Security of supply of medical isotopes A pathway towards Full Cost Recovery Picture source: Book - Medical isotope production without highly enriched uranium (2009)
Aiming for Full Cost Recovery (FCR): an odd objective An economist would say It s not only about recovering your costs Producer surplus Commercial players would want to see a return on investment, based on the risk taken Return for risk And even maximise producer surplus based on the willingness to pay Willingness to pay Variable cost Keynes, An economist So maximise profit in order to attract private capital, invest in new capacity and innovation Price Fixed cost 2
Historically, governments had good reasons for supporting the development, construction and operation of nuclear (research) facilities Ownership structure of current research reactors used to produce Capacity in 6-day Curie 99Mo in 2022 Name: HFR Exp. Cap: 241.800 Owner: EC Name: BR2 Exp. Cap: 163.800 Owner: SKC-CEN Name: LVR-15 Exp. Cap: 90.000 Owner: CVR Name: RA-3 Exp. Cap: 18.400 Owner: CNEA 99Mo1) Name: RIAR & KARPOV Exp. Cap: 66.800 Owner: RIAR Demand and supply curve for nuclear research Price Demand Supply gap due to market failure that is covered by governments Supply Name: MARIA Exp. Cap: 95.000 Owner: NCBJ Name: SAFARI-1 Exp. Cap: 130.700 Owner: NECSA Qmarket Name: OPAL Exp. Cap: 92.450 Owner: ANTSO Fully Public owned Indirectly Public owned HFR is owned by EC, while OPAL, MARIA, SAFARI-1 & RA-3 are owned by national governments directly (e.g. through government agencies) LVR-15, BR-2, RIAR & KARPOV are owned by independent research institutes that are indirectly controlled by the government Qoptimum Quantity 1957 Euratom treaty: jointly develop nuclear activitites - health protection - safeguarding against proliferation of nuclear weapons - supply of nuclear fuel and - nuclear research Nuclear research as a public good (nonexcludable and non-rivalrous good), not being delivered by the market 1) This overview excludes Brazil, Korea, China and Russia due to their limited production (below <50.000 Ci-EOP / year) Source: Strategy& analysis 3
In the near future, we need to replace old reactors. Full Cost Recovery (FCR) is considered to be the key in order to achieve this To create a sustainable 99 Mo/ 99m Tc market, the High-Level Group on the Security of Supply of Medical Radioisotopes agreed upon six principles to realize longterm, secure 99 Mo/ 99m Tc supply A key principle is the move to Full Cost Recovery Full-cost Recovery is not a price-setting tool, but rather a methodology to define cost elements and allocation methods to determine the cost associated with 99 Mo/ 99m Tc production Source: Strategy& analysis based on OECD-NEA data, OECD-NEA updates, EANM 2016 1 OECD-NEA recommends 35% Outage Reserve Capacity (ORC) as buffer for unplanned reactor outages, to avoid potential global shortage crisis 4
An economic analysis of the 99 Mo supply chain is needed in order to determine how FCR can be stimulated Does not apply Applies Hospitals & end-users Radiopharmacies Generator Manufacturers Processors Research Reactors Target suppliers The good Perishable Same day 12-14 days 2 days 1 day 6/7 days No Homogenous Yes generators are identical Yes, Bulk Moly No, Targets for specific processors Externalities The market Diagnostic scans patients + Better health Provides 99 TC dose - Safety Generators to produce 99 TC Extracts 99 Mo from targets Irradiates Mo targets Provides targets - Safety - Waste, safety and - Waste, safety and security security - Security Players Major Many Thousands 6 major Can be 4 Can be 5 players 4 integrated integrated Geographical Local Local Global Global Local Local Asset heavy Subsidised Asset light Long investment cycles (technology and licencing) 5
SubSub You need to move together in order to achieve FCR. If we keep on subsidizing current capacity, the market functions inefficiently Scenario 1: governments keep on subsidising current capacity Subsidies cause changes in the supply curve Supply curve FCR based pricing Price ( /six-day curie) P FCR Supply curve with subsidies Price ( /six-day curie) P S Sub Demand for 99 Mo R 1 R 2 R 3 R 4 Quantity (six-day curie) What if: all current supply is subsidised? Demand for 99 Mo Sub Sub R 1 R 2 R 3 R4 Quantity (six-day curie) leading to inefficient market outcomes Demand and supply curve 99 Mo Price ( /six-day curie) # P FCR P S @! Q FCR Q S Specific subsidies as well as cross subsidies FCR based supply curve Subsidized supply curve Quantity (six-day curie) Note: The supply curves in these figures are meant for illustrative purposes only, as they do not take into account Fixed costs 1 2 3 Welfare loss Prices remain low because of subsidies Lower prices lead to overconsumption, no incentive to use the good efficiently Overconsumption leads to more nuclear waste Transfer of welfare Tax payers pay for the subsidies provided by governments in countries with reactors Healthcare consumers in other countries benefit from subsidies No incentive new cap. As prices remain low, new capacity is struggling to ensure a viable business case with private funding 6
We need to address two problems in order to move towards FCR 1 Free rider problem 2 Price absorption problem A level playing field (between competitors) should be safeguarded by removing subsidies Price increase must be accepted/absorbed within the supply chain Pictures courtesy: Nounproject.com 7
1 Subsidies Price increase Towards a level playing field We need to stop subsidising But what if one player still is being subsidised? Non subsidized suppliers are being pushed out of the market and are not able to earn back their investments Scenario 2: new plant is needed, one government subsidises, the other does not Selective subsidization also affects the supply curve Supply curve FCR based pricing Price ( /six-day curie) P FCR Demand for 99 Mo R 1 R 2 R 3 R 4 Quantity (six-day curie) What if: R 4 gets subsidized by the govt? Supply curve with subsidies Price ( /six-day curie) P S Demand for 99 Mo Sub R 1 R 2 R 4 R 3 Quantity (six-day curie)! leading to inefficient market outcomes Demand and supply curve 99 Mo Price ( /six-day curie) P FCR # P S @ Q FCR Q S FCR based supply curve Subsidized supply curve Quantity (six-day curie) Note: The supply curves in these figures are meant for illustrative purposes only, as they do not take into account Fixed costs 1 Individual players are hit 2 Individual new players that have entered the market at FCR levels are pushed out of the market Incentive to lower prices Players who are considering entering the market are hesitant because of selective subsidization Welfare loss Though smaller than when all are being subsidised 3 Transfer of welfare Though a smaller than when all are being subsidised 8
1 Subsidies Price increase Based on the self assessments, we seem to be on our way, but Progress is made in applying full-cost recovery. Results self assessment (2014) Argentina Australia Belgium Czech Republic Netherlands Poland Russia South Africa however subsidies are still being granted in some countries: Argentina s new plant is paid by government funds and at the current plant support is granted for capex and waste management Australian s government granted a loan to construct a new production plant and a waste processing plant, but the parties are now discussing if this loan can be waived off Belgian s new plant, MYRRHA, 40% funded by Belgian Ministries and currently Belgian Government pays for waste and security Czech republic s capital, overhead and decommissioning costs are not covered in the price Netherlands got a subsidy for the last refurbishment of the HFR. FCR is planned to be used in new PALLAS reactor Poland did not start yet, so assuming government funding. Intends to seek private funds for a new processing plant Russia applies its own FCR method for irradiations, processing and generator manufacturing South Africa does not grant financial support Not started Some progress made Significant progress made Fully implemented * For South Africa, Argentina, Belgium and Australia FCR progress applies for both reactor and processor Note: The self assessments are not entirely reliable/representative of countries progress towards FCR because there is no transparency in the methodology used to assess this (i.e., each country may interpret FCR differently and include different costs) 9
1 Subsidies Price increase still large incentives exists to subsidise. Security of Mo-99 supply in many countries is of public interest. Delay of investments could lead to governments stepping in The vicious circle of continued subsidy provision Lack of new investments Low prices Potential future shortage Govt. intervention (subsidies) Medical isotopes (e.g. 99 Mo) emerged as a by-product of the nuclear research market, thus they benefited from state aid - > resulting in low prices If low prices are maintained, the market becomes unattractive for investors, resulting in lack of investments Due to lack of investments (from the private sector), a potential supply shortage is predicted by the market A supply shortage would endanger security of supply thus govt. intervention occurs in the form of subsidies It is crucial that the market comes out of this vicious circle by breaking the low prices link -> start by moving to FCR New planned capacities are expected, but often delayed and decreased Projected capacity (6 day Ci-EOP x 10 6 / year) 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 Projections from 2010 2012 2014 2016 2010 2012 2014 2016 2010 2015 2020 2025 Note: Projections, as reported in OECD-NEA reports 2010, 2012, 2014, 2016 FRM-II regarded as potential new capacity as they require adjustments to the reactor to be able to produce Actual capacity in 2010 derived from actual capacity in 2012 Source: OECD-NEA 2010, OECD-NEA updates 10
Subsidies 2 Price increase At a first glance, it seems to be easy to increase prices: Full Cost Recovery (FCR) levels at the reactor will have a limited impact (~1% increase) on the end price. So, no problem right? Prices per 6-day Curie 99 Mo across the supply chain Price increase from reactor (move to FCR) Selling price Easy? Easy? Easy? 99 Mo prices at Full Cost Recovery (FCR) levels will have limited impact on the end price Reactor Processor Generator Radio pharmacy Price increase towards FCR 20 (needed) ~6% increase ~5% increase ~1% increase Source: The supply of Medical isotopes: An economic study of the Molybdenum-99 supply chain, OECD (2010) Strategy& analysis based on input from interviews with stakeholders across the chain 11
Subsidies 2 Price increase But can the market increase prices? This depends on three economic forces:! Substitutes @ Willingness to pay # Pass-trough in the chain If prices increase will the demand be lowered because the end users switch to alternatives? Or if different production techniques exist in the supply chain, will suppliers of the end product switch to other supply chains? Are end consumers of the product willing to pay more? Are there additional pressures on the system? Rising healthcare costs? Do the market dynamics allow pass-through of price increases along the supply chain? Are there inherent market characteristics that will cause resistance to any price changes? 12
Subsidies 2 Price increase From an economic viewpoint, there seems to be limited disciplining at present from downstream substitutes like PET. In developed markets, there might be higher disciplining from PET in the future Downstream substitutes analysis Parameter SPECT PET Imaging quality Technological trend Traditionally lower resolution but less expensive Towards hybrid SPECT/CT Traditionally better imaging quality than SPECT, yet more expensive Towards hybrid PET/CT Market size 26,200 (2015) 4,900 (2015) Market size trend (developed countries) Market size trend (emerging markets) Declining Rising Rising Not rising rapidly (due to higher cost) Tracer used Tc-99m Fludeoxyglucose (FDG) Number of procedures Using Tc-99m (2015): Using FDG (2015): 39,1 million 1 4,6 million 1 Cost of machine $ 400k - $ 600k $ 2 million Cost of medicine per procedure ~$ 68 ~$ 178 1 Total number of procedures: 48 million (MEDRaysIntell 2015), less 2 million assumed for therapeutics; percentages are rounded Source: Strategy& analysis, Wikipedia, Zimmermann workshop 2016 The cost of SPECT machines (and scans) are much lower than the cost of PET. Therefore, PET currently does not seem to be a commercial substitute (no disciplining effect on prices). However, the time needed for performing a PET scan is lower. These efficiency gains are taken into account in the cost analysis, but it might lead to an advantage for PET scans. In developed markets, there might be higher disciplining from PET in the future because the number of PET procedures and new camera installations have grown faster than SPECT over the last 20 years, driven by better imaging quality of PET. But, quality improvements for SPECT are expected through software updates and by moving to hybrid SPECT/CT. In the emerging markets, PET is not expected to be chosen over SPECT in the near future, because PET cameras are more expensive as an initial investment and the most common isotope for PET (F-18) requires dense cyclotron network to produce generators. In the short run, a price increase should be possible 14
Subsidies 2 Price increase and at the upstream level, there is limited disciplining from alternative production technologies as they are not commercially viable or scalable at present Upstream substitutes analysis Parameter Nuclear research reactor Cyclotron reactor Tech. development Proven Mature, small scale Purity High Lower GMP approval OK Not yet Geographic constraints on market Number of plants needed to replace one reactor (of ~150 kci/yr) Global Local N/A 300-500 Reactor based production is expected (globally) to remain the dominant supply route for Mo-99 because it is economically more efficient when compared to Cyclotrons Cyclotron production is not expected to compete on a large scale with reactors in the foreseeable future Other new technologies (e.g. SHINE, ASML reactor etc.) depend on unproven technology and success remains highly uncertain. But, if they become technically and commercially competitive in the future, there might be a higher disciplining effect on prices Half-time 66 hrs 6 hrs CAPEX requirement 300-600 million 3-5 billion OPEX 25 million ~ 1 billion Production cost ~ 15 per Tc-99 dose ~ 70 per Tc-99 dose In the short run, a price increase should be possible Source: Strategy& analysis, RRFM Conference 2016, ANSTO, OECD-NEA 2010, Wikipedia, Zimmermann workshop 2016 15
Subsidies 2 Price increase Because of rising healthcare costs, there is strong drive towards cost reduction at the insurance companies. So, even if the willingness to pay is high at end-user level, insurers might oppose price increases Growth of health expenditure ( /capita) 4.000 CAGR +4% Europe 1 2.000 Patients/ Hospitals Insurance companies/ Governments (health care schemes) 0 2000 2016 4.000 2.000 0 20.000 10.000 CAGR 2000 CAGR +3% +5% 2016 Japan United States Willingness to pay at the end-user level is believed to be high because of the benefits from diagnostic scans (hospitals can provide better health care based on a good diagnosis and patients have a better chance of recovery) but with rising healthcare costs, governments and/or insurers might oppose price increases depending on the market structure and health care schemes in different countries 0 2000 2016 Source: Strategy& analysis using OECD data (2017) 1 Europe here refers to the Euro area. Therefore, UK is not included. Pictures courtesy: Nounproject.com 14
Subsidies 2 Price increase and the ability to transfer price along the chain is also low at the Generator manufacturer and radiopharmacy level Research Reactors Processors Generator Manufacturers Radiopharmacies Ability to transfer price increase High High Low Low OPAL LVR-15 HFR Curium ANSTO Health ANTSO Health NTP GE Healthcare Lantheus North America Market coverage MARIA SAFARI BR-2 Currently 6 serving global market NTP IRE Currently 4 serving global market Curium Currently 5 serving globally; Curium might have market power Europe Rest of the world Largest market: US, with Cardinal having 60% market share Capacity restrictions Medium High Low Low Ease of switching suppliers Low (Due to transportation constraints of targets, it is a local market with very few target suppliers) Low (takes time due to logistics, licensing & contract related issues) High (Generators can source globally, and Curium might have high bargaining power) High (Radiopharmacies source globally, but face pressure from healthcare market) Source: Strategy& analysis based on OECD-NEA data (2016), OECD-NEA updates; Market coverage percentages for reactors and processors are based on capacity 15
How can governments help? Policy instruments to facilitate the implementation of FCR (1/2) Instrument Creates a level playing field? Helps in absorbing price increases? Supply chain participants impacted Who can enforce it? State Aid regulation enforcement in the EU - Investigation by European Commission to ensure State aid complies with EU rules Everyone (but mainly noncompliant Reactors & Processors) within EU European Commission (EC) Anti-dumping* measures ad valorem duty, or specific duties (paid by the importer) or price undertakings (company offers to sell at a minimum price) Legal obligation for FCR to include all costs within the price Earmarking subsidies for research & performing regular audits for proof Auditing players along the chain for FCR compliance Government regulation Processors and Generators outside EU Reactors and Processors (easier to implement if they are state owned) Reactors that receive subsidies, to avoid cross subsidies All Reactors, Processors & Generators European Commission (EC) and national governments National govts (with no state aid regulation) EC and national governments EC and national governments 16
How can governments help? Policy instruments to facilitate the implementation of FCR (2/2) Instrument Creates a level playing field? Helps in absorbing price increases? Supply chain participants impacted Who can enforce it? Anti-trust policy Government investigation to prevent abuse of dominant position in the market or the existence of cartels All supply chain participants European Commission (EC) and national competition authorities Split the price component related to nuclear isotopes within the diagnostic cost Government health care regulation Radiopharmacies, Insurers and Hospitals National governments & healthcare systems FCR Label for 99 Mo (combined with audits to ensure FCR compliance) Lobbying for FCR-based absorption of price increases downstream Possibility to renegotiate prices in contracts Between market players Reactors, processors and generators Everyone (since entire chain needs to be FCR compliant for the label) Radiopharmacies, Insurers and Hospitals National regulators, competition authorities National governments Health ministries within each nation 17
Closing statement and contact details The goal should not be to stop at FCR, but to build a sustainable market Email: jan.willem.velthuijsen@pwc.com Tel.: +31622483293 18
Supporting slides: policy instruments 19
Policy instruments to facilitate the implementation of FCR by creating a level-playing field Instrument State Aid regulation enforcement in the EU - Investigation by European Commission to ensure State aid complies with EU rules Anti-dumping* measures ad valorem duty, or specific duties (paid by the importer) or price undertakings (company offers to sell at a minimum price) Legal obligation for FCR to include all costs within the price Earmarking subsidies for research & performing regular audits for proof Auditing players along the chain for FCR compliance Government regulation Description Treaty on the Functioning of the EU generally prohibits State Aid unless it is justified by reasons of general economic development. 1) Intervention by the State or through State resources which can take a variety of forms (e.g. grants, interest and tax reliefs, guarantees, government holdings of all or part of a company, or providing goods and services on preferential terms, etc.); 2) The intervention gives the recipient an advantage on a selective basis, for example to specific companies or industry sectors, or to companies located in specific regions 3) Competition has been or may be distorted; 4) the intervention is likely to affect trade between Member States. 1) A company is dumping if it is exporting a product to the EU at prices lower than the normal value of the product (the domestic prices of the product or the cost of production) on its own domestic market. 2) A material injury must have be suffered by the Community industry (causally linked). 3) Imposition of measures is not against the Community interest. All market parties within the 99 Mo supply chain should be legally obliged to set their prices at FCR levels. This is claimed to have been done in Australia. But, implementing this will be a challenge because it needs to be proved that the market functions more efficiently if this is done, and that end-consumers are expected to benefit from it. All government subsidies provided to Nuclear reactors should be earmarked for specific research activities, and this should be audited by an independent party every year to prevent any cross-subsidization between research & medical isotope production Audit of cost structures and allocation of costs to 99 Mo production, prices charged (include the costs?) and subsidies received (specific subsidies for 99 Mo and for other activities) 20
Policy instruments to facilitate the absorption of FCR-based price increases across the supply chain Instrument Anti-trust policy Government investigation to prevent abuse of dominant position in the market or the existence of cartels Split the price component related to nuclear isotopes within the diagnostic cost Government health care regulation FCR Label for 99 Mo (combined with audits to ensure FCR compliance) Description Check and prevent the creation of horizontal agreements (between actual or potential competitors operating at the same level of the supply chain) and vertical agreements (between firms operating at different levels, i.e. agreement between a manufacturer and its distributor). Check and prevent all 99 Mo supply chain participants from abusing market power (by charging unfair prices, by limiting production, or by refusing to innovate) Separate/unbundle the price component related to 99 Mo/ 99m Tc within the final price of SPECT/PET procedure, in order to track the development of the costs Generator manfacturers can proof to their customers (radiopharmacies) that they sources the 99 Mo from processors/reactors that are FCR compliant. Lobbying for FCR-based absorption of price increases downstream Possibility to renegotiate prices in contracts - Between market players All governments that are committed and moving towards FCR implementation within their value chain, should drive the absorption of FCR-based price increases downstream by lobbying within the healthcare system Contracts between different players across the supply chain are currently long-term based. These should be flexible for renegotiation of prices. 21