The Contribution of Multinational Pharmaceutical Companies

In the Development of Pakistan Economy

Chapter 5 – Summary of Findings

SUMMARY OF FINDINGS

PROBLEMS FACED BY THE PHARMACEUTICALS

INDUSTRY

The Pharma industry has a number of problems due to its peculiar nature. It has
to maintain quality control by upgrading its production standards. The latest
equipment for quality control has to be imported. With the rapid explosion of
technology during the last two decades, it is uphill task to keep up with
international standards and to ensure medicines of the best quality. This is a
costly process.

The Pharma industry differs from other industries in the sense that when the
cost of inputs like electricity, telecommunications, gas charges etc, increase
manifold, the Pharma industry is not allowed to increase its prices
correspondingly. Most of the raw materials for medicines are imported. The
Pak rupee is subject to continuous depreciation, thus making imports costlier,
the industry is not allowed to increase the prices of its products.

The Pharma industry by definition specializes in the manufacture of

therapeutically effective, ready to use Pharma dosage forms - the manufacture
of the chemicals essentially comes under the realm of chemical industry. The
industry does however manufacture its specialty chemicals for as long as it
possesses their patents and once these patents expire the chemical industry can
manufacture these chemicals more economically. The controversy that exists in
the country is probably due to the fact that most of the Pharma MNCs is also
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 The Contribution of Multinational Pharmaceutical Companies
In the Development of Pakistan Economy
Chapter 5 – Summary of Findings

chemical giants, nevertheless they have refrained from basic chemical

manufacturing in Pakistan. The absence of the chemical industry in the country
has been the main impediment to the development of the basic manufacturing
of Pharma chemicals. Therefore any basic manufacturing unit must remain
dependent on imported raw materials. The lack of a consistent and pragmatic
government policy hinders any development in this respect.

Demographic trends in Pakistan contribute to a growing market, but the real

issue for the investor is that of pricing. Problem of registration of drugs has
hindered the development of the local market. The ministry of health has
hindered the development of the local market. The ministry of health has
adopted a policy that allows MNCs to only market those drugs, which they sell
in their country of incorporation. This policy ignores the fact that diseases of
the rich and those of the poor can be different. Pharma organizations are
fighting to overturn this policy. Another policy is that of free float. This is
effected through small share capital basis, which assists the foreign parents in
exercising majority control. Consequently, all major decisions are taken by the
holding company, affecting the products that are sold by the subsidiaries.

GROWTH PROSPECTS AND FUTURE OUTLOOK FOR THE

INDUSTRY

The local Pharma industry is in the growth cum maturity stage. Although
entrenched competitors - with strong distribution networks and excess
capacities have adequate barriers to entry, growth continues through increased
volumes for the existing producers. Increase in primary demand, and
consequently volumes is also critical because the average annual increase in

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 The Contribution of Multinational Pharmaceutical Companies
In the Development of Pakistan Economy
Chapter 5 – Summary of Findings

the wholesale price index of the industry has only been 7 to 9% over the last
seven years.

Without an inflationary growth the industry is heavily dependent on real

growth. The prospects in this realm are bright because presently only about 1%
of GNP is spent on health care, which is one of the lowest allocations towards
health for any country in the world. Pakistan has one doctor for 2050 persons,
one dentist for 51800 persons, one hospital bed for 1506 persons, one nurse for
6180 persons. Life expectancy at birth for a Pakistani man is 56 years
(compared to 61 years for other LCDs); infant mortality is 100 per 1000 live
births (compared to 60 per 1000 for other LCDs); child (age 1 to 4 years) death
ratio is 10 per 1000 (compared to 5 per 1000 in other countries); and crude
death rate is 12 per 1000 (33 per1000 for the other third world countries). The
plight is worsened by the fact that health care facilities are concentrated in
urban areas where only 30% of the population dwells. To eradicate this
situation, the present government has launched “ health for all by 2000 “
campaign, which is expected to improve the health sector infrastructure in the
country.

Some of the factors that will be pivotal in expanding the primary demand:
• A 5% rate of urbanization
• A 3% rate of population growth
• Per capita income growth rate of 3% at constant factor cost and 17% at
current factor cost
• The privilege of retailers to sell drugs without prescription

It is encouraging to note that the per capita consumption of medicines in the

country has increased from $3 in 1987-88 to $5 in 1992-93. Since the factors
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 The Contribution of Multinational Pharmaceutical Companies
In the Development of Pakistan Economy
Chapter 5 – Summary of Findings

driving this demand are likely to continue for some time, the industry is bound
to benefit from expanding in the foreseeable future. Apart from the boom in
primary demand due to infrastructure factors, three other demand drivers will
be the movement away from herbal and homeopathic forms of medicines as
literacy and awareness improve; the opening up of export markets; and the
allocation of loans and aids by international development agencies (IDAs) to
the health sector.

The market for Pharma products (in terms of volume) will continue to grow
significantly. Growth estimates for the next three to five years will range
between 15% and 20% per annum. In 1994 the government of Pakistan
approved price increases of 7.5% for all regulated products. This had a positive
impact on the earnings of companies with products in the regulated segment.
Also the voluntary price freeze was extended till June 30 1995. The prices of
non-essential products (category C: no controls) are expected to rise even
further, giving a potential boost to participants with significant products in
these categories.

Further deregulation in prices is expected over the next couple of years. The
industry is already working with the ministry of health in order to develop a
“new and improved” price indexation formula, for products that are in the
controlled categories of life-saving and essential drugs.

Another recent development in the pricing arena is the introduction of “leader

pricing” which allows the competitors to charge the same price as the market
for their own brand of the same compound. This has already led to some price
adjustments and will also influence the Pharma industry by introducing
oligopolistic price signaling.
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 The Contribution of Multinational Pharmaceutical Companies
In the Development of Pakistan Economy
Chapter 5 – Summary of Findings

The winners are likely to be the multinational companies who can have
successful products and who can position themselves in product categories,
which have fewer price controls. Local companies who can license approved
products and sell them successfully in the local markets will also be profitable.
Moreover, local or international companies who can make some breakthrough
in basic manufacturing will be able to lower their costs and thus tend to
improve their performance.

In addition, new segments (e.g. Oncology, Cardio-vascular) will gain

importance, and go higher up in the therapeutic ranking. On the demand side,
private institutions will increase in importance as far as buying power is
concerned. Western countries are losing their research advantages to Japan due
to the increased awareness of animal rights in the west and thus the decreased
opportunity for testing the new drugs. Some small Japanese companies are
coming up with excellent chemicals and products. These products are likely to
be available for licensing in Pakistan - both the local companies and MNCs.
Some MNCs will enter generic business, which has traditionally been done
only by local companies might close, especially for those local companies who
are aggressive in licensing new products. Some Korean and Japanese firms are
also expected to enter the market over the next three to five years.

CONCLUSION

The pharmaceutical industry in Pakistan includes both multinational and

domestic companies. Multinationals have an upper hand in a way that they
possess worldwide advertising facility and can spend allot of money on their

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 The Contribution of Multinational Pharmaceutical Companies
In the Development of Pakistan Economy
Chapter 5 – Summary of Findings

research programs. On the other hand local Pharmaceuticals basically rely on

licensing for their core business, as they are unable to match the advertising
budget and expertise of their multinational competitors.

Competition in pharmaceutical industry is fierce, perhaps more so than in any

other high technology industry. No other manufacturing industry devotes more
resources to R & D than the pharmaceuticals industry. Pharmaceuticals
research is essentially highly risky business. Out of 5000, or so compounds
discovered and investigated, on average only one reaches the prescription
market.

Although pharmaceuticals innovation has generated enormous economic

benefits, in Pakistan, the real savings don’t show up as a reduction in total
health spending. Rather, they released resources to increase the total amount of
treatment to be used elsewhere in the health services.

But the long-term benefits of medicines to the national economy as a whole are
generally ignored. Health managers under pressure on costs often overlook the
impact of the shift away from hospital to primary care on prescribing.

There is little purpose in achieving therapeutic innovations if those who stand

to gain most from new treatments cannot gain access to them. By limiting the
choice or even prohibiting the use of modern medicines simply on grounds of
cost may not necessarily be in the best interest of the tax payer either,
particularly if the short term savings in a long cost burden to the average
consumer.

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 The Contribution of Multinational Pharmaceutical Companies
In the Development of Pakistan Economy
Chapter 5 – Summary of Findings

Originally the Pakistani pharmaceuticals industry principally engaged in the

packing and distribution of imported medicines. Even now the manufacture of
drugs are limited, due largely to non-availability of raw materials. The industry
has emerged as a processing and conversion industry, which is engaged mainly
in converting raw material into different dosage forms and packing of the
finished products.

Multinationals in Pakistan have their own forum with the name of “The Pharma
Bureau”. Out of 39 companies, 29 companies are the members of this forum.
The purpose of this forum is to find out problems and issues confronting
overseas investors in the pharma industry and then concentrate approach in
projecting and solving common collective business for the group.

After having a low figure in 1992-93, when GDP grew only by 2.3% Pakistan’s
economy has embarked on a faster growth trend. GDP growth improved to
3.8% during 1993-94 and further rose to 4.7% during 1994-95. A
comprehensive package of incentives and concessions has been provided to
investors who are second to none in the emerging capital markets. There are
three stock exchanges are working in the country i.e. in Karachi, Lahore and in
Islamabad.

The public and private sectors both contribute to the national health system in
Pakistan. The existing network of health services at the national level consists
of 814 hospitals, 4280 dispensaries, 4850 basic health units (BHUs), 820
maternity and child health centers (MCHCs), 488 rural health centers (RHCs)
and 242 tuberculosis centers. There are a total of 80,908 hospital beds in all
hospitals, BHUs and RHCs.

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 The Contribution of Multinational Pharmaceutical Companies
In the Development of Pakistan Economy
Chapter 5 – Summary of Findings

Antibiotics, vitamins and analgesics are the top three therapeutic classes in
terms of sales by value. The market size of the pharmaceutical industry is
estimated to be around $550 million. Per capita consumption of drugs and
medicines is increasing the country. It was RS. 95 per capita in 1987-88 which
increased to RS. 159 in 1992-93.

The income payable is 37% for public limited companies and 47% for private
limited companies.

The major properties of the pharmaceutical industry are composed of 20 well-

entrenched competitors, with no player controlling more than 6% of the
market. Absence of monopolistic distortions and intense rivalry result in
competitive products and superior quality of long term earnings. The industry
is generally profitable and has pretax profits for MNCs ranging between 12%
and 18%.

The maximum retail prices of drugs and the Ministry of Health under the Act
of 1976 control medicines. In 1990, the government introduced a range of
reforms to reinvestigate the economy. A key issue in these reforms was the
pricing formula for the pharmaceutical products, which was working to the
detriment of the industry and was destroying healthy competition through
company owned depots.

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 The Contribution of Multinational Pharmaceutical Companies
In the Development of Pakistan Economy
Chapter 5 – Summary of Findings

RECOMMENDATIONS

1. The government should allow yearly price increases in the essential drugs to
account for the rupee devaluation and for the rampant inflation. It should
also decontrol the prices of all those drugs that are produced by atleast three
or four manufactures locally so that their prices may be determined by the
market mechanism.

2. When the government feels that the price being charged on a particular drug
is unreasonable and that unjustified profits are being made, it should allow
the temporary import of that drug in consultation with the PPMA.

3. The import of those medicines, whose demand can be adequately met

through local production, should be banned.

4. The Pharma industry should be declared an essential industry and it should

be given preference with regard to utility connections. Labor activities
should also be banned in this industry.

5. Incentives should be provided to both the national and the multinational

companies to start the manufacture of raw materials locally.

6. Practically all the existing production facilities are operating below capacity
levels and therefore no new unit should be allowed to commence operations
for atleast next five years.

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 The Contribution of Multinational Pharmaceutical Companies
In the Development of Pakistan Economy
Chapter 5 – Summary of Findings

7. To keep up with international quality standards the Pharma industry has to

constantly keep on importing highly sophisticated and sensitive quality
control equipment. Since this type of equipment is very expensive to import,
the government should withdraw the duties and taxes imposed on their
import.

8. Funds for development should be provided at concessionaire rates so that

quality medicines can be produced at reasonable prices and in sufficient
quantities.

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