Pharma Industry

Chicken and egg syndrome. That is the diagnosis one would make about Nepal’s pharmaceuticals industry after listening to the complaints of the manufacturers and regulators regarding their expectations from each other. While, the pharma industry sector demands protection for its growth, the regulators say protection before the improvement in the domestic industry will undermine people’s interests. The Association of Pharmaceutical Producers of Nepal (APPON) complains that many of its member units are facing a grim situation because of "existing discriminatory revenue system favoring drug imports". But the government authorities stand on the argument that as availability of quality drugs at affordable price is of paramount importance, drug imports cannot be stopped. They can be regulated, and that is what is being done, claims Dr. Asfaq Sheak, the Chief Drug Administrator (CDA) who heads the Department of Drug Administration (DDA) of HMG, a body designated as the regulator of country’s pharmaceutical sector.

However, it is exactly this very importance of drugs in the overall well-being of the population that the pharma industry puts forward as the basic logic demanding this industry a priority status. "The status provided to this industry is not commensurate with its importance", says Pradeep Jung Pandey, President of APPON.

Explaining the importance of the pharma industry in national economy, Pandey points out that while many other industries may cause diseases, pharma industry helps cure those diseases. Similarly, it helps in development of manpower by employing highly educated chemists and pharmacists. Moreover, being a producer of goods with a high value in low volume, this industry has a very high potential for exports as the cost of transportation per unit will be substantially lower in pharmaceuticals than in most of Nepal’s existing exports.

Policy on drugs and industry

The National Drug Policy brought out in 1995 as a prescription for the problems, pledged to accord pharmaceutical manufacturing the status of national priority industry. But that proved to be an empty promise as the government forgot to include modern pharmaceutical manufacturing in the list of National Priority Industries while effecting the second amendment in the Industrial Enterprises Act in 1997. The list in the annex of the Act has those industries that produce Ayurvedic, Homeopathic and other traditional medicines, but not those that produce allopathic medicines. That means the prescription has failed because it was not administered properly.

Sheak however contends that a policy is only a guideline towards an ideal. Thus it is not as binding as a law. "Still the progress report over the last decade conclusively shows that the policy has helped this industry grow", he asserts. And the CDA has a strong point there. Going by APPON’s own account, the number of pharmaceutical manufacturers has been growing steadily.

Ten years ago there were only 10 pharma units in the country. The number has, now reached 33 and seven more are in the pipeline. Taking the establishment of Royal Drugs Ltd. as a public enterprise in 1972 to be the first serious effort towards developing modern pharmaceutical industry in the country, it can be seen that it took about 20 years to set up the first nine units. But it took only about 10 years to set up next 20 units. And it is the contribution of the National Drug Policy-1995 and its earnest implementation, contends Sheak.

Picking up on this contention of the CDA, pharma industry sources claim that thanks to this rapid expansion, this sector is now ready to fulfil domestic demand for many of the drugs, and will be capable to do so for the rest as well. "If it is given a more conducive atmosphere, Nepali pharma industry can fulfil 50% of the domestic demand by 2005 and 75% by 2010", assures Pandey. But the denial of those facilities promised in the declared policy has thwarted its growth, he laments.

The result is, according to Pandey, a mere 39% capacity utilization in this industry and a paltry 23% share of domestic manufactures (28% according to Sheak) in the nearly five billion rupees market (including institutional purchases and foreign donations in kind). Though a survey by IMS A.G. of Switzerland reports the market size to be a little over three billion rupees only (see box), Sheak and Pandey both agree the actual size to be five billion rupees. The rest of the market share is gobbled up by Indian companies.

However, the situation was even worse a few years ago. There were about 12,000 brands of drugs from about 1100 companies available in the Nepali market then, as Sheak concedes. "In fact we had not expected the industry to grow this fast", he further concedes indicating to the need for revision in the policy. However, the CDA also says that the expectation of the policy is to make the country self-sufficient in 80% of essential drugs, but the achievement so far is less then 60%. In this situation, it is not possible to ban drug imports as that would limit competition and lead to exploitation of the consumers, argues the CDA. However, it is not that the government is not trying to check drug imports at all.

As the domestic industry grew, the government imposed a few controlling measures in drug imports, though that was in response to, as Pandey claims, strong lobbying from the domestic companies. And the result is that now there are only 4,000 brands of 600 medicines (including 273 essential drugs) in the market from 350 companies, according to the CDA. However, APPON President Pandey still claims that the number of brands available is the same as before. He accepts that the number of companies has reduced, but only to 550, not to 350. Among the brands available, only 750 are from Nepali companies, according to Pandey.
DDA Chief Sheak

One controlling measure introduced only last year was the requirement of WHO’s GMP ( Good Manufacturing Practice) certification for any foreign company to get permission to sell its drugs in Nepal. As Nepali companies too are required to get GMP, the requirement of this certification from foreign companies may not be regarded as a measure to really favor the Nepali companies. While a number of Nepali companies claim that they are already at GMP standard, Sheak says, only eight of the 40 Nepali companies registered are capable to meet the standard with some little improvements, while 16 others need some substantial improvement. For the rest, it is going to require a lot of additional investment, he opines. The government has granted Nepali companies three years to become GMP certified and one year of the moratorium is already over.

APPON Leader Pandey

Despite the number of foreign players being reduced substantially as claimed by DDA, Nepali companies bemoan of facing a very hard time in marketing their products, because of higher production cost, unfavorable duty structure and costly marketing ‘deals’ to be provided to the dealers.

Explaining the situation, Pandey says, pharma sector suffers from the same problems that other sectors complain of about the production costs being higher, viz. transportation, scale of operation, frequent general strikes and the like. It is in duty structure and marketing ‘deals’ that the sector faces unique problems.

Duty Discrimination

Sheak points out, drug imports attract 3% customs on invoiced value, but no VAT, and no local development tax. Pandey reminds that the 3% customs duty is waived for drugs if the imports from India are under DRP (Duty Refund Procedure). According to his estimation, about 75% of the drug imports are under DRP. Though official statistics are not available to confirm his claim, it can be construed that even when only 50% of the drugs imports are under DRP, the Nepali industry has to compete with a sizeable imports that is duty free, because Nepali pharma industry is denied of similar government generosity. It has to pay 1% customs on raw material imports, though it does not have to pay VAT on raw material import. Packing material imports, however, attract 5% customs duty, 1.5% local development tax (LDT) and 10% VAT, thus making the cost of the output higher. According to Pandey, packing material normally account for 40% of the drug price.

But Sheak denies Pandey’s assertion and explains that VAT is refunded through duty drawback procedure against the presentation of a proof showing that the imported packing material is actually used by the company for packing drugs. "I know some pharma units actually utilizing this facility", he says. Moreover, he adds, if the trademark of the drug to be packed in is already printed on the packing material (capsules, bottles, boxes etc.) being imported, drug manufacturing company is not required to pay VAT for such imports.

Still, the pharma entrepreneurs are not satisfied. In two separate letters dated April 22 and May 1 this year and addressed to the Minister of Health and Minister of State for Industry, Commerce and Supplies, APPON has repeated its plea for duty concessions in the coming budget citing the same old problems of customs, VAT and LDT. Though one may argue that APPON’s complain is because of the drudgery involved in getting the duty drawbacks, Pandey’s arithmetic shows the duty payable at customs point by domestic industry to add up to 3% (1% customs, 1.5% LDT and 0.5% others) - exactly the same as for prepared drug imports. Moreover, though 10% VAT may be refundable later, the unit has to suffer an additional investment of that much amount and for that there will be no return earned.

In such a situation, APPON’s demands with the government are: reduce the number of foreign companies to 200 and impose 10% customs on those drugs the equivalent of which are sufficiently being produced domestically. In its letter to the Minister of State for Industry, Commerce and Supplies, APPON has also demanded 20% customs on drugs that have low therapeutic value. "Vitamins, cough syrups and the like are such drugs", explains Pandey. According to him, as the country already has a quite large number of pharmaceutical manufacturers, time has come to be selective and for filtering substandard companies. "It’s now time that we promote internal competition".

Sheak, however, denies the possibility of such a step. "Vitamins are most essential drugs. That’s why government has been launching vitamin A campaigns", he points out, though he also accepts that those who actually need vitamins are not receiving them while those who do not need them are taking them. His indication is towards the deficient distribution system and anomalies in prescribing drugs by the doctors.

The differences between the DDA and pharma industry are there also about the number of companies that should be allowed to sell drugs in Nepal. "For a five billion rupees market, 300 to 500 companies are needed. So, in my opinion, the ideal situation would be 100 Nepali and 200 foreign companies", says the DDA chief. And he promises that the number of foreign companies allowed to sell drugs in Nepal will gradually be reduced from present 350. Going by DDA chief’s view, APPON demand to reduce the number of foreign companies to 200 immediately does not seem to be likely fulfilled in the near future.

Nasty ‘deals’

Talking about competition, on which Dr. Sheak places so much hope for ensuring easy availability of quality drugs at reasonable prices, APPON’s leader Pandey questions whether the unregulated practice of providing ‘deals’ to the pharmacy shops is helping in any way in promoting a healthy competition. A ‘deal’ is a trade scheme provided by the company to encourage shopkeepers to sell a particular drug. Sheak explains that a deal of some limited percent may be permissible for new drug brands for a limited period to promote the new brand. Accepting that his department has not been able to control the unhealthy practice of perpetual deals as astronomical as over 100%, the DDA chief says, it is the question of ethics on the part of the drug companies and shopkeepers concerned. "You provide perpetual deals, if your product is not of the required quality. Prestigious companies stop the deals for the new product once the product is promoted enough", he argues.

Drugs in Nepali market: Not all Nepali

The extent of deals has crossed 100% meaning if a shopkeeper buys one strip of capsules, he gets another strip free. Nepali companies blame the Indian competitors for such heavy trade discounts. To match them, the Nepali companies have to suffer heavy costs.

According to Sheak, the result of such heavy trade discounts is compromised quality of the drugs. "The composition may be all right, but the chemicals used may be nearing expiry of their potency, thus being possible to be provided at cheaper rate and making it viable to offer heavy discounts", he explains.

While Nepali pharma entrepreneurs claim that such practices will stop automatically if the foreign companies are kept away, DDA is not convinced. It is equally likely that the Nepali companies may try to benefit from the monopoly situation that such a step brings about, Sheak fears.

But APPON president Pandey has a strong point to dispel Sheak’s fears. "Four and a half years back APPON fixed the price of paracetamol at Rs. 0.55 per tablet, and the Indian companies also had to bring down their price in Nepal to the Rs. 0.55 level. The price is still not raised and the quality also has not deteriorated", he says promising that the same will happen if the association is given the responsibility of ensuring reasonable price and easy availability.

Reacting about the DDA chief’s fear that the companies may indulge in importing cheap and impotent raw material to reduce costs so as to be able to offer attractive deals, Pandey brings to notice the prevailing practice under which the import of raw material by Nepali pharma companies is strictly regulated through the system of permits and monitoring of each consignment by a committee of representatives from a number of government authorities. "So, where is the possibility for Nepali companies to import substandard material?", he questions and says, "It is possible only for Indian companies, and many sub-standard Indian companies are exactly doing this". According to Pandey, Nepali authorities have not been able to test even 1,500 brands being sold here. Every Nepali company’s brand is tested in Royal Drug Research Laboratory (RDRL) before DDA approves it for marketing, but it is not so for every Indian company’s brands.

Market Standing

Despite the competition with India’s so called substandard companies as well as multinationals like Glaxo, Nepali companies have succeeded in making their presence felt.

Lomus Pharma of Pandey is reported by the IMS survey as the number one company in terms of sales in Nepal in both years (1999 and 2000) while a number of its other compatriots are among the top twenties and top tens. ORG-MARG Nepal, another research firm, gives somewhat similar results from its survey for the month of November 2000 though the reports differ in details owing to methodologies and other limitations. On top of this is the fact that Nepal Pharmaceutical Lab, one of the oldest Pharma units of Nepal, has since last year started exporting drugs to India, the traditional source of drug imports into Nepal, thus trying to reverse the flow and practically establishing that it is indeed possible to export drugs from Nepal. The procedural hurdles in exporting to India are however there. Pointing at the excessive ease in import of drugs into Nepal from India, and difficulties for Nepali drugs to access Indian markets, the industry sources argue that the government should work for streamlining processes for drug imports from and export to India on the basis of the principle of reciprocity.

Now that both Tribhuvan University and Kathmandu University have started to produce higher level pharmacist (B. Pharm. & M. Pharm.), the industry is not going to face manpower problem, hope the pharma industrialists. But time is running short for the development of this industry, as there will be problems of patent rights when Nepal joins WTO, an event likely to happen soon as Nepali government is preparing to get membership in this global free trade fraternity.

However, differences exist again in this issue between the industry and the regulators. While Pandey sees the future dark and pleads for proper initiatives to be taken right now, Sheak says, WTO is going to affect Nepali pharmaceutical industry only marginally as it is producing only those drugs in which the patent rights have expired.

By Madan Lamsal