Looking ahead to a challenging year

Asia is emerging as a rival to the US as a leading source of drug discovery and high end innovation. Both clinical trials activity and investments by drug majors are set to expand in Asia, with India and China leading the charge. But the Indian, Chinese and Philippino governments are proposing to increase price controls on medicines, and lax intellectual property laws across the region could hinder growth.

When assessing the outlook for the global pharmaceutical market, ‘Asia’ tends to be viewed as single entity. In fact, the markets of this region are developing in different ways and at different speeds, says Asia correspondent A Nair.

In a bid to push through and surface among the Top 5 global pharmaceutical markets, the medicines industries of Asia are developing at markedly different speeds and are characterised by both contrasting and similar macro environments.

Asia is emerging not just as a drug manufacturing powerhouse but also as a rival to the US as a leading source of drug discovery and high end innovation. Both clinical trials activity and investments by drug majors are set to expand in Asia, with India and China leading the charge, fuelled by the increased consumer spend on drugs and enormous domestic demand.

The challenges are as varied as the countries that comprise the Asian pharmaceutical sector, which are projected to have a total pharmaceutical market value of US$69.1bn (€53.1bn) by 2016.

Primary and secondary healthcare services in India are set to see more investments from the corporate sector, with the Indian government doubling the country’s healthcare budget to 2.5% of GDP (gross domestic product). Indian drug makers are expected to join the league of Big Pharma in terms of sales, with the total value reaching $50bn (€38.5bn) in the next five years from the $12.6bn (€9.7bn) recorded in 2011. This will account for about a third of the world’s total growth. India boasts 169 US FDA approved plants and a pharma sector that has been growing at an enviable rate of 14% to 16% per annum.

In China, drug sales are expected to increase by $40bn (€30.8bn) over the next five years. Expansion is likely to be driven by demographic changes such as a rising middle class and the increased prevalence of chronic illnesses like diabetes and heart failure. The Chinese pharmaceutical market, currently the fifth biggest in the world, is set to rise to the third spot by 2013, according to IMS Health.

However, two key policy changes in India in 2011 are threatening to upset the applecart. The government has initiated greater scrutiny of foreign direct investment in local drug companies and the proposal to expand price controls to contain healthcare costs could well obstruct the pace of the Indian drug sector.

Although India’s generic drug industry grew by 16% between April and December 2011 compared with the same period a year ago, a major dampener was the draft National Pharma Policy that is committed to increasing price control to 400 drugs from the current 74 in the country’s essential medicines list. The move is likely to cap prices of about 75% of drug formulations sold in India.

Similarly, in China the Ministry of Health and the National Development and Reform Commission implemented two rounds of drug price reductions in 2011, in March and in September. Most of the drugs reduced were manufactured by multinationals, which had previously not been subject to pricing controls.

The Indonesian pharmaceutical market is projected to grow at a high single-digit CAGR in US dollar terms and is set to be the sixth largest pharmaceutical market in the Asia Pacific region by 2016

Moreover, in July 2011, the ministry of health in China revealed that it might introduce a mandatory licensing policy to secure cheaper drugs for HIV/AIDS patients as part of the country’s universal health coverage programme. Yunnan still holds the dubious distinction of having more HIV infections and AIDS patients than anywhere else in China.

That is not to say that other regions in Asia are not going to face challenges in 2012. The complete lack of r&d in Indonesian domestic companies could severely crimp the market. Due to the sheer size of the population, the Indonesian pharmaceutical market is projected to grow at a high single-digit CAGR in US dollar terms and is set to be the sixth largest pharmaceutical market in the Asia Pacific region by 2016. However, despite the country possessing huge manufacturing capabilities, its lax intellectual property regime could pose a major hurdle.

legislative changes

In the Philippines, which has some of the highest drug prices in the world, changes brought about by the controversial Cheaper Medicine Act are set to affect the Philippines pharmaceutical market in a number of areas, including intellectual property laws and drug price control mechanisms. Several drugs have seen price reductions of up to a half and the immediate term is expected to be most volatile with the government battling with the international drug industry.

According to Y K Hamied, chairman of Indian drug major Cipla, Asian firms face many challenges. ‘The combination of patent expiration of main revenue generating drugs, competition from generic versions of branded drugs, and increasing r&d costs is forcing drug makers across Asia to look for strategies to cut costs and speed up the r&d processes,’ he said.

He was of the opinion that the most dramatic shift would be coming from the Chinese government, which recently announced a massive programme to boost healthcare spending; this is currently 4.5% of GDP, compared with 16% of GDP in the US. The country has earmarked $125bn (€96bn) for healthcare with a goal of attaining universal coverage by 2020. Cipla had recently invested in biotech companies in China.

G Ram Prasad, general manager at S Amit, a chemistry solutions provider in India catering to chemicals, intermediates and speciality chemicals, said China is racing ahead of the pack. ‘The Chinese market grew at 20% in 2010. With public private partnerships, Chinese GDP was $9 trillion (€6.9 trillion) in 2009 as compared with $2–4 trillion (€1.5–3 trillion) in other [countries]. China offers products at prices that are 5–15% lower than the other BRIC countries. The challenges are many, but their government is supporting the domestic industry,’ he said.

Although the global financial crisis enhanced the importance of Asia, notably India and China, to many drug companies around the world that were seeking cost reductions, Asian companies are reviewing and improving their operating models, as they contemplate the multiple issues constraining the pharmaceutical industry around the world and at home.

‘There has been a paradigm shift in the use of innovative drugs. Following the economic recession, there has been a shift to low cost API drugs. Asian drugmakers are set to benefit,’ said Omkar Patwardhan, sales officer at Thomas Baker Chemicals, which manufactures and exports a comprehensive range of fine chemicals and laboratory reagents.

Despite concerns over counterfeiting and low efficacy of generic products, intellectual property rights protection and manufacturing standards are improving across Asia, thanks to effective national regulations and foreign investment and joint ventures with multinational companies.

Daiichi Sankyo has been marked out as ‘one to watch’ in what will be a ‘happening year’ in the Japanese market

‘The trio of India, China and Japan are soon to be the “hotspots” of the Asian pharmaceutical sector, even as Korea and Taiwan are going to be increasingly significant. India has proved itself as an excellent value proposition for global pharma companies, most of whom are leveraging India’s cost competitiveness and large pool of technically skilled chemists and manpower,’ said Chetan Sekdar, sales manager at Brenntag Specialities, a distributor of speciality and industrial chemicals.

Investment banking firm M P Advisors has noted that 2012 would be a ‘happening year’ for Japanese pharma. The next layer of reform that will come into force from April will have a further impact on rapidly changing scenarios, largely supporting generic companies. With select innovators from Japan holding value in terms of their r&d effort, 2012 will unfold much of this value and create investment ideas. Multinational companies are not going to keep away from this market and are set to merge, consolidate and align with the indigenous developments, suggested N Mehta of M P Advisors.

The challenge for Japan is to start looking outside its domestic markets for its future growth as the market reaches saturation

The company predicts that corporate players to look out for in Japan will be Chugai, on account of its approaching r&d milestones; Daiichi Sankyo with its maturing hybrid model; Towa, backed by favourable reforms; and Torii, which is set to leverage value through its partners. But M P Advisors also notes that Eisai will lose much of its value in 2012.

While the challenge for Japan is to start looking outside its domestic markets for its future growth as the market reaches saturation, the pharmaceutical industry in China too will have to come to terms with excessive competition. More than 6,000 companies exist and the top 10 companies hold less than 10% market share; in contrast, in India the market share of the top 10 companies is more than 30%. Excessive competition among domestic drug makers in Asia will lead to paper-thin margins, starving the companies of much needed cash to fund process improvements or drug development.

Although the various countries in Asia will undeniably face a multitude of challenges as they develop their domestic base, given their traditional resourcefulness and determination Asia’s place within the global pharmaceutical sector is clearly set to grow in prominence in 2012.

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