Cover Story
| Reform
programme — a major step in right direction |
|
By Syed M. Aslam
Dec 06 - 12, 1999
GlaxoWellcome Pakistan Limited is a
subsidiary of Glaxo Wellcome plc, a research-based pharmaceutical company incorporated in
the UK. Formerly Glaxo Laboratories (Pakistan) Limited, has maintained its presence in
Pakistan since the country gained independence in 1947. It derives its present name from
the take-over of another UK-based pharmaceutical company, which also operated in Pakistan
under the name of Wellcome Pakistan Limited.
The Company has made a remarkable
progress, particularly between 1990 and 1998— the share capital has doubled from Rs
163 million to 335.5 million; reserves and unappropriated profit has increased almost
five-fold from Rs 304.5 million to Rs 1.46 billion. Sales has increased over four-fold
from Rs 740.6 million to Rs 3.3 billion and total assets quadrupled from Rs 674.4 million
to Rs 2.7 billion.
The Company managed to improve its sales
by 27 per cent to Rs 3.3 billion in the year ended December 31, 1998, over the previous
year. Since the pharmaceutical companies have not been allowed to increase the prices from
November 1996, the substantial growth in sales was totally volume oriented.
Glaxo’s long presence in Pakistan has
turned it into an insider which fully understands the realities of the local market, the
pattern of the supply and demand, and a vast industry experience regarding investment in
Pakistan.
PAGE sent a list of questions to the
Chairman and Managing Director of the company, Alan R. Eldridge, to get his view on what
could help attract foreign direct investment into the country. The following are the
excerpts:
Q: What is your industry
experience regarding investment in Pakistan?
A: See following answers.
Q: What is your contribution to the
national economy ?
A: The 24 research based multinational
pharmaceutical companies represent the largest single group of overseas investors in
Pakistan, in numerical terms. The group directly employs over 16,000 highly-skilled
managers and workers who support another 90,000 + dependents. In the past, the
multinationals have undertaken substantial direct investments in modern manufacturing
plants and laboratories to facilitate the transfer of modern technology and the
introduction of advanced, research-based products into Pakistan. The multinationals have
also supported and developed ancillary local industries such as the glass and packaging
industries. The group has been good corporate citizens who have generously supported local
charities over the years and have been major corporate tax payers. For example, over Rs.40
billion has been paid by the multinationals as corporate tax over the past 50 years.
Q: What has been the trend of sales and
profitability?
A: Recent sales growth rates for the
industry have been modest whilst the profits of the foreign-invested firms have been
declining rapidly in recent years. For example, in 1998, 10 out of the 24 multinationals
actually made losses on their Pakistan operations whilst during the first-half of 1999,
another 3 companies also made losses, one of them for the first time in 27 years. The
group's collective profit after tax in Pakistan for 1998 stood at a dismally low figure of
2.07% of total net sales whilst the collective return on investment was less than 5% for
the same period. Given this very negative environment, it is not surprising that basically
all investment plans have been suspended in the sector and without substantive changes, it
is feared that a number of companies will be forced to initiate substantial disinvestment
programmes.
Q: Does the government policies provide a
conducive environment in your particular sector of activities ?
A: Government policies towards the
pharmaceutical industry have been very negative in recent times. Pharmaceutical selling
prices are strictly controlled by the Government. Despite input cost increases of over 40%
over the past 3 years, the previous government did not honour in letter and spirit its
written commitment in the form of SRO 1038(I)/94 dated 16th October 1994, which mandates
an annual price review on the 1st of November each year, based upon a laid down formula,
devised by the Economic Coordination Committee of the Federal Cabinet. In fact, the last
increase granted to the industry was on 1st November 1996 and since then, there has been
no increases awarded but rather the selling prices of 77 products have been mandatorily
reduced by up to 29% without adequate consultation with the industry. The latter was
ordered by the previous government on the basis of a very biased and selective comparison
of selling prices in India. In fact, an objective survey of the respective selling prices
in both countries has graphically revealed that many of the prices in Pakistan for leading
medicines are now well-below those prevailing in India which means that local retail
prices are now at or near the lowest in the world.
Q: What are your experiences of the
implementation of the policies?
A: See above. In addition, the
multinationals are disturbed by a perceived reluctance of government officials to grant
registration and marketing approval to the most modern medicines often on the basis of
subjective and specious pricing arguments. The lack of policing and effective legal action
by the responsible officials against the purveyors of spurious and counterfeit
pharmaceutical products is also a cause for deep concern as is the perceived reluctance to
effectively implement intellectual property protection laws.
Q: How the economic conditions have been
affecting the demand and profit margins?
A: As Pakistan is basically a market where
the user pays for medicines, demand is directly related to the general state of the
economy and in particular, the status of disposable incomes across the population. The
poor performance of the Pakistan economy in recent times has markedly inhibited the
ability of a large segment of the population to access adequate, high quality medical
facilities, including much-needed medicines.
Q: What needs to be done to attract
foreign direct investment?
A: The effective implementation of the
reform programme recently enunciated by the Chief Executive of Pakistan clearly would be a
major step in the right direction in the eyes of potential foreign investors. More
specifically, a range of economic and public policy initiatives need to be defined and
rigorously implemented and to this end, the detailed economic plan to be announced by the
government on 15th December 1999, is eagerly awaited.
For foreign investors, it will be
imperative that transparent and consistent policies be put in place and maintained over
time to facilitate long-term planning. For example, it is critical that wholesale changes
are made to the present taxation system to ensure that all members of society pay their
fair share of the costs of running the country. Additionally, the elimination of
corruption plus, the removal of law and order problems, would also encourage more foreign
investment.
By and large, foreign investors believe
that free markets are the best means of delivering high-quality products and services to
consumers at competitive prices. Therefore, should the government exhibit a clear
commitment to markedly deregulating the economy and accelerating the privatisation of
publicly-owned companies, then foreign investment would substantially increase over the
medium to longer-term.
Q: How do you feel the IPP's issue has
been handled ? What has been its impact on investors' confidence?
A: The IPP's issue has been handled very
poorly by the previous government and clearly this issue has negatively impacted on the
sentiments of foreign investors. It is axiomatic that major investments have long-term
planning horizons and require sustained consistency of government policy if investors are
to be encouraged to risk their funds in Pakistan as opposed to other potential, investment
destinations. In order to begin the process of restoring Pakistan's reputation as a sound
location for investment funds, it is imperative that existing foreign investors such as
the IPP's and the multinational pharmaceutical companies be treated fairly and fully in
accordance with stated government commitments. To this end, it is to be hoped that the new
government moves to quickly resolve the very real difficulties of both investor groups.
