Pakistan Pharmaceutical Industry

Pakistan Pharmaceutical Industry In 1947 when Pakistan gained independence from the British there wasn’t a single company operating in the pharmaceutical industry but now after 68 years of independence there are almost 400 manufacturing units being operated by both national and multi-national firms. The Pharmaceutical industry caters to almost 70-80% of the local demand of finished medicines. 42% of this demand is met by Multi-National Companies while 58% is met by Local companies Background Pakistan’s Pharmaceutical industry started out slowly but gradually became an integral contributor to the developing economy of Pakistan. Arguably the most significant day for the Pharmaceutical industry was 26th January 1961, when the Pakistan Pharmaceutical Manufacturers Association (PPMA) was formed. The Ministry of commerce registered PPMA as the sole non-governmental representative of Pharmaceutical manufacturers in Pakistan. The head office of PPMA is situated in Karachi. At the time of formation there were only 10 members of the PPMA, as of 2015 there were around 235 companies holding membership. The initial 10 members of PPMA are the ones through whose efforts resulted in the formation of this association. These initial members and early members have contributed significantly to the Pakistan Pharmaceutical industry and they still remain the major players in today’s ultra-competitive industry. ! ! Ministry of Health (MOH) Alongside The PPMA the Ministry of Health (MOH) was also a key component of the Pharmaceutical industry until it was devolved in June 2011. The Ministry of Health had a wide variety of tasks which included Providing Manufacturing License : This was the most fundamental role of the Health ministry. Any company that has a license is allowed to legally manufacture and sell drugs. Any company producing without a license cannot sell its drug in Pakistan.

Protecting Patents

Any medicine that is under a patent becomes the intellectual property of the patent holder. If a company tries to make a drug that has been patented by another company then the Pakistan Health Ministry is liable to take action against that company under the claim of intellectual property theft. In simple terms if a company copies the formula of another company without prior consent then it would be committing a crime and The Pakistan Health Ministry is supposed to protect companies against all such crimes. Imposing a price freeze MOH has the authority to impose a freeze on prices at any time it pleases. Under the imposition of a price freeze no company can change the price of any drug. This step is taken to ensure that the general public receives quality medicine which is affordable to all. In certain cases of Hardship the pharmaceutical manufacturers can appeal to the MOH to lift the price freeze off a certain drug. Encourages the use of Good Manufacturing Practices (GMP) GMP is a set of guidelines which enable manufactures to maintain a certain standard of quality. MOH encourages its use in accordance with both domestic and international guidance. MOH feels that the use of these guidelines is in the best interests of the industry. Most of Pakistan’s manufacturing units are ISO certified adhering to UK and USA standards. The National pharma industry has shown a progressive growth over the past five years. The industry has invested substantially to upgrade itself in the last few years and today the majority industry is following Good Manufacturing Practices (GMP), in accordance with the domestic as well as international Guidance. Currently the industry has the capacity to manufacture a variety of product ranging from simple pills to sophisticated Biotech, Oncology and Value Added Generic compounds. Although Pakistan’s pharmaceutical and healthcare sectors are expanding and evolving rapidly, about half the population has no access to modern medicines. Clearly this presents an opportunity, but much more work needs to be done by the government and industry's stakeholders. The value of pharmaceuticals sold in 2015 exceeded US$3.5 bn, which equates to per capita consumption of less than US$ 10 per year and value of medicines sold is expected to exceed US$5.3 B by 2018. Power to create a DRA

MOH also possesses the ability to form a DRA (Drug Regulatory Authority) as an independent body under the 18th Amendment. In recent years PPMA has called for the creation of such an authority so as to stop the counterfeiting of drugs. Registration of Generic Drugs! Without the proper registration of the MOH no drug can be produced by a company. The MOH conducts Bio-equivalence studies on the Generic drugs before giving company’s permission to produce them.

Pharmaceutical Industry and its Significance in Pakistan Pakistan's Pharmaceutical market is very significant in the World market as it is the 10th largest in Asia Pacific and the 4th fastest growing market (2008/09) after China, India & Vietnam. The total worth of Pakistan’s Pharmaceutical industry is measured at Rs. 191 Billion (USD 1.8 Billion) in September 2015 most of which is down to private sector investment. The private sector contributes to an overwhelming 82.5% of the total health expenditure. Leaving the government of Pakistan with a very meagre amount of 17.5% which is around 1% of GDP, this percentage is considerably lower than other South Asian countries. This is a very disturbing stat for a country where 24% of the population lies below the poverty line; it is difficult to understand how the poor people are able to afford medicines. This constitutes to the fact that per capita spending on medicines was US$ 10 in 2010. Figure below

provided insight of growth trend for both MNC’s and National pharmaceutical

companies.

Both multi-national and national companies have contributed to the growth of this industry, but national companies have contributed a higher percentage to the growth simply because national Companies are greater in number compared to multi-nationals. Table below shows the total value of National Companies and the value of MNC’s in PKR of the Pharmaceutical Industry of Pakistan.

The Pharmaceutical Industry of Pakistan consists of numerous players large and small but only a few companies are major contributors to the overall valuation of the industry. The following is a market share distribution with respect to each company’s sales volume as of September 2015.

GSK is the market leader and also the leading Multi-National with almost 12% share. The biggest local manufacturer is Getz Pharma which has around 4.46% of the market share. Pakistan’s Pharmaceutical industry specialises in antibiotics, vaccines, tranquillisers, hormones, anti-oxidants, cardio vascular, anti-cancer, cicatrix, contraceptives and birth control medicines. Around 125 different categories of medicines produced locally which include vitamins, anti-allergic, ointments and cough syrups etc. The following table provide details of the highest selling molecules in Pakistan in terms of sales volume in PKR (Drug Regulatory Authority of Pakistan, 2015).

Global scenario The pharmaceutical industry in any country is considered as the mainstay of public health. Looking at the global scenario, the importance given by developing nations to the pharmaceutical sector can be clearly identified by including healthcare and pharmaceutical industry in their health and welfare strategy. The global pharmaceutical market is valued at no less than US$440 billon, with annual growth of 6%. As the following graph indicates, the developed countries of North America, Europe and Japan have the largest share of the global pharmaceutical market

Key statistics of Pakistan Pharma Industry

A quantitative overview of the pharmaceuticals sector is presented in the following table.

Top 25 local Pharma Companies in Pakistan

Top 10 Multinational Pharma Companies in Pakistan

Production/manufacturing process

Manufacturing facilities Pakistan produces various dosage forms, including tablets, capsules, syrup, suspension, drops, cream, gel, ointment, ophthalmic/optic drops, infusions, insulin, suppositories, vaccines, liquid and powder injections, inhalers, vitamin sachets, disposable enemas and modified release dosages. The national pharmaceutical industry is currently catering to more than 60% of the country’s needs in terms of volume. (If we were to add the volume being produced for multinational companies (MNCs) on contract, the figure rises to approx. 75%.) As a result, the heavy dependency on imported products has decreased and the local industry has experienced a great boost. In accordance with GMP, most of the leading national pharmaceutical companies invested heavily in the latest technology to produce cost-effective and quality products. Hence, the production facilities now include state-of-the-art equipment imported from leading European, US and Chinese manufacturers. The smaller units are understandably struggling. The leading national pharmaceutical manufacturers claim that their products have an edge over Southeast Asian products. One of the reasons is that the active pharmaceutical ingredients (APIs) of most local products manufactured in Pakistan are imported from quality manufacturers in Europe, Japan, Korea, South America and Southeast Asia. The reliability of the quality of local products is evident from the fact that leading multinational companies are having their products manufactured by the national companies under contract manufacturing arrangements. The national companies have been quite successful in introducing various innovative products by using technology transfers and licensing arrangements. If the amount of manufacturing done for the MNCs were to be added to the direct brand sales of the local manufacturers, this would exceed the 75% requirement of pharmaceutical products of the country. Local companies have also acquired latest technologies and entered the field of microencapsulation of bitter molecules for taste masking and enteric coatings of various products. The leading companies have acquired ISO quality certifications. There are about 15 new production facilities currently under construction that aspire to obtain FDA credentials. This clearly indicates that the local pharmaceutical companies are preparing to enter the highly regulated markets, such as the United States and Europe through achieving high quality on priority. The quality of national pharmaceutical products has been acknowledged

and accepted by many international countries and quality certification authorities, which include quality accreditation from: • European Union (German GMP) • Uganda (NDA) International Trade Centre 25 • Yemen (MoH) • Uzbekistan (MoH) • UAE (MoH) • Turkmenistan (MoH) • Senegal (MoH) • Tanzania (MoH) • Canada (MoH) • Sudan (MoH) • Sri Lanka (MoH) The leading companies are also inclined to improve their systems and documentation requirements by complying with various quality management standards in their organisations, including ISO 9001, 2000 and ISO 14001. Most of the essential drugs outlined in the WHO list are manufactured by national and international companies operating in Pakistan. The industry employs over half a million people — directly and indirectly. Considering the complexity of operations and introduction of new technologies, highly educated, competent, and committed human resources of the country are working in the pharmaceutical sector. This should ideally result in the pharmaceutical sector stepping in the research operations where they have considerable potential to earn substantial revenues in the form of contract research arrangements. The Ministry of Health, Government of Pakistan, controls all aspects of the industry and has played a vital role in improving the quality standards of manufacturers. This has been

possible by ensuring that product registrations are only given on the basis of ability to manufacture quality products. In a number of new product registrations, an exclusive inspection of the applicant’s production facilities is also carried out, thus ensuring compliance with cGMP in accordance with the need of that particular molecule. Moreover, certain new regulations are under discussion and it is expected that their enforcement shall further strengthen their objective i.e. compliance with cGMP in pharmaceutical manufacturing as well as marketing

Availability, quality and price of raw materials Only a few companies are manufacturing quality APIs in Pakistan. There are only few smallscale API manufacturers operating, but they neither have technical commercial-scale expertise nor resources to operate as per Good Manufacturing Practices (GMPs). However, the Government of Pakistan is inclined to promote API manufacturing and has a positive attitude towards this particular category. The Government has often supported quality API manufacturers by granting various tariff protections. The majority of pharmaceutical companies are dependent on European, Japanese, Korean, South American and Southeast Asian manufacturers for the requirements for their API raw materials requirements of their products hence have little control over the cost of APIs. The problem is further aggravated as the national manufacturers of APIs misuse the tariff protection and sell APIs at higher than international prices. This makes finished products for the exporters uncompetitive at the international market. The pharmaceutical industry imports approximately 91% of all raw materials. The local availability of raw materials is restricted to the following actives • Amoxacilin • Ampicillin • Aspirin • Cefixime • Cefadroxil • Cephalexin • Cefradine

• Ciprofloxacine • Cloxacillin • Ephedrine • Ephedrine Sulphate • Flucloxacillin • Furazolidone • Ibuprofen • Magnesium Stearate • Norfloxacillin • Paracetamol • Parabinez • Piperazine • Pseudoephedrine • Pyrazinamide • Santonin The raw materials mentioned in the above list do not necessarily meet the entire need of the industry and a major portion of special grades is still imported. There are numerous factors restricting the entry of national companies manufacturing APIs to the international market. A few of them have been mentioned below: • Substantial cost of setting up R&D facility • Continuous cost of test runs to achieve • Required yields • Required stability • Required purities

• Required characteristics • Continued technical support • Salaries and perks to qualified scientists • Cost of indirect inputs Because of the limited manufacturing of quality APIs, uncontrolled API prices as well as various tariff protections meant to support the indigenous industry, the exports of certain molecules is affected and substantial opportunities are lost. Another fact, worth considering, is that currently the national pharmaceutical products are registered and exported not only to the developing countries of Africa, but they are also doing quite well in quality-conscious markets like Canada, the European Union, Central Asia, Middle East, South Africa and the Far East. Raw and packaging material is easily available from international sources such as India and China. Their quality varies from one source to another. Yet in most of the cases, the materials are subjected to stability testing to conform to the standard of US Pharmacopeias and British Pharmacopeias. In exceptional cases, raw/packaging is not available off the rack and has to be manufactured to conform to the user’s specific needs. This entails longer planning horizon and lead times. The shortage of some raw packaging material occurs occasionally due to exceptional increase in demand. Cipro, for example, affected the local industry a couple of years ago no differently from the rest of the world. The prices of raw packaging have been on the decline for the last few years. The European prices are slightly higher followed by the lower prices of India and China. The prices of Europe are usually higher to the extent of 20% as compared to other countries. Raw and packaging material from India and China conform to BP/USP standards thus prompt the local industry to switch to these sources.

Other production inputs Following are the production inputs used in plant/machinery: • Plant/machinery (should be according to cGMP regulations) - HVAC systems - Mixer - Blender

- Granulation suits - Packing area machinery - Molding - Water treatment plant - Quality control equipment - HPLCs - GC etc • Energy - Generator - Electricity connection • Documentation - SOPs - Registrations - Regulatory compliance - Quality/standard certification • Building - Drainage waste system - Raw material temperature control - Dispensary area - Laboratory - Stores - Packaging material stores - Finished goods stores

- Quarantine area • Personal - Management - Executives - Regulatory - Distribution and supply chain - Marketing - Import and export - Engineering - Technical staff - Labour

Growth in the sector Based on IMS figures growth in the pharmaceutical sector of Pakistan in 2015 was: Market growth in volume - 10% per year Market growth in value - 8 % per year

SWOT

analysis

of

Pakistani

pharmaceutical

companies The following SWOT analysis has been done after interviewing manufacturers, exporters, PPMA and Pharma Bureau. It also includes the consultants’ views and observations.

Strengths • Pakistan has a fairly large prevalence and continuous supply of well-trained, English speaking pharmaceutical technicians and professionals. The colleges and universities all over Pakistan produce 1,500 pharmacists and 3,500 chemists every year. • Approximately 430 pharmaceutical manufacturing units are working in the country. These include 24 multinational pharmaceutical plants, manufacturing and marketing more than 100 molecules, which results in the transfer and dissemination of technology and information from these innovators to the Pakistani industry. Each year about 13 to 15 new manufacturing licences are issued. • There is still a huge potential existing for pharmaceutical products to penetrate into the Pakistani market because they are still not reaching each consumer in Pakistan. No data is available for Pakistan, but a Pharmbiz report for India indicates that pharmaceuticals reach only 30% of the total Indian population, the rest of whom still rely on traditional medicines and faith healers. Additional strengths include: • Flexibility • Because of the recent global political and economic changes, there is a reverse-drain of skilled Pakistani pharmaceutical professionals and technicians from developed countries to Pakistan. • The Pakistani pharmaceutical industry is growing at a rate of 12-13% each year. The growth is phenomenal both in terms of value and volume. • Pakistani pharmaceutical professionals have developed good skills in making the generic copies of innovative molecules through reverse engineering and process development. • The pharmaceutical exports of Pakistan are growing: from US$37 million in 1997 to US$63 million in 2005. More and more Pakistani companies are now inclining towards exports. This surge of exports is well supported by enabling government policies. • There is a 50% subsidy on the registration of pharmaceutical products in export countries. Also, the Government gives a freight subsidy for exports to some countries.

• Opening and liberalising trade with India is resulting in the inflow of useful and affordable capital goods and raw materials for the Pakistani pharmaceutical industry. • The availability of rich and promising knowledge base in the field of Unani Tibb can be helpful in developing Pakistan as a major supplier of herbal raw material, herbal products and Neutraceuticals. Weaknesses The main weaknesses identified were as follows: • The low perception of quality – by customers and consumers. • The Pakistani pharmaceutical industry is 100% dependant on copying of innovative drugs. Not much innovation takes place in processing and developing products. • Hardly any Pakistani pharmaceutical manufacturing plant has a license or approval from renowned international regulatory authorities. (India has 74 US FDA-approved plants.) Others mentioned the following weaknesses: • Scarce management know-how, especially in international marketing. • Auto-financing. • The low per capita health expenditure in Pakistan shows US$76 for Pakistan, US$356 for Iran, US$130 for Vietnam, US$167 for the Philippines, US$1,091 Argentina and US$477 Mexico). • No world-class reference labs are available for drug evaluation and testing. • National companies, despite being very large in number (406 national against 24 multinational companies), have only 47% of the total market share, which indicates the low level of national capacity development. • Pakistan is largely dependant on imports for raw materials and hi-tech finished products. At least 91% of raw materials consumed by the Pakistani pharmaceutical industry is imported. • Approximately 24% of pharmaceuticals sold in Pakistan are imported. • The price of pharmaceuticals in Pakistan is fixed, which restricts competitions.

• R&D efforts and expenditure in the pharmaceutical industry are very low. • The size of the Pakistani pharmaceutical market is small. Pakistan’s population is 2.5% of the total world population; however the Pakistan pharmaceutical market is only 0.325% of the total world pharmaceutical market. • Entry barriers for the Pakistani pharmaceutical market are very low. For this reason, competition is ever increasing and it is further complicated by tight price regulations. Opportunities The main opportunities identified were: • A well-developed regulatory network compliant with WHO standards that regulates the pharmaceutical market all over Pakistan, combined with the recent modernisation in drug regulations in Pakistan: • A drug regulatory authority is being developed and will be an independent body under the federal cabinet. • Herbal drugs will soon be regulated: the draft has been submitted to national parliament for debate. • The Supreme Court has been vigilant in modulating regulatory practices through instructions on various issues to the Ministry of Health. • Migration to a patent product regime is likely to transform industry fortunes in the long term. The new patent product regime will bring with it new innovative drugs. This will increase the profitability of multinational pharmaceutical companies and will force domestic pharmaceutical companies to focus more on R&D. • Being low-cost producers, Pakistani companies can become a global outsourcing hub for pharmaceutical products, provided they obtain regulatory approvals and upgrade their plants.

Others mentioned the following opportunities • Knowledge of local/regional markets.

• Motivation. • The positive development of the natural products market. • The rapid development of the generics market. • Pakistan’s economy has taken a positive turn. The per capita income is increasing. • The increasing penetration of the media and the growing rate of literacy have increased health awareness. • Recent trends stressing primary healthcare are opening new horizons for exploration. • The saturation point of the market is still far away. • Recent trade pacts with neighbouring countries, for example Sri Lanka, and expected regional agreements (ASEAN) are likely to give bigger market opportunities for the exports of Pakistani pharmaceuticals. This migration could result in consolidation as well. Companies operating at small-scale may not be able to cope with the challenging environment and may succumb to bigger companies. The large number of drugs going off-patent in Europe and in the United States between 2005 and 2009 offers big opportunities for the Pakistani companies to develop modern generics. Opening up of the health insurance sector and the expected growth in per capita income are key growth drivers from a long-term perspective. This leads to the expansion of the healthcare industry, of which the pharmaceutical industry is an integral part. Threats Following are the main threats identified: • Trade barriers, especially regulatory difficulties. • The existence of very strong pharmaceutical manufacturing and marketing industries in neighbouring countries that would speedily penetrate the Pakistani market in case of trade liberalisation. • The increasing vigilance of international regulations and the hi-tech demands of the regulators have significantly increased the cost of quality compliance. Others mentioned the following additional threats:

• Poor access to finance. • The Internet, enabling customers/consumers to access competitive information and seeking other options. • Globalisation, new entrants in the home market and in export markets. • The industries of these countries also give a tough competition to Pakistani exporters in export markets. • There is also a rise in the cost of entry into the new export markets • Pakistan has entered a product patent regime that expels Pakistani products from competing into the more modern molecules’ markets.

Competitive Profile Matrix of Pharma Market leaders in Pakistan CPM Critical Success factors

Abbott

GSK

Pfizer

Weight

Rating

Score

Rating

Score

Rating

Score

Advertising

0.06

2

0.12

3

0.18

3

0.18

Product Quality

0.09

3

0.27

3

0.27

3

0.27

Price Competitiveness

0.07

2

0.14

3

0.21

3

0.21

Management

0.12

3

0.36

3

0.36

3

0.36

Financial Position

0.08

2

0.16

3

0.24

3

0.24

Customer Loyalty

0.06

2

0.12

3

0.18

3

0.18

Global Expansion

0.10

3

0.3

3

0.3

4

0.4

Market Share

0.08

2

0.16

3

0.24

3

0.24

Research & Development

0.17

2

0.34

2

0.34

3

0.51

Employee Turnover

0.07

3

0.21

4

0.28

3

0.21

Brand

0.10

2

0.2

3

0.3

4

0.4

Totals

1.00

2.38

2.9

3.2

Market Concentration The concentration in the industry is very high, the three market leaders constitute more than 60% of the industry’s revenues they are capturing almost 85% of the total market share. (BASED ON THEIR SALES REVENUE) Company GSK Abbot Pfizer Total

Market Share 40% 24% 21% 85%

Hirschman-Herfindahl index HHI = (40)(40)+(24)(24)+(21)(21) = 1600+576+441 = 2617 The Hirschman/Herfindahl index is about 2617 and concentration is 85% indicating very high concentration refers to dominancy.

Porter’s Diamond Model Analysis of the Pharmaceutical Industry of Pakistan As we conduct the analysis, the purpose is to understand the dynamics of the Pharmaceutical industry. How different players interact and affect the market synergy? What are the leading and lagging indicators? What factors determine market demand and supply? What sort of government interventions assist and create hurdles in the formation of market structure? And, what are the ramifications? What sort of price control policies exist? The strengths, weakness, opportunities and threats

The emphasis will be laid upon making the reader understand guiding principles that formulate the industry, so that a critical eye will be able to identify the loopholes, and based upon this industrial note further research could be carried out that could address the critical issues raised in this report. More importantly, many a times what happens is that researchers tend to extrapolate certain assumptions that helps us identify the dark spots that are many a times being ignored. Suppliers The Pakistani industry is different from most of the pharmaceutical industries of the world. Most big pharmaceutical industries around the world get benefits such as volume benefits, accessibility to cheap locally produced raw materials, wide range of suppliers so low over all costs of raw materials and also opportunities are available for forward and backward integration between suppliers and producers. Unfortunately in Pakistan all these advantages are not available to the drug manufacturers. National manufacturers however hold an advantage compared to the multi-nationals. Local manufacturers who do not have quality standards as high as that of the multi-nationals so they can afford to use low grade raw materials imported from countries such as China, Afghanistan and at times even use very low quality domestically produced raw materials. On the other hand multi-national which are highly conscious of their quality standards and hence are forced to import expensive raw materials from European countries such as France, Holland, Sweden other Scandinavian countries. Also the parent companies of these multinationals demand that their companies use highest quality raw material usually imported from the county of origin the company. This is one of the most important advantages of that local manufacturers hold over the multi nationals. Customers First of all it is important to understand who actually the customers of the pharmaceutical industry are. Unlike most industries the general public isn’t the direct customers of the industry. But the doctors are the customers. Doctors do not have to bargain for prices, this is how they are unique from normal customers. The doctors do have a wide variety of products to choose from. Due to ineffective patents many similar products produced by different companies are at the doctor’s disposal for prescribing. The ineffective patent laws allow

similar products to be produced at different prices, this gives doctors freedom to prescribe drugs to different patients. This makes drugs affordable for everyone. Drug companies distribute their medicines to retailers and wholesalers through their specified distributors. The general public purchases medicines from these retailers and wholesaler, the wholesalers traditionally offer lower prices. Some small retailers also purchase medicines from these wholesalers. There is a trend that when medicines are bought from retailers a discount of around 10% is on offer in case of bulk purchase. New Entrants The pharmaceutical industry is highly regulated by the MOH which makes it very difficult for new companies to enter the industry. The presence of very large established companies such as GSK and Novartis it is difficult for new entrants to establish themselves as a major player in the market.

Not only is the Pakistani market littered with well-established

companies but also the market is highly saturated with both large and small firms. The only positive for new companies is that the market is rapidly growing so there will be some opportunities for new prospects. Apart from this the high interest and inflation rates make it impossible for owners to start new companies from scratch. Also the unforgiving economic situation does not encourage fresh investment in any industry let alone in the pharmaceutical. The set up cost of pharmaceutical industry is also rather high especially the need to have a highly trained and knowledgeable workforce. In the Pharmaceutical market it is very important to have a well-trained sales force as they are solely responsible for generating revenue. When the salesperson goes to a doctor to sell medicine he needs to have perfect knowledge about the product so they can convince the doctors to prescribe their medicine. The training costs of employees make a big chunk of the expenses of pharmaceuticals. Substitutes The Pakistani market has a general disrespect for patent laws and intellectual property rights. The leniency of law also encourages many local firms to quickly copy the formulas of the bigger well established firms in order to bring in cheaper substitutes. There also a role of the PPMA and MOH who are not very strict about patents and patent expiries. The companies which turn a blind eye towards patent laws use very cheap raw materials imported from

Afghanistan or made in Pakistan. This harms the reputation of the Pharmaceutical industry and also causes huge losses to established companies.

Competitive Rivalry within the industry The conclusive analysis of the industry gives us that the industry is pretty competitive but there is still some room for improvement in this department. The Pakistan market is still very young with a lot of room for improvement. The market is still controlled by around 10-20 of the large firms, most of which are multi nationals. With new entrants coming in competition will increase and should spread the market share more evenly.

Demand Conditions At present, the global pharmaceutical industry is worth approximately USD 1 Trillion so the Pakistan industry isn’t even 1% of a rapidly growing and vibrant industry. Being home to almost 200 million people, Pakistan is a very attractive market for both local and foreign investors. ! Please note following information was gathered in 2009. The following pie chart shows the global market share of the pharmaceutical market by region.

The table below shows the country wise per capita expenditure on in US Dollars (2013)

Pricing Perhaps the greatest challenge faced by the pharmaceutical industry in Pakistan is the control of the government on the pricing of the medicines produced in Pakistan. The last across the board price increase announced by the government was in April 2001. In 2010 there was another price increase but this price increase was granted only to the vitamins sector of the industry and was notgranted across the board to all products. Whereas the dilemma viewed by the eyes of the industry are the ever increasing charges by hospitals and doctors’ fees. Despite repeated efforts by the Pakistan Pharmaceutical Manufacturer’s Association (PPMA) since the last 3-4 years, there has been no formal agreement on the pricing formula between the government and PPMA. The government still practices the old pricing formula based on costs but this has been heavily Criticised by the PPMA as they cited concerns that the government in fact wanted to keep a check on the profitability of the companies. According to the PPMA any formula based on the costs would deter investment in the industry as it would fail to provide incentives for companies to grow. The health ministry has classified drugs into controlled (essential) and decontrolled categories. The ministry also demands regular disclosure and breakdown of costs which has been a bone of contention between the government and the PPMA. During the last decade, the cost of raw materials and other inputs has risen sharply. Inputs such as electricity and gas have recorded exponential increase in their costs. Also, the recent

devaluation of the rupee has increased the costs of importing machinery and chemicals. Also considering the fact that 85-95% of the raw material used is imported the costs of production has risen immensely during the last decade. The delay by the government in announcing a price increase during the last decade has hurt the pharmaceutical industry badly and also deterred many investors from investing in the sector.

Transfer Pricing Another factor contributing to the high costs of production is that of transfer pricing. The fact to be noted is that instead of importing chemicals at an internationally competitive price from the world market, most of the multinational companies are importing chemicals from their parent companies. Simply speaking, instead of buying chemicals at the lowest available cost they are actually paying more than they should. Not only does it increase their cost of production, it also has a negative effect on Pakistan’s balance of payment account.41.2% of Pakistanis live below the poverty line and to these people pharmaceutical drugs, even at the fixed prices of the Pakistani government are too expensive and inaccessible. While powerful multinational companies are adamant about increasing prices time and again, experts say that there can be a substantial decrease in prices if the government adopts measures to contain transfer pricing by MNCs. The exchequer is losing huge sums in terms of foreign exchange due to transfer pricing. There could be a substantial cut in drug prices if transfer pricing is contained and those drugs are manufactured whose patents have expired. Patent rights expire after 16 years and will expire after 20 years when the WTO becomes effective. Hence the monopoly of the company comes to an end and anybody could manufacture a drug whose patent has expired. MNCs are adamant about increasing wholesale prices of drugs and since the Ministry of Health is resisting such a move, they are exerting pressure and insisting that pricing should be done by the Ministry of Industries and Production. But MNCs are trying to involve the Ministry of Industries and Production to fix the drug policy. If this policy is implemented then it will have a devastating effect on affordability, quality, rational use and safety of pharmaceutical products in the country. The new policy draft under consideration of the government these days does not even take into account the concept of essential drugs promoted vigorously by the health authorities throughout the world.

Local Demand At present, Pakistan is able to meet 70%-80% of its pharmaceutical requirements with locally produced medicines while the rest of the demand (approximately 20%-30%) is met through imports. Sales are currently growing at 11% and because of the increase in natural disasters and diseases demand for medicines has the industry is expected to report a further increase in demand. Despite boasting a population of almost 180 million people, Pakistan’s per capita expenditure on Medicines are just under US $10 per annum. Pakistan’s pharmaceutical expenditure was estimated to be PKR 152.97 billion (US $1.79 billion) in 2010. The country’s pharmaceutical market is moderately large by Asian standards being just ahead of Vietnam (US $1.58 billion) and behind the Philippines (US $12.58 billion). According to the estimates made by Business Monitor International, by 2014, the market’s value at consumer prices is expected to post a compound annual growth rate (CAGR) of 7.13% in local currency terms. Due to the weakening rupee, however, growth will be just 3.50% in US dollar terms, which will also act as a deterrent to foreign participation. The situation is forecast to improve somewhat over the ten-year forecast period, with CAGR rates coming in at 8.84% and 6.98%, respectively. Prescription drugs are expected to account for the majority share (at around 76% to 78%) for the remainder of our forecast period (both five- and ten-year spans) Exports and Imports The Trade Development Authority of Pakistan (TDAP) has recently founded a Pharmaceutical Celling TDAP in order to capitalise national companies’ potential to participate in the growth of export of Pakistan. TDAP has observed that despite being technologically efficient and having all the technical expertise the national pharmaceutical companies are devoid of any international accreditations. After a recent agreement signed between PPMA and TDAP, PPMA will ensure that by 2015, there will be at least 10 WHO pre-qualified companies in Pakistan. In a recent conference held by TDAP to bring PPMA members up to date on the issue, the WHO

Country Advisor pointed out that, due to the lack of WHO Pre-qualification, national companies are unable to participate in US$ 110 Million bids which are appropriated for drugs’ supply to Pakistan by the WHO.

Because of the rapid devaluation of the local currency and the government’s failure to announce an across the board increase in prices of medicines, Pakistani pharmaceutical manufacturers have turned to exports. Currently, exports are growing at an average of 15% per annum mainly to South Asian countries like Afghanistan, Central Asian countries and to countries in Africa which includes Sudan and Somalia. 2009 estimates show that the share of pharmaceutical exports was approximately 4.04% of the total exports.

Export destinations and their volumes of Pakistani Pharmaceutical medicines

Pharmaceutical exports are currently the seventh largest manufacturing-based export segment, but high infrastructure and operating cost, rapid inflation, high interest rates, inconsistent government policies, high duties, lack of research and development facilities, energy shortage and the poor security situation have obstructed efforts to raise exports to their potential.

Corporate strategy, Structure and Rivalry The devolution of the Ministry of Health to the provinces; The website of the Ministry of Health, www.health.gov.pk, says, “The Ministry of Health has been devolved as per federal Government notification No. 4-9/2011-Min.I”. Pakistan’s Ministry of Health was abolished on the 30th of June 2011 and a number of federal health responsibilities were placed under the jurisdiction of seven other government ministries/divisions. With the passage of the 18 th Amendment Bill, health is going to become exclusively a provincial subject and, according to the Constitutional requirements, all the departments under the federal health ministry are to be Absorbed gradually in the provincial health administrations. This includes the registration and Regulation of medicines. Recently, pharmaceutical companies and their representative bodies have expressed serious concern about the possible devolution of federal drug administration to the provinces. According to Pakistan Pharmaceutical Manufacturers Association – after the devolution of Health Ministry to provinces under the Amendment, the pharmaceutical industry may face colossal losses, closure of business as well as a sharp decline in exports. Their standpoint is that drug registration, issuing licenses, etc, are federal subjects and provinces lack the expertise to handle such matters as they have traditionally been taken care of by the federal government in Pakistan. PPMA also complains that since the Ministry of Health has been devolved there are going to be major variations in the quality-control procedure if provinces govern and

regulate drugs and medicines, thereby creating block hurdles as one drug may be declared safe in one province and may be banned in the other. There can also be a case that a drug “X” may be registered in Sindh for pain relief and the same drug may be registered in Punjab for cholesterol control, etc., so there is expected to be confusion over who will provide, govern and regulate licenses. PPMA has advised the government to form a Drug Regularity Authority (DRA) which should be directly under the federal government so that there is no confusion over the issuing of licenses, they suggest that the DRA would look into all the matters that the provincial governments don’t have to expertise to work in.

Corporate structure At the time of independence there was hardly any pharmaceutical industry in Pakistan. Today the pharmaceutical industry in Pakistan comprises of over 400 pharmaceutical manufacturing units Including around 30 operated by multinationals present in Pakistan. Province wise breakup of Pharmaceutical Manufacturing units in Pakistan is given below.

At present there are around 66,000 registered formulations in Pakistan and around 1300 registered molecules. For example, paracetamol is a molecule that can be used to make a number of formulations like tablets, Syrups, injections etc. A new technology by the name of Taste Marking has also recently been introduced in Pakistan. Taste marking helps to improve the taste of medicines.

Rivalry

Because the multinational pharmaceutical companies have brought in millions of dollars of investment in Pakistan, the government policies are tilted in their favour. The Drugs Acts of 1976 gives the government the authority to fix the prices of drugs, it must be remembered that this law was passed in an era of nationalisation but despite the fact that the other nationalisation laws have been repealed, the Drugs Act of 1976 still continues to play a significant role in pharmaceutical sector. The government has often been accused of favouring the multinationals and ignoring the pleas of the local manufacturers. Because the prices are set according to the face value of the companies, the multinationals because of their larger cash backings always secure high prices for their products. The government has been accused to offer multinationals a price that is 50% to 170% higher than that offered to local companies for the same products. The control of the government on the pricing mechanism is a major barrier of entry into the market and has been blamed for the closure of many companies. In 1992, almost 82% of the market was controlled by the multinational companies while the local Companies had a share of just 18%. Today, the tide has turned and some form of equilibrium has been achieved with foreign companies controlling only 37% of the market while the rest of the 63% is controlled by the local companies. The import of medicines that are also locally manufactured is destroying the market as some of the drugs made locally cannot compete in quality to these imported goods. The PPMA demands that only those medicines not produced locally should be imported. Factor conditions Raw material A very high % of the raw material used in the pharmaceutical industry is imported. Most of the chemicals are imported from India and China while large quantities are also imported from Japan, Germany, Switzerland and the United Kingdom. Even though it is said that Pakistan possesses most of the raw materials to manufacture these chemicals on its own, the extraction of these raw materials is a thorny issue and has been ignored by the government since the inception of Pakistan mainly due to the high costs involved. Neither does Pakistan has the money to extract these minerals, nor does it has the technology to further process the raw materials. Local wholesale dealers often import chemicals which are then sold to these

pharmaceutical companies. Because these whole sellers do not have any testing equipment to check the purity of the imported content they import it any way and there have been instances when the local manufacturers of drugs had bought the chemicals from whole sellers and these chemicals proved to be substandard during the tests conducted by the manufacturers in their labs. Special warehouses and cooling units are required for storing some of the imported goods. Raw materials for the purpose of packaging are used from the local market, packaging material such as paper, glass bottles and plastics. Other raw materials taken from the Pakistani markets include sugar which is used as a sweetener in some of the medicines and glucose which is used as an ‘energy portion’ in some of the drugs.

Technology Most pharmaceutical companies have their own labs where the chemicals are tested before being used to produce medicine. Those companies that cannot afford a laboratory often outsource their laboratory work to hospitals or other independent labs. The pharmaceutical industry is highly capital intensive and requires the installation of huge machines almost 90% to 95% of which are imported from foreign countries and the remaining manufactured locally. Although the process is entirely capital intensive, some small companies employ labour for the packaging and counting processes. Due to the acute shortage of energy in the country, most pharmaceutical companies have also installed massive generators for the supply of electricity in the event of an energy shortfall. Some companies have also installed shredders to shred the empty chemical bottles so that they cannot be reused. Incinerators have also been installed by some of the companies for the safe disposal of their hazardous solid and liquid wastes. Often, the government has offered to subsidise the import of machinery but in order to import more machinery the importers often import 2 old machines for the cost of 1 new one. This has affected the efficiency and has often resulted in rapid depletion of

the

machinery. Also, this practice has increased the electricity consumption as old machines are not as energy efficient as the new ones. An unstable economy In the short-term, flooding and political unrest will remain key features defining Pakistan. From an economic standpoint, experts are concerned that a decline in output and an aggravation of price pressures will exacerbate Stagflationary concerns, while reconstruction

efforts will drain public funds for years to come. From the healthcare point of view, malaria is expected to affect 2 million people in the flood-affected regions over the coming four months, according to the September 2010 statements made by Medical Emergency Relief International's (Merlin) malaria expert Naeem Durrani. He added that efforts should be immediately scaled up to fight the disease, with much of the pharmaceutical treatment as well as funds for reconstructions likely to come from foreign donations. The outbreak and the rapid spread of the Dengue Virus in Punjab and the spread of Swine Flu in the recent past has exposed the vulnerability of Pakistan’s healthcare sector as it was often the case that medication required for the treatment of affected patients was often not available in Pakistan and had to be imported from abroad. The Pakistani pharmaceutical sector has experienced huge losses during FY10/11 as a result of uncertainty in the industry, according to Pakistan Pharmaceutical Manufacturers Association chair Mian Asad Shujur Rehman. He said the prevailing uncertainty is likely to hinder export earnings from the sector. Rehman's comments followed the enactment of the 18th amendment, under which powers have been transferred from the central government to the provinces. He said that the devolution of power would create ambiguity among drug manufacturers of all sizes and prevent local and foreign investors from investing in the sector, thus also affecting trade.! ! The prices of the Active Pharmaceutical Ingredients (APIs) used for the manufacturing of drugs as well as of the other raw materials such as paper, plastic, glass, rubber, etc, have increased manifold since 2001. The cost of oil, gas, electricity, transportation, and labour has all gone up dramatically. Besides, the cost of compliance to environmental standards; power and water filtration requirements and sophisticated machinery for quality drug manufacturing have also increased manifold during the last seven years. All the factors mentioned above have seriously eroded the profit margins of drug manufacturers. Several local pharmaceutical companies face the threat of closure if immediate remedy is not provided. Pakistan Pharmaceutical Manufacturers Association (PPMA) has underlined difficulties through the media and has been campaigning rigorously for the last few weeks to move the authorities concerned to come to the pharmaceutical industry’s rescue. Lack of Research and Development (R&D)

Most industry experts are convinced that unless the government encourages research culture and streamlines public-sector universities, the country will continue to lose opportunities in this important arena of research and development. Experts believe that the local private sector is not motivated to conduct research. This is in contrast to China and India, which have emerged as the top destinations for researchers in the global pharmaceutical industry. China and India are providing benefits to their patients with new treatments. This has also helped them in authenticating their registration process by getting local pre-registration data. China and India are benefitting from generating revenue by giving industry status to clinical research. These countries are creating a culture of research for drug development that will take them further ahead of Pakistan. In Pakistan, the only research taking place is on the marketing and packaging side, there is hardly any research on product development as it requires millions of dollars to develop a molecule. Labour Even though it is a capital intensive industry, the pharmaceutical industry in Pakistan provides direct and indirect employment to approximately 4 million people. There is an acute shortage of trained experts in the industry especially in the quality control departments. There are regular training sessions for the employees at some of the companies. The pharmaceutical sector is the largest employer of white collar skilled labor in Pakistan.

The three magic points: focus – standards - alliance Focus Focus for the industry The industry should focus on: • Product portfolio: Stop trying to make and sell everything. Companies should concentrate on product lines in which they are strong, effective and efficient, and for which they have a

high degree of market expertise and credibility. If they absolutely need other products, they should buy them instead of making them. • Sourcing: Companies should review their purchases of literally everything: machinery, services, raw material, packaging material, and negotiate more favourable conditions with their suppliers. • Exports: Companies should identify the export markets where their products stand the best chances of success. Focus for the government The government too should concentrate its efforts where they really matter: • Choose the best suited foreign markets and concentrate on whatever support services available for these markets. Study and, where appropriate, apply successful industry supporting measures from other countries. • Simplify all administrative obligations for exporting companies and keep only the ones that are really important. • Always have the pharmaceutical industry prominently present in international discussions. The pharmaceutical industry happens to be a very important industry for the Pakistani economy. Standards ‘Good enough’ is not good enough everywhere all the time, and it is especially true for thepharmaceutical industry. For the industry and for the government alike, all the standards presently in use should be elevated by at least a couple of points. This applies to: • Quality • Simplification and speed of administrative chores imposed by the government and increased smoothness and expediency of international operations in thecompanies. • Professional competencies of international executives in the companies: insight in international marketing principles, language proficiency, negotiation skills and diplomacy.

Alliances At a time when the international giants of the pharmaceutical business are getting together in ever more intricate associations — strategic alliances, mergers, acquisitions — it cannot be that the relatively small Pakistani pharmaceutical companies could meet all of today’s formidable challenges on their own. Alliances are therefore called for: • Between Pakistani pharmaceutical companies • Between Pakistani pharmaceutical companies and companies from other (developing) countries • Between Pakistani pharmaceutical companies and multinational companies, in particular the so-called medium-tier companies • And last but not least, between the Pakistani pharmaceutical companies and the government of Pakistan

Conclusions The Pakistani pharmaceutical industry has come to a crossroads. It is fast outgrowing itscapacity to live and thrive on the scale of Pakistan alone. It has to re-orientate its focus from inside-looking to outside-looking. A number of Critical Success Factors will ensure the success of that endeavour: • An unlimited commitment to quality, • The organization of a learning and information system for the industry, • The mobilisation of the young intellectuals of the country for adapted and appropriate pharmaceutical R&D, • And above all, the willingness to do things together with colleagues in Pakistan and abroad. The Government has shown its eagerness to support the industry, by easing or eliminating policies that may hamper the internationalization of the industry, by supporting the search for high quality, and by defending the interests of the industry in international organizations, in particular at the WTO.

The future looks promising but also full of challenges that will require diligence, hard work And initiative

Recommendations: a) The pharmaceutical industry has a long standing demand for allowing a reasonable price increase against inflation and heavy increase in input costs. The government must consider their legitimate demand after carrying out mandatory cost audit of each product through cost auditors so that the increase in prices and profits are not so excessive that put additional burden on the common man. (b) The Drug Regulatory Authority (DRA) need to be revamped and restructure to transform it into a dynamic and professional body that may develop effective policies for the pharmaceutical industry. (c) The government should offer tax incentives to attract investments from foreign pharmaceutical companies and also to encourage the local pharmaceutical industry to produce quality medicine. (d) The government should support research and development initiatives in the pharmaceutical sector, like in other countries, to ensure availability of quality drugs in the country. In this connection, the government may also consider release of grants to pharmaceutical companies on meeting set criteria. (e) The government should make it mandatory through legislation for every pharmaceutical company to produce at least on essential raw material in Pakistan so as to reduce heavy dependence on imports of costly raw material from other countries. This would not only save foreign exchange but also help bring down prices of medicines in Pakistan which would ultimately benefit the people. (f) The government must take strict measures to prevent sale of fake, sub-standard and nonregistered drugs as well as hoarding of medicines, by imposing penalties and making legislation.