By: S M Turab Hussain & Muhammad Usman Khan. Presently, the size of the local pharmaceutical market in Pakistan is around US$2.0 billion (60% of the market share belonging to local manufacturers) with a contribution to GDP of almost 1%. This share can potentially exceed US$2.5 billion by 2015 as incomes increase and health expenditure as percentage of GDP increases (currently 1% per capita). The current exports from the sector are just under US$ 200 million. Given the sectors contribution and its future growth potential, it is important to address the concerns of the stakeholders on the impact of normalized trade with India.
According to representatives of the pharmaceutical sector in Pakistan; the major obstacles to investment and growth in the sector are, absence of local chemical industry, poor governance and regulatory mechanism, lack of compliance with international standards and last but not least, chronic electricity shortages.
The current regulatory mechanism is identified as a major concern as it controls prices of about 900 active ingredients, creating distortions in the market and lowering industry margins, preventing investment and growth in the sector.
Another issue identified by the local industry is that the government policy for the pharmaceutical sector, by design has always been pro-multinationals (MNCs). The policy allows MNCs to act as price leaders in the market. As most of the MNCs derive their profits from transfer pricing, they are able to set significantly low drug prices, making it very difficult for the local industry to compete. The Pharmaceutical industry also suffers due to lack of compliance with the quality and standards requirements of international markets. For instance, India has over 800 WHO certified units while Pakistan has none.
Another important compliance requirement is the enforcement of “Good Management Practices” (GMP). GMP compliance is a necessary requirement of the US-FDA and several local companies in India have managed to get GMP compliance certificates. However, there is no implementation of these requirements in Pakistan with compliance limited to process and not to functional implementation.
The local pharmaceutical industry in Pakistan is still predominantly small scale. The reason is that the local industry is mostly financed by equity and none of the major industrial groups in Pakistan have ventured into the sector due to the lack of technical knowhow. The Pharmaceutical industry is normally classified as a knowledge-based industry and Pakistan has a shortage of requisite trained workers. Moreover, the other industrial sectors, such as textiles, offer higher incentives in terms of government support/subsidies, reducing incentives for entrepreneurs to enter into pharmaceuticals.
In contrast, the Indian Pharmaceutical sector is now the world’s third largest in terms of volume crossing the US$25 billion mark. The total sector exports are well in excess of US$ 10 billion. Thus the pharmaceutical sector of Pakistan is only a fraction of that in India.
In addition, a strong chemical industry base in India supports the pharmaceutical industry in terms of domestic sourcing of raw materials. Moreover, consistent growth and investments in India have resulted in over 500 units that have international certifications and registrations for export. Out of these, 150 units are US FDA approved, in sharp contrast to Pakistan, which has none.
A key reason given by the sector for this difference in scale is that India has always had a strong protectionist policy for its pharmaceutical industry. The large difference in scale between the two countries is evident, as Pakistan has only 400 manufacturing units compared to 25,000 units in India. Moreover, in India, though MNCs are part of the top 10 largest firms within the sector, their share/size is almost the same as the large local companies. Therefore, apprehensions, within the pharmaceutical sector regarding normalizing trade with India essentially stem from domestic market and policy issues stated above.
The pharmaceutical sector fears that given the low income domestic market in Pakistan, it would make commercial sense for the low quality drug manufacturers in India to export to Pakistan. Given the current lack of capacity of the drug regulatory authority to impose quality checks, this might result in the Pakistani market getting flooded with low quality cheap drugs from India causing losses not only to the domestic industry but also compromising the health and safety of consumers.
The detailed focus group consultations with the pharmaceutical sector indicate that there are three key steps that need to be undertaken by the government in order to mitigate the potential negative effects on the sector from normalizing trade with India.
Firstly, the Drug Regulatory Authority of Pakistan needs to revamp its regulatory mechanism, focusing on incorporating the following five key attributes:
– A drug pricing policy that places price controls on a limited Essential Medicines List (EML) of drugs, coupled with ensuring deregulation of non-EML drugs.
An annual, transparent price adjustment formula that incorporates domestic inflation and variations in exchange rate.
A local registration policy that is efficient and encourages exports through speedy registration procedures. Export-related certifications currently take months to obtain in Pakistan and less than a week in India.
A Uniformly Enforced Quality Monitoring Policy that sets a clear roadmap for all domestic manufacturers to comply with CGMP requirements as per WHO standards.
Secondly, import policy for the pharmaceutical sector needs to be amended to ensure that only quality products enter the domestic market. One way to do this would be to follow Bangladesh’s example. Under its trade agreements with India, Bangladesh negotiated that only those companies that have the US Federal Drug Authority (FDA) certification will be allowed to send products into Bangladesh. Such a requirement would restrict poor quality producers from entering into Pakistan.
Finally, it is suggested that TDAP support procedures be simplified, that instead of the existing lengthy re-imbursement procedures, TDAP may consider reimbursing 10% of Export Proceeds as support to cover marketing and regulatory costs.
Given that these policy changes are implemented by the government, we expect that granting Most Favored Nation (MFN) status to India may actually turn out to be advantageous to the pharmaceutical industry in terms of the technological, regulatory and scientific exchange of ideas and personnel.
This would lead to development of not just pharmaceuticals but also its allied health care industry in Pakistan which is significantly behind that of India in many segments such as clinical trials, bio equivalence, equipment and technology.
Dr. S M TurabHussain is a PhD and Associate Professor at the Department of Economics at the Lahore University of Management Sciences.
Usman Khan is a chartered financial analyst and faculty member at LUMS, holding an MPhil in Finance from University of Cambridge, UK