İlaç Endüstrisi / Pharmaceutical Industry

transcript

A.Eşari Yılmaz

Şerife Doğanay

Ali Kömür

PHARMACEUTICAL INDUSTRY

CONTENTS

GENERAL PROPERTIES OF PHARMACEUTICAL INDUSTRY ..................................................... 2

1. PHARMACEUTICAL COMPANIES ............................................................................................ 2

1.1. The Original Pharmaceutical Firms .......................................................................................... 2

1.2. The Generic Pharmaceutical Firms .......................................................................................... 3

2. THE COMPETITION BETWEEN PHARMACEUTICAL INDUSTRY ...................................... 4

2.1 The Competition In The Market ................................................................................................ 4

2.2 The Competition Between R&D ............................................................................................... 4

2.3 The Competition Between Original Pharmaceutical Firms ....................................................... 5

2.4 The Competition Between Original and Generic Pharmaceutical Firms .................................. 5

3. THE PATENT PROTECTION IN PHAMACEUTICAL INDUSTRY .......................................... 6

4. FOREIGN OWNERSHIP ............................................................................................................... 6

5. MERGERS AND ACQUISITIONS................................................................................................ 7

6. ORGANİZATİONS AND REGULATİONS .................................................................................. 8

6.1. Regulations Towards Providers ................................................................................................ 9

6.2 Regulations on Demand .......................................................................................................... 10

6.3 Regulations in the Distribution Stage ...................................................................................... 11

7. PHARMACEUTICAL INDUSTRY IN TURKEY ....................................................................... 11

8. PRICING IN TURKEY ................................................................................................................. 14

REFERENCES…………..…………………………………………………………………….............15

GENERAL PROPERTIES OF PHARMACEUTICAL

INDUSTRY

When the pharmaceutical industry is considered on the supply side it has a structure of intensive R&D

and promotional activities. Most of the time these activities are described as a barrier to enter the

market. After the delivery of drug to the market place successfully, leading companies try to protect

the brand loyalty with promotional activities and strives to maintain its market power. The most

important factor in the market place is patent. Patent provide the right of being monopoly to the firm

until patent rights are over. When the patent rights are over similar drugs are entered to the market

place by other firms. That’s why the market is formed by original and generic drugs. However this

classification is uncertain. Because sometimes the original drug firms can supply some kinds of

generic drugs to the market.

1. PHARMACEUTICAL COMPANIES

1.1. The Original Pharmaceutical Firms

The original drug firms conduct R&D activities continuously. In doing so, the firms make production

and marketing of their drug with patent. The business model of these firms are based on R&D.

According to E.U. Commission Report, 60% of original drug firms make production of

biotechnological products and research about them. (E.U. Commission Report, paragraph 51).

According to identified data in E.U Commission Report, original drug firms allocated 18% of their

budget to R&D to produce new or developed drugs in time period of 2005-2012.

Table 1: Annual Revenue to Cost Ratio of the Original Pharmaceutical Companies (%)

(Prescription Drugs, 2007)

According to a research which is made by Pharmaceutical Research and Manufacturers of America

(PHRMA) to supply innovator drugs to the market, it is needed to conduct a research of 12 or 15

years. When it is analyzed in terms of Money, to develop and innovator drug, on average, 1.3 or 1.6

billion U.S Dollars are needed.

Figure 1: Innovative Spent a Drug to Enter the Market Effort (US Case)

1.2. The Generic Pharmaceutical Firms

Generic drug is similar with original drug in terms of treatment. (Substitute drug). The entrance of

generic drug to the market place affects the price competition directly and R&D competition

indirectly. Generic drug firms are small scale according to original drug firms. Some of these firms

operate in global market but most of them are local firms

In E.U commission report, the business model of generic drug firms supply the substitute original drug

when patent right is over. Especially the successful ones from an economic perspective. (E.U

Commission Report, paragraph 89). The activities of generic drug firms provide sustainable R&D

activities. The competition that arise when generic drug firms enter the market place causes a decrease

in original drug firms’ revenue. That is why, the original drug firms have to discover new and

revenue-generating drugs to maintain their fixed cost and revenue level. (E.U. Commission Report,

paragraph 92) As you see on the table Generic drug firms' R&D cost is 7%, but if you remember, this

percentage is 18 for the original drug firms. The generic drug firms’ R&D cost are lower than original

drug firms. So, Generic drug firms have lower cost for the produce drug.

Table 2: Annual Revenue to Cost Ratio of the Generic Pharmaceutical Companies (%) (Prescription

Drugs, 2007)

2. THE COMPETITION BETWEEN PHARMACEUTICAL

INDUSTRY

The competition condition between original and generic drug firms is a function of product

differentiation. (Product differentiation= The physical change of the product to increase life of the

product). Because of the product differentiation strategy, the price competition in the sector is

imperfect competition.

2.1 The Competition In The Market

Original drug firms’ revenue is decreased by generic drag firms. So, when the price of original drug

decrease, the price of generic drugs increase on the other hand. There is a positive relationship

between the number of generic drugs and market loss of original drugs.

2.2 The Competition Between R&D

Figure 2: Firms’ Profitability under patent protection

In the figure above (Grabowski and Vernon 1994), profitability is shown starting in the R & D stage

of a patented pharmaceutical and in the period up to the end of the patent term in the US

pharmaceutical market. Accordingly, providers are folded into the R & D stage of sunk costs, but at a

later stage, is the period between the expiry of the patent to market the product reaches a certain

income level Profit is obtained. It is more than economic profit. Here, the pharmaceutical R & D

phase and the patent period, it is assumed that there are no immediate therapeutic substitution.

On the other hand, the critical R & D departments in the delivery of innovative products; increasingly

being difficult to prove the return on their R & D investments. This situation a significant risk on

behalf of the sustainability of innovation on a global scale. The development of an innovative drug in

2011, has an average cost of over 1 billion US dollars, compared to 2010 is 21% more expensive

(Measuring the Return from Innovation, Deloitte &Thomson Reuters). This situation is adversely

affected which sustainability related to research and development on a global scale.

2.3 The Competition Between Original Pharmaceutical Firms

In the competition model between drugs which are used in treatment of the same diseases but have

different active ingredient, after the entrance of innovator drugs there would be substitute drugs which

has different active ingredients in the market place. The most significant example is developments in

drugs market which are used in AIDS treatment. After the entrance of the first AIDS drug with patent

to the market in England (August 1996), the second and the third type of the first drug with patent

started to enter the market place which are use in AIDS treatment.(October, November 1996)

(Redwood 1997). These entrances cause an oligopolistic structure in the market. This situation

restricts market power with a pressure on the price of the drugs in free pricing conditions (Karakoç

2005, 23). The entrance to the markets which have a free pricing condition market the demand for

drug sensitive to its price. If price of that product increases, people substitute this drug with others.

As a conclusion we can say that as the number of similar drugs increase in the market, the demand for

the innovator drugs will decrease.

2.4 The Competition Between Original and Generic Pharmaceutical Firms

It is accepted that generic drugs are perfect substitute of original drugs. Therefore, with the end of the

patent protection, the firms’ entrance to the market which are generic causes to decrease market

volume of original drug firms. By the price competition in drug markets it is meant that, the entrance

of the generic drug firms to the market. The first firm which is entered to Pharmaceutical industry has

an advantage for pricing. The first firm in the industry charges a higher price but it don’t lose its

market volume. Because under the patent protection just this firm can produce active ingredients and

this causes the monopoly power (Scherer and Ross 1990 ).

The most significant barrier the generic drug firms face when they enter to the market is brand loyalty.

This situation causes the generic drug firms to turn to customers which are sensitive to price.

Therefore, the generic drug firms charge a lower price for their product than original drug firms.

The original drug firms do not give a discount when the generic drug firms enter to the market place

because there is a monopoly power which is based on brand loyalty and original drug firms’ costs are

more than generic drug firms’.

3. THE PATENT PROTECTION IN PHAMACEUTICAL

INDUSTRY

The patent protection is important to maintain the sustainability of R&D activities (Karakoç 2005). On

the other hand patent protection provide market power to the firms and this causes a imperfect

competition. Also patent protection restricts the entrance to the active ingredient market and this is an

advantage for the existing firms to increase their revenue in this market. Under the patent protection,

the drugs in the market increase the market volume and provide a high profit margin.

Figure 3: Impact of Data Protection and Development of the Market Volume Price - Concept

Screening

4. FOREIGN OWNERSHIP

The Pharmaceutical Industry has an international importance and international trade because it is base

on information and intensive R & D investment. That is why, it is not possible to say national industry

for the pharmaceutical Industry. The order of the biggest Pharmaceutical Industry in the World are

following; The U.S.A, Japan, China, France and Germany. Turkey is fifteenth in this order. The

importance of this industry in Turkey increases day by day. Also for Pharmaceutical Industry it is

impossible to be national industry because an intensive capital is needed for R&D activities.

5. MERGERS AND ACQUISITIONS

The need for intensive capital for R&D lead to firms to mergers and acquisitions. The Sector Turnover

Ratio of Research and Development Expenditures are higher in Pharmaceutical industry than any other

industry.

Figure 4: Sector Turnover Ratio of Research and Development Expenditure.

Source: The Pharmaceutical Industry in Figures 2011, EFPIA

This situation causes to increase the merger and acquisitions of firms in recent years. Also possible to

say that the merger of the company with the highest amounts. Finally, merger and acquisitions are

seen as a way to increase sales and reduce costs.

Figure 5: Number of Acquisitions & Mergers

Source: Reinventing Innovation in Large Pharma, Deloitte

Table 3: Acquisitions and Mergers Giant in the Last Decade

Source: Alternative Incentive Schemes for Pharmaceutical Investments in Turkey, Deloitte

6. ORGANİZATİONS AND REGULATİONS

Complexity of the pharmaceutical industry is caused to be subjected to regulation of the

sector.

Basic regulation in the sector can be grouped under four main headings including the

regulation of

- The quality of products and entry of market (licensing)

- Prices, profit margins and earnings of suppliers

- The demand sector

- The activities of the distribution channel.

The regulation for the sector's economic operation excels in countries where the state or state

agencies covered by the financing of health spending as in Turkey. What is meant by

economic regulation; providers (price, the profit margin, gain control, etc.), demand sector

(contributions, drug budgets, etc.) and the activities of the distribution channels (profit

margin, forced substitution, etc. can be given drugs to generics in the prescription.) is the

control.

6.1. Regulations Towards Providers

Patent protection is caused to leads to obtaining market power by the patent holding company.

Obtained the patent period of market power, and the average price of its activities makes it

difficult for new entrants to the market and leads to remain at high levels. Public authority

uses a variety of tools in order to break this structure. The objective is to prevent the prices are

not too high, and ensuring that patients achieve the proper conditions to the drug.

6.1.1 Price Controls

Price control is a market regulation that limited to pricing for providers based on the capacity.

Although independently determine the price of the products, it is reflected in the increase in

inflation or exchange rates.

Indirectly controls are possible out of the price to be determined directly by the public

authority.

6.1.1.1. Equivalent Pharmaceutical Applications

Equivalent Pharmaceutical Applications, equal/equivalent with drugs are grouped together,

the maximum reimbursable amount is determined for this group and the price of those

individuals who want to take over this amount of drug is a financing method that meets the

pocket the difference.

6.1.1.2 Profit Controls

Profit controls is a system that prices were not determined directly by the regulatory authority

and enters into the category of indirect price controls. In this system, profit levels of the drug

dealers are taken under control in level of company or product. It was first applied in the UK

(Jacobzone 2000, 38).

Products on the basis of the profit control, each product are determined for a certain profit

margin , taking into account the costs associated with production In the profit-regulation at the

level of provider , the price of any product not determined and providers decide price of the

product within the specified margin in firm-level.

6.2 Regulations on Demand

In price regulation the amount of consumption of the drug cannot be controlled. Therefore,

additional measures are taken demand-side with control prices. They are more doctors

prescribing behaviors and emerge as measures limiting consumption of patients.

6.2.1 The Regulations on Doctors

The demand for drugs is determined significantly by doctors. Doctors prescribing behavior is

influenced by some factors. Among these; doctors approach of physicians located and non-

financial and financial incentives and promotional activities. It is difficult to change doctors'

prescribing behavior and identify although it requires a multidimensional approach in this

direction, there are some applications that are implemented. Keeping mandatory generic

prescribing among the most widely referenced applications, financial with / without

incentives, there is surveillance and control of prescribing.

6.2.2 Controls For Patients

Demand-side arrangements for patients, presentation of information and occurs in the form of

cost sharing. Regarding the treatment to increase the importance of the decision making

process of the patient; adequate, reliable, and the correct of access to information is required.

The health authorities and reimbursement agencies is also applied to the financial measures of

the patients to ensure to be more sensitive to drug consumption. Cost sharing or participation

more known method called the share of health insurance payments are based on the meeting

of his pocket a portion of the expenses in cases where the individual concerned.

There are two main objectives of these cost-sharing; Limiting the reduction of costs and

unnecessary drug use. The most important effect of cost sharing is known on lower income

customers. Because elasticity of demand is greater than the high-income populations.

6.3 Regulations in the Distribution Stage

This section will focus on the regulation on pharmacies. Pharmacies performs sales to

individuals who are low knowledge level and price elasticity. Therefore, the basic

expectations of pharmacy regulatory authorities, informing patients about medications and

drugs is to sell at least above the maximum price. The purpose of the Regulation is directly

related to the restriction of pharmacy profit margins by controlling spending. On the other

hand, it is referenced in order to facilitate market entry of generic medicines and there is an

important role in the control of expenditure in substitution applications realized by the

pharmaceuticals.

7. PHARMACEUTICAL INDUSTRY IN TURKEY

A lot of statements regarding structure and properties of pharmaceutical industry is also pertinent to

the human pharmaceutical market in Turkey. An important part of the large and medium-sized

companies operating in our country are controlled by the global capital. In addition, sales prices to

wholesalers are adopted by reference of the EU member states and foreign based companies are set

their decisions to submit or not a new drug to Turkey market according to global profitability. In

Turkey drug market, the government are both the biggest rule maker and recipient.

According to the data of year 2011, two countries, the US and Japan has the largest pharmaceutical

market in the world. Turkey, on the other hand, is the 15th largest pharmaceutical market in the world.

When Turkey is analyzed in terms of production, is the 16th largest pharmaceutical market. Turkey’s

share of the global market is about 1% (AİFD 2012, İEİS 2011). Although low compared to Europe,

Turkey pharmaceutical market; is the sixth largest pharmaceutical market in Europe after France,

Germany, Italy, England and Spain (EIU 2011).

Graph 34: Turkey Pharmaceutical Market Development (Billion US $)

Source: Business Monitor International, BMI* Estimated Value Represents.

It is possible to look at the distribution of drugs in Turkey both domestic and imported or generic and

original. When the analyses the market distribution between domestic and imported drugs with the

based on medicine box, we can say domestic drugs has a high market volume than the imported drug.

This ratio was 75% in 2011. Level is the amount of money seems to be around 49% of the weight of

the domestic pharmaceutical. At the same time it is observed that there is an increase in volume ratio

of imported drugs over the years.

Chart 89: Imported - Domestic Distribution

Source: AİFD

At the same time it is observed that there is an increase in volume ratio of imported drugs over the

years.

Table 10: Turkey Pharmaceutical Market distribution of imported - domestic

Source: AİFD

Abdi İbrahim comes first with the highest turnover at about 1 billion TL sales volume in Turkey. Abdi

Ibrahim is followed by Novartis and Bilim İlaç. Looking at the sales figures of the largest 20 firms,

realize 80% of all drug sales in Turkey. Abdi İbrahim is partnering with Japanese pharmaceutical

company Otsuka in order to increase profit margin in global markets. Also Abdi İbrahim created new

brand in their body for dominate the market. It is called Abdica .

Table 11: Top Revenue Owner Companies in Turkey Pharmaceutical Market

Source: İEIS, 2012

This case shows that we have a strong infrastructure and competitiveness of the Turkish

pharmaceutical industry.

8. PRICING IN TURKEY

Pricing in Turkey was regulated with “Decision on Pricing of Pharmaceuticals for Human Use”.

According to the this regulation;

-5 to 10 countries of EU member countries are determined as “reference country” each year. (France,

Italy, Greece, Spain and Portugal were designated as the reference countries,

-The reference price for any drug, the price of the original product in those countries where price is the

lowest in the country,

-The price of the original drugs will not exceed the reference price until the generics enter market,

when the license given to the generics, price will be maximum 60 % of the reference price

-The generic products that their original is not in Turkey may be maximum 60 % of the reference price

which registered in Ministry,

-In the case of that deviating excess of 5 % from upper and lower limits of Euro that determined by the

Commission, it was agreed that the Commission will evaluate the price with extraordinary meeting.

THE RESULTS

As a result the intense of R&D activities in the pharmaceutical sector are considered as barriers to

entry to the market. The patent is the most important factor in the market. Firms act a monopoly until

the expiration of the patent. Firms have a market power with using the patent rights, this situation

would cause imperfect competition. When the patent right expires, similar drugs enter the market and

eliminates the effect of monopoly and the firm's profit drops significantly. So, entrance of the

substitution drugs in the market causes the formation of sector which oligopolistic and consist of

intense competition in product market. The increase of the substitution drugs leads reduce original

drug fırms' demand.

REFERENCES

DAVIDSON and GREBLOV "The Pharmaceutical industry in the Global Economy",2005

Deloitte, International Investors Association "Türkiye Sağlık Sektörü Raporu",2012

E.U. Commission (Competition DG), "Pharmaceutical Sector Inquiry-Final Report",2009.

KARAKOÇ, H. D. "İlaç Sektöründe Fiyat Rekabet", Rekabet Kurumu Uzmanlık

Tezleri Serisi, Ankara, 2005.

KARAKOÇ H. D. "İlaç Sektörü Nasıl Daha Rekabetçi Olabilir: Sektörün Yapısı ve

Rekabeti Artırmaya Yönelik Politika Önerileri", Sağlık Hukuku Sempozyum No: 3-4,

Marmara Üniversitesi Hukuk Fakültesi, s. 77-101, 2008.

İlaç Endüstrisi / Pharmaceutical Industry

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