Under Development

The pharmaceutical market in the Asia Pacific region can be summed up in a single word: evolving. With the notable exception of Japan, the markets in the region are still developing countries, and are therefore undergoing significant change in just about every area affecting the pharmaceutical business. Even the Japanese market, the second largest in the world, is on the cusp of a transformation.

Although currently growing at a sluggish pace, the Japanese pharmaceutical market dominates the region with audited sales of $58bn and a 64 per cent share of the regional audited market in 2004. Going forward, market growth in local currency terms will continue to be strongest in China, which is currently ranked number two in the region with an 8 per cent market share. China has posted double-digit (12-15 per cent) growth in pharmaceutical sales for the past five years, a trend which is set to continue.

The region has, and will continue to have, wide disparities in levels of GDP per capita. Even by 2009, for instance, Japan's GDP per capita will still be 60 times stronger than that of India. China and India will continue to act as the strongest drivers of economic expansion in the region, posting GDP growth at compound annual rates of 8 per cent and 7.2 per cent, respectively.

In China, as wealth expands beyond the largest urban areas into smaller cities, there will be a significant upturn in pharmaceutical sales if companies can overcome the logistical hurdles involved. Of special note is the fact that bilateral trade between China and India is growing at an astounding rate - from around $300m a decade ago to approaching $15bn. It is not inconceivable that these two nations could combine their individual competencies (technology in India, manufacturing in China) to become a formidable force in the world market.

Elsewhere in the region, economies will continue to grow at compound annual rates of 4-5 per cent, while expansion in Australia will average just over 3 per cent a year. Growth in Japan, Asia's pre-eminent economic power, will be more modest, at a compound annual rate of less than 2 per cent.

Funding is the common denominator that will colour healthcare policy decisions throughout the region during the next five years. In certain countries, such as Indonesia, the proportion of central government funds allocated to healthcare remains remarkably low, and only a handful of countries in the region provide anything approaching universal health insurance coverage. The developing countries in the region actually intend to channel more tax revenues into healthcare, albeit with the goal of stretching their resources as broadly as possible. Any cost containment policies they do employ will focus on reducing supply-side costs.

The governments of Japan and Australia, where universal coverage is provided and spending is running at about 9 per cent of GDP, will be preoccupied with limiting the rate at which their healthcare bill increases and shifting some portion of their spending burden to the private sector.

Regulatory Framework

Gradual improvements in the efficiency and transparency of the regulations governing the pharmaceutical industry will occur across much of the region in the next five years as many governments hope to attract foreign investments. Domestic and multinational companies should benefit from shorter registration periods and a more predictable registration process.

Quality standards will continue to rise gradually and some countries will be more stringent in enforcing existing regulations. This will begin to edge out manufacturers that do not comply with Good Manufacturing Practices.

Many countries, India and China in particular, have passed legislation to protect intellectual property as prescribed by membership of the WTO, and investments in new drug discovery should eventually increase as a result. However, that is not to say that research-based manufacturers will not be plagued by the occasional infringement. In India in particular, it will take some time for drugs to receive a patent, so the impact of the protections will probably not be felt until 2008. Still, Indian companies are busy formulating post-patent strategies and multinationals are expected to launch patent-protected products, albeit with more restraint.

Industry Structure

The industry's structure will change significantly in several countries over the next few years. Increasingly, market shares will be concentrated in the hands of leading companies, and the proportion of market shares held by local manufacturers and foreign companies will shift.

In Japan, where the top ten foreign firms already command 30 per cent of the market, domestic companies will see their market share decline further. Their ageing portfolios are more exposed to the regular price cuts imposed by the government and most do not have the scale they need to compete with multinationals in R&D. However, the government is committed to healthcare reform and creating an environment that will nurture productivity and innovation. At the same time, Japanese manufacturers are beginning to consolidate to gain the depth and breadth they need to compete. However, the Pharmaceutical Affairs Law has made it easier for foreign manufacturers to enter the Japanese market, enabling them to break free of their licensing-out arrangements with domestic companies and to market products themselves.

In China, new government standards are forcing small companies out of business; up to 2000 domestic manufacturers face closure by the end of 2005 if they are unable to comply with the new GMP standards. As in Japan, multinational companies can now operate in China independently, without having to maintain a joint venture with a domestic partner.

In most countries, domestic producers will continue to dominate the market in terms of sales volume, especially where government programmes are encouraging the use of inexpensive generics rather than multinational brands.

Providers and Pricing

Traditionally, in most of the markets in the region, the majority of patients turn to the hospital first for treatment, and the public healthcare systems are overstretched. In those markets, a stronger primary care provision is emerging and the focus is shifting towards disease control and prevention.

The drive to separate prescribing and dispensing is continuing slowly in many countries. The retail markets in Japan, China and South Korea have all increased in value dramatically in the last five years. In Japan, more than half of all prescriptions are dispensed in the retail sector. In South Korea, retail pharmacies now account for almost two-thirds of the pharmaceutical market. In China, retail pharmacy chains are growing and adopting western-style business models. Elsewhere, governments have opted to encourage separation of prescribing and dispensing rather than impose it, as many retail sectors are ill equipped to deal with dispensing on a large scale.

The price of prescription drugs will remain under pressure throughout the region during the next five years and the price of established drugs will be forced down. The pressure will come from a combination of direct government price controls, hospital and/or retail purchasing strategies, increased levels of generic market penetration and competition for market share.

The Japanese Government will maintain its stranglehold on the introductory prices of most new drugs and its biennial price cuts for others, while recent moves to liberalise prices in India have stalled and could be reversed following the change in government in 2004. Prices in Hong Kong, Malaysia, the Philippines, and Singapore will be the exception, remaining free from direct government control. In these markets, market forces will limit price growth.

Market Forces

Brand-conscious prescribers and consumers (along with the absence of strong pro-generic policies) will continue to favour branded copies and generics over unbranded generics. Promotion and marketing alliances between multinationals and local companies will remain widespread in most countries. Such agreements are likely to decrease in Japan and China, however, where the governments now allow multinationals to operate in their countries independently.

Interestingly, in those countries where insurance coverage remains limited, most multinational companies are targeting the private hospital and general practitioner sectors. Meanwhile, most domestic manufacturers generate a large share of their revenues in the public sector, where price is often the determining factor in securing business. Because prescribing and dispensing are becoming separate functions in Japan and South Korea, manufacturers in these countries are beginning to detail pharmacies, a process that is entirely commercial, with discussions focused on the financial transaction.

While many of the obstacles to business in Asia Pacific are falling, the region as a whole still represents a challenge to the pharmaceutical industry. In some cases, the challenges are now greater for local companies than multinationals, and the coming few years will be very pivotal for the future of both. The companies that can weather this period of change stand to enjoy a healthy return on their investment.