Having completed his analysis of the markup required for the financial viability of the community pharmacies in Sonsonala [see Sonsonala (A)], Carlos Delgado, Undersecretary of Finance in the Ministry of Health, turned his attention to the financing requirements for the revolving drug fund.

REVOLVING FUND CHARACTERISTICS

The revolving drug fund was designated to be a self-contained financing mechanism for the country's essential drugs. Although once it was operating successfully, it might be expanded to include both additional drugs for childhood diseases as well as adult diseases, initially it would finance only the 9 essential drugs, shown in Exhibit 1. The fund would work as follows:

• The Ministry of Health, through an arrangement with the Ministry of Finance, would purchase the drugs initially, arranging for the necessary foreign exchange transactions, shipping, and other logistical matters.
• Upon receipt, an order would be stored centrally and repackaged for shipment to a regional distribution center.
• A regional distribution center would hold the packaged units until it received an order from one of the community pharmacies, at which time the order would be filled.
• Community pharmacies would sell the drugs to customers. Once a month, based on sales, the community pharmacies would remit the cost of the drugs to the Ministry, which would complete the cycle.

Each of these steps would take some time. After conferring with several people in the Ministry's Drug Program, Sr. Delgado concluded that it would take approximately one month from the time the Ministry made payment to the supplier, via a letter of credit, until an order was received. Another month would be necessary for packing and storage prior to shipment to the regional distribution center. A third month would elapse on the average from the time a shipment was received by a regional distribution center until it was sent out to one of the community pharmacies in its region. Community pharmacies were expected to be somewhat less efficient, given their need to have all drugs on hand at all times without knowing how much would be required by customers during any given month; the average shelf life thus would be about 2 months.

THE ANALYSIS

As he reviewed this information, Sr. Delgado realized that he could use it to make an estimate of the working capital needed to finance a revolving fund for the 230 community pharmacies that were planned. He also realized that it would be a relatively simple matter to extrapolate from this calculation to the additional financing that would be necessary if the 100 existing urban pharmacies were included in the system. What troubled him, however, were the possibilities for slippages . . .

Assignment

1. Based on the 9 diseases and drug regimens shown in Exhibit 1, what are the working capital needs associated with the revolving drug fund for 230 pharmacies? How, if at all, are these affected by the inflation rate?
2. What sorts of "slippages" might take place in the revolving drug fund? How would these affect the working capital needs? What other factors might affect the working capital?
3. Based on the information in this case, the (A) case, and your own knowledge of essential drug programs, what should Sr. Delgado recommend to the Minister?