particular product or intervention. Whether a country decides to adopt a new technology or therapy after regulatory approval as part of a national disease control program is a significant risk that can be further amplified by a lack of clarity at the country level on how such decisions are made and how long it would take to roll out a new technology, if adopted.
  • Budget and purchasing power risks: Volatility in donor budgets for global health lead to unpredictable demand. Furthermore, if developing countries pay for some or all of the costs (for example through a co-financing mechanism), uncertainty about domestically financed health also affects demand. This risk category also includes the possibility that funding aimed at product purchase is diverted, through legal or illegal means.
  • Credit risk: A borrower, supplier or customer might fail to honor its contractual obligations. This may be quite pronounced if the contractual obligations are weakly enforced - again, a characteristic of developing country pharmaceutical markets.
  • Price-related risk: Key decisions are made based on particular assumptions about near- and long-term prices, which may behave differently than expected - for example, because large purchasers are in a stronger negotiating position than anticipated and able to bargain down prices.

Regulatory and quality assurance factors also convey significant risks, especially in developing country environments, where regulatory agencies may have a poorly defined role, have a shorter track record than in developed country markets, and be less predictable.

  • Regulatory and post-regulatory regime risks: Regulatory regimes change in unpredictable ways; this may include new requirements concerning manufacturing processes, changes in intellectual property regimes and new clinical trial requirements.
  • Regulatory enforcement risks: Where enforcement of regulations is weak or changing quickly, there is the risk that poor quality or counterfeit products will enter the market and crowd out good quality or branded products.

Finally, a set of major risks associated with logistics affect decision making, particularly in developing country environments. These include:

  • Nontimely delivery: These are risks associated with unforeseen weaknesses and bottlenecks throughout the supply chain, including transportation breakdowns, leading to stock-outs.
  • Losses in distribution chain: Waste due to leakage or lack of appropriate storage (for example, breakdown of the cold chain), if not predicted in placing orders, can pose a risk.
  • Complementary inputs: Human resources, accompanying products (for example, testing kits needed prior to some treatments and injection supplies), or other inputs may not available in the quantity or location needed to make use of a product. This may occur, for example, if scale-up of services occurs rapidly with inadequate ability to respond with newly trained or deployed personnel, vehicles or other complementary inputs. It may also occur if orders are placed without bundling complementary products, such those for testing and treatment.