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Asia Pharmaceutical Sector

Outlook

Liew Kou Yew, Assistant Vice President Life Sciences, Asia Rabobank International

As increased competitiveness paves its way in the global arena, all market places, whether pharma, automotive or manufacturing are undergoing continual changes to cut cost and increase efficiency. This article brings with it the challenges faced by individual companies to tailor their project managements and stay ahead of the competition.

In 2005, Asia’s pharmaceutical market size was approximately USD106.8 billion, with Japan making up about half of the market with a domestic consumption of about USD58 billion. The average per capita consumption in Asia, a population of 3 billion people, stood at USD36 per person. In contrast with the US at USD839 and Europe at USD439, the industry in Asia offers much room for growth.

Asia’s economy has been growing much faster than that of the US and Europe over the past 5 years. In 2004-2005, the Asian economy as a whole grew 4.9% compared to 3.5% in the US and a tepid growth of 1.7% in Europe. Propelled by a combination of a low per capita consumption and a rapidly growing economy, the industry is expected to sustain a double-digit growth over the next decade. Major Western pharmaceutical companies, faced with shrinking opportunities in their home markets, will thus have to focus their attention on Asia for their next phase of growth.

Asia today is a net importer of pharmaceuticals mainly from Europe, with which it had a trade deficit of USD7 billion in 2004 but enjoyed a small trade surplus of USD640 million with the US. In 2004, the major net exporter of drugs in Asia was India with a total net export of about USD2 billion. According to preliminary data, India’s position as the main net exporter in Asia is being contested by Singapore, which has shown a strong track record backed by years of substantial government investment. Singapore achieved total exports of USD2.4 billion and imports of USD1.04 billion in 2005. Given Japan’s position as the world’s second largest market, it comes as no surprise that they are also Asia’s largest net importer with a deficit of USD3.5 billion, the majority of it with Europe.

Many countries in Asia are developing economies, with the exception of Japan and the four Newly Industrialized Economies (NIEs) of South Korea, Taiwan, Hong Kong SAR, and Singapore. The disease profile of the developing economies is significantly different from that of the more developed economies of US, Europe and Japan. Asia has a lower incidence of lifestyle diseases such as cardiovascular and CNS (central nervous system) conditions, although incidence of these are beginning to rise in the urban centers of India and China. Antibiotics, most of which are locally manufactured generics, are the main therapeutics consumed in these developing economies. These therapeutics drugs are usually regulated under government price controls to ensure that essential drugs are affordable to large segments of the poor as countries like China and India lack a comprehensive health insurance system. The economic developments in these economies are however creating a new class of affluent consumers who can afford and demand the novel patented treatments being peddled by the pharmaceutical majors.

The attractiveness of the market and concomitant implementation of IP protection have encouraged the pharmaceutical majors to invest in Asia to develop novel drugs and grow their markets. The cost of hiring a scientist in India is about a quarter of what it would cost to hire a similarly qualified person in the US. However, this advantage is gradually being eroded with rising wages and other business costs.

Table 1. Comparing Asia to the US and Europe

  • 2005
  • Population Estimate (mn)
  • Population Growth
  • GDP (USD bn)
  • GDP Growth Rate (real)
  • Per capita consumption (USD)
  • Production (USD bn)
  • Import (USD bn)
  • Consumption (USD bn)
  • Export (USD bn)
  • Asia*
  • 2998.6
  • 1.00%
  • 9477.3
  • 4.9%
  • 35.6
  • 119
  • 13.9
  • 106.8
  • 7.7
  • US
  • 296
  • 0.92%
  • 12362
  • 3.5%
  • 838.6
  • 236
  • 31.6
  • 248
  • 19.5
  • EU-25+Switzerland
  • 457
  • 0.15%
  • 13310.1
  • 1.7%
  • 439.3
  • 221.6
  • 147.3
  • 200.8
  • 151.1

The challenges facing the Asia pharmaceutical industry are as varied as its countries. The challenge for Japan is to start looking outside its domestic markets for its future growth as the market reaches saturation. Future growth for Japan will have to come from Asia both as a market and as a source of innovation. Major pharmaceutical companies like Novartis and Pfizer have looked increasingly to countries such as China, India, and Singapore to outsource the development of innovative drugs to overcome the huge costs of bringing a drug to the market; The Boston Consulting Group has tagged this cost at a staggering USD880 million . According to the consulting arm of KPMG, the cost of developing a similar drug and filling an NDA is about a tenth of that if developed in India.

The pharmaceutical industry in China today is too fragmented to be competitive. Over 6000 companies exist and the top 10 companies hold less than 15% market share, compared to India, where the market share of the top 10 companies is more than 30%. Excessive competition among domestic pharmaceutical companies is resulting in a potential “Downward Spiral” syndrome where such competition has resulted in paper thin margins, starving the companies of much needed cash to fund process improvements or drug development. In addition, the lack of R&D prevents these companies from developing unique products that could command a higher margin. The Chinese financial regulations exacerbate the situation by making M&A activity difficult, thus hindering the consolidation of the industry. Chinese pharmaceutical companies will need to follow India in raising their production quality to achieve US FDA compliance. This would allow them to export and market their drugs to the developed markets like the US and EU where margins are higher.

The eventual rise of China (it is not a question of if but when) will inevitably challenge India’s position as a low-cost producer. In fact, according to Bain & Co. , nearly 90% of the pharmaceutical executives interviewed from US and European firms believe that China has become the preferred location for low-cost drug manufacturing compared to India. Indian pharmaceutical companies need to invest more in R&D to maintain their competitive advantage and develop their own novel drugs even as they are seeking to expand their reach in the generic markets by aggressively acquiring companies in Europe. In 2005, the average R&D expenditure of leading Indian pharmaceutical companies was only 5.7% of their net sales compared to 7.9% by Teva (the world’s largest generic company) and 14.5% by Merck & Co. Fortunately for India, the legacy and financial regulatory issues faced by China provides India a brief respite, allowing the latter to accumulate cash in the generics sector to invest in R&D.

Singapore has adopted a rather unique strategy in the face of its negligible domestic markets. The government and the powerful Economic Development Board decided a decade ago to enter the industry by focusing on the high-end R&D. Generous grants, tax incentives and billions of dollars were invested to attract pharmaceutical and biotech MNCs to set-up R&D operations in Singapore. The flagship of this initiative was the formation of “Biopolis”, a US1 billion self-contained biotech park. Singapore faces a unique challenge in its lack of a strong and robust domestic pharmaceutical manufacturing base. This would place a challenge on her ability to exploit the fruits of its research. At such, Singapore needs to develop an approach to keep these companies in Singapore in order to drive a self-sustaining eco-system where profits earned from the sale or licensing deals of these novel drugs are reinvested in Singapore.

We see continued growth in the Asia pharmaceutical sector. Going forward, its size likely to exceed that of Europe and the US within the next few decades. Asia, led by Japan and India, will also start developing a robust pipeline of novel drugs that address the needs of both Asia and the rest of the developed world such as the US and Europe. The various countries in Asia will undeniably face a multitude of challenges as they develop their industries. However, given their traditional resourcefulness and determination, it is beyond doubt that Asia’s place within the global pharmaceutical industry over the next few decades will grow in rapid prominence.

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