Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the August 7, 2007 issue of the Bangkok Post.
By Zoya Vassilieva
The centre of gravity of the global pharmaceutical industry is shifting. Not only is Asia set to be the largest pharmaceutical market in the world, but many Asian territories will be powerhouses of the industry.
According to a recent survey by PricewaterhouseCoopers, the overwhelming majority of pharmaceutical industry insiders agreed with this view. The survey, Gearing up for a Global Gravity Shift, is based on in-depth interviews with 185 senior pharmaceutical executives across nine different territories in the region: China, India, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.
While the pharmaceutical markets differ significantly among these nine countries, there are a lot of commonalities in the way the industry is changing in the region, and what issues concern pharmaceutical companies most.
What has prompted the global pharmaceutical industry to shift to Asia, and which Asian countries stand to benefit?
The shift started as economies grew and low-cost manufacturing in the region expanded. China, India and Singapore are poised to become leading countries in the Asia pharmaceutical space. India and China have emerged as major suppliers of several bulk drugs, producing these at lower prices compared to formulation producers worldwide. Other territories, notably South Korea, Malaysia, Thailand, Taiwan and Hong Kong are also building strong domestic pharmaceutical bases.
Is there competition within the countries of the region to attract industry players?
The race is very much on between countries to lure international players by offering grants, incentives and infrastructure support. Again, India and China are emerging as the key markets for inbound investment by global pharmaceutical players.
What kind of pharmaceutical investment activity are we seeing in China?
In recent years, we have seen many companies follow the example of Xian Janssen (Johnson & Johnson) who set up in China in the early 1980s. In 2006, Novartis announced a US$100-million investment in a new R&D centre in Shanghai's Zhangjiang Hi-Tech Park close to Roche's R&D centre, while at the same time building a new API plant in Jiangsu province.
Earlier in 2006, AstraZeneca set aside $100 million for a new R&D centre, set to start operations by the end of 2009, while also investing heavily in their manufacturing site in Wuxi.
In addition, Dutch State Mines (DSM) formed a joint venture with North China Pharma Group and is investing more than $100 million while building a new facility for nutritional supplements. Baxter, Bayer, Roche and Pfizer are all investing in new or existing manufacturing sites in the country.
What is the pharmaceutical market like in India?
The Indian clinical trials market is worth about $120 million currently and is expected to reach $1 billion by 2010. Contract manufacturing, worth $350 million currently, is also expected to reach $1 billion by 2010. There are 85 United States Food and Drug Administration (FDA) approved active pharmaceutical ingredient (API) and formulation plants located in India, the highest such number outside the United States.
How are the pharmaceutical markets in China and India different?
While China's domestic pharmaceutical industry is largely focused on generic manufacturing of brand-name drugs and researching traditional Chinese medicine, Indian domestic manufacturers have risen above the generics label and are now undertaking serious drug discovery contract research for big companies.
What is the pharmaceutical market like in Thailand?
As of 2006, Thailand's pharmaceutical market was worth about $2 billion. It is the second largest pharmaceutical market in Southeast Asia, following Indonesia, and the fastest-growing. The growth of Thailand's pharmaceutical industry is expected to be about 10-15% per year over the next five years (compared to 5.5% growth for the Philippines and 10% for Indonesia).
The majority (64%) of drugs are distributed through hospitals (out of which 80% are through government hospitals and 20% through private hospitals), 26% through drugstores and the remaining 10% through health centres, private clinics and direct sales. The prescription sector accounts for approximately 56% of total sales value.
How has the pharmaceutical industry structure in Thailand changed in recent years?
As global pharmaceutical companies have been consolidating their manufacturing bases, they have selected other countries, rather than Thailand, to establish their regional manufacturing headquarters. In the past, as many as 10 multinationals manufactured their drugs in Thailand, including Glaxo-Welcome, Waner-Lambert, Takeda, Hoechst and Schering-Plough. Today, none of them have their own production facilities in the country, and instead they outsource drug manufacturing for products sold locally to domestic contract manufacturers.
At the same time, domestic manufacturers focus on formulating drug products from imported active ingredients and manufacturing generic products. In contrast to other countries in the region, specifically China, India, Singapore and South Korea, no API is produced in Thailand.
Is Thailand seeing any investment in R&D?
In contrast to the growth in China and India, no MNCs in Thailand have invested in building R&D centres here, although a few are involved in clinical trials and some R&D projects. One such project is the three-year R&D venture started in 2005 between Novartis and Biotech, a government agency. According to the company's representatives, it was attracted to Thailand because of the country's research facilities, quality of its researchers and its commitment for further development of its research capacity.
The government agency has stated its intention to actively promote clinical trials and R&D capabilities, especially in the areas of tropical diseases (malaria, dengue fever, and tuberculosis research) and pharmaceutical genomics. It is currently working with Singapore on outsourcing clinical trials for some global pharmaceutical companies.
How do intellectual property (IP) rights affect an MNC's decision on where to set up a base?
The subject of IP licensing still dominates the agenda for MNCs. Schering-Plough, for instance, chose Singapore as its manufacturing and R&D hub in Asia, mainly due to the country's comprehensive regime for the protection of intellectual property rights. Compulsory licensing is viewed by the industry as a government's bargaining chip and the most likely outcome is that the drug companies will lower prices and the Thai government will issue no fresh threats.
What are the challenges ahead for domestic Thai manufacturers?
Major challenges for domestic manufacturers are expected with the implementation of the Asean Free Trade Area (Afta) agreement in 2010. Elimination of tariffs and non-tariff barriers among signatory countries is expected to significantly increase cross-border trade and, hence, competition in Thailand as many Indian and Chinese companies are expected to enter the market with their products and potentially look for acquisitions.
Local manufacturers will have to create competitive advantages, such as reducing pricing or increased quality. The good news is that the impact will not be felt immediately, as the countries are still working on harmonising or standardising the registration requirements.
In Part II of this article on Aug 21, we will look at how pharmaceutical companies are planning to expand in the region, and what issues they should take into consideration before doing so.
The above is based on the results of a recent PricewaterhouseCoopers' survey, entitled Gearing up for a Global Gravity Shift: Growth, Risk, and Learning in the Asia Pharmaceutical Market.
