“It is not the strongest or the most intelligent who will survive but those who can best manage change.” ― Leon C. Megginson Industries in Pakistan are under constant pressure these days due to changes in the world economics and its subsequent impact on Pakistan. As the major concern of every industry is to maximize its profits, in the given circumstances it seems difficult to achieve the same. Profit maximization can be achieved by either, efficiently running the production, procuring raw material at competitive prices or achieving economies of scale. The one who finds the optimal combination of all three is considered to be the fittest of us all. These factors become much easier for us to achieve if we adopt new and innovative methods of producing goods by reshaping our working standards. We would like to mention that in our last few reports we have been trying to motivate the industry in taking initiative to make things better by taking steps towards innovation and creating something big. We cannot deny the fact that doing so exposes us to higher risks but it is high time that we realize that taking risk is better than staying behind. Looking at the industries internationally and locally it would not be wrong to say that technological advancement is the fundamental pillar of revolutionizing any industry. Technological advancement has helped industries to grow faster, saved time and reduced cost of doing business. The rate of technological advancement is increasing with time; industries are considering, creating and developing easier ways to uphold businesses. The major concern that is being discussed among the pharmaceutical industry from time to time are the rigid policies of Drug Regulation Authority of Pakistan (DRAP). Spreads between selling price and cost of production are shrinking everyday as the policy does not let producers to set the desired price considering their real cost of production. The prices have been frozen from 2001 and 2012 and within these years the cost of production has nearly doubled. The new policy seems a bit favorable allowing a gradual price increase but it doesn’t do much good either as it’s based on the increase in Consumer Price Index (CPI), and market participants have reservations regarding the way it is derived. Since cost of producing pharmaceutical products is continuously increasing and shaking the dynamics of profit maximization, it is perceived that soon smaller companies will start to incur losses rather than profit. Though fighting for a better pricing policy is a necessity for this industry but there is a different perspective of looking at this problem. The rigid policies of DRAP are there for the betterment of living standard for the citizens. Why don’t we work in creating and exploring more efficient ways of producing the same medicines, why can’t we work towards technology advancement, why can’t we lower the cost of production and achieve economies of scale by merging various smaller pharmaceutical producers into lesser big scale manufacturers? AUGUST 2018 Survival of the Fittest
Transcript
“It is not the strongest or the most intelligent who will survive but those who can best manage change.” ― Leon C. Megginson Industries in Pakistan are under constant pressure these days due to changes in the world economics and its subsequent impact on Pakistan. As the major concern of every industry is to maximize its profits, in the given circumstances it seems difficult to achieve the same. Profit maximization can be achieved by either, efficiently running the production, procuring raw material at competitive prices or achieving economies of scale. The one who finds the optimal combination of all three is considered to be the fittest of us all. These factors become much easier for us to achieve if we adopt new and innovative methods of producing goods by reshaping our working standards. We would like to mention that in our last few reports we have been trying to motivate the industry in taking initiative to make things better by taking steps towards innovation and creating something big. We cannot deny the fact that doing so exposes us to higher risks but it is high time that we realize that taking risk is better than staying behind. Looking at the industries internationally and locally it would not be wrong to say that technological advancement is the fundamental pillar of revolutionizing any industry. Technological advancement has helped industries to grow faster, saved time and reduced cost of doing business. The rate of technological advancement is increasing with time; industries are considering, creating and developing easier ways to uphold businesses. The major concern that is being discussed among the pharmaceutical industry from time to time are the rigid policies of Drug Regulation Authority of Pakistan (DRAP). Spreads between selling price and cost of production are shrinking everyday as the policy does not let producers to set the desired price considering their real cost of production. The prices have been frozen from 2001 and 2012 and within these years the cost of production has nearly doubled. The new policy seems a bit favorable allowing a gradual price increase but it doesn’t do much good either as it’s based on the increase in Consumer Price Index (CPI), and market participants have reservations regarding the way it is derived. Since cost of producing pharmaceutical products is continuously increasing and shaking the dynamics of profit maximization, it is perceived that soon smaller companies will start to incur losses rather than profit. Though fighting for a better pricing policy is a necessity for this industry but there is a different perspective of looking at this problem. The rigid policies of DRAP are there for the betterment of living standard for the citizens. Why don’t we work in creating and exploring more efficient ways of producing the same medicines, why can’t we work towards technology advancement, why can’t we lower the cost of production and achieve economies of scale by merging various smaller pharmaceutical producers into lesser big scale manufacturers?
AUGUST 2018
Survival of the Fittest
Number of Pharmaceutical Firms Number of Pharmaceutical Firms by Province In Pakistan (Estimates by IMS) One of the ways to achieve efficiency and reducing cost of production is to have a good procurement policy for raw materials / intermediates and this is where API producing companies can play a very effective role. Active Pharmaceutical (API) industry has great potential in Pakistan as we have 700 plus pharmaceutical companies against only a hand full of local API producers. This leads to a huge number of companies importing APIs. If new entrants would come up to address domestic demand of API, it would be a win-win situation for both API producers as well as the formulation companies. Distribution of Drug Consumption in Pakistan International trade affair always brings in hurdle and uncertainty. As mentioned in our previous report, what we need to understand is that no matter how well a company negotiates with the international sellers, they are never able to compete with the same molecule produced locally (price wise). The prices offered by local producers are always lower than import of the same material as local production is partially dependent on US$ to PKR conversion rate, compared to imports which are 100% sensitive to the depreciation of PKR. There might be few instances where the imported material might cost lower then local production but such inefficiencies and disparities are rare. In the recent times most of the companies that import APIs have been more concerned regarding the procurement of raw material rather than concentrating on their core job of producing and selling quality products. Had these companies been procuring the raw material locally, they would have been less concerned about the US$ movement. In our opinion in order to be more profitable the formulation companies should emphasize more on their core activities rather than trading in the raw material market, leaving the trading market to the local manufactures.
Having said that formulation companies are the ones that can play a major role in strengthening domestic companies producing raw materials not only because we need our domestic API producing industry to grow, but also because it would be favorable for them as they do not have to invest their time and efforts managing foreign exchange parities. Domestic / Local Currency transactions are way more convenient for any local formulation company as compared to imports.
Leading Molecules in Pakistan
In our opinion it’s time for the formulation companies to gird up their loins as DRAP is expected to strengthen their policies further making them more stringent in the next few years. This would create a difficult time for the smaller manufacturers but on the brighter side the consumers would be enjoying better and quality life. National Policy and Action Plan (NAP) has been developed which is now part of the Mid Term development Framework (2005-2010) of the Planning Commission of Pakistan. In accordance with this Action Plan, more than PKR 2.0 Billion (USD 40 Million) have been spent over the past few years for developing the infrastructure. Strengthening of industries is the first goal of NAP. DRAP has already started their working on making this industry stronger and free of counterfeit drugs producers and for that the pharmaceutical industry has praised DRAP for implementing the ‘barcoding and serialization’ system to help check sale of counterfeit and spurious drugs. As per a press release, the barcodes would provide all information about the batch numbers, expiry dates and the genre of medicines. The DRAP stated that 390 medicine manufacturing companies had already implemented the barcode policy. The complete enforcement of the barcode would help eradicate spurious medicines from the market. Concluding our argument we would like to acknowledge the fact that DRAP is actually going in the right direction. We do agree that in some scenarios they over do things but in a bigger picture whatever policies they establish are for the betterment of the living standard of general public. These policies are expected to get more and more stringent going forward so in our opinion it is the right time for pharmaceutical producers to gear up and be ready for stricter rules and regulations. Now is the time, as the ones who start preparing themselves to face difficult times will survive going forward. These policies might not be established right now but in the next few years we expect to see serious infrastructure changes in government agencies. On the other hand the pricing policy still remains unfavorable shrinking the overall margins of the pharmaceutical industry; hence achieving economies of scale seems the only path for survival and might also be a game changer for this industry.
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