Parvez M Chowdhury Analyst: Pharmaceuticals and Consumer Goods

Transcription

1 Parvez M Chowdhury Analyst: Pharmaceuticals and Consumer Goods parvez@bracepl.com An overview of the pharmaceutical sector in Bangladesh July 2010 Introduction The pharmaceutical market in Bangladesh remains tiny compared to the population size because of the lack of spending power of the population. Pharmaceutical spending is also amongst the lowest in the world in per capita terms. Healthcare expenditures consist of only 3.4% of GDP. However, the increased awareness of healthcare and the government s increased expenditure in this sector is causing the demand to increase in this sector. In addition to the demand of therapeutic drugs, the demand for wellness drugs such as vitamins and minerals are increasing gradually and the future growth of the sector lies in it. Surprisingly, the pharmaceutical sector, which is widely regarded as a hi-tech industry, is the most developed among the manufacturing industries in Bangladesh. Roughly 250 companies are operating in the market. According to IMS, a US-based market research firm, the retail market size is estimated to be around BDT 55 billion, which grew by 16.8% in The market size in 2008 was BDT 47 billion with a growth of 6.9%. The actual size of the market may vary slightly since IMS does not include the rural market in their survey. However, the deviation is estimated to be not more than 5-10% in either direction. Unfortunately, there is no solid information source in Bangladesh other than IMS. The retail market is about 90% of the total market. In that respect, the total market size is more than BDT 60 billion. One of the fastest growing sectors with an annual average growth rate consistently in the double digits, Bangladesh s pharmaceutical industry contributes almost 1% of GDP. It is the third largest tax paying industry in the country. Bangladeshi pharmaceutical firms focus primarily on branded generic final formulations using imported APIs (Active Pharmaceutical Ingredients). Branded generics are a category of drugs including prescription products that are either novel dosage forms of off-patent products produced by a manufacturer that is not the originator of the molecule, or a molecule copy of an off-patent product with a trade name. This definition is used by both the FDA and the United Kingdom's National Health Service (NHS). About 80% of the drugs sold in Bangladesh are generics and 20% are patented drugs. The country manufactures about 450 generic drugs for 5,300 registered brands which have 8,300 different forms of dosages and strengths. These include a wide range of products from anti-ulcerants, flouroquinolones, antirheumatic non-steroid drugs, non-narcotic analgesics, antihistamines, and oral antidiabetic drugs. Some larger firms are also starting to produce anti-cancer and antiretroviral drugs. Table 1: Health expenditure as a % of GDP Total expenditure on health as % of GDP UK USA Japan India Sri Lanka Pakistan Malaysia Thailand Indonesia Bangladesh Source: World Health Statistics 2010, WHO Table 2: Pharmaceutical sector growth rate Year Growth Rate % % % % % % % % % Source: Bangladesh Association of Pharmaceutical Industries (BAPI) We initiate this sector research in an attempt to present an overview of the sector. Within this research we will cover the state of the sector, it s strengths and weaknesses, and finally the overview of some leading pharmaceutical companies.

2 Although the sector has a long way to go, the reasons we are optimistic about the sector can be summarized in Figure 1. We believe that the strengths outweigh the weaknesses. Figure 1: Strengths and weaknesses of the pharmaceutical sector in Bangladesh Growth potential of the domestic drug market In order to get a sense of what might potentially be the size of the drug market let us consider a simple model. Here we assume that the economy will have an average GDP growth of 6%. The economy will witness an uptrend in healthcare expenditure because of the growing health consciousness and the increased demand for wellness drugs as well as government expenditure. This means that drug and nondrug healthcare expenditure will increase at about the same pace. So, we also assume that the percentage spent on drug as part of total healthcare expenditure will remain similar current level, which is about 28%. These simple assumptions present an impressive growth upside of 83.6% by 2015 with a 6 year CAGR of 10.7%. Recent growth figures have proved to be better than the projection, which demonstrates that the growth prospect of the sector is justified. Table 3: Growth potential for domestic drug market GDP (MM BDT) 6,149,432 6,518,398 6,909,502 7,324,072 7,763,516 8,229,327 8,723,087 Healthcare Expenditure % of GDP 3.4% 3.6% 3.8% 4.0% 4.2% 4.3% 4.4% Healthcare Expenditure (MM BDT) 209, , , , , , ,816 Drug/Medicine Sales (MM BDT) 60,000 67,341 75,347 84,072 93, , ,144 Average GDP Growth Rate 6.0% Growth Upside 83.6% CAGR 10.7% Source: Bangladesh Bank, WHO, IMS Health and analyst s estimate 2

3 Market players Domestically, Bangladeshi companies including the locally based MNCs produce 95%-97% of the drugs and the rest are imported. Although about 250 pharmaceutical companies are registered in Bangladesh, less than 100 are actively producing drugs. The domestic market is highly concentrated and competitive. However, the local manufacturers dominate the industry as they enjoy approximately 87% of market share, while multinationals hold a 13% share. Another notable feature of this sector is the concentration of sales among a very small number of top companies. The top 10 players control around two-third of the market share while the top 15 companies cover 77% of the market. In comparison, the top ten Japanese firms generated approximately 45% of the domestic industry revenue, while the top ten UK firms generated approximately 50%, and the top ten German firms generated approximately 60%. Figure 2: Market share concentration MNCs 13% Others 20% Top Ten 67% Source: BAPI and newspaper reports Square Pharmaceuticals is the stand out market leader with a market share of 19.3% which posted domestic revenue of BDT 11.2 billion in the last four quarters (Apr 09 - Mar 10). Their nearest competitors are Incepta Pharmaceuticals and Beximco Pharmaceuticals with market shares of 8.5% and 7.6% Figure 3: Domestic market share of companies ACI Limited Acme Laboratories Aristopharma Square Pharmaceuticals Sector Beximco Pharmaceuticals Eskayef Pharmaceuticals Renata Limited Incepta Pharmaceuticals Opsonin Pharmaceuticals Drug International Source: Newspaper reports Top Ten Company Growth Apr 09 - Mar % 8.0% 13.6% 13.9% 18.4% 22.0% 27.3% 28.5% 31.0% 31.7% 39.2% Table 4: Domestic market share of companies Top Companies Revenue April 09 - March 10 Market Revenue 2009 Market (MM BDT) Share (MM BDT) Share Square Pharmaceuticals 11, % 10, % Incepta Pharmaceuticals 4, % 4, % Beximco Pharmaceuticals 4, % 4, % Opsonin Pharmaceuticals 2, % 2, % Eskayef Pharmaceuticals 2, % 2, % Acme Laboratories 2, % 2, % Renata Limited 2, % 2, % ACI Limited 2, % 2, % Aristopharma 2, % 2, % Drug International 2, % 2, % Sanofi-Aventis 1, % 1, % GlaxoSmithKline 1, % 1, % Novo Nordisk 1, % % Sandoz % % Novartis % % Others 13, % 13, % Total 57, % 54, % Source: BAPI and newspaper reports respectively. Incepta and Beximco had BDT 4.9 billion and BDT 4.4 billion in domestic sales for the last four quarters. Although a number of MNCs are operational in Bangladesh market, no MNCs are in the top ten in terms of domestic sales. Because Bangladesh API capacity is insignificant, pharmaceutical companies import approximately 80% of their APIs. Fifteen to twenty Bangladeshi firms are involved in the manufacture of about twenty APIs, but they usually run the relatively easier final chemical synthesis stage with API intermediaries, instead of the complete chemical synthesis. The other 1,000 required APIs are imported. Approximately 75-80% of the imported APIs are generic. 3

4 Table 5: Pharmaceutical Import to Bangladesh (USD Million) All Products Pharmaceutical Product Import Pharma % of Total 0.35% 0.46% 0.46% 0.41% 0.31% 0.34% 0.29% 0.29% 0.36% YoY Growth for Pharma 18.18% 12.82% 2.27% -8.89% 21.95% -2.00% 26.53% 29.03% Source: Bangladesh Bank, Bangladesh Bureau of Statistics Sourcing of APIs and raw materials Bangladesh has a competitive disadvantage when compared to India, since pharmaceutical manufacturing is not backward-integrated. Most APIs have to be imported, and even if the API is manufactured in Bangladesh, the raw materials have to be imported. This generates higher factor costs, especially in cases where the provider of the API is a competitor in selling the finished product. Building up backwards-integration for all relevant APIs is not a realistic option: scale disadvantages and infrastructure constraints are more relevant in the early stages of the value chain, where the products have a strong commodity character. Figures 5, 6: Organic Chemicals and Pharmaceutical Products Import to Bangladesh Organic Chemicals Import to Bangladesh Pharmaceutical Products Import to Bangladesh Others Others Indonesia Hungary U.S.A India Japan Italy Taiwan Belgium Germany Netherlands Malaysia Germany Republic of Korea France Singapore Denmark China Spain India MM BDT Switzerland MM BDT 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8, ,000 1,200 Source: Bangladesh Bank, Bangladesh Bureau of Statistics Availability of machinery, know-how and human resources The machinery for pharmaceutical manufacturing does also have to be imported. This places Bangladeshi companies at a cost disadvantage compared with Indian manufacturers who can source the machinery nationally. The leading manufacturers import most of their equipment from Europe or Japan, a fact they claim ensures quality advantages over their Indian competitors. Other manufacturers import machinery e.g. from China or India. Part of the cost may be compensated by export subsidies these countries are giving. However, when competing in international markets, it becomes a question of comparative export subsidizing in these countries: whether machinery exports being more or less subsidized than drug exports. Current drug market The therapeutic groups The most important therapeutic group in the Bangladeshi market are Systemic Antibiotics. They account for almost 30% of the market. The second therapeutic group, Anti-acids, are much less relevant in terms of 4

5 market, as well as from a public health perspective. Vitamins, Analgesics, Mineral supplements, Cough and Cold preparations and muscle relaxants also figure prominently. It is to be noted, that typical developed market therapeutic groups like those addressing diabetes, cardiovascular diseases, allergies or psychological disorders also are among the most important in Bangladesh, whereas HIV/AIDS and Anti-malarial drugs are not. API manufacturing In most cases, APIs have to be imported from abroad, which, together with the necessity to import machines, is one of the main disadvantages in terms of cost when compared to India. The leading manufacturers are therefore going into API manufacturing, focusing mainly on Antibiotics, but also other drugs, such as anticancer drugs. However, Antibiotics are particularly demanding in terms of manufacturing conditions, as GMP procedures require special care to avoid cross-contamination. For example, each API manufacturing line has to be in a separate building. For many APIs, the domestic market is too small to justify an API manufacturing plant. This stresses the fact that whereas several Bangladeshi manufacturers have the know-how to manufacture APIs, the initial investment and the production scale required are high. This means that in order to establish API manufacturing e.g. for Antiretroviral APIs in Bangladesh, the manufacturers would need to be sure of their access to several export markets. This barrier is unlikely to be taken without external support. Distribution channels Basically, there are three distribution channel systems in Bangladesh: public hospitals, private hospitals and private pharmacies. Public hospitals source mainly from the state-owned Essential Drugs Company Limited (EDCL), whereas private hospitals and pharmacies source from the private sector. However, public hospitals can also source from private pharmaceuticals through tender bids. As for the private Sector, there is a network of wholesalers, comprising of around 1200 wholesale medicine shops. Whereas small and medium scaled pharmaceutical companies sell to those wholesalers directly from the factory, the large companies usually have a complementing distribution network of their own: from their factories, the drugs are taken to a central depot in Dhaka, then to the zonal depots in the different regions and from there, they are sold both to wholesalers and to retailers through trained sales representatives or distribution assistants. Retail-sales of drugs in Bangladesh are allowed only under direct supervision of a pharmacist registered with the Pharmacy Council of Bangladesh. The licenses for retail pharmacies and for wholesalers are also being controlled by the Drug Administration of Bangladesh. There are close to 76,000 licensed retail pharmacies in the country, and an estimated 125,000 unregistered retail pharmacies. In addition, drugs like antibiotics can also be found in village shops etc. without proper supervision. Whereas the law foresees no OTC drugs, requiring all drugs to be dispensed through a prescription, in fact all medicines are available without any prescription. Bangladesh s drug distribution marketplace is composed of small independent pharmacies. Pharmaceutical firms can sell their products to private sector pharmacies, the government and its public health care facilities, or to international organizations operating in Bangladesh (e.g., UNICEF). Government sales are not as profitable as private sector sales because the government pays less, on consignment, and at times, after considerable delay. Pharmaceutical firms nevertheless still target pubic facilities because doctors become acquainted with the firms drugs and then prescribe them in their private practices. And, because drugs are not readily available at public facilities, patients receiving treatment there may still go to a private pharmacy to procure the required drugs. Without these public sector connections, many firms would turn more attention to the private sector. 5

6 Although there are approximately over 200,000 private pharmacies in Bangladesh, the government lists officially around 76,000 pharmacies. The rest are illegal, without a license or a licensed pharmacist on staff. Pharmacists have varying education levels and many lack adequate training. Most pharmacies are individual shops, though some chains are starting to develop, especially in urban areas. Large pharmacies generally buy medicines according to sales trends, e.g., what sells the most. The medium and small pharmacies generally have affiliation with a medical doctor. Their sales are therefore usually skewed towards that medical professional s preferences. Several brands of each drug, with variable quality levels, are on the market. In urban areas, the pharmacies tend to sell higher quality brands, whereas in more rural areas, pharmacies tend to sell lower quality, lower cost brands. This may be due to a district s local influences swaying brand selection. The pharmacies tend to have brands associated with people who hold power in that district. Those more distant from the city center consume increasingly more indigenous medicines such as ayurvedic and herbal medicines. Indigenous medicine has a sizeable market size of an estimated BDT 10 billion (about 15% of the total market). Majority of the users are from low-income bracket with little or no education. However, indigenous medicine is a niche market and it is generally not considered as a competitive threat to mainstream medicine. The top twenty pharmaceutical manufacturing firms have established extensive sales and distribution networks. Most pharmacies have pharmaceutical firms supplying their medicines daily. Hundreds of medical representatives of top pharmaceutical companies visit pharmacies daily to take drug orders. The success in sales for pharmaceutical companies have become extremely marketing oriented. They usually boost their sales by giving incentives to pharmacies and to doctors in the form of higher commission so that they would recommend their products to patients. On an average, a company incurs 10-15% of their total costs in this process. However, they usually hide these costs in their cost of goods sold. Since Bangladeshi firms produce low cost products, the gross margin actually is more than 60% for most of the companies. But because of this widespread practice, they usually report 45-50% in gross margin. Each pharmacy may receive approximately shipments per month from a particular company. Pharmacies do not usually restock any medicine that does not sell well. The small pharmacies keep a medicine for a maximum of six months. Who decides on the drugs to be consumed A significant number of drug consumers obtain drugs without a prescription. When consumers lack a prescription, they will usually either ask a pharmacist for a specific drug or describe their ailment to a pharmacist who diagnoses the problem and recommends a drug on the spot. Popular products include a variety of antibiotics, painkillers, and gastric remedies. Consumers purchase one to ten tablets or capsules at a time. The quantity of drugs purchased often depends more on the consumer s finances than on the required dose of medicine. Drug regulation The Directorate of Drug Administration (DDA), the national drug regulative authority, regulates drug manufacturing, import and quality control of drugs in Bangladesh. It belongs to the Ministry of Health and Family Welfare. The Directorate issues licenses for import of raw materials for different drugs and packed drugs from a 6

7 selected list to pharmaceutical companies and importers. It also monitors quality control parameters of marketed drugs through an agency called the Drug Testing Laboratory. DDA also administers vaccines and the indigenous systems of medicine called Ayurvedic and Unani systems. The Homeopathic system of medicine is not, however, under the regulatory control of the Directorate. There is, in fact, no regulatory body in the country for homoeopathic medicine perhaps for the practical reason that testing and monitoring methods are not standardized because of inadequate scientific understanding of the system. The system, indeed, has attained the status of a handy home remedy in Bangladesh and in other countries where it is practiced. According to executives of leading Bangladeshi drug exporters, administrative barriers to exports have been largely eliminated in close cooperation between the pharmaceutical industry and the Drug Administration. However, in order to export, a drug still has to be licensed in Bangladesh. Prevailing laws regarding drug regulations are as follows: National Drug Policy 1940 Drug Act 1940 Drug Control Ordinance 1982 Drug Control Ordinance 2004 National Drug Policy 1982 Drug Act 1940 The Drugs Act, 1940 is a law that regulates the import, export, manufacture, distribution, and sale of drugs in the country. It was originally enacted by the Government of India in 1940 and adopted by the Pakistan Government in 1957 in its modified form. It was adopted in Bangladesh in This Act seeks to regulate the import of drugs into the country, the manufacture of drugs, as well as sale and distribution of drugs. The Drugs Act permits the import of certain classes of drugs only under the licenses or permits issued by the relevant authority appointed by Government. In contrast to the control of the drugs manufactured in the country, quality requirements on imported drugs are very strictly controlled, thus successfully preventing Indian manufacturers, who could serve the Bangladeshi market at competitive prices, from entering the market. Licenses are also required for the manufacture and for the sale or distribution of drugs in the country. Regular control over manufacturing and sales is exercised by periodic inspection of licensed premises by drug inspectors who are specially appointed under the Act. Surveillance over the standards of drugs is maintained by taking samples from drugs, manufactured or offered for sale, and by testing in the Central Drugs Laboratory. Drug Control Ordinance 1982 The Drug Control Ordinance 1982 is an Ordinance which controls the manufacture, import, distribution, and sale of drugs in Bangladesh. It was promulgated in 1982 as additional to the Drug Act Through this Ordinance, the Drug Control Committee and the National Drug Advisory Council are constituted. Both gremia consist of a Chairman and a varying number of members appointed by the government according to necessity. Under this Ordinance, (i) no medicine of any kind can be manufactured for sale or be imported, distributed or sold unless it is registered with the licensing authority; (ii) no drug or pharmaceutical raw material can be 7

8 imported into the country except with the prior approval of the licensing authority; (iii) the licensing authority cannot register a medicine unless such registration is recommended by the Drug Control Committee; (iv) the licensing authority may cancel the registration of any medicine if such cancellation is recommended by the Drug Control Committee on finding that such a medicine is not safe, efficacious or useful; (v) the licensing authority is also empowered to temporarily suspend the registration of any medicine if it is satisfied that such a medicine is substandard; (vi) the government may, by notification in the official gazette, fix the maximum price at which any medicine may be sold and at which any pharmaceutical raw material may be imported or sold; (vii) no person is allowed to manufacture any drug except under the personal supervision of a pharmacist registered in the Pharmacy Council of Bangladesh; (viii) no person, being a retailer, is allowed to sell any drug without the personal supervision of a pharmacist registered in any Register of the Pharmacy Council of Bangladesh; and (ix) the government may, by notification in the official Gazette, establish Drug Courts as and when it considers necessary. The National Drug Advisory Council advises the government on the implementation of the national drug policy; on the promotion of local pharmaceutical industries and the production and supply of essential drugs for meeting the needs of the country and on matters relating to the import of drugs and pharmaceutical raw materials. Intellectual property legislation Bangladesh is a signatory of the GATT Uruguay Round and World Trade Organization (WTO) agreements, including the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). It is also a least developed country (LDC) and thereby is exempted by the Doha declaration from implementing patent protection for pharmaceutical patents until This only holds for countries that have not yet implemented a legislation that provides for such patent protection, though. It is therefore necessary to look at the Bangladeshi law: The Bangladeshi patent law dates from 1911 and was amended in The responsible government institution is the Ministry of Industries, Department of Patents, Designs and Trade Marks. The patent law is thereby largely the same as in India before adapting to the requirements of TRIPS in Although there have been disputes about the patentability of pharmaceutical products according to this law, it is reasonable to assume that the interpretation that was chosen in India, namely the patentability of pharmaceutical processes but not of pharmaceutical substances, can also be adopted in Bangladesh. Bangladesh is a member of the World Intellectual Property Organization (WIPO), and adhered to the Paris Convention on Intellectual Property in Although its intellectual property laws are often considered as outdated and enforcement as being weak, Bangladesh has never been on the US trade representatives "Special 301 Watch List. This List identifies countries that deny what the US trade representative considers adequate and effective protection for intellectual property rights. The industry after 1982 Bangladesh formulated its National Drug Policy (NDP) and established the Drugs Control Ordinance in 1982, to ensure availability, affordability and safety of essential drugs. The Drugs Control ordinance bans certain types of drugs from the market, limits the marketing rights of foreign companies and establishes a price control for both finished drugs and their raw materials: Bans: Combination drugs are only allowed in cases where single drugs are not available or not costeffective; Sale and manufacturing of drugs with limited therapeutic usefulness (e.g. cough mixtures, throat lozenges) or with abuse potential are prohibited. Foreign Companies: foreign brands are not allowed to be manufactured under license in Bangladesh if similar products are being manufactured in the country. Multinational companies that do not have an own production facility in Bangladesh are not allowed to market their products even if manufactured in the 8

9 country by toll / contract manufacturing (manufacturing by a Bangladeshi company on behalf of the multinational). Price Control: 150 drugs were defined as essential drugs. For those, level prices are fixed for the finished drugs as well as for their corresponding raw materials. No manufacturer can set maximum retail prices for their goods beyond that limit. Changes in these level prices are decided by the Drug Control Committee. Since 1993, the number of price-controlled drugs has been reduced to 117 primary health care drugs. However, currently there are 209 drugs on the essential drugs list. For drugs that do not fall into this Controlled Category, the manufacturer can set their own price, which must, however, be approved by the Drug Control Committee. This resulted in withdrawal of many foreign companies from the market in which they had had a share of around 70% in 1970, and strong growth in local production. This also created a boon for local pharmaceutical manufacturers. According to the Directorate of Drug Administration records, in the year 2002, all the essential drugs were produced locally and about 45% of the local drugs production concerned essential drugs. Locally produced drugs amount to over 80% of the market share and meet over 90% of the local drug demand. There are over 200 licensed pharmaceutical factories in the country, six of them are owned by multinational companies producing about 13% of the local production. 85% of the raw materials used in the local production are imported. Only about 1 % of the locally produced drugs is exported. Global export market Due to cost pressures, MNCs increasingly seek to manufacture pharmaceuticals in developing countries. Pharmaceutical contract manufacturing and research services is a large and growing business. Worldwide revenues totaled $100 billion in With a predicted average annual growth rate of 10.8%, revenues are estimated to reach $168 billion by Pharmaceutical firms in Bangladesh exported approximately $45.67 million (approximately 0.03% of the estimated global pharmaceutical market revenue) in products to 73 countries during Bangladesh s exports are growing rapidly, as shown in the table below. Table 6: Pharmaceutical Exports from Bangladesh July-June July-June July-June July-June July-April (USD Million) All Export 10, , , , ,940.1 Pharmaceuticals Pharma % of Total 0.26% 0.23% 0.30% 0.29% 0.27% YoY Growth for Pharma 2.51% 52.75% 6.21% 13.39% Source: Export Promotion Bureau Bangladeshi firms are trying export to the following markets: Regulated: Square Pharmaceuticals, the only Bangladeshi pharmaceutical firm accredited in a regulated market, received the UK s regulatory approval in May The largest barriers to regulated markets are modern manufacturing facilities which come at a cost of at least $50 million, and know-how. Moderately Regulated: Some markets, such as Pakistan, Sri Lanka, Tanzania and Malaysia, are moderately regulated. While countries do not always require stringent certification, a certification from a regulated market signifies quality and provides a firm with a competitive advantage. 9

10 Unregulated: Most Bangladeshi pharmaceuticals are exported to less than fully regulated markets such as Bhutan, Nepal, Vietnam, Myanmar and African countries such as Ivory Coast, Male, etc. Major exporters The majority of Bangladesh s pharmaceutical exports are from MNCs such as Sandoz. Sandoz, an MNC operating in Bangladesh, has approximately 25 manufacturing sites globally. Bangladesh is one of its smaller sites. The Bangladeshi manufacturing site is an EU certified plant which produces about 500 million tablets a year and generates about USD million in sales. It has been growing rapidly 15-18% per year and is responsible for a significant portion of Bangladesh s pharmaceutical export growth. It imports APIs, acquires packaging domestically, and manufactures final formulations in Bangladesh for export of USD 12 million or for sale to the domestic market ranging from USD million. Exporting pharmaceutical products is not accessible for all companies. Each country has its own product regulations, registration requirements, language requirements, cultural preferences, national packaging requirements, and industry protection mechanisms. Sales on the global market are quite competitive with firms from around the world vying for business. Furthermore, initiating exports requires a significant investment in money, time and paperwork to register the product in the target country. As generic products are branded in less regulated markets, pharmaceutical firms also need to make significant investments in sales and marketing to create product demand. All these investments are made without a guarantee of future sales. Most pharmaceutical firms in Bangladesh are family owned. While many have the capacity to export, some do not have the in-house expertise. As a result, only sixteen firms export products. There are no majority exporters, e.g., companies that sell more than 50% of their output in export markets. Beximco, for example, is one of the leading exporters. Its 2009 exports were about USD 4.0 million or 5.9% of total sales. However, many companies initiated the process of product registration in international markets only in the last few years. The export situation is evolving. For example, Square Pharmaceuticals increased exports by 58% from to Indirect benefits of export Bangladeshi firms that export are slightly more productive than non-exporting firms. Some possible reasons for this advantage may be due to: 1. Technological lessons learned from foreign buyers. 2. Exporters improved their own technological capabilities to exploit profitable opportunities in export markets. For example, exporters need to adopt stringent technical standards to satisfy more sophisticated consumers, and/or they are under more pressure to fill orders in a timely fashion and to ensure product quality for export markets which are more competitive than domestic market. 3. Better firms self-selected to enter export markets for the prestige rather than the effects of exporting necessarily improving the firms. The pharmaceutical industry in Bangladesh has been aggressively investing in infrastructure. Most of the companies invested heavily in the 1990s and the late 2000s most likely to upgrade their facilities to obtain international export certifications. The top ten firms accounted for most of the investments. MNCs can operate in a country in multiple ways, including foreign direct investment (FDI), contract 10

11 manufacturing, joint ventures and strategic partnerships or licensing. Each arrangement varies in terms of which partner contributes more resources and technical knowledge, which partner assumes more risk, and which partner accrues more benefits and profits. Contract manufacturing Contract manufacturing is a good business opportunity for Bangladeshi firms, and if well done, it can enable technology transfers to domestic firms. As a result, they can acquire world-class experience in finished dosage manufacturing, APIs or other aspects of pharmaceutical manufacturing. Square Pharmaceuticals, one of Bangladesh s largest pharmaceutical firms, attributes much of its success to what it learned by working with an MNC. Bangladeshi pharmaceutical firms can make several types of contract manufacturing arrangements with MNCs, including: Contract manufacturing with the product intended for export to a regulated market. The current National Drug Policy (NDP) permits this. Contract manufacturing for export is a significant financial opportunity, but challenging. The domestic pharmaceutical firm must have a facility accredited by the regulators of an advanced market. Square Pharmaceuticals is one of the very few Bangladeshi firms with a qualified facility. It is currently initiating a contract manufacturing arrangement with a British firm. Contract manufacturing with the product intended for the domestic market. The Drug Control Ordinance (DCO) prohibits foreign firms from selling products in Bangladesh unless they have a manufacturing presence in the country. Thus, Bangladeshi firms can only contract manufacture for domestic distribution with MNCs that already have a presence in Bangladesh. An example of this arrangement is Beximco contract manufactures Ventolin, which is an inhaler for GlaxoSmithKline. Demand for essential drugs Bangladesh has a strong pharmaceutical industry represented by private enterprises and the state-owned EDCL. Bangladesh is largely self-sufficient with regard to drugs and has no significant drug availability problem. In fact, the availability of drugs has a stronger outreach than the availability of health care professionals. Due to widespread vaccination schemes, successful eradication of leprosy and widespread use of oral rehydration for diarrhea, many of the traditional health problems are minimized and life expectancy has risen to around 65 years comparable to India and Pakistan rather than to African LDCs who mostly have life expectancies below 50. The most important health issues in Bangladesh today are related to maternal health and malnutrition, vitamin and iron deficiency. AIDS, Malaria and TBC are potential health threats. Other important causes of death are cardiovascular diseases, diabetes and cancer. Mental disorders are an important reason for disability. Thus, in line with the statement that there is no significant drug availability problem in Bangladesh, the therapeutic groups do largely reflect the major health issues in the country. The health care system Bangladesh is a signatory to the Alma Ata Declaration on Primary Health Care (PHC) in In 1988, the Bangladeshi Government adopted the PHC approach as a guiding principle to the health systems development in Bangladesh. Due to resource limitations, introduction of PHC was started in selective districts. In 2004, an estimated 48 million out of Bangladesh s 140 million population is covered by PHC. The public health expenditure, totaling 3.4% of GDP in 2001, comparing to 4.1% in India, 4.2 in Sri Lanka 11

12 and 2.7% in Pakistan. Public health expenditure accounts for roughly 33.6% of the total health expenditure. There are around 43,000 registered physicians and 40,000 nurses and midwives, resulting in about only 3 physician and 3 nurses and midwives per 10,000 population. The hospital beds per 10,000 population is only about 4. The number of public health worker is about 6,000 (less than 0.5 per 10,000 population). With 21,000 community health workers the ratio is only 1 for 10,000 population. For details and a comparison with selected other countries, see the tables 12 & 13 at the back of the report. Price and price sensitivity For those drugs that are not subject to a fixed price, there is considerable price sensitivity in Bangladesh, which is explained by the very high variation in quality with significant incidents of health-damaging spurious drugs and fake drugs that contain no active ingredient. Thus, it is not uncommon for the high quality branded generics of the leading manufacturers to have a 100% price premium over their competitors. In some cases the premium is even higher. Unmet demand The demand for essential drugs in Bangladesh is largely covered. In accordance with the above, in many cases the cheap availability of essential drugs without adequate health care infrastructure is not without problems. The global need for essential drugs is huge in theory and the actual demand depends to a large extent on financing possibilities and mechanisms, which are difficult to foresee in detail, but the creation and dedication of funds and institutions like e.g. the Global Fund to combat AIDS, Malaria and Tuberculosis, justify a significant growth expectation for the actual demand. It is also to be expected that wherever donor funds are directly used to purchase drugs (as e. g. the Global Fund or the Gates Foundation), the demand will come with such quality requirements that would put a country like Bangladesh with a good track record and a lot of experience at advantage over African LDCs that are only just entering the business of pharma manufacturing. On the other hand, the tendency of traditional donors to budget funding may lead to governments of African LDCs giving preference to lower quality local manufacturers for political reasons, creating high barriers of entry for Bangladeshi manufacturers in these market segments. Diseases that are typically considered developed country diseases like cardiovascular disorders or cancer are also on the rise in many developing countries. However, at present, both adequate diagnosis of these diseases and availability of funding for drug needs are doubtful. Investors and sources of capital In Bangladesh, there are several national investors interested in building up pharmaceutical manufacturing: many of the existing pharmaceutical corporations, like Square and Beximco, belong to large conglomerates that have proven the commercial opportunities to invest in pharmaceutical manufacturing plants. Foreign investors have not been particularly interested in setting up manufacturing plants in Bangladesh, notably the investment flow from India, expected by some industry specialist following the Doha declaration, has not materialized so far. When investing in pharmaceutical manufacturing plants, the equity rate used by Bangladeshi investors is significantly higher than the usual equity rate in transnational pharmaceutical companies. The reason lies partly in the comparatively high cost of capital and also in the necessity to group together different banks for financing a large credit sum, since the sum each bank is allowed to lend is usually not sufficient to finance a 12

13 large drug manufacturing plant. As a result, there is a large number of very small scale manufacturer present in the industry. These manufacturers focus mostly on a handful of basic and essential drugs. Specific risks of national production The dependence on import of APIs is the main risk, since the providers are also competitors. This has not affected Bangladeshi pharmaceutical manufacturers too much as they concentrated on the national market which was not deemed attractive by their providers. As long as Bangladeshi manufacturers concentrate on developing country markets, they may be able to circumvent this problem by sourcing from developed countries manufacturers who are not targeting these markets. However, this would probably also increase their cost. TRIPS The WTO s Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) requires all signatories to legislate twenty-year patent protection for pharmaceutical products into their domestic law. TRIPS is not a uniform international law, but a framework for intellectual property protection with minimum agreed standards. While signatory countries must meet its requirements through legislation, TRIPS provides significant flexibility. Until 2016, TRIPS provides Bangladesh with domestic, patent-free production rights and limited exporting advantages. Bangladesh imports approximately 80% of its APIs for domestic production, 20-25% of which are patented. These API costs will most likely rise as TRIPS phases in. Bangladesh enjoys some export advantages from TRIPS. But these advantages are somewhat offset by the pace and competitiveness of the Indian and Chinese generic markets. In both markets, companies can produce drugs at highly competitive pricing even with higher costs associated with buying patented APIs or paying royalties. Bangladesh will have to rely on the standard business practices of producing the highest quality product at the lowest price to compete on the international market. Until 2016, however, Bangladesh has the following export advantages under TRIPS: 1. Export to any country if the drug is not under patent. Any firm in any country can benefit from this stipulation. For example, most drugs on WHO s Model List of Essential Drugs are not patented, as affordability is one of the criteria used in designating medicines as essential. 2. Export to another LDC or non-wto country that has not implemented product patent protection. It seems that most LDCs have instituted patent protection. Only two African LDCs have not provided for TRIPScompliant intellectual property protection, one of which was not yet a WTO member, according to a 2001 Intellectual Property Rights (IPR) Commission study. In Asia, Myanmar, which is engaged in the WTO accession process, is perhaps the only country that has not yet put in place a patent protection regime. TRIPS states that any country using the transitional flexibility period shall not change its laws to result in a lesser degree of consistency with TRIPS. However, Bangladeshi firms are exporting generic versions of patented drugs to many LDCs without a problem. 3. Export to a country where the patent holder has not filed for patent protection for the drug. Companies do not file drug patents in all countries, particularly where sales and profit prospects are low or there is no meaningful judicial patent protection. These gaps in patent coverage can be exploited. 4. Export to a country that has issued a compulsory drug license and awarded the production contract to 13

14 Bangladesh. TRIPS grants governments the right to issue a compulsory license for public health purposes, which occurs when a government overrides a patent and grants another entity the right to produce the patented product. Although Canada, Japan, the United States and the United Kingdom have all issued domestic compulsory pharmaceutical licenses, very few developing countries have done so. The expense and time of litigation with developed countries can act as a deterrent. Governments must also balance fully exploiting TRIPS flexibilities while maintaining good relations with MNCs, which often use domestic firms for outsourcing or manufacturing. Before 2005, many countries could fulfill a compulsory license importation request because many were manufacturing patented drugs off patent. As of 2005, Bangladesh patented drugs off patent whereas India and China, the world s largest suppliers of generic drugs, will no longer be able to engage in this practice for any drug patented after Because firms require two to three years to reverse engineer and start producing a specific drug of quality, if any country issues an import request for a compulsory license for any drug patented after 2005, Bangladesh will have an advantage if it is already manufacturing the drug domestically. However, TRIPS has clearly stated that export for compulsory licensing is intended for health policy not industrial policy. Conclusion The essential drugs market in Bangladesh is well supplied, and there is no availability problem of essential drugs. The DDA, responsible for the safeguarding of the drug quality through licensing and control, lacks the necessary capacities, equipment (notably test laboratories) and governance to perform all its tasks effectively. WHO is supporting the DDA through capacity building and new test laboratories. Partly due to the failure of the local authorities to provide credible quality certifications, and partly due to their aspiration to increasingly target export markets, leading Bangladeshi manufacturers are already successfully working on obtaining international quality certification for their products and plants, in some cases bringing in experienced experts from MNCs or Indian competitors. The ability of the Bangladeshi drug industry to manufacture drugs for all kinds of needs is beyond doubt. While some manufacturers are already able to produce world class quality drugs, others would require considerable assistance to be able to reach that target. However, the Bangladeshi industry has been largely focused on the domestic market until recently. Knowledge about and contacts to the different players in potential export markets is still limited and constitutes a key bottleneck to expansion of manufacturing facilities. In terms of cost, Bangladeshi companies can be expected to compete successfully with African players, especially if an international quality standard is required. The ability to compete with Indian and Chinese manufacturers is limited due to the necessity to import machinery and notably the precursor substances. The ultimate competitiveness of Chinese and Indian manufacturers depends on the expected rigor of the TRIPS enforcement, the viability of voluntary or compulsory licensing for Indian and Chinese players, and the amount of license fees they would have to pay, and the competitiveness of Bangladeshi manufacturers will largely depend on the pricing of the raw materials. Still, Bangladesh is probably one of the few LDCs where under the TRIPS agreement new patent protected drugs and APIs can be cost-effectively produced and at high quality. Thus, Bangladesh is a natural candidate to supplement or substitute Indian and Chinese providers to the developing country markets of both finished drugs and APIs, notably in antibiotics, anti-ulcerants, antihypertensives and anti-depressants. However, the domestic market is large enough to be self-sustaining and lucrative for the domestic players until they become ready to take on the global pharmaceutical market. 14

15 Top Listed Pharmaceutical Companies Square Pharmaceuticals Limited (Position in terms of domestic sales: 1) Square Pharmaceuticals is the largest pharmaceuticals manufacturing company in the country. The company has consistently created value for its shareholders, with average Return on Equity (ROE) of over 20% in the last 7 years. While maintaining the profitability in its core pharma business, the company has created a number of other businesses in house in the past, and after profitable commercial operation of the businesses commenced, spun off such subsidiary businesses to monetize the investment. Square Pharmaceuticals has undertaken an expansion program to be completed in two phases. The first Phase will be completed in 2012 at a total cost of BDT 3.6b (we anticipate a 25% cost overrun for a final cost of 4.5b). This first phase is expected to almost double the current production capacity. The second phase starts in 2014, completing in 2017 for a total cost of 2.0b (including an estimated cost overrun of 25%). We expect the expansion programs contributing to revenue growth after Capital expenditure will be financed by internally generated cash as the company generates a handsome amount of cash each year Current debt to equity ratio is quite low at 23%; in the absence of any other major expansion plan, we do not anticipate assumption of any more debt. Some of the business units (e.g., Square Knit Farbics Ltd. and Square Cephalosporins Ltd.) are just starting to become profitable and more are on the right path (e.g., Square Hospitals Ltd.). Square will definitely benefit from this. We believe the company is still undervalued. We need to look a for the value of the company beyond 2013 as the major value addition to the company is going to take place after We believe the market has not yet identified the real value of the company. Table 7: Square Pharmaceuticals Snapshot 2009A 2010E 2011E 2012E 2013E Revenue (MM BDT) 11,826 13,026 15,099 17,287 22,003 Operating Income (MM BDT) 2,929 3,149 3,537 3,945 4,960 Operating Margin 25% 24% 23% 23% 23% Net Income (MM BDT) 2,116 2,644 3,306 4,132 5,165 Net Margin 18% 17% 16% 16% 16% 5-Year Revenue Growth (CAGR) 13% Capex (MM BDT) 2,049 1,386 1,398 1,426 1,451 Debt/Equity 23% 20% 18% 16% 14% No. of Shares (MM) Diluted EPS (BDT) Dividend (BDT) Current Price (BDT) 3722 Target Price (BDT) 7000 CAGR Return (Up to end of 2013) 23% 15