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Business Implications •
Rapid expansion in the economies of China and Southeast Asia, combined with
government and private health care initiatives, is creating major opportunities
for pharmaceutical companies in this region. In all of the countries reviewed
here, pharmaceutical market growth reached double digits over the past five
years and is expected to remain strong well into the next century. Market Overview The Opportunity Recent economic data suggest that China and Southeast Asia are poised to join the ranks of the high-growth Asian economies such as Korea and Taiwan. Over the past few years, alongside modest (1-3% / year) economic growth in much of the developed world, the economies of China and Southeast Asia have expanded rapidly, with many countries achieving growth in the double digits. Although the per capita gross domestic product (GDP) of China, Indonesia, Thailand, the Philippines, and Malaysia is still low by Western standards, real growth in GDP (Table 1) is considerably higher than in most Western countries and is projected to remain strong well into the 21st century. According to The Economist’s forecast of global economies, by the year 2020, China, Indonesia, and Thailand will rank as the first, fifth, and eighth largest economies, respectively, in the world. The World Bank estimates that over the next ten years, East Asia (excluding Japan) will grow twice as fast as any other region in the world. Table 1 Economic Indicators of Selected Asian Countries, 1995
a. Per capita GDP in the major cities is often double the figures in this column. b. This figure is low in part because most people in China receive free housing, and many receive medical benefits and/or food and clothing allowances. Notes: Figures are in U.S. dollars; GDP = gross domestic product. Source: U.S. Department of Commerce. Decision Resources, Inc. High economic growth and increased wealth have meant more available cash to spend on health care in these countries. Between 1993 and 1995 alone, the number of hospitals in Thailand increased by 44%. In March 1995, the Taiwanese government implemented an ambitious national health insurance program to provide comprehensive medical care for all of the country’s 21 million people. In Indonesia, the government built 103 new public health centers between 1989 and 1994; private-sector expansion has been even more rapid. As a result of this and other activity, health consciousness is increasing among Southeast Asians. This trend is likely to continue as the populations in China and Southeast Asia become increasingly prosperous in the coming decades. In fact, health economists are predicting that some of these nations will be among the world’s top ten health care markets by 2020. Projected to consume 8% of the world’s pharmaceuticals by 2000, Southeast Asia is the fourth-largest pharmaceutical market in the world, behind the United States, Japan, and Europe. Southeast Asia is also the world’s fastest-growing pharmaceutical market. While most analysts expect the worldwide market for pharmaceuticals to grow just 5-6% / year through 2000, the Chinese and Southeast Asian markets are predicted to experience double-digit growth over the same period, continuing the trend of the past five years (Table 2). Table 2 Five-Country Pharmaceutical Sales and Market Growth, 1995
Note: Figures are in U.S. dollars Sources: Pacific Bridge, Inc., and Decision Resources, Inc. Factors driving this market expansion include strong economic growth, a broadening middle class, a growing and aging population, increasing economic liberalization, and an expanded government and private-sector role in improving health care. The market for over-the-counter (OTC) products is expanding particularly rapidly. In 1995, the OTC segment accounted for 48% of the total pharmaceutical market in Southeast Asia and is growing significantly faster than the prescription drug markets. (Note that the definitions of OTC and prescription drugs vary in these countries, so direct country-by-country comparisons of these markets are difficult if not impossible to make.) The Challenge Pharmaceutical companies have long recognized the potential of these emerging Asian markets. Many acted years ago to establish a local presence in the hopes of catching the wave of the region’s predicted economic upturn; few major companies are now without a presence in these countries. As these companies have found, however, the promise of Asian markets is tempered by a host of challenges affecting the industry as a whole and especially foreign manufacturers. Important issues facing pharmaceutical companies in China and Southeast Asia include weak intellectual property protection, differing disease needs, haphazard drug distribution, a shortage of trained doctors and pharmacists, and a host of pricing and reimbursement issues. Weak intellectual property protection is probably the largest hurdle facing companies in this region. Lack of such protection means that a registered new drug might be copied, manufactured, and sold by a local competitor at much lower prices. Many countries examined here have adopted legislation designed to address this issue; in general, however, these reforms fall short of the standards spelled out in the TRIPS (Trade-Related Aspects of Intellectual Property Rights agreement) guidelines. One issue related to intellectual property protection that appears far from resolution in this region is that of trade secrets. In many emerging Asian markets, information related to drug registration – including information on how to manufacture the drug – is provided to local Ministry of Health officials and is sometimes clandestinely made availale for scrutiny by local competitors. Another issue that drug companies face is the different disease needs of the populations in these countries. The top-selling prescription drug classes in most Southeast Asian markets are anti-infectives, alimentary and metabolic drugs, and repiratory drugs – all of which reflect high demand for products to combat infections (particularly respiratory and intestinal infections) and other gastrointestinal disorders. Initial strategies for penetrating emerging markets have generally focused on introducing established product lines for these highly prevalent conditions. Now, however, some companies are taking the more innovative approach of developing products specifically to serve these markets. Given the large populations in these countries, as well as their differing disease needs, this strategy makes good business sense. Glaxo Wellcome, for example, is focusing on emerging Asian markets in its development of 3TC (lamivudine) for hepatitis B. This strategy carries a risk; it remains to be seen whether enough people in countries such as China will be able to afford the cost of therapy (tagged by some analysts at $800-1,000/year) required for the drug to be profitable. Reimbursement
and pricing can also be major hurdles. In countries where the government is
largely responsible for providing health care to citizens, companies may have
a difficult time negotiating a price for their products. Currently, many government
health authorities wield extensive power when it comes to pricing, something
that will change as health care becomes more privatized. Private hospitals,
which often operate without government price controls, may be the best place
to sell high-priced foreign drugs. While most analysts expect the worldwide market for pharmaceuticals to grow just 5-6% / year through 2000, the Chinese and Southeast Asian markets are predicted to experience double-digit growth over the same period. As economic expansion and government initiatives continue to reshape the health care systems of China and Southeast Asia, new opportunities will arise for companies to strengthen their presence and expand their revenue potential in these countries. Business strategies pursued now will be instrumental in determining which companies will emerge as industry leaders in the 21st century. An analysis of the health care markets and recent pharmaceutical business activity in these countries can help identify areas that offer the greatest potential. This report profiles several of the countries that present the greatest opportunity for foreign pharmaceutical investment. China Only two decades ago, China was a poor agricultural country; now it boasts the third-largest economy in the world, with a GDP of more than $560 billion in 1995. Experts forecast that by 2020, China will be the world’s largest economy. Although doing business in China can be frustrating, many foreign companies are attracted by the country’s 1.2 billion consumers and their increasing spending power. Today, signs of capitalism and consumerism abound in urban China: stores are full of merchandise of all types and crowded with shoppers; wherever one looks, new construction is under way. Health Care System China’s traditional socialist health care system is being fundamentally dismantled. The government can no longer afford to provide health care to all its people through a massive reimbursement system, and today, after a period of gradual scaling back, universal coverage has ended. Two state-run insurance systems continue to predominate: (1) full health care coverage for retirees, students, military personnel, and members of the Chinese central, provincial, and local governments; and (2) full health care coverage for employees of large state-owned enterprises and collective enterprise programs. In 1995, these two state-run programs covered only 23% of national health care costs. An estimated 75-80% of the population, or more than 800 million people, have no health insurance. Recently, however, the government has embarked on a reform effort to create a nationwide market-based health insurance system based on copayments. This effort is evolving city by city and province by province, with each locality imposing different copayment policies for workers and employers. Company contributions also vary by type of corporation, with private (foreign) companies often contributing more than state-owned enterprise. Use of Western-style medicine is increasing in China. In 1996, locally and foreign-produced Western medicines made up an estimated two-thirds of the Chinese drug market. Cost-containment has been and continues to be an important trend in China’s health care system as health care costs soar. The Chinese government has been slashing subsidies to hospitals and reforming them into self-sufficient and self-sustaining organizations. Provincial governments such as that in Shanghai have implemented limited pharmaceutical reimbursement lists to maintain low drug prices. In addition, a National Essential Drug Bulletin (NEDB) was issued in the mid 1990s to restrict the numbers and prices of drugs eligible for state reimbursement. Moreover, ceilings have been imposed on the value of prescriptions doctors are allowed to issue. In China’s increasingly cost-conscious health care system, pharmaceutical manufacturers will have to work hard and devise new strategies just to maintain the market share they gained in the early 1990s, before the implementation of major health care reforms. In addition to the perennial problem of intellectual property rights, other factors limiting the profit potential in this market include low prices (necessitated by the economic gap between China and most Western nations) and limited access to health care, particularly among the 75% of the population living in rural areas. (Compared with other emerging Asian markets, however, China’s health care numbers are respectable, with 382 persons per hospital bed and 648 persons per physician.) In addition, meeting regulatory requirements can be a challenge. Many companies complain that the laws are unclear, making compliance difficult. Forging strong relationships with state enterprises and with government officials to get the inside track is the only way to get around this hurdle. Finally, distribution channels are changing rapidly. In the past, the state distributed all pharmaceuticals. Today, distribution is more fragmented, with national, regional, and even private-sector distributors. Thus, forging distribution relationships can be more complex and time-consuming. Some signs are encouraging for foreign-based pharmaceutical producers, however. For example, although data on the types of medicines used are difficult to come by, there is strong consensus that use of Western-style medicine is increasing. In 1996, locally and foreign-produced Western medicines made up an estimated two-thirds of the Chinese drug market (by sales, not by volume). In addition, consumer acceptance of imported pharmaceuticals is increasing as it becomes more apparent that local industry has some quality and supply problems. Aggressive promotion of foreign brands has also improved their acceptance. Pharmaceutical Market Despite
the Chinese government’s cost-containment efforts, China ranks second
in pharmaceutical sales in Asia Pacific, behind only Japan. According to the
State Pharmaceutical Administration of China (SPAC), total sales of pharmaceuticals
– including both Western and traditional drugs – reached $10 billion
in 1995. pharmaceuticals reportedly make up more than 40% of all
health care costs in China, partly because of low physician and hospital costs
and partly because hospitals use pharmaceutical markups to increase revenues.
Among imported drugs, anti-invectives are by far the leading category of pharmaceutical imports, forming a $318 million market in 1995, or nearly a quarter of all imported drugs. The leading exporting nations are Japan and Germany, with 1995 pharmaceutical exports to China of $126 million and $107 million, respectively (Table 3). The United States ranks ninth, with just $30 million in pharmaceutical exports. Leading foreign pharmaceutical companies in China in 1995 were Ebewe (BASF’s Austrian subsidiary), Hoffmann-La Roche, Hoechst, Glaxo Wellcome, and Amifarma. Table 3 Leading Pharmaceutical Exporters to China, 1995
Note: Figures are in U.S. dollars and include bulk and finished pharmaceuticals Source: State Pharmaceutical Administration of China. Decision Resources, Inc. Imported drugs must meet a range of criteria designed to protect local manufacturers. Three types of drugs can be imported: •
Drugs that are not produced in China or are produced in insufficient quantities. Areas in which foreign investment is encouraged include bulk pharmaceuticals covered by patent protection, anti-inflammatories and antipyretics, new anticancer and cardio / cerebrovascular drugs, drugs with novel delivery mechanisms (e.g., sustained-release, transdermal), certain contraceptives, and biopharmaceuticals. Areas in which investment is restricted include commodity-like antibiotics, blood products, narcotics, certain vitamins, and traditional Chinese medicines. Domestic Market. China has a large domestic pharmaceutical industry, providing 80% of China’s pharmaceutical consumption. In 1995, approximately 3,000 domestic state pharmaceutical enterprises produced a total output of $12 billion, of which more than $3 billion was exported, according to the SPAC. Over the past few years, Chinese pharmaceutical firms have been merging to improve economies of scale, concentrate resources, and increase competitiveness through vertical integration. Many large, state-owned pharmaceutical companies are also transforming their ownership structures into joint ventures or public companies to become more efficient. The result has been average growth of 21% / year in the domestic pharmaceutical industry between 1990 and 1995. According to the SPAC, China aims to become the world’s leading producer of pharmaceuticals and medical instruments and devices in the first half of the next century. (Of course, Chinese government sources are often overly optimistic.) With pharmaceutical lists becoming more prevalent, foreign pharmaceutical manufacturers must lobby government health officials and hospital authorities to make sure their products get on the reimbursement bulletins. Because China lacks widespread technological sophistication, however, the country’s pharmaceutical industry produces mainly unfinished products and “first-generation” pharmaceuticals such as aspirin, antibiotics, and vitamins. Thus, there is room for foreign manufacturers to compete on innovative technology and superior quality. For instance, in 1995, the SPAC made an exception in granting approval for Bayer to produce and sell an effervescent aspirin formulation in China although aspirin was already widely manufactured by local Chinese firms. The SPAC determined that the effervescent form was a unique product that could be more easily absorbed by the body. Capsugel, a subsidiary of Warner-Lambert in Suzhou that produces capsules for other companies, has also successfully competed on quality. Although the prices of Capsugel’s hard capsules are higher than the prices of its Chinese competitors, the company has captured approximately 12% of the capsules market because of its product quality. Recent Developments Although China’s pharmaceutical market is growing steadily at about 15% annually and offers a potentially lucrative market for overseas companies, the boom that many foreign pharmaceutical manufacturers experienced in the 1980s and early 1990s appears to be fading. Until recently, hospitals with budget shortfalls could make money by increasing prescriptions for patients covered by public health care insurance schemes. Doctors did not hesitate to prescribe the normally more expensive joint-venture-produced and imported pharmaceuticals. Partly for these reasons, many foreign pharmaceutical companies manufacturing in China or exporting to China at the time enjoyed huge sales. For instance, in 1993 the Chinese joint ventures established by Astra and Bristol-Myers Squibb saw sales jump by more than 50% each. However, the recent introduction of the NEDB and local reimbursement bulletins has capped the practice of hospitals dispensing ever-increasing quantities of expensive drugs. Having one’s drug included in the NEDB or local reimbursement bulletin has been very important for foreign pharmaceutical manufacturers’ sales. For example, when Shanghai authorities removed Amgen’s erythropoietin (Epogen, for chronic renal failure) from the reimbursement list, Amgen’s sales in Shanghai plunged by 70-80%. After the drug was reinstated, sales rebounded to close to their former levels. With pharmaceutical lists now becoming more prevalent in other parts of China and beginning to be more strictly enforced, foreign pharmaceutical manufacturers must begin to lobby national, provincial, and municipal government health officials as well as hospital authorities to make sure their products get on and stay on the reimbursement bulletins. Another available strategy is to tailor marketing and distribution efforts to the increasing numbers of Chinese consumers who can afford to pay for Western drugs. In China’s eastern coastal cities, for example, with hubs in Shanghai, Beijing, and Guangzhou, average per capita GDP now tops $2,000 (compared with $555 nationally). Aggressive brand promotion, particularly where quality differences exist, can help companies build strong local demand for a product. Pharmaceutical companies should be aware of an important change in pharmaceutical regulation that may have a major impact on the market. In 1995, officials at the SPAC announced that the government would create legislation distinguishing OTC and prescription drugs. In theory, no drugs to date have been available in China without a doctor’s prescription. In reality, OTC products (predominantly Western drugs) currently account for approximately 10%of all drug sales in China, and they are growing at an annual rate of 15-20%. OTC purchases have increased in recent years as consumers have grown wealthier and traditional dependence on health care provided through state companies and their respective work units has decreased. With the new regulations expected to be implanted over the next three to five years, OTCs represent a potentially huge growth market. Competing successfully in the OTC market will require joint ventures with local Chinese factories as well as strong, consistent sales and marketing efforts to establish brand-name loyalty. Another development that may have an impact on foreign companies is the recent announcement that the SPAC plans to be more selective in the future in approving foreign-partner joint ventures. The SPAC cited concerns over the lack of drug exports produced by joint ventures in China and increasing importing by these companies of bulk chemicals that could be produced locally. In December 1996, SPAC director Zhen Xiayu stated that a new national policy on foreign investment in the pharmaceutical and related industries would be implemented in the near future. Business Activity Despite the current challenges that China’s pharmaceutical market presents, foreign pharmaceutical manufacturers continue to be attracted by long-term opportunities in China. Most of the world’s leading multinational pharmaceutical companies have operations in China, usually in the form of joint ventures. According
to official sources, by the end of 1995, some 1,500 foreign-funded firms were
operating in China’s pharmaceutical industry and total foreign investment
in pharmaceuticals approached $2 billion. Table 4 lists major foreign joint
ventures established in China since the beginning of 1995. Joint ventures have
been established in diagnostics, contract research, and related areas as well
as in the development, manufacture, and marketing of pharmaceuticals. Vaccines
and antibiotics are the most common product areas involved. Table 4 Selected Pharmaceutical and Related Joint Ventures in China, 1995-1997
Source: Decision Resources, Inc. Glaxo Wellcome has also made a commitment to expanding in China. The company recently announced the goal of establishing a full range of activities in China, from R&D to manufacture of bulk ingredients and secondary products. The R&D effort includes a recent application to conduct Phase III hepatitis B trials with 3TC. In formulating its strategy, Glaxo Wellcome is meeting the challenges presented by this market head-on. Decision making has been decentralized to four regional offices that will allow executives to build local relationships and respond quickly to regional conditions. In addition, the company has opened a medical affairs department in Beijing to handle regulatory issues. Glaxo Wellcome has also stated that it plans to counter weak intellectual property protection with strong promotion and packaging – a strategy that helped Zantac gain the largest chunk of the market in Taiwan despite heavy pirating. The company’s efforts appear to be paying off: Glaxo Wellcome announced that corporate growth in China in the first half of 1996 was well ahead of the overall market’s 20% growth, and that output had increased almost tenfold. Smith Kline Beecham made an early commitment to this region with a 1984 manufacturing and marketing joint venture, Tianjin SmithKline French Labs, that now employs 700 people. The company has recently stepped up its efforts in China. In February 1996, SmithKline Beecham announced collaborations with two of China’s leading research centers to develop two of China’s leading research centers to develop technologies for determining the molecular mechanisms of cardiovascular and bone diseases. Just two months later, the company partnered with China National Biological Products and the Shanghai Institute of Biological Products to establish a vaccine manufacturing plant in Shanghai. SmithKline Beecham announced that the plant, with a reported initial investment of $30 million, was the first stage in a ten-year, $100 million investment plan in China. Most recently, in April 1997, the company established a new joint venture with Shanghai Institute of Biological Products to produce and market genetically engineered vaccines, with an initial focus on hepatitis A. Indonesia An archipelago of 17,000 islands stretching nearly 5,000 km from the Asian mainland into the Pacific Ocean, Indonesia is the fourth most populous nation in the world. In its first half-century under independent rule, Indonesia has been able to move away from its traditional reliance on oil and gas exports and diversify its export economy. Indonesia has maintained high GDP growth, and during the past 30 years its economy has consistently ranked in the top 10% among all developing countries. Increasing buying power among Indonesians has led to greater consumption of imported goods; total U.S. exports to Indonesia doubled between 1988 and 1994 to reach $2.8 billion. Health Care System Indonesia’s health care sector is currently inadequate to meet the needs of its large population (203 million in 1996). In 1995, there were 1,643 persons per hospital bed and 6,861 persons per physician, indicating significantly less access to health care than in China. While the government has been making efforts to improve health care, the greatest source of growth in this market has come from the private sector. Although the number of government hospitals expanded by 4%/year between 1989 and 1994, growth in private hospitals, at 27%/year, far outpaced this figure. This sharp increase resulted in an almost equivalent number of private and government hospitals (546 private versus 561 government). Total health expenditures are increasing at more than 20%/year, but they still represent only 2% of GDP. The Ministry of Health has attempted to make health care more accessible to the poor by setting a very low uniform fee for public health services through heavy subsidization. Unfortunately, however, health insurance coverage in Indonesia extends only to government employees, military personnel, and civil servants, covering an estimated 15 million people (about 7.5% of the overall population). Recently, the government has been pressured to expand coverage of health insurance to the private sector through JAMSOSTEK, the Labor Social Welfare insurance program. Pharmaceutical Market The Indonesian pharmaceutical market has grown rapidly in recent years despite the shortage of health care availability. Pharmaceutical sales have experienced double-digit growth since 1990, expanding 20% in 1995 alone to reach $1.2 billion (Figure 1). OTC drugs make up 25-30% of these sales. Although Indonesia’s per capita consumption of pharmaceutical products remains among the lowest in Southeast Asia at $5, or about 2.5% of per capita GDP, Indonesia has one of the largest pharmaceutical markets in Southeast Asia because of the size of its population (approximately 200 million). Annual growth over the next several years is predicted to moderate somewhat to 12-15%. Pharmaceuticals make up 32% of the health care budget in Indonesia – far higher than in most Western countries but consistent with the rest of the region. Domestically produced drugs dominate Indonesia’s pharmaceutical market, accounting for nearly 90% of total pharmaceutical sales. This dominance grew out of government policy; before a deregulation package was passed in October 1993, the Indonesian government had prohibited any imports of ready-made or finished drugs. Unable to export pharmaceutical products directly to Indonesia in the past, foreign pharmaceutical manufactures had no choice but to establish joint ventures with domestic firms. The deregulation package also enabled foreigners investing at least $2 million in a component – manufacturing or raw materials processing plant to retain 100% equity ownership for the first ten years after commercial production begins – a significant improvement over the previous $50 million investment requirement and five-year ownership limit. Of the 250 or so pharmaceutical manufacturing companies now operating in Indonesia, 80% are domestic pharmaceutical firms, 15% are state-owned enterprises. Of the 30 largest pharmaceutical producers in Indonesia in 1995, however, more than one-third are foreign joint venture companies. Foreign joint ventures have fared well in terms of market share, controlling more than 35% of the Indonesian market. The domestic firm P.T. Kalbe Farma, however, is the nation’s leading pharmaceutical company, with more than 10% of the market. Many domestic Indonesian pharmaceutical manufacturers, unable to conduct their own research and product development, produce pharmaceuticals under license from foreign partners. Because no major upstream chemical and pharmaceutical businesses operate in the country, 95% of all pharmaceutical raw materials and intermediates are imported. The biggest suppliers of raw materials and intermediates are Germany, Switzerland, Italy, France, Finland, Austria, China, Japan, and the United States. In the past, the government attempted to prod the industry into vertical integration by mandating that pharmaceutical manufacturers produce at least one type of raw material. Recently, however, the government has relaxed that restriction, having found it unfeasible because of the limited size of the domestic market. Figure 1 Pharmaceutical Sales and Market Growth in Indonesia, 1990-1995
Sources: Pacific Bridge, Inc., and G.P. Farmasi (Indonesian Pharmaceutical Association). Decision Resources, Inc. Although
Indonesia’s pharmaceutical market is large compared with those of other
Southeast Asian countries, it is still too small to support the extensive capital
and R&D requirements of vertical integration. Recent Reform Efforts In May 1995, the Indonesian government took significant steps toward liberalizing Indonesia’s pharmaceutical market as part of an attempt to make the domestic pharmaceutical industry more efficient. Important measures include the following: •
Cuts in import tariffs on drug ingredients by an average of 5-20%. Changes in intellectual property protection are also expected in the near future. Although intellectual property protection has been a real problem in Indonesia, the government has said that it will adhere to TRIPS by the end of the decade, as required by the General Agreement on Tariffs and Trade (GATT). To bring Indonesia in compliance with TRIPS by the deadline date, the Indonesian government announced in 1996 that it would begin enforcing its patent laws in 1997. Also, at least in theory, domestic companies that have been making money by selling copied products will no longer be able to do so, thereby leveling the playing field for foreign companies who have spent millions on R&D. Proper enforcement of intellectual property law is still difficult in Indonesia, however. Business Activity Recently, Indonesia’s fast-growing pharmaceutical sector has been characterized by a mad scramble of mergers, acquisitions, and licensing agreements. In one of the largest deals, Baxter World Trade (Baxter International) formed a joint venture with P.T. Kalbe Farma in 1996. As part of the agreement, Baxter acquired 51% of P.T. Pfrimmer Infusol, a Kalbe subsidiary, to expand production of intravenous solutions in Baxter’s Viaflex containers. Baxter had sold limited amounts of these products, mainly through distributors, before this agreement. The joint venture gives Baxter access to Kalbe’s extensive distribution networks, an important consideration in a country where the population is spread out over 17,000 islands. Recently, Indonesia’s fast-growing pharmaceutical sector has been characterized by a mad scramble for mergers, acquisitions, and licensing agreements. State-owned P.T. Kimia Farma is Indonesia’s second-largest pharmaceutical company, with total 1995 sales (both pharmaceutical and nonpharmaceutical) of $211 million. Kimia’s success stems largely from its many license agreements; the company has more than 50 products under license from such companies as Rohto (Japan), Schering (Germany), Medinova (Switzerland), and Organon (the Netherlands). Most recently, Kimia signed a memorandum of understanding with U.S. company Ari-Med Pharmaceuticals to distribute and produce Flex-all 454, a leading topical analgesic. Kimia also owes much of its success to its strong distribution network (34 wholesalers and 127 pharmacies), the ability to produce its own raw materials, and its close government connections. Thailand Thailand is one of the fastest-growing nations in Southeast Asia. Between 1988 and 1994, annual GDP growth averaged just over 10%. At the same time, inflation rates have remained relatively low at about 5%/year. This fortunate combination, along with low labor wages, may be the reason that Japanese and South Korean executives ranked Thailand as their first choice for investment in Asia in a recent poll conducted by Asian Business News and Far Eastern Economic Review. Health Care System Thailand’s health sector has recently been undergoing major improvements. The government’s Seventh National Health Development Plan (1992-1996) to expand health care facilities and hospitals resulted in a dramatic 54% increase in Thailand’s health care budget, from $1.33 billion in 1992 to $2.05 billion in 1996. Spurred by the Thai government’s special “investment privileges” to hospitals, such as exemption from corporate income tax for up to five years and a 50% reduction in import tax for medical equipment and supplies, business investors are also setting up private hospitals throughout the country. Between 1993 and 1995, 96 private hospitals were built, representing a 44% increase. The public sector continues to dominate Thailand’s health care landscape, however, employing 80% of the nation’s doctors and accounting for 70% of hospital beds. Currently, there are 604 persons per hospital bed and 4,327 persons per physician in Thailand, representing an average number of beds but a significantly low ratio of doctors compared with other ASEAN (Association of Southeast Asian Nations) members. The government of Thailand maintains a National Essential Drugs List, based on the WHO’s list of essential drugs, encompassing approximately 400 products. Government hospitals must spend 80% of their pharmaceutical budget on drugs from this list. Hospital purchases of these drugs are based on median prices, determined through price surveys. Pharmaceutical Market Thailand’s pharmaceutical market has also been growing rapidly, albeit at a slower pace than Indonesia’s. Growth averaged 13%/year between 1991 and 1996 to reach nearly $1 billion (Table 5). Increases in pharmaceutical sales for foreign companies have been above industry average, with the Pharmaceutical Producers Association members (primarily foreign companies) achieving 16%/year average sales growth between 1990 and 1994. Table 5 Thai Pharmaceutical Market, 1991-1996
Note: Figures are in U.S. dollars. Source: Pacific Bridge, Inc. Decision Resources, Inc. Thailand’s 1995 per capita GDP of $2,595 is the second highest among the countries in this study, behind only Malaysia. As Thailand’s expanding middle class gains access to greater amounts of disposable income to spend on health care, growth in the pharmaceutical market is expected to remain in the range of 10-12%/year through 2000. Pharmaceuticals account for 35% of total health expenditures. Imports account for approximately 35% of the total pharmaceutical market and domestically produced drugs for 65%. The share of imports is increasing, however. Currently, 174 local manufracturers (of which 85% are wholly Thai-owned) and approximately 5000 importers operate in Thailand. The domestic industry is dominated by several large companies, such as the Government Pharmaceutical Organization (GPO) and Thai Nakorn Patana. In addition, most of the larger foreign pharmaceutical companies are also represented in Thailand, where they dominate the ethical market. The three leading international companies in 1995 were Glaxo Wellcome, Hoffmann-La Roche, and Hoechst (now Hoechst Marion Roussel), with estimated sales in Thailand of $35 million, $34 million, and $33 million, respectively. The main distribution channel for pharmaceuticals in Thailand are private and government hospitals, which together account for 49% of pharmaceuticals sold. Retail drug stores account for 36%, while health centers and private clinics account for 15%. Business Activity Market Hurdles. The role of the GPO in the Thai drug market has been a source of irritation for private pharmaceutical firms. Under current Thai regulations, all drug purchases by state hospitals must be placed through the GPO. Because state hospitals represent the biggest portion of the pharmaceutical market, this regulation has a major impact on the market. In addition, drugs on the government’s National Essential Drug List must be purchased from the GPO if the organization produces them and if the price is competitive. Private pharmaceutical firms charge that the GPO not only exercises monopolistic control but also is exempt from the quality controls placed on private-sector producers. (The GPO does not need to comply with GMP if it is deemed that there is a “national need” for a drug.) The Pharmaceutical Research and Manufacturers of America (PhRMA) has urged the Thai government to liberalize the pharmaceutical industry. So far, however, major changes have not been forthcoming. In 1995, the GPO’s sales totaled approximately $80 million, or 9% of Thailand’s total pharmaceutical market. Growth in the Thai pharmaceutical market is expected to remain in range of 10-12%/year through 2000. An important issue for foreign pharmaceutical companies in Thailand is the relatively weak protection of intellectual property rights. Although Thailand extended patent protection to pharmaceuticals in 1992, the regulation still contains many deficiencies. In 1993, losses resulting from pharmaceutical patent piracy in Thailand were estimated at $60 million, ranking Thailand as one of the worst offenders in the region, behind only China ($450 million) and India ($320 million). In 1994, however, the United States removed Thailand from its Special 301 Priority Watch List for retaliatory trade action, stating that Thailand had proven its commitment to endorsing intellectual property laws. As the deadline for TRIPS in the year 2000 approaches, intellectual property rights in Thailand should begin to improve. In the meantime, companies should go through the legal work of filing patents, but because the law does not yet offer serious protection from patent infringement, they would do well to avoid problems by choosing local partners carefully and keeping tight control over sensitive information. For example, drug development and production should occur outside of the country. Local ventures are best limited to tasks such as packaging and labeling. Emerging Prospects. Despite the aforementioned difficulties, bright prospects lie ahead for the Thai pharmaceutical market. Vaccines maker Institut Mérieux provides an encouraging example. The company first opened its branch office in Thailand in 1988 and since then has captured roughly half of the market in human vaccine products. Citing this success, the general manager of Mérieux (Thailand) recently announced that the parent company is planning to use Thailand as a springboard for expanding its operations to Indochina. Other companies have also made substantial investments in the Thai market. In 1994, Daiichi Pharmaceutical stepped up its sales effort in Thailand by switching from distributing through local agents to establishing a cooperative marketing operation with local firms Kanematsu and Watana Inter-Trade. In early 1996, Bayer acquired equity stakes in tantalum and petrochemical projects in Thailand amounting to $40 million. Zeneca also stepped up its presence in Thailand in 1996 when it established Zeneca Pharma Asiatic (a joint venture with Thailand’s East Asiatic Public Company) with the aim of marketing Zeneca’s existing products as well as introducing new products in the future. The recent explosion in the number of AIDS patients in Thailand has helped to spur activity in the pharmaceutical sector. In late 1995, local firm Trinity Medical Group agreed to develop Immune Response’s Salk HIV-1 immunogen vaccine in Thailand after a 2,000-patient clinical end-point study to determine the product’s ability to delay the progression of HIV infection to AIDS. In April 1996, Trinity took a $5 million equity stake in Immune. Other companies have also been active in this area. Early in 1996, VIMRx Pharmaceuticals received final approval from the Thai government to evaluate its antiviral agent VIMRxyn in HIV-infected patients. The Philippines After 20 years of dictatorship and several coup attempts, the democratic election of President V. Fidel Ramos in 1992 heralded the restoration of political and macroeconomic stability in the Philippines. In 1994, the country’s GDP grew 5.1%, nearly double the growth rate in 1993. Moreover, inflation is under control, interest rates are lower than at any time in the past ten years, and the government’s budget has a surplus. Although the nation’s per capita GDP of $1,055 in 1995 is low compared with that of some other East Asian countries, and poverty is still a serious problem, the Philippines is showing the determination and discipline to join the economic tigers of Asia in the 21st century. Health Care System Unlike the health care sectors in Indonesia and Thailand, health care in the Philippines is primarily private. At the end of 1994, the country housed 503 licensed public hospitals, 1,068 licensed private hospitals, and 125 unlicensed hospitals. In private Filipino hospitals, doctors play a substantial management role and often have an ownership interest. Under the Local Government Code of 1991, primary responsibility for the delivery of health services shifted from the national government to local government units. The national Department of Health purchases drugs only for the relatively few regional public hospitals (about 40) that remain under its control. Overall access to health care in the Philippines is about average for the region, with 683 persons per hospital bed and 1,062 persons per physician. Although it wields less influence than its counterparts in other ASEAN nations, the Department of Health continues to oversee the national health care system by establishing and enforcing minimum standards for facilities and services, promoting the development of hospitals, and maintaining authority over local management efforts. Over the past decade, the national government has increased emphasis on the country’s health care sector. The budget for national health care, for instance, increased 400% between 1985 and 1991 to reach $386 million. Pharmaceutical Market The Filipino pharmaceutical market is worth approximately $1.2 billion and is growing even faster than the domestic economy. Between 1985 and 1993, the pharmaceutical market expanded by 38%, or 4 percentage points more than the domestic economy’s growth over the same period. Pharmaceutical growth for 1995 is estimated at 18%. Currently, Filipinos have the highest per capita consumption of pharmaceuticals among the countries in this study, with per capita drug spending of $14 in 1995. Domestic Versus Foreign Production. Unlike China, Indonesia, and Thailand, where a relatively large domestic pharmaceutical industry has taken root, the Filipino pharmaceutical industry depends heavily on imports for both raw materials and finished products. Of the $170 million of pharmaceutical imports brought into the country in 1992, less than 2% (by volume) were raw materials. The leading national suppliers of pharmaceuticals to the Philippines, in order of sales, are Germany, Switzerland, the United States, Australia, and United Kingdom (Table 6). Leading foreign companies include Hoffmann-La Roche, Warner-Lambert, and Bristol-Myers Squibb. Foreign pharmaceutical companies control about 66% of total industry sales, with market shares of individual foreign companies ranging between 1% and 6%. One hundred and forty-three European companies command a combined market share of 38%, and 76 U.S. companies control a combined market share of 28%. Japanese companies have less of a presence in the Philippines than in many other Southeast Asian countries, controlling 4% of the market. Thus, only 30% of pharmaceutical sales are accounted for by domestic Filipino companies. Unilab, the largest Filipino company, has the largest individual share of the domestic market (about 22%), while more than 200 smaller Filipino firms share the remainder. In the Philippines, the greatest demand is for antibiotics, followed by vitamins and vaccines. Table 6 Sources of Philippine Pharmaceuticals, 1991-1993 (millions of U.S. dollars)
a. Hong Kong serves as a re-exporter of drugs from other nations. Source: U.S. Department of Commerce, National Trade Data Bank. Decision Resources, Inc. With the exception of Unilab and Chemfields, domestic companies generally do not produce active substances but are limited to activities such as compounding active substances, packing bulk drugs into dosage forms, processing simple galenic medicinals into final drug form, and diluting concentrated extracts to marketable strengths. Because the cost of R&D is prohibitive, domestic pharmaceutical companies gain access to new drugs either through their domestic offices abroad or through licensing agreements with foreign pharmaceutical manufacturers. Distribution. Because the Philippines is an archipelago, it is uneconomical and inefficient for most pharmaceutical companies to distribute their own products. Therefore, most companies use professional distributors such as Zuellig Pharma, Marsman, Metro Drug, and Philusa. Although distribution fees vary, the cost generally ranges from 12% to 15% of product sales. Only a limited number of pharmaceutical companies, such as Unilab and Warner-Lambert, have their own direct distribution networks. In contrast to China, where most drugs reach patients through hospitals, drug stores account for more than 80% of all drugs sold in the Philippines. Large drug store chains have become especially popular. By serving as both wholesaler and retailer, these chains have been able to offer comparatively low prices and a wide selection of products. Drug store chains now control nearly 70% of the drug store business. Leading Drug Classes. In the Philippines, the diseases of poverty – such as pneumonia, tuberculosis, diarrhea, and malnutrition – are still the leading causes of morbidity and mortality. Thus, the greatest demand is for antibiotics, followed by vitamins and vaccines. Changing lifestyles and growing prosperity, however, have led to a recent rise in cardiovascular and neoplastic diseases. Leading classes of pharmaceuticals sold through drug stores are anti-infectives (20% of the market), alimentary tract and metabolism treatments (17%), respiratory drugs (14%), and cardiovascular agents (8%). The leading pharmaceutical product in 1995 was Ventolin (Glaxo Wellcome’s bronchodilator albuterol). Business Activity Founded in 1945 as a small corner drugstore, Unilab is now the undisputed leader of the Philippines’ pharmaceutical industry. In addition to holding more than 20% of the domestic market despite stiff competition from European and U.S. pharmaceutical companies, Unilab holds about 8% of the collective Southeast Asian pharmaceutical market. This share of the market gives Unilab nearly double the clout of its closest rival in Southeast Asia. Unilab has numerous strengths that help account for its success: •
A product line of some 300 specialty drugs presented in about 600 formats. Malaysia Malaysia is one of the most ethnically diverse countries in Asia. Two-thirds of the country’s population is made up of ethnic Malays, 30% are Chinese immigrants, and the remainder includes mainly Indians, Pakistanis, and Tamils. While ethnic tensions have been a serious problem in the past, strong economic growth has helped alleviate some of this stress. Malaysia’s per capita GDP of $4,253 is one of the highest among ASEAN members, behind only Singapore and Brunei. Malaysia has also earned a reputation as one of the most trade-friendly nations in Southeast Asia. Health Care System The Malaysian government is firmly committed to improving health care for all its people. In 1995, the government spent about $975 million for health care and plans to allocate more than $1 billion annually in the Seventh Malaysia Plan, 1996-2000. Health care spending thus amounts to about $50 per person, or approximately 6% of Malaysia’s GDP, a relatively high figure for this region. The Seventh Malaysia Plan focuses on six areas: (1) promoting health and preventive medicine, (2) increasing access to health care in rural areas, (3) providing an adequate supply of trained health providers, (4) increasing efficiency through privatization of hospitals, (5) reducing the government’s role in the provision of health services, and (6) increasing the government’s regulatory and enforcement functions. An example of the government’s effort to make health care universally affordable is the recent announcement by the deputy prime minister that private hospitals will be required to reserve space for providing treatment to the poor. As the financial
burden of providing health services grows, the trend in Malaysia is toward increased
privatization of the health care system. Unlike Thailand’s GPO, Malaysia’s
Government Medical Stores, which previously supplied pharmaceuticals to all
government hospitals, have recently been privatized into a new entity known
as Remedi Pharmaceuticals. In 1995, Malaysia’s health minister began a
test program to privatize hospitals, starting with 11 state-run facilities.
If the test is deemed a success, the government may expand hospital privatization. Pharmaceutical Market In 1995, Malaysia’s pharmaceutical market was estimated at $300 million, significantly smaller than most of the other markets discussed here. Annual growth in this market averaged 13% from 1990 to 1995 but is expected to slow somewhat to 8-9%/year through 2000. Like the Filipino market, Malaysia’s pharmaceutical market depends heavily on imports for both raw materials and finished products. Imports account for approximately 70% of the market and local production for 30%. The leading category of drug sales in Malaysia is antibiotics (chiefly penicillins and cephalosporins), followed by vaccines, antiulcer medications, and analgesics. Domestic Industry. Although local production of pharmaceuticals is limited, it has increased substantially over the past five years and is expected to grow 15%/year through the end of the decade –slightly ahead of overall growth in pharmaceuticals. Currently, 35 local manufacturers operate in Malaysia. These companies mainly blend pharmaceutical preparations, relying heavily on imported raw materials. Leading pharmaceutical manufacturers in Malaysia include Chemical Company of Malaysia (CCM), Glaxo (Malaysia), Warner-Lambert (Mfg), Pfizer (Malaysia), Pharmamalaysia, and B. Braun Medical Industries. Table 7 Malaysia’s Health Statistics, 1995
Source: Pacific Bridge, Inc. Decision Resources, Inc. Foreign Investment Initiatives. To spur investment by foreign pharmaceutical and other high-technology companies, in 1994 the Malaysian government began offering financial incentives to companies in the fields of advanced electronics, equipment / instrumentation, automation, electro-optics, and biotechnology (including broadly the development, testing, and production of pharmaceuticals), among others. Such high-tech companies are eligible for a full tax exemption of statutory income for five years or an investment tax allowance of 60% on qualifying capital expenditures incurred within five years. Malaysia is also courting foreign governments in its bid to improve the country’s ability to produce and develop pharmaceuticals. Recently, France agreed to assist Malaysia in developing its natural-product pharmaceutical industry. The French government agreed to send scientists to Universiti Malaya to undertake joint R&D and to award scholarships to Malaysian students to further their study of related fields in France. Partly in response to these initiatives, and partly because of other factors such as decent intellectual property protection, many foreign-owned technology companies have set up operations in Malaysia. Distribution. Recently, PharmaCARE Medicine Shoppe has given birth to a new distribution concept in Malaysia; the retail pharmacy franchise. The company offers franchise licenses to aspiring entrepreneurs to own and operate pharmacies under its trade name. By transferring the knowledge and skills required to open and manage a pharmacy to new groups of people, this franchise scheme is expected to expand the number of pharmacies operating in the country. Currently, Malaysia houses approximately 550 pharmacies. PharmaCARE plans to open 200 new pharmaceutical outlets by the year 2000 and expects to hold 25% of the pharmaceutical market by that time. Whether PharmaCARE is able to compete with traditional independent pharmacies and corporate pharmaceutical chains remains to be seen. Malaysia is experimenting with early forms of managed care through the Establishment of organizations such as Mediscreen and HMO Pacific. Business Activity Over the past few years, domestic producer CCM has been aggressive in improving its competitiveness and position in Malaysia’s pharmaceutical market. With funds received from disposing of its 50.1% stake in ICI Paints, CCM acquired several companies in 1995, including Upha Pharmaceutical Manufacturing and its parent Upha Corporation, Hohan Medical, and Warner-Lambert (Mfg). In 1996, CCM also entered into a memorandum of understanding with ACIC of Canada to distribute and manufacture intermediate raw materials for pharmaceutical products, and a joint venture with Kinesys (also of Canada) to market and manufacture pharmaceutical products for the sports medicine market. CCM also has plans to establish 60 pharmaceutical retail outlets within three years, at a cost of about $200,000 each. CCM’s recent performance has been exceptional. In 1995, sales turnover increased by 34% and pre-tax profit rose 89%. Recently, Novartis has expanded its business in Malaysia to provide a gateway for entering the ASEAN region. Previously, Ciba-Geigy Malaysia (70% owned by Ciba-Geigy and 30% by a local Bumiputera firm) served only as a marketer for Ciba-Geigy’s pharmaceutical, crop protection, and animal health products. In December 1995, the firm made its first venture into manufacturing in Asia when it opened a masterbatch plant in Klang. The company had an estimated turnover of $18 million in 1996. As in Thailand, the rapid rise of AIDS in parts of Southeast Asia has spurred activity in Malaysia’s health care sector. The focus in Malaysia appears to be on diagnostics, however. Bayer Diagnostics recently agreed to distribute HIV and pregnancy tests from Ireland’s Trinity Biotech in several countries, including China, the Philippines, Vietnam, and Taiwan, as well as Malaysia, where shipment has already begun. In 1995, Malaysian company Focus Profile allied with Canadian firm Empyrean Diagnostics to distribute and manufacture the latter company’s HIV test kit in Malaysia, Indonesia, Singapore, Thailand, and Brunei. Conclusion Although each of Asia’s emerging markets presents hurdles, the pharmaceutical markets in China, Indonesia, the Philippines, Thailand, and Malaysia are all growing rapidly as these nations’ economies expand. Despite the challenges, many multinational pharmaceutical companies are investing millions of dollars in this region to build and maintain a long-term local presence. These companies clearly understand that by the 21st century, China and Southeast Asia will present major opportunities for Western pharmaceutical manufacturers as increased disposable income and health-consciousness combine to drive up drug sales. About the Author Ames Gross is president and founder of Pacific Bridge, Inc., a Washington, D.C. – based company that specializes in linking Western pharmaceutical and other health care companies with Asian partners, as well as conducting primary market research and building distributor networks in Asia. Mr. Gross has written extensively about Asian medical and business issues for journals in the United States, Europe, and Asia. He also frequently serves as a featured speaker at various medical conferences and meetings. Before establishing Pacific Bridge in 1988, Mr. Gross gained broad experience and contacts in Asia while working in positions at three major Wall Street firms – First Boston, Salomon Brothers, and Smith Barney – during which time he consummated more than $500 million of Asian cross-border transactions. Mr. Gross has a B.A. from the University of Pennsylvania and an M.B.A. from Columbia University.
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