PHARMACEUTICAL INDUSTRY

It is responsibility of government to keep medicine prices affordable and also to stop sale of spurious and counterfeit drugs

By SHABBIR H. KAZMI
Dec 20 - 26, 2004

Once upon a time, pharmaceutical industry had the largest share in foreign direct investment in Pakistan. However, with the passage of time the interest of multinational and transnational companies in Pakistan precipitated. The lack of interest cannot be attributed to any shrinkage in market size or growth potential but only to the economic managers. They not only failed in keeping the investors' interest live but also created a perception that the industry is on the lowest priority of the government. While all the efforts were made to solicit new investment in oil & gas sector, power generation and telecommunication sectors by offering lucrative incentives, pharmaceutical industry got nothing but broken promises.

Pakistan has a total population of over 150 people as against this the aggregate annual revenue of pharmaceutical industry is estimated around 60 billion rupees. This translates into per capital expenditure of 400 rupees. Since the total revenue of these companies comprise of other than pharmaceutical products, it is estimated that per capita consumption is less than 150 rupees in a year. Is this not sad state of affairs? The figure becomes even more pinching if one takes into account the common allegation that pharmaceutical prices in Pakistan are far higher than the prices prevailing in other countries of the region.

The most common allegation is that multinational companies operating in Pakistan sell their products at a fabulous price. The immediate reference point is prices of same or similar products in India. Whether prices are reasonable or not in Pakistan is a never-ending debate. However, the most important point to explore is, does a person get the real worth for the money he pays? The immediate reply is in negative. The buyer is often not sure about the quality of product and above all its effectiveness. But who is responsible for the prevailing situation?

According to the pharmacists, Pakistan faces three serious menaces: 1) spurious drugs, 2) expired drugs and 3) impotent drugs. The blame for this goes to the regulators or the government alone. No manufacturer can afford counterfeit drugs floating in the market. Availability of such products in the market not only bring bad name put also deprives it from the revenue the income from counterfeit products goes to faceless cheaters, who are also playing with the lives of innocent people. It is the responsibility of manufacturers as well as the wholesale/retail outlets to see that no counterfeit drug is sold in the market.

As regards expired drugs, the entire chain, from manufacturers to retailers, has to be blamed. Firstly, it is the responsibility of the manufacturer to ensure that all expired drugs are returned. Similarly, but to a larger extent, it is the responsibility of the vendors that they make sure return of these products to the manufacturers. But if these remain with the vendors, despite the knowledge of the manufacturers, then the regulators has to put his foot down. Floating of expired drug proves one point only that the regulators are not discharging their duties efficiently and effectively. While this may not be a serious issue in metropolitan cities, it is a very serious problem in the rural areas.

The third and last issue, impotent drugs, is the real contentious issue. The manufacturers produce the best quality but its efficacy is reduced while in transit or at the warehouses. A number of pharmaceutical preparations demand storage under controlled temperature and protection against direct exposure to sunrays. However, the empirical evidence is that most of the preparations loose their efficacy in transit and at the warehouse because of high temperature or direct exposure to sunrays. A lot of this blame goes to the vendors, who do not follow the rule. However, manufacturers are also responsible for the state of affairs because they do not stop supplies to those vendors, which do not have adequate storage facilities.

It was said in the beginning that the policy makers were responsible for the subdued growth of the pharmaceutical industry. A lot need to be discussed regarding the indifferent rather discouraging attitude of the policy makers. Historically, the sector has been split into two categories, national and multinational. Therefore, the policies have also been tilted towards multinational companies. There was nothing wrong with the policy as the government was keen in ensuring availability of quality pharmaceutical products. It also had a selfish motive, inflow of foreign investment.

The empirical data also shows that multinationals have been playing a key role in the development of this industry in Pakistan. They not only bring the much needed capital but also the technology. However, their investment decisions are also governed by the headquarters. Their investment is govern by the global strategy, where at times return on equity is a prime factor. The multinational network in Pakistan has flourished only because of the government policy, ensuring a minimum return on equity. Noting was wrong with the policy, but it did offend the local investors.

The slogan of new millennium is 'capital has no nationality', meaning that both the local and foreign investors have to be treated at par. Preference to one over the other does not help in creating even playing field. The aftermath of preference of multinationals over the local companies may have helped initially buy the pinch is being felt now. For decades, around two dozen companies have enjoyed the lion's share. One may say that at present the situation has turned in favor of local companies because now they enjoy almost equal share. Saying that it is also a fact that less a dozen companies control nearly half of the market share and the balance is shared by nearly 150 companies.

According to the data available 550 entities have the manufacturing license. Out of these only half are actively involved in the manufacturing of pharmaceutical products. According to a report out of total annual revenue of 60 billion rupees about 20 companies, both local and multinational, control about 80 percent share of the market. Out of these twenty companies some are the local companies. One may wonder, what has really changed?

Thanks to the global mergers and acquisitions. The number of multi and transnational companies has been on a decline, and the same is reflected in Pakistan. These mergers and acquisitions were aimed at improving the core competence. As a result, the number of products has also reduced because the production of similar products was discontinued. Similarly, some of the manufacturing facilities have to be closed down because these turned uneconomical. At the same time, the concept of 'Toll Manufacturing' got popular. This created enormous opportunities for the national companies.

The idea behind outsourcing manufacturing was aimed at achieving economies of scale as well as cutting down overheads. The concept became popular and acceptable because national companies proved themselves to be fully competent to undertake such manufacturing. The basic requirement for getting the contract was 'quality manufacturing facilities'. Some of the local companies had excellent infrastructure and all those which lacked in some way made substantial investment. Getting the job of a reputed company helped the local companies in improving/upgrading their facilities. Their learning curve improved and helped in getting more contracts.

In the past, it was said that local companies were not neither paying good remuneration to their employees nor paying much attention to human resource development. In a way they were forced to follow this practice because their margins were low. However, there has been a significant change in the mindset of 'owners', which has changed the overall 'corporate culture' of these entities. The improved remuneration policy has also helped them in attracting superior quality executives as well as workers. This has brought value addition along with improvement in quality and productivity. As a result earnings of these companies are on the rise, enabling them to make fresh investment in infrastructure as well as human capital.

One of the issues, which have remained a serious hurdle, in the expansion of pharmaceutical industry in Pakistan is the control of government on pricing. Now the products have been dividend into two broad categories, controlled and decontrolled but incorporating any increase in price of controlled category remains a serious hurdle. According to industry sources, "The government is reluctant to honor its own words". It was decided in the past that price increase would be linked with inflation. However, the policy is not being followed in letter and spirit and that is affecting profitability of the companies.

It is no secret that most of the ingredients or raw materials have to be imported because Pakistan does not have basic manufacturing facilities. Therefore, the normal inflation coupled with rupee depreciation requires price revision on quarterly basis, not annually. As such the approval system is so slow that by the time government approves the increase another increase becomes due. According to a CEO of a company, "The government never seems to be willing to grant price increase on the pretext that pharmaceutical prices are already high in Pakistan. However, the perception is not true. We are working on a very low margin and none of the manufacturer is in a position to charge a price of its own choice".

However, a critic has a slightly different opinion. He said, "Most of the products are proprietary. At the best a few companies make similar products. However, the pricing power remains with the patent holder, as the market leader. Since the products are not identical the other manufacturers are able to fix a price closer to the price being charged by the market leader. This gives other opportunity to also make handsome profit".

The multinational companies are often accused of charging a fabulous profit, though may not be reflecting in the books of accounts. One of the allegations has been that they indulge in 'transfer pricing'. This is said to be done by purchase of raw material from the parent company at a significantly high price. Though, this allegation has been made for decades, no substantial proof has been submitted so far, and it remains only an allegation.

According to a pharmaceutical sector expert, "One may have all the complaints against the multinational companies, but it is also a fact that national companies have been failing miserably in marketing their products, purely on the basis of high quality. It is a fact that multinational companies pay a nominal commission/discount as compared to national companies but survive mainly on volume. As against this some of the national companies offer as high as 50% discount to the wholesalers for the sale of their products. The result is that products of national companies are sold as substitute for the well known formulation. Since the manufacturers are at the mercy of wholesalers, they have to bow down to their 'other' demands."

Therefore, it may not be wrong to say that the policies being followed by the national and multinationals are poles apart. While the focus of multinational companies is doctors, the national companies mostly rely on trade to promote their products. Since it is the doctor who writes the prescription the multinational companies end up in a win win situation. The buyer not only insists on the medicine written in the prescription, but often refuses to buy the substitute recommended by the retailer. However, retailers often emerge successful in the rural areas due to poor literacy, as most of the people never know that they are given a substitute.

In Pakistan, one of the largest group buying medicines is the hospitals and dispensaries owned by the government. A common complaint is that not only an improper procurement procedure is followed but short-supplies; purchase of low potency medicines and even expired drugs is common. It is also said that at times the orders are not placed with the manufacturers but the wholesalers/suppliers. The procedure and practice allows ample opportunities for irregularities. Therefore, often the companies abstain from participating in such tenders. The ultimate result is what see and hear 'non-availability of medicines at government hospitals/dispensaries and/or supply substitute medicines in lieu of quality products'.

OUTLOOK

Pakistan faces two serious issues, high mortality rate and prolonged illness. The root cause of both the problems is inadequate supply of medicines and unaffordable prices. It becomes all more pinching when a person does not get worth for his/her money. Providing healthcare is the responsibility of the government. If the government cannot provide free of cost service to all, it should do the minimum ensure availability of these services at an affordable cost. As a first step prices of medicines should be made affordable.

As regards controlling sale of spurious and counterfeit drugs, it is the prime responsibility of the Ministry of Health. If the markets are flooded with such drugs it proves only one point that the watchdogs are either sleeping or keeping their eyes closed. Since the human lives are at stake, no one should be allowed to play with their lives. By opening fire one can kill a few people but use of spurious and counterfeit drugs can kill hundreds and also inflict deformities in future generations.

One of the reasons for sale of all sorts of medicines at the 'medical stores' is that these are neither owned and operated by qualified pharmacists nor are having qualified people on their payroll. There is a law of the country that each medical store has to have the services of a qualified pharmacist at its disposal. However, no one seems to be bothered about implementing the law. The blame also goes to the ministry of health.

In all the developed countries and even in some of the countries sale of medicines without a prescription is not allowed. As against this any one can buy any drug in Pakistan without a prescription. Some of the medicines, particularly having sedative effect should never be sold without the prescription. Most of these drugs are used by 'addicts'. The uncontrolled sale is adding more addicts, who sooner or later get involved in unlawful activities and then become hard-core criminals.

The last but most important advice for the government come up with pragmatic policies and then implement those in letter and spirit. The point to remember is, "Investors are willing to work under the worst policies but adhoc policies and inconsistency make them think otherwise". Another point to remember is, "Capital has no nationality it is like migratory birds". It flows to those places where it feels safe and get the food (return). The third point to remember is "There should be no discrimination between domestic and foreign investors. The interest of domestic investors can only convince the foreign investors that they should also invest their money in an alien country. They need a local joint venture partner.

Last but not the least the new world order will become effective from 1st January 2005. It offer new opportunities but also posses enormous challenges. With stringent implementation of patents and intellectual property rights the local pharmaceutical industry is expected to face serious problems. The general consensus is that neither the government nor the local investors have done enough homework to face the challenge. The new year is knocking at the door, are we ready to face the challenge?