PHARAMAECUTICAL INDUSTRY OF PAKISTAN

ACKNOWLEDGEMENT

All praises belong to almighty Allah who is the supreme authority knows the ultimate relations underlying all sorts of phenomenon going on in this universe and whose blessings and exaltation flourished our thoughts and thrives our ambitions to have the cherished fruit of our modest efforts in making project of entrepreneurship. We also offer our humblest thanks to holy prophet Hazrat Muhammad (P.B.U.H) who is the forever torch of guidance and knowledge for humanity as a whole.

We deem it our utmost pleasure to avail this opportunity to express gratitude and deep sense of obligation to our teacher Prof. Hameeda bataol for his valuable and dexterous guidance, scholarly criticism, untiring help, compassionate attitude, kind behavior and moral support. Through the project he helped us and guided us in every aspect, as that was a very new experience for us.

We would also like to thank all friends who were always there to meet and talk about our idea. Last, but not least, we would like to thank Our Parents for unconditional support and encouragement to pursue our interests. At the end, we just want to say it is eagerly waiting for your strong interest in the study of this report.

PHARMACEUTICAL INDUSTRY

INTRODUCTION“Pharmaceuticals are the substances that are aimed to treat, cure, prevent or recognize

diseases and relieve pains through their applications.”

The pharmaceutical industry develops, produces, and markets drugs licensed for use as

medications. Pharmaceutical companies can deal in generic and/or brand medications. They are

subject to a variety of laws and regulations regarding the patenting, testing and marketing of

drugs.

The practice of using chemical agents to treat disease is not new. Extracts from plants (such as

ephedrine, caffeine, opium, quinine and hundreds of other biologically active compounds) have

been used for thousands of years by "healers" to treat a variety of physical ailments. While

natural products were the basis for the pharmaceutical industry, the formal start of the industry

has been fixed to 1935 when sulfonamide antibacterial was introduced for general use. The

industry has made significant accomplishments in its attempts to cure disease over the last 60

years; however, there are still several areas which lack effective treatment options.

The primary goal of the pharmaceutical industry is to find, develop, and market new chemical

entities (NCEs) which can be used against untreatable diseases, or which have superior

properties when compared to currently available drugs. Research and discovery are the essence

of pharmaceutical industry, and its success has played a vital role in maintaining pre-eminent

position of the pharmaceutical industry in the world today. Such activities demand a sustain rate

of huge investment over a long period. Pharmaceutical Industry devotes huge resources to R&D

more than any industry.

HISTORICAL BACKGROUND

At the time of independence there were only two small units which were enabled to meet the

local demand. The rest of the medicines were imported. The decision taken in 1972 to abolish

brand names, restrict availability of essential drugs to 850, fix maximum retail prices across the

board and freely allow local manufacturer of all the essential drugs was in fact the life line for

the national segment of the industry. Due to several reasons, especially inaccessibility of new

researched medications this policy was ultimately reversed in 1976.

Since 1999 the Govt. has invested US$ 133 million in the pharmaceutical industry. The last

10years was eventful for the Pakistan Pharmaceutical Industry because they have developed a

large number of domestic manufacturers. In 2006 there were 400 licensed pharmaceutical

companies in Pakistan, including 30 multinationals who had over 53% of market share. Today

the industry has developed technology, production and an infrastructure of imports. It is a well

regulated industry. It has domestic companies which are quite confident of doing good business.

PAKISTAN PHARMACUETICAL INDUSTRY

Although Pakistan’s pharmaceutical and healthcare sectors are expanding and evolving rapidly,

about half the population has no access to modern medicines. Clearly this presents an

opportunity, but much more work needs to be done by the government and industry's

stakeholders. The value of pharmaceuticals sold in 2007 exceeded US$1.4bn, which equates to

per capita consumption of less than US$ 10 per year and value of medicines sold is expected to

exceed US$2.3 B by 2012.

Pakistan is a developing pharmaceutical market, with a large population and economic progress

evident, but per capita drug spending was rather low at around US$9.30 in 2007. Private

spending accounts for 65% of total healthcare expenditure sourced through out-of pocket

payments, international aid and religious or charitable institutions. Pharmaceutical spending

accounts for less than 1% of the country's GDP, comparable to levels in some neighboring

countries but above that in some of the South Asian countries.

COMPANY’S MARKET SHAREGSK 11.6%ABBOTTLAB 7.9%HIGHNOON LABS 6.3%GETZ PHARMA 3.9%SANOFI AVENTS 3.8%ROCHE 3.1%

COUNTRY DEMAND

Pakistan meets 80% of its domestic demand of medicines from local production and 20%

through imports. The pharmaceuticals market size is Rs. 70 Billion (US $ 1.2 Billion),

approximately. The market for pharmaceuticals in Pakistan has been expanding at a rate of

around 10 to15% since last few years.

EXPORTS AND IMPORTS

Pakistan is also exporting its surplus drugs to a large number of countries particularly to the

Asian and African regions with an expanding trade in the newly emerged Central Asian States.

About a hundred million strong populations of the Central Asian States, with almost no local

manufacture of medicines, offers an attractive market for industries located in Pakistan. The

share of pharmaceutical industry in exports has been reached to 4.04% that was 3.28% in 2008.

So far as imports are concerned Pakistan imports nearly 95%of the basic raw-material used for

manufacturing from countries such as China, India, Japan, U.K, Germany, and others and major

importers are in Islamabad, Karachi, Lahore, Peshawar and Quetta.

BMI'S BUSINESS ENVIRONMENT RATINGS

Pakistan slipped from 13th to 15th and last place, out of the key markets assessed in the Asia

Pacific region. In addition to the challenging economic environment, the country's

pharmaceutical expenditure will also be shaped by the volatile political and security situation.

Overall, it is expected that pharmaceutical market value to increase at a compound annual

growth rate (CAGR) of 9.39% in local currency terms, reaching PKR206.9bn (US$2.3bn) in

2014. Growth over our longer, 10-year, forecast is likely to be somewhat more subdued, at a

CAGR of 8.75% in local currency, as the operating environment stabilizes.

MAJOR SUPPLIERS

Major suppliers include United States, U.K., Germany, Switzerland, Japan, Holland and France.

BASIC MANUFACTURES

There are five units operating in Pakistan for the Semi Basic Manufacturing of pharmaceutical

raw material and still Pakistan has the capacity to absorb the significant investment in this field.

MULTI NATIONAL MANUFACTURERS

At present 30 multinational pharmaceutical organizations are producing their products in

Pakistan.

LOCAL MANUFACTURERS

411 units are involved in local pharmaceutical manufacturing.

SOME KEY STATISTICS OF THE INDUSTRY

REGISTERED DRUGS 47000

REGISTERED MOLECULES 1100

R&D EXPENDITURES 1% of the profit

AVERAGE GROWTH RATE 11%

MARKET SHARE OF

MULTINATIONAL COMPANIES

45%

MARKET SHARE OF LOCAL

COMPANIES

55%

MARKET LEADERS Glaxosmithkline

HEAD OFFICE

PPMA has its head office located at KARACHI with two Regional offices in Punjab & NWFP.

BUSINESS CONNECTIONS AND EFFICIENCY:

Pharmaceutical companies are of two types, one is manufacturing and other is

franchising, most of the companies manufacture and sell their medicines

themselves, while some companies purchase marketing rights from any

manufacturing company, if you are interested in pharmaceutical marketing you

can easily get these products right to market at 20%-40% of trade price, for

example, if the trade price of a products is Rs.10 you can purchase it by paying 2 -

3 rupees , so remaining can be one’s profit. I think it sounds great for investors,

even the smugglers that they can make profit without breaking the law, isn’t it?

Moreover when the chemist receives this product on T.P (trade price) Rs.10, he

will sell it at15% profit margin that is Rs.1.76 at one tab, so the customer has

paid Rs.10+1.76=11.76 and the difference of cost and sales price is Rs.9, he is

paying 9 rupees extra, it is an example of a franchise business., if it has been a

manufacturing concern the profit margin definitely will be higher. .

Secondly, Pharmaceutical companies are investing heavily in promotional

activities, like gifting for doctors, refresher courses for the doctors, giving them

medical equipments, arranging awareness programs. This also leads to the price

hike of the medicines. Apparently it sounds great rather necessary but in practice

this fair trade is also marred with unethical practices. For example, bribing doctors

to prescribe their medicines, like foreign tours, giving highly valuable gifts e.g.

cars, paying their clinic rents, their utility bills, celebrating their even their kid’s

birthday, financing their kid’s educational expenses. Most of the antibiotics are

sold on “deals” their rates are fixed like any other commodity, who bids higher

gets the business, even one of the top national company fixes a fair amount of

budget for that kind of activities i.e. 3% of their sales value. Two years back it was

7%.

Moreover, the profit margin of chemist is 15%, which is nearly 5 times greater

than the profit a seller of FMCG (fast moving consumer goods) gets.

The law enforcing agencies should come forward and put a close check on this

industry, pharmaceutical companies should also sit together and make decisions

not to get involved in unethical practices and decrease their unnecessary

promotional expenses, and the government should frame a law to set profit margin.

If these issues are settled, the next meeting of pharmaceutical industry will be

conducted to provide some relief to the people not to raise the prices.

ROLE OF GOVERNMENT

The government has set up an independent Drug Registration and Pricing

Authority. In Pakistan the Ministry of Industries decides about the drug pricing.

In the biotechnology sector, Pakistan has initiated many programs. It is

planning to set up biotechnology plant worth Rs.400 million to meet the growing

needs of quality medicines in the country.

While substantial increases in public sector spending have been witnessed in

recent years.

Some major public sector programs have been initiated to address the healthcare

needs of the population. These include:

The National Program for Family Planning and Primary Health Care

The Expanded Immunization Program

National Program for Hepatitis Prevention and Control

National Tuberculosis Control Program

National Malaria control Program

National HIV/AIDS Control Program

Women's Health Program.

The public sector health development expenditure increased from PKR 4.3

billion in 2003-04 to Rs.6 billion in 2004-2005, and Rs.9.5 billion in 2005-

06.

Ministry of Commerce has given 50% subsidy to pharmaceutical

companies for registration of their exported products in foreign countries for

export from 1998 to 2003

The government has also formed a policy recently allowing companies to

produce raw materials locally.

Companies in Pakistan rely heavily on China, India, Germany, UK and

Japan for raw material imports

Since 1999 the government has invested US$ 133 million in the

pharmaceutical industry

FLOW CHART OF PROCEDURE FOR LICENSING OF PHARMAECTICAL UNIT

FLOW CHART OF DRUG REGISTRATION

PEST ANALYSIS

PEST ANALYSIS

PEST analysis is a useful tool for understanding the big picture of the environment in which we

are operating, and the opportunities and threats that lie within it. By understanding the

environment in which we operate (external to your company or department), we can take

advantage of the opportunities and minimize the threats.

Specifically the PEST or PESTLE analysis is a useful tool for understanding risks associated

with market growth or decline, and as such the position, potential and direction for a business or

organization.

POLITICAL FACTORS

The government plays a vital role within the operation of manufacturing these products in terms

of regulations. There are potential fines set by the government on companies if they do not meet

a standard of laws. Some examples include:

Political instability

Tax policy (including tax rate changes, new tax laws and revised tax law interpretations)

Employment laws

Environmental regulations

Trade restrictions and tariffs

Current wave of terrorism in Pakistan

NATURE OF CHANGE

In pharmaceutical industry prices are fixed by ministry of health. It exposes a significant risk on

pharmaceutical industry.

IMPACT OF CHANGE

Profit margin of pharmaceutical industry will be reduced due to price fixation policy.

THREAT

Price fixation is a long term threat for pharmaceutical industry.

STRATEGIC RESPONSE

Those companies who are involved in efficient portfolio management of their products resulting

in sophisticated profit margins.

ECONOMIC FACTORS

Economic factors affect the purchasing power of potential customers and the firm's cost of

capital. The following are examples of factors in the macro economy:

Economic growth

Interest rates

Exchange rates

Inflation rate

NATURE OF CHANGE

Inflation and exchange rate fluctuations are important factors influencing pharmaceutical

industry of Pakistan because raw material such as molecules and supporting material is imported.

IMPACT OF CHANGE

Inflation and exchange rate fluctuations expose a risk of increase in cost because main cost

involved in pharmaceuticals is import of raw material.

THREAT

This change will increase pressure on cost control functions.

STRATEGIC RESPONSE

Industry has to consider operational efficiency in order to reduce the impact of this threat.

SOCIAL FACTORS

Social factors include the demographic and cultural aspects of the external macro environment.

These factors affect customer needs and the size of potential markets. Some social factors

include:

Health consciousness

Population growth rate

Age distribution

Career attitudes

Emphasis on safety

NATURE OF CHANGE

Population is increasing day by day resulting in increased demand of pharmaceutical products.

Cross border relationships have also strong influence on pharmaceutical industry of Pakistan.

Supporting material is imported from India and China. So, cross border situations of India and

Pakistan do matter. Terrorism and global alliance are also important factors stimulating the

standing of pharmaceutical industry of Pakistan.

IMPACT OF CHANGE

Diseases are increasing day by day due to increase in population. Sales will be reduced due to

cross border relationship and terrorism activities. Due to global alliance market share increases.

THREAT

Unfavorable cross border relationships and terrorism will have a threat on pharmaceutical

industry of Pakistan.

OPPORTUNITIES

Increase in population and global alliance are growth opportunity for pharmaceutical industry to

explore further market.

STRATEGIC RESPONSE

Increase in population creates demand for pharmaceutical industry which can be explored

through strong research and product development. Unfavorable cross border relationships and

terrorism activities can cause reduction in profits. Global alliance is a growth opportunity which

can be achieved by focusing on market capitalization strategies.

TECHNOLOGICAL FACTORS

Technological factors can lower barriers to entry, reduce minimum efficient production levels,

and influence outsourcing decisions. Some technological factors include:

R&D activity

Automation

Technology incentives

Rate of technological change

NATURE OF CHANGE

Technology is changing day by day. Pharmaceutical industry should acquire new and

advanced technologies for further improvement in product’s quality, to achieve cost

efficiency and in order to, compete in the market.

Technological changes affect the growth of business greatly.

The effectiveness of company's advertising, marketing and promotional programs.

The new technology of internet and television which use special effects for

advertising through media. They make some products look attractive. This helps in

selling of the products. This advertising makes the product attractive. This technology

is being used in media to sell their products.

IMPACT OF CHANGE

Massive production is possible through advanced technologies by which they can achieve

economies of scale.

OPPORTUNITY

Economies of scale will strengthen the standing of companies because it would be a competitive

advantage.

STRATEGIC RESPONSE

Whenever new technology is evolved need for trained and skilled employees arise. Either

training of existing employees or hiring of new employees is required. Huge funds allocation is

needed in this perspective.

PEST IMPACT

NATURE OF CHANGE

IMPACT OF

CHANGE

OPPORTUNITIES THREATS STRATEGIC RESPONSES

Political Forces

Price Fixation Low Profits Long Term Efficient Management

Economic Forces

Inflation, Exchange Rates Fluctuations

Increase in cost

Pressure on cost

Focus on operational efficiency

Social Forces

Cross border Relationship

Decrease in sales

Growth opportunities Research & product development

Terrorism Decrease in sales

Reduction in Profits

Strong business relationship

Global Alliances

Increase in Market Share

Growth Opportunities

Focus on Market Capitalization

Political Forces

Advanced Technology

Economies of Scale

Competitive Advantage

Human Resource & Fund Allocation

Porter’s Model

Threat of New Entrants (Moderate)

Industry Environment

Bargaining Power of Buyers (Low)

Threat of Substitute Products (High)

Political Legal Forces (High)

Technological Forces (High)

Social Force (High)

Macro Environment

Economic Forces (High)

Pharmaceutical Industry

Rivalry among the Competitors (Moderate)(

( High)

Bargaining Power of Suppliers (High)

PORTERS FIVE FORCES MODEL

Porters five Forces Model is used for industry analysis and it implies that risk adjusted rates of

return should be constant across firms and industries. According to numerous economic studies it

has affirmed that different industries can sustain different levels of profitability, part of this

difference is explained by industry structure. External threats and profits move into

opposite direction.

RIVALRY AMONG THE EXISTING FIRMS

‘The strength of competition in the industry’

So far as industry analysis is concerned it implies that rivalry among existing firms in

pharmaceutical industry is almost at moderate level. Pharmaceutical companies are

competing on the basis of:

Quality

Cost

Product rang

Research and development

BARGAINING POWER OF SUPPLIERS

Suppliers of pharmaceutical industry of Pakistan are the originators and large research based

companies located in developed countries. They are a few in numbers as compared with

pharmaceutical companies in Pakistan. Therefore they have strong bargaining power with them.

BARGAINING POWER OF CUSTOMERS

It is very sensitive to switch from one product to another because it is a life concern so customers

cannot switch easily from one reliable product to the other. On the other hand there are many

pharmaceutical companies offering a wide range of products. So, the bargaining power of

customers is at moderate level.

THREAT OF NEW ENTRANT

Pharmaceutical industry of Pakistan is growing rapidly and there is still significant potential for

growth. There are chances of some new entrants but this threat is at moderate level. It is not easy

to establish a new pharmaceutical company in Pakistan due to requirement of huge investment

THREAT OF SUBSTITUTES

Research and development are the essence of pharmaceutical industry. Every pharmaceutical

company in Pakistan is making efforts for the betterment of their research and development

department. Still there is a significant threat of substitute products because of rising discoveries

and pacing research and development in the whole world.

PORTER’S FIVE FORCES HIGH MODERATE LOW

Rivalry among the existing firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of new entrant

Threat of substitutes

STRENGTHS

Export potential Contribution to GDP Employment generation (70000 directly and 150000 indirectly) Advancement in technology

WEAKNESS

Price fixation No tax No R&D incentives Imported raw material lack of resources Registration process

OPPORTUNITIES

Molecule development (Clinical trials and research) Market growth (Increasing health consciousness) Global alliance (Highnoon laboratory is having enough capacity for the production of

medicines. They are also doing outsourcing for other companies such as for Solvay Pharmaceuticals in Germany).

Incredible export potential (Central Asia states) Aging of the old population New diagnoses and new social diseases

THREATS

TRIPS (Trade Related Aspects of Intellectual Property Right) agreements Competition from MNCs High cost of R&D Low funds for plant up gradation Government policies (0.7% of GDP for health sector) High cost of inputs (95% import)

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 at least 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 Pharmacy industry should be declared an essential industry and it should be given preference

with regard to utility connections.

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 at least next five years.

7. To keep up with international quality standards the Pharmacy 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. Biotech pharmaceutical plants should be installed.

9. Funds for development should be provided at concessionaire rates so that quality medicines can

be produced at reasonable prices and in sufficient quantity.

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 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. By following

the above suggestions many problems of the pharmaceutical industry of Pakistan can be

resolved.