In recent decades, the pharmaceutical market has expanded its geographical reach. This trend appears to be here to stay; in a survey of major pharmaceutical firms conducted by global consulting firm PwC’s Strategy& team, more than half of respondents anticipated that over 30% of their global sales would originate in emerging markets by 2018.
Even in the most newly opened markets, drug companies have seen growth: forecasts for Myanmar, for instance, indicate that pharmaceuticals could quickly grow into a $1bn industry.
As governments and companies continue to take note of this high-potential sector, both are pursuing development in the face of cross-cutting challenges, particularly with regard to the resources required to develop new products and the accompanying intellectual property protection concerns.
Strong Demand
As economies grow, and health care provision and insurance mechanisms expand, demand for local and imported pharmaceutical products is on the rise. Research from consulting firm McKinsey & Company highlights that emerging markets have been outspending Germany, France, Italy, the UK and Spain (the EU5) on pharmaceuticals for several years, with a total market size of $281bn compared with the EU5’s $196bn in 2014.
Estimates from the research also indicate that between 2015 and 2020, emerging market spending is expected to account for $190bn in sales growth. On the African continent alone, the pharmaceutical industry expanded in value from $4.7bn in 2003 to $20.8bn in 2013, with projections that the need for medicines and medical equipment will rise by between 6% and 11% by 2020. The Strategy& survey highlighted that between 2015 and 2020, fast-growing markets like Turkey and Mexico were expected to see a 9.3% increase in sales.
Not only is demand on the rise, but the diversity of pharmaceutical needs is growing as emerging markets increasingly deal with non-communicable diseases already prevalent in wealthier economies, including diabetes and hypertension, while communicable diseases that afflict many emerging markets – such as AIDS, malaria and tuberculosis – persist.
The incidence of diabetes in particular is expected to accelerate in many emerging markets and drive demand for pharmaceutical products. According to the World Health Organisation (WHO), the global prevalence of diabetes has nearly doubled since 1980 from 4.7% to 8.5%, growing most rapidly in low- and middle-income countries. On top of this, people are living longer, with estimates that the global population over 65 years old will increase by 8% between 2015 and 2020, from 559m to 604m.
Intellectual Property & Research
Despite this rising demand for products, local production and innovation in less-developed markets is still limited, due in large part to the human and other resources required to establish and enforce intellectual property rights (IPR).
Innovation does not come cheaply or quickly; McKinsey estimates that large-scale biotech manufacturing facilities require $200m-500m and take four to five years to build, with high annual operating costs. The International Federation of Pharmaceutical Manufacturers & Associations (IFPMA) notes that it takes 10-15 years to develop a new medicine or vaccine, and the cost can exceed $2.6bn. In established markets, governments typically grant IPR as an incentive to incur the costs of developing innovative products that can save lives and generate a return. As noted by the IFPMA, the pharmaceutical industry invests more in research and development (R&D) than any other industrial sector.
In contrast, in many emerging markets the written law and enforcement of it has often left major players wary of entering. If patent protection is not guaranteed, the anticipated returns for undertaking an expensive effort may not outweigh the costs. Another factor in many emerging economies is that the strongest need for research relates to diseases affecting populations that will not be able to pay high prices for products. Known as the “10-90” gap by the Global Forum for Health Research, R&D has historically focused only 10% of resources on diseases making up 90% of the global burden, including dengue fever and cholera, which primarily affect low-income populations in tropical environments.
Overall, the lower financial incentive to innovate has prompted debate over how to ensure these products are developed. Research from organisations like the OECD highlights that IPR reform – addressing patent protection, copyright and trademarks – is the way to drive positive economic results that benefit markets and provide the needed research. Others, including economist Joseph Stiglitz, have argued that there are other solutions that better balance the need to incentivise innovation with allowing for access to life-saving drugs, including increased support for research from centralised mechanisms or tax credits for innovative solutions.
Legal Framework Advancement
In order to help address this challenge, there has been steady progress with regard to the establishment of global mechanisms for IPR frameworks. Since 1994, the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, administered by the World Trade Organisation (WTO), has regulated intellectual property issues for WTO members, ranging from developed to emerging nations.
In addition, WHO Resolution WHA 61.21 on a Global Strategy and Plan of Action on Public Health, Innovation and Intellectual Property was adopted in 2008, and provides specific guidelines on how local production in emerging markets can promote innovation while still building local capacity and ensuring access to life-saving drugs.
Individual countries have also been making strides on the national level, at least on paper, adhering to a set of elements articulated by the WHO that make for a comprehensive and effective national pharmaceutical law, including control of marketing and supply (whether imported or domestic), procedures for mediating conflicts between parties, and a legislative framework that is aligned with national policy in the pharmaceutical sector.
Kenya, which joined the TRIPS Agreement in 2001 with the establishment of its Industrial Property Act is one example. This legislation is the basis for granting and regulating patents, utility models, technical innovations and industrial designs. It is complemented by the Pharmacy and Poisons Act, Cap. 244, which controls the manufacturing, trade and distribution of pharmaceutical products, as well as the 2008 Anti-Counterfeit Act, which prohibits trade in counterfeit goods, including pharmaceuticals.
The US International Trade Administration (ITA) also cites Qatar as a success story in terms of IPR legal frameworks. Qatar’s Ministry of Public Health requires registration of all products imported into the country, and will not register unauthenticated copies of products patented overseas.
Tunisia also maintains long-established pharmaceutical regulations; since 1942 the law has mandated that all pharmaceutical products, whether locally produced or imported, must obtain a certificate of approval from the Ministry of Health before being placed on the market.
Implementation Gap
Even if a country’s written rules align with international norms, one of the most important challenges remains the enforcement of these rules on the ground. In many markets, there remains a high incidence of piracy and counterfeits, which are often difficult to track.
According to a November 2017 WHO report, an estimated one in 10 medical products in low- and middle-income countries is either fake or substandard, which results in an estimated 10.5% failure rate of medications. Another issue when it comes to implementing written regulations is unreliable dispute resolution mechanisms; even if counterfeits are properly identified, the resolution process for companies can be long and unwieldy. In Nigeria, for example, drug producers still complain of a long and bureaucratic adjudication process, and global consulting firm PwC describes the “lack of meaningful patent legislation or pricing and reimbursement” as one of the key challenges for the development of the country’s pharmaceutical industry.
However, there have been some signs of progress. Jordan, for one, has seen intellectual property protection improve in recent years, according to the World Economic Forum’s 2016 Global Information Technology Report, which places the country 35th out of 139 nations on this metric. Furthermore, as highlighted by the ITA, Jordan’s drug industry generally abides by its TRIPS-consistent Patent Law and shows commitment to even stronger enforcement of IPR, particularly in the pharmaceutical sector.
Elsewhere, in Myanmar, “counterfeit products represent a massive issue for firms selling premium or original products,” Girish Wadhwa, president of the Myanmar office of Thailand-headquartered Mega Lifesciences, told OBG. “However, in 2015-17 companies saw improvement because of the Ministry of Health’s involvement, and the increased strength of the Food and Drug Administration.”
Côte d’Ivoire has also been making efforts to more effectively manage its pharmaceutical sector, reducing fraud and illegal sales. With reforms to government office the Public Health Pharmacy (Pharmacie de la Santé Publique, PSP), now known as the N-PSP, the agency manages the purchase and distribution of all pharmaceutical products, and has put in place software that tracks the flow of medications with the help of identification codes. The government is hopeful that this system will enable the authorities to track all pharmaceutical products from purchase to receipt. In Mexico firms have also seen increasingly strong enforcement of regulations.
Gurulinga Konanur, CEO of Hetero Drugs Mexico, told OBG, “Transparency is continuously gaining importance in Mexico, and enforcement has improved in recent years in previously unregulated areas, which is giving companies a higher comfort level when it comes to investing in the pharmaceutical sector or pharmaceutical research here.”
Public Support
In addition to drafting and enforcing strong pharmaceutical-related legislation, governments have taken a range of policy steps to promote drug production and research.
Cristóbal Thompson, executive director of the Mexican Association of Pharmaceutical Research Industries (Asociación Mexicana de Industrias de Investigación Farmacéutica, AMIIF), told OBG that the country employs a model of building bio-clusters that create government-industry alliances and bring jobs to various parts of the country.
“In the state of Querétaro, for example, AMIIF signed an agreement in December 2017 to further increase Mexico’s clinical research in the state and support an exchange of information that will help increase local investment there,” said Thompson.
On a national level, the Mexican National Council on Science and Technology administers incentive programmes that refund a percentage of company R&D-related expenses, including wages for staff involved in research, new studies, patents or copyrights, and tuition reimbursement for master’s and doctorate degrees relevant to R&D. Filed projects are now evaluated by state and local jurisdictions, and funds are allocated based on the technical value of the project and the local jurisdiction’s priorities.
In Saudi Arabia, developing the pharmaceutical industry is part of a series of efforts to diversify the economy, particularly in light of lower oil prices. As such, in February 2017 the minister of health, Tawfiq Al Rabiah, announced the government’s intention to support the industry under the National Transformation Programme 2020, and to increase the proportion of local pharmaceuticals manufacturing in the domestic market from 18% to 40%.
Ghana has been using tax incentives to support the sector. The Value-Added Tax Amendment Law, Act 590 implemented in 2015 increased the number of active pharmaceutical ingredients on the exemption list from 66 to more than 510 to facilitate domestic production and consumption, and make trade more competitive. Vietnam aims to raise activity in pharmaceutical R&D by liberalising its investment policy. Changes introduced in 2017 lifted the previous cap of 49% foreign ownership to attract interest from multinationals, which has already resulted in several mergers and acquisitions.
Resources
In addition to establishing and implementing legal and policy measures that stimulate drug production and research, aspiring research centres need further support from public and private entities that encourage R&D.
According to the WHO, only 4% of all global spending on health research is by low- or middle-income countries, funded primarily by public sectors. Emerging market players have long recognised this. A 2010 paper by the African Union, Council on Health Research for Development and the New Partnership for Africa’s Development Agency of the African Union provided implementation approaches that could lead to further R&D, arguing that states should be encouraged to allocate 2% of their national budget to research. Some markets have taken this approach. Kenya, for example, now has one of the highest R&D spending rates as a percentage of GDP for a lower-middle-income country (0.22%, compared to 0.07% for Africa overall and 0.02% for lower-middle-income countries).
In addition to a lack of physical resources to incentivise pharmaceutical innovation and growth, there is often a shortage of skilled labour. The WHO estimates that there are 352 times more health researchers in high-income countries than in low-income countries, and neither multinational nor local companies will have success in R&D without a team of highly skilled experts to oversee operations.
Indeed, the Strategy& survey found that sourcing and keeping strong local talent remains a key concern for pharmaceutical firms conducting research or looking to break into a new market. This is another area where Mexico has made strides. Konanur told OBG, “Mexico’s public universities are developing courses or diplomas in more specific subspecialties in biotechnology, pharmaceutical chemistry and bioengineering that were not previously offered in order to meet market needs, and grow a professional pool of people who can do this work.”
Clinical Trials
Developing markets are also increasingly focusing on clinical trials, which can serve as an entryway into R&D. According to a 2015 Deloitte Access Economics report, an estimated $320m was spent on clinical trials in Thailand in 2015, with more than 111,000 participants. Pharmaceutical companies sponsored 38% of the trials.
“Thailand’s growth in R&D is mainly in clinical trials, which contribute 0.05% of GDP and allow firms to go further in the upstream with drug discovery know-how and in the downstream from registration to the manufacturing global supply chain,” Busakorn Lerswatanasivalee, president of the Pharmaceutical Research & Manufacturers Association in Thailand, told OBG. “Particularly given the health issues of Thailand’s ageing population, clinical trials can be the starting point for tropical disease clinical research and innovative drugs.”
In 2015 the Pharmaceutical Manufacturers Association of Turkey cited local law firm Fırat Izgi’s prediction that “clinical trials may increase in Turkey, as investments in R&D are on the rise among both multinationals and local companies alike. Universities are investing heavily in R&D as well, and they will receive support from the Turkish government.”
Mexico has also made clinical trials a key component of its pharmaceutical development strategy, with current investment levels of around $250m expected to triple in the next three to five years. “Three years ago, when we worked on the strategic plan with the government, we highlighted clinical trials as key to capitalising on the global annual $140bn in investment in the health care sector, given that eight out of every 10 dollars spent is on clinical research,” Thompson told OBG. “One of our studies even showed that for every additional dollar spent on research there is $1.64 in added value, and every new job in clinical research adds more than four jobs in the market. So when we saw that there were delays in getting clinical research protocols approved, we started working with authorities to see how we could accelerate this, and have achieved huge progress. We have cut down approval time to 60-70 days, and within one year Mexico hopes to be in line with the top clinical trial hubs in the world.”
Konanur also highlighted how efficient the Mexican government has made the process for conducting clinical research, telling OBG, “Mexico has been opened to R&D by the government, which is highly supportive of any pharmaceutical company seeking to invest in research. This includes approval systems that provide the required permissions within an established and relatively short time frame.”
Provided the trials are conducted in an ethical and scientifically rigorous way, the potential benefits for companies conducting their clinical research in emerging markets are vast. Not only are operational costs lower, but the ability to work with previously untested populations on diseases specific to a certain market could provide life-saving results and products that are in high demand.
Generics
The burgeoning generics industry can provide lower-cost alternatives for desperately needed medications, and production is on the rise. For example, it is estimated that between 2013 and 2020, Africa’s generics market will have expanded at a compound annual growth rate of 9%. While generally comprising the same active ingredients as their branded predecessors, generics do not bear the same development costs, ultimately allowing for lower sales prices and greater sales volumes.
In Nigeria, for instance, currency fluctuations in 2017 made consumers more price sensitive, increasing the market for lower-cost, generic drugs. Similarly, in Tunisia, efforts to reduce health care expenditures and improve access to medicines have led to a rise in the production of generic drugs, which account for two-thirds of local output.
Some markets also see the long-term opportunities for local pharmaceutical players as cost-effective producers of generics for export as well as local consumption. Several Egyptian pharmaceutical companies, for instance, are looking to export to less-developed markets in sub-Saharan Africa, as well as Yemen, Iraq, Sudan and Libya.
While increased access to medication is clearly positive, the expansion of generics, including those produced legally – modelled on drugs for which patents have expired or those that were never patented, for example – their use presents a challenge in that it reduces the incentive for pharmaceutical companies to invest in R&D for new products. Thailand, which implemented its sweeping Universal Coverage Scheme in 2001, has been pursuing the production of generics. However, although affordable generics are appealing to customers in the short term, this slowdown in the development of innovative products will be a future issue, particularly in countries like Thailand with large, ageing populations.
Striking A Balance
Ultimately, markets are likely to work towards a balance between supporting the development of generics to ensure short-term access to products while still providing incentives for much-needed medical innovation in the longer term.
There have been some success stories on this front. In Egypt, which has the highest incidence of Hepatitis C infections in the world, according to WHO estimates, health officials first reached a deal with US company Gilead in 2014 to purchase its patented treatment at a discounted price. Today, 18 Egyptian companies have a licence from the US innovator to locally produce the drug Sofosbuvir, which allowed for the treatment of more than 1m patients from mid-2015 to the beginning of 2017.
Similarly, in Kenya, with the aim of improving local access to essential AIDS medications, local companies Cosmos and Universal Corporation were granted voluntary licences under TRIPS provisions to manufacture treatments developed by patent holders GlaxoSmithKline and Boehringer Ingelheim.
Industry experts have also highlighted branded generics as a sound strategy to ensure high-quality products are developed, but at a price where they have a local market. These off-patent products, which include the same ingredients as the brand-name version, often fetch higher prices than unbranded generics because consumers will pay to buy the product from a trusted manufacturer, even if they cannot afford the full price of the branded version. For instance, EastPharma, a Turkish pharmaceutical firm, acquired the rights to manufacture eight Roche-branded generics registered in Turkey.
As emerging markets and companies both increasingly recognise the rapid growth in demand for pharmaceuticals, and the value that can be gained from conducting pharmaceutical R&D locally, interest in entering these markets is likely to continue rising. According to the Strategy& survey, 60% of the multinational respondents were considering investment in local R&D activities in emerging markets.
At the same time, domestic pharmaceutical companies are becoming interested in competing with these multinational firms, capitalising on their knowledge of consumer preferences, the price points for particular segments of the population and the availability of health insurance products. As the resources and legislation that govern more developed markets are put in place, the opportunities to gain knowledge of previously untested populations at a competitive price will be too great to ignore.
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