Awaiting Sunrise
In March 2010, a report by McKinsey, a global management company, identified Pakistan’s pharmaceutical sector as a ‘Sunrise Industry’ which could “lead Pakistan to economic prosperity.”
The report, which was commissioned by the Planning Commission of Pakistan and the Asian Development Bank, suggested that in order to develop the pharma sector, four areas should be focused upon: introducing drug pricing reforms, providing incentives for investment for FDA certified plants (to gain access to more export markets), allowing contract manufacturing without limitations and enforcing high quality standards.
The report highlighted the fact that pharma companies’ profit margins were decreasing, due to which the industry faced multiple challenges, including reduced availability of lower priced medicines due to tight price controls, and opined that price rationalisation should come into play to trigger investment in the industry.
Fast forward to over a decade later and it seems that there has been no real progress, and the reasons for this, according to several stakeholders of the pharma industry that Aurora spoke to, lies in the fact that there is no consistent government policy in place to enable the pharma industry to reach its potential.
Inconsistent Pricing Policies Prices of medicines were frozen between 2001 and 2013. Then in 2013, price increases were allowed by the government only to be revoked following public outcry. In 2015, due to judicial intervention, a Drug Pricing Policy came into being.
According to an article published in Dawn on October 16, 2016, titled The Politics of Medicine Pricing, Dr Muhammad Aslam, CEO, Drug Regulatory Authority of Pakistan (DRAP), at the time was quoted as saying “a new formula for drugs pricing was evolved… according to which yearly prices will increase by 50% of the consumer price index [CPI].”
The policy was revised in 2018 and currently, the prices of ‘essential’ drug prices can be increased by up to seven percent and ‘non-essential’ or ‘non-scheduled’ drugs by 10% every year. However, it is important to note that such increases do not come into effect automatically every year; they take much more than the mandated time to be approved by the Cabinet and it is not uncommon for them to be revoked sporadically. Furthermore, retailer and distributor margins are built into the price of drugs which amount to 15% and 10% respectively and this further affects profit margins.
Zahid Saeed, MD, Indus Pharma, points out that the method of using the CPI as a barometer to implement price increases is not ideal. “Last year, the inflation rate was at least 12%; therefore, with such caps in place, such increases are not adequate.” He points out that this way of classifying medicines was established by the World Health Organization (WHO) to ensure that essential drugs were always available in government hospitals globally. He adds that at some point, even ‘non-essential’ drugs become essential for patients, which is why this way of classifying them is not practical. “Our government is not able to purchase medicines for the public from its funds, so as an alternative they say they are making them affordable by squeezing prices. Ideally, they should make them available free of charge at their hospitals.”
Stakeholders are of the opinion that the industry is “overregulated” as every single drug is price controlled. Furthermore, they point out that due to the devaluation of the rupee over the last decade they have been impacted greatly, as approximately 80 to 90% of their raw materials are imported, not to mention their machinery (which has to be updated regularly in compliance with international standards) and other essential equipment and technology. Therefore, the CPI adjustment does not affect them in a positive way.
A question that does arise is that if prices were to increase regularly, would that not further make medicines unavailable to the poorer segments of society? Stakeholders feel that this would lead to competition which would result in lower prices.
According to Osman Khalid Waheed, CEO, Ferozsons Laboratories, “on the surface that argument seems to hold, but if you dive a little deeper, it doesn’t. In most countries, governments take the responsibility of providing healthcare. Our argument is that the poor should get medication for free – that is a responsibility that the government should fulfil – not the manufacturers. No matter how cheap medicines are, they will still be too expensive for people at the bottom of the pyramid.”
He adds: “If 50 quality players are competing against themselves, it is a good enough mechanism to ensure price controls through competition, rather than artificial enforcement. The problem arises when someone takes an ad hoc decision that has no linkage to economic reality, and imposes it on manufacturers.” He points out that Pakistan deregulated the industry in the nineties, but the decision was reversed within months. “India deregulated after us and never looked back.”
Consequently, the value of the industry has been affected. According to Tauqeer Ul Haq, Chairman, PPMA, it has grown from Rs 300 billion in 2017 to Rs 501 billion in 2021, but remains more or less stagnant in dollar terms due to the depreciation of the rupee and is currently valued at an estimated $3.1 billion. (According to several estimates, of the 650-750 pharma companies in Pakistan, the top 100 companies capture approximately 95% of the market and the remainder account for the remaining five percent.) All these factors combined have resulted in profit margins declining substantially, which in turn, hinders the industry in several ways.
THE MNC ‘Exodus’
According to an interview in Business Recorder on August 16, 2019, Ayesha Tammy Haq, Executive Director, Pharma Bureau (which represents MNC pharmaceutical companies) stated that “MNCs were 80% of the market share not so long ago and now they are 40%.” She tells Aurora: “In Pakistan pharma is an orphan child and gets the short end of a very long stick. If you cannot increase your prices, you close down your company and leave.”
This is the reason why MNCs prefer to set up their business in other countries such as Bangladesh and India, where pricing is not controlled in such a stringent manner. According to Pakistan’s Pharmaceutical Industry 2017 – a report compiled by PPMA: “the failure to enforce copyright and patent laws is also thought to be another detriment to foreign investment coming into Pakistan. Since drugs can be easily copied and sold without proper check, it makes little sense for would-be investors to introduce their products in this kind of a non-protected environment.”
“If I have developed a drug and have a patent for it, no one can use the formula to make a generic version. However, what has happened in several instances is that MNCs have registered their patents, but they have somehow been leaked due to a lack of strict patent and copyright laws,” points out Haq. In this respect, she cites contract manufacturing (outsourcing) without limitations as a possible solution for increasing manufacturing for both local and international companies, as currently DRAP issues contract manufacturing licenses for a limited amount of time. Contract manufacturing entails a larger company outsourcing a certain function of their plant (such as manufacturing a drug) to a smaller company (after they upgrade their facilities). The larger company then trains their employees and in doing so transfers training and technology, thus freeing up their capacity to manufacture other products. “Contract manufacturing is the future in terms of putting the industry on the rails. The local industry has come up due to contract manufacturing, as they did not have manufacturing capabilities initially – only the MNCs did. We have been talking to DRAP for a long time now, and they have understood the importance of what we have been saying for a long time and will be issuing licences for five years.”
Shortage of Medicines
The financial non-viability of manufacturing essential low-priced drugs has led to several companies halting production which has, at times, resulted in their unavailability which leads to the use of imported substitutes which are priced higher. Another serious repercussion of this shortage is that doctors are forced to prescribe newer and stronger versions, which are not only more expensive, but increase drug resistance to older versions. Furthermore, shortages lead to an influx of smuggled drugs which are more expensive or, even worse, sub-standard or counterfeit.
Stakeholders are therefore of the opinion that DRAP should, rather than fixating on pricing, pay more attention to quality control, which it allegedly does not, leaving the function of quality control to the pharmaceutical companies.
Lack of Innovation
Most pharma companies do not have the resources to have dedicated R&D departments. According to Waheed “R&D is extremely expensive; one in 13 drugs makes it to the market after companies spend billions of dollars on it. This is impossible for us given that our market is barely worth three billion dollars. Unless you have a more deregulated method that allows companies to earn and set aside money for R&D, the process will not begin.”
Adding to the lack of development is the fact that approvals for new products take a lot of time. “If Indus Pharma decides to launch a new product now, we will probably get the approval for it years later. By that time the product will be obsolete. We need responses in specified periods of time, be it 15 days or two months,” says Saeed.
Another reason for lack of innovation is a dearth of research programmes in universities. In countries like the UK and the US and even India, a significant number of drugs and vaccines are initially developed at higher education institutions and pilot projects are conducted there. For example, the AstraZeneca vaccine for Covid-19 was developed at Oxford University. In Saeed’s opinion, curriculums in Pakistani universities and colleges are not in line with the requirements for most pharma companies and this is why they have to spend a substantial amount in training them. “Students have to be trained about things such as the regulatory environments, whereas ideally they should come in and add value to our companies, but this is not the case, even among people who have PhDs.”
Another aspect of innovation would be for pharmaceutical companies to attain US FDA approval, which would allow them to export their products to other parts of the world. (See Strangled Potential on page 20.) However, this is not possible due to the fact that the costs for such certifications are extremely high. For context, in 2016, India and Bangladesh had 201 and five FDA approved plants.
The DRAP Effect
Ultimately, all these issues seem to arise from the lack of a uniform policy from DRAP. However, despite their grievances, stakeholders point out that the cause of the problem is that DRAP has not been given autonomy. Waheed says, “DRAP as an organisation is not filled with incompetent people or people who are not interested in quality regulation – they need to be empowered. CEO and directors are appointed and reappointed every three months and this undermines their authority. This needs to change; they are well-intentioned and competent people stuck in a system that does not allow for good decision-making.”
Given the above, what are the solutions if Pakistan’s pharma industry is to become a Sunrise Industry? First and foremost, all stakeholders agree that the pharma sector should be given the status of an industry and be governed by the Ministry of Commerce or Finance (the case in other countries) rather than the Ministry of Health. Another would be to decrease the number of drugs that are regulated by DRAP in terms of their price, which is the case in India and Bangladesh, where only a percentage of essential drugs are price controlled. Haq and Saeed are of the opinion that the government should provide incentives and subsidies to pharma as it does to other industries, as this could lead to an increase in manufacturing and exports. “We have more potential than other industries such as textiles, agriculture and leather, in terms of exports or otherwise. They are dependent on ‘weather and water’; we are a synthetic industry and can multiply our production very quickly,” says Saeed. Waheed, however, disagrees and opines that subsidies create artificial situations and that it is “far better that the government supports us through large scale procurement and medicine for the poor. That will help us scale up and become more competitive – everybody wins in that scenario.”
Ultimately, if the pharma sector is to attain the status of a Sunrise Industry, it is imperative that a forward-thinking and holistic government policy comes into place. A policy that is enforced actively and rather than just fixating on price controls, focuses on encouraging R&D, increasing exports, enforcing copyright and patent protection, reducing the use of counterfeit and smuggled drugs, and increasing the duration for contract manufacturing licences. Unless that happens, the pharma sector, which has always had the potential to grow exponentially, will never reach its potential.