The Contribution of Multinational Pharmaceutical Companies

In the Development of Pakistan Economy

Chapter 2 – Review of The Literature and Studies

REVIEW OF THE LITERATURE AND STUDIES

RELATED LITERATURE

THE PHARMACEUTICAL INDUSTRY IN PAKISTAN

♣
The Pakistan pharmaceutical industry is a high technology, essential and
even strategically important industry that numerically represents the single
largest collective multinational investment in Pakistan; i.e. 31 dedicated and
fully committed foreign companies. It is an industry which manufactures a
wide range of research based life saving and life-enhancing medicines. It is
a major contributor to the health of the Pakistani people, and to the
economic well being of the country. Without a strong domestic
pharmaceutical sector, which directly supplies almost 80% of our nation’s
total pharmaceutical needs, Pakistan would have fewer resources to pay for
adequate health and social care.

The pioneers of the pharmaceutical industry in Pakistan were several public

sector concerns, which had been operating here since the perpetration year
(prior to 1947). All along, the research based multinational pharmaceutical
companies played a key and increasing role in making an enormous
financial investment, transferring technology, and providing the latest
innovative excellent quality medicines to the deserving consumers
throughout the country. With the passage of time first the import and sale of
foreign medicine started, and in the 1950’s and 1960’s, the country
experienced the establishment of a large number of multinationals in the
pharmaceuticals business. With the introduction of the generic system in the

Manual of Hart Man.

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 The Contribution of Multinational Pharmaceutical Companies
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Chapter 2 – Review of The Literature and Studies

early 1970’s, local companies were encouraged to begin large-scale

production but they confined themselves to a few products only.
Subsequently, the reversal to the branded product system favored the
MNC’s, which possessed strong international brands and adequate funds for
promotion and advertising. This led to a gradual withdrawal of national
companies from the market. At present, the total foreign investment in the
pharmaceutical sector is estimated at RS. 2.8 billion. However, fresh foreign
investment has become rare, as new companies prefer third party
manufacturing rather making own fixed investment.

Originally, the Pakistan’s pharmaceutical industry principally engaged in the

packing and distribution of imported medicines. Even now, the manufacture
of drugs is limited, due largely to non-availability of raw material. The
industry has emerged as a processing and conversion industry, which is
engaged mainly in converting raw material in to different dosage forms, and
packaging of the finished products.

According to the Ministry of health, there are about 250-270 licensed units
producing medicines and related goods in the country. Although it may
appear that this industry is highly fragmented, in actuality only 20 MNCs
hold nearly 60% of the market share. Therefore, the organized sector may be
defined as oligopolistic structured. At present there are 16 pharmaceutical
companies listed on the Karachi Stock Exchange, all but two (Ferozsons
labs and Zafa) being subsidiaries of multinationals.

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 The Contribution of Multinational Pharmaceutical Companies
In the Development of Pakistan Economy
Chapter 2 – Review of The Literature and Studies

♥
LIST OF THE 31 RESEARCH BASED MULTINATIONAL
PHARMACEUTICAL COMPANIES CURRENTLY OPERATING IN
PAKISTAN:

USA COMPANIES:
1. Abbot Laboratories Pakistan limited
2. Cyanamid Pakistan Limited
3. Merck Sharp & Dohme of Pakistan Limited
4. Parke Davis & Company Limited
5. Smith Kline & French of Pakistan Limited
6. Bristol-Myers Squibb Pakistan (Private) Limited
7. Wyeth Laboratories(Pakistan) Limited
8. Upjohn Pakistan (Private) Limited
9. Eli Lilly Scientific Office-Pakistan
10. Johnson & Johnson Pakistan (Private) Limited

BRITISH COMPANIES:

1. Beecham Pakistan (Private) Limited

2. Glaxo-Wellcome Pakistan Limited
3. ICI Pakistan Limited
4. Reckit & Colman of Pakistan Limited
5. Reckitt & Colman Pharmaceuticals (Private) Limited
6. Smith & Nephew Pakistan (Private ) Limited
7. Woodwards Pakistan (Private) Limited

GERMAN COMPANIES:


Publication of Overseas Investors Chamber of Commerce & Industry (O.I.C.C. & I.)

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 The Contribution of Multinational Pharmaceutical Companies
In the Development of Pakistan Economy
Chapter 2 – Review of The Literature and Studies

1. A.D.Marker (Private) Limited (E.Merck)

2. Bayer Pharma (private) Limited
3. Boehringer MannHeim GmbH*
4. Hoechst Pakistan Limited
5. Knoll Pharmaceuticals Limited (formally Boots)
6. Schering Asia GmbH, Pakistan Branch*

SWISS COMPANIES:

1. Ciba-Geigy (Pakistan ) Limited

2. Roche Pakistan Limited
3. Novartis Pakistan Limited (formally Sandoz)

JAPANESE COMPANY:

1. Otsuka Pakistan Limited

DUTCH COMPANY:

1. Organon Pakistan (Private) Limited

FRENCH COMPANY:

1. Rhone Poulenc Rorer Pakistan (Private) Limited

* Member company of Pharma Bureau

Table 1:
COMPARISON OF PERFORMANCE OF MAJOR PLAYERS IN THE
PHARMACEUTICAL INDUSTRY

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 The Contribution of Multinational Pharmaceutical Companies
In the Development of Pakistan Economy
Chapter 2 – Review of The Literature and Studies

COMPANY MARKET CAP. NET P/E RATIO EPS

EARNINGS
Glaxo 215.62 109.81 32.40 5.09
Abbot 100.58 71.61 24.02 7.12
Wellcome 65.54 133.78 12.04 20.42
Knoll 64.02 77.23 18.48 12.07
Wyeth 35.00 39.23 21.77 11.21
Hoechst 69.45 11.92 68.70 1.72
Sandoz 57.02 13.07 58.44 2.29
Parke-Davis 19.58 49.54 13.84 25.28
SK&F 45.00 13.22 46.63 2.94
Cynamid 59.81 19.09 28.88 31.82
Avg. Avg.
TOTAL 731.62 538.50 32.52 12.00

Ψ
More specifically the domestic industry prepares drops, tablets, capsules,
injections, powders and ointments from imported basic chemicals. At
present, about 1000 different drugs are available in Pakistan. About 16,000
formulations have been registered in different dosage forms and strengths,
5,000 of which are for local production and the remainder in respects of
imports. Since the industry is primarily engaged in packaging and
formulation, investment in equipment and machinery is relatively low. Low
depreciation charges are a hallmark factor in inflating the bottom line.
Backed by the R&D and technology of globally recognized parents, local
subsidiaries have virtually zero capitalized R&D expenditures on their
books. The major competitors regularly engage in BMR (Balancing,
Modernization and Replacement) activities and try to solicit Maximum
advantage from the marketing, sales and production expertise of parent
companies.

The induction of process technology is slow since basic manufacture is just

beginning. A capacity utilization factor of 65-76% implies that economies of
scale are not being optimized by the industry. The biggest opportunity lies

Manual of Abbot Laboratories (Pvt.) Ltd.

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Chapter 2 – Review of The Literature and Studies

in the Government incentives to basic manufactures. Backward integration

and supplier control can streamline the operations of key players, resulting
in lower input.

A NOTE ABOUT PHARMA BUREAU

The Pharma Bureau of Information & Statistics of the overseas investors,

Chamber of Commerce & Industry came into being in October, 1998, when
small group of like minded research based multinational pharmaceutical
companies felt the need to have their own separate forum. This need was
felt because the problems and issues confronting overseas investors in the
pharma industry were manifolds and diverse, and required a focused and
concentrated approach in projecting and solving common collective
business interests for the group. Since then the membership has grown, and
today 29 multinational companies, out of a total of 31 companies, currently
manufacturing and marketing a wide range of excellent quality research
based human pharmaceuticals products, are the members of the bureau.

The current specific objectives of the Pharma Bureau are:

To work closely with the relevant government authorities, and primarily
with the Federal Health Ministry in Islamabad, in resolving ongoing
outstanding issues of prime importance to the pharmaceutical industry in
general, and the multinationals in particular, as follows:

a) Price

To work towards an acceptable system of automatic maximum retail price

level fixation and subsequent periodic price increases, based upon an
approved method of indexation linked to inflation, for various categories of
medicines, which would lead to a complete decontrol of prices for all

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Chapter 2 – Review of The Literature and Studies

categories, with products finding their own price levels according to the
dictates of market forces (intense inter-company competition) for each
therapeutic segment.

b) Transfer Pricing

To works towards a just and amicable settlement of the Transfer Pricing

issue, and to ensure that the Government adopts a fair, reasonable and
acceptable policy for research based multinationals, for whom the entire
issue of Transfer Pricing is an integral part of their vary business existence
throughout the world, because of the huge investments made in the research
and development of newer and better drugs.

c) Ease of Product Registration Procedures

To work towards a satisfactory system of registering new drugs from time to

time according to established norms and laid down guidelines, thereby
making the existing cumbersome and lengthy procedures more easily
workable.
d) Protection of intellectual property rights

To emphasize to the authorities that the Pakistan government must not only
continue to respect international patent laws, but to vigorously support,
monitor and promote such intellectual property rights within Pakistan
particularly for the pharmaceutical industry, in which multinational research
based companies provide innovative vital ongoing research at great expense
and over a very long time frame. To work towards atleast a 16 years period
of firmly enforced patent protection in Pakistan for all patented products.
Furthermore, to pursue the need that such patent protection is extended to
products (compounds) and just processes.

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Chapter 2 – Review of The Literature and Studies

e) Positive changes in the Health Administration set-ups

1. To help and encourage the government to constantly bring about

improvements and changes in the structure and workings of health
administrations throughout the country, and also in the rules and
regulations which are meant to govern the import, manufacture, sale,
stocking, distribution and ethical promotion of human and veterinary
medicines.

2. To maintain a valuable data bank for industry related statistics, for the
benefit of the Bureau’s members, as well as for the information of
interested government agencies and other interested persons and
groups.

3. To constantly improve the overall image of the pharmaceutical

industry in general, and the research based companies in particular,
through sound public relations.

A BRIEF NOTE ABOUT THE O.I.C.C. & I

ℵ
The Overseas Investors Chamber of Commerce and Industry (O.I.C.C. & I)
stemmed from and superseded the Karachi chamber of commerce, which
was founded in 1860, and is the oldest chamber of commerce in Pakistan.
To conform to the government’s policy of rationalization, the present name
of the chamber - Overseas Investors Chamber of Commerce & Industry was
adopted in 1968. The Chamber has 163 members, of whom 76 are industrial


Publication of overseas Investors Chamber of Commerce & Industry (O.I.C.C. & I.)

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 The Contribution of Multinational Pharmaceutical Companies
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undertakings, 58 in trading, 20 in banking, 9 in insurance and shipping. The

nationalities represented are:

60 British 41 European
33 American 12 Japanese
6 Middle Eastern 2 Canadian
9 others

The 29 members companies of the Pharma Bureau, which are all industrial
undertakings, represent 38% of the total 76 manufacturing units. As a group,
the 31 multinationals operating in the industrial sector of the O.I.C.C. & I.
represent 41% of the total number of manufacturing units. Numerically
speaking, the 31 pharmaceutical members represent the largest single
overseas group investment in Pakistan.

Membership is open to companies wherein more than 25% equity is in the

hands of the foreign nationals, branches of foreign companies, or
individuals. The membership represents approximately RS. 15 billion in
equity, of which the foreign apportion is RS. 10 billion. The sales of these
companies constitute 4% of the country, and 20% of the GNP of the
manufacturing sector. Between them they contribute nearly one sixth of the
total tax revenue of the government of Pakistan, and employ over 50,000
people.

The chamber’s main function is to promote and protect the commercial,

industrial and financial interests of foreign investors engaged in commerce
and industry in Pakistan. It also collaborates with the government in
promoting private foreign investment.

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The chamber projects the views and relations of its members to policy
makers, and is often called upon to assist in formulating government policy
in the financial, commercial and industrial businesses operating in the
country.

One of its more important objectives is to ensure that members views are
heard and given due consideration by the government, while forming and
implementing policies for the country’s socio-economic development. The
chamber also takes up with the authorities, difficulties encountered by its
member firms arising from the administration of such policies.

PRICE CONTROLS: A KEY ISSUES

THE PRICING FORMULA

The maximum retail prices of drugs and the ministry of health under the
Drug Act of 1976 control medicines. The current pricing formulae are as
follows.

A. Imported drugs

The maximum retail price is calculated by adding a 40% mark-up to the cost
and freight price. The mark-up includes the import license fee, the insurance
fee, distribution expenses and the profit of the importer and seller.

B. Local drugs

The maximum retail price is equal to the prime cost plus the mark-up. The
prime cost includes the cost of raw and packing materials while the markup

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Chapter 2 – Review of The Literature and Studies

covers the profit of the manufacturer and the retailer. It also includes
administration, sales promotion, distribution, worker welfare, R & D,
gratuity and education fees charges etc.

THE PRICE ISSUE

The single most important issue currently facing the companies is that of
pricing. Prior to 1970, there were no government regulations regarding the
initial fixation or the subsequent increase in the retail prices of
pharmaceutical products. The prices were determined according to the
market forces of demand and supply. The import of raw materials and
finished goods only required standard commercial licenses.

Towards the end of 1970 the standard import licenses were replaced by cash
-cum-bonus-licensing system to greatly bolster the country’s exports and
improve the country’s foreign reserves. Since this was not entirely
successful, an element of price controls crept into government policies.
Between 1970 and 1990 the industry had to face a range of controls and
restrictions. Due to this the industry suffered very badly. The
pharmaceutical companies were allowed price increases on a case to case
basis and even those few companies that did receive permission to raise
their prices were not able to adequately cover their losses due to inflation
and devaluation.

In 1990, the government introduced a wide range of reforms to reinvigorate

the economy. A key issue in these reforms was the pricing formula for
pharmaceutical products which, with its crude mechanism, was working to
the detriment of the industry and was destroying healthy competition.

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 The Contribution of Multinational Pharmaceutical Companies
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Chapter 2 – Review of The Literature and Studies

Keeping in mind the importance of the industry, the Economic Coordination

Council (ECC) constituted a committee to examine the existing controls on
the pharmaceutical industry and its possible deregulation, to evolve a retail
pricing formula for drugs, to suggest measures to increase local production
and to review the overall drugs registration system. After conducting an
extensive study and consulting with the pharmaceutical industry and the
various professional bodies, the committee came up with the following
recommendations.

1. Classification of drugs into three categories

Category A comprising of drugs identified as life saving and whose

prices should be controlled.

Category B comprising drugs, which are widely used and in the

leading brands market dominance would require a check on the prices
for sometime.

Category C would cover all the remaining brands where no control is

required.

2. Within the above framework, the normal market forces should be

allowed to operate without any restrictive controls on the retailer’s
margin and other discounts. The retail price of the drug should be
marked clearly on the packages and the changes in the prices would
require approval by the Ministry of Health.

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Chapter 2 – Review of The Literature and Studies

3. In order to provide transparency in the price indexation, the

government may announce each year an indexation, based on
inflation and changes in the rupee’s parity.

The Drug Act of 1976 empowers the ministry of health to regulate the prices
of drugs and medicines. For the last two decades, regulatory authorities and
producers, especially MNC’s have been at loggerheads over pricing, since
profits and social welfare became competing goals. The retail prices of
drugs are the same, whether they are produced by national or multinational
firms. However the industry relies on imports for 90 to 95% of raw
materials, which represents about 60% of the total product costs.

Therefore, MNCs contend that controlled prices lead to losses because of

the steady depreciation of the Pakistani rupee: rising costs of production
material, wages and power charges; and non recovery of research and
development costs. More specifically the depreciation of the rupee has
escalated raw material costs alone by 35% over the last few years. In
addition to this, other inputs like electricity, gas transport and labour etc,
have risen by approximately 150% over the past few years.

As a consequence of strict price control, the industry underwent a shakeout

in 1992 when 89 “mushroom” concerns went under. In June 1993, the
previous government attempted to deregulate drug prices, which sky
rocketed in no time at all. By January 1994, regulatory measures were
reenacted.

The drug market was divided into three strata:

Category A: including 289 lifesaving drugs

Category B: including 527 medications classified as semi-essential

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Chapter 2 – Review of The Literature and Studies

Category C: vitamins and food supplements, which are termed non-essential

Category A and B, accounting for about 72% of the market were placed
under price controls, while products falling under category C were
decontrolled. Furthermore, the industry gave an undertaking that price
increases even for decontrolled drugs would be gradual. To separately
reassure the public, MNCs decided in February 1994 to voluntarily restrict
price increases to an agreed level with the government, as well as impose a
price freeze until end June 1994. In end June 1994, this price freeze was
voluntarily extended by the industry for an additional period of three
months. However, once the free market forces were allowed to interact, the
prices shot up by almost 100%.

Though the prices of raw materials of the pharmaceutical products have

been falling, the prices in Pakistan continued to rise. The main reason for
this is that the drug market, in its present form, is very monopolistic and the
absence of anti-trust laws has also lead to the present situation in which
prices are fixed amongst the pharmaceutical giants. In some cases the prices
of the drugs are 50% more than the prices in the international market.

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