Contributer: Lulu Pickering, Ph.D.
It is a fascinating time to be involved in the pharmaceutical industry because of all the major changes that are occurring in the business model. The manufacturing requirement in emerging markets is one such change.
More countries, such as Russia and Indonesia, are requiring local manufacturing as a means to develop the domestic pharmaceutical industries and decrease reliance on costly imported brands1.
- Significant pharmaceutical opportunities exist in Indonesia because of the country's large population of 243 million people. In 2008, the Indonesian government introduced new rules that require pharmaceutical companies to set up local manufacturing facilities within two years if they want to be licensed to sell drugs in Indonesia. These rules have created unease among some MNCs, and the International Pharmaceutical Manufacturers Group (IPMG), an organization of 29 international research-based pharmaceutical companies operating in Indonesia, is lobbying the Indonesian government to revoke the local manufacturing requirement.
- The Straits Times, a Singapore news source, reported that the local health minister was threatening that companies that failed to comply would be banned from selling their products or distributing them through companies that do have plants in Indonesia. If they want to get licenses (to sell their products), they have to invest here as well, and not just take advantage of the Indonesian market. They can't just operate like a retailer here, with an office size that's three-by-three meters and make billions of rupiah. That is not fair, said Health Minister Siti Fadilah Supari.
The trend of requiring local manufacturing is likely to continue in the near term because the issue of drug affordability is not going to go away in most emerging markets, which, in turn, will put pressure on decreasing the country's dependency on drug imports.
However, my perception is that the exact nature of the manufacturing requirement is still not well defined in some countries. Does final packaging satisfy the requirement. How about fill and packaging from the imported bulk supply of a drug. Is the production of a certain drug formulation sufficient. Does the active ingredient itself have to be manufactured locally.
- The Russian government is in the process of implementing a broad series of policies designed to develop and modernize the domestic pharmaceutical industry2. Pharma 2020 has the ambitious goal of raising the proportion of domestically produced drugs from a market share of 23% in 2009 to 50% by 2020. The expected effect will be to substitute imported drugs with locally produced drugs, which will drive down prices and is expected to reduce government spending on drugs by 20-30%.
- A major provision of Pharma 2020 is a requirement that foreign drug importers invest in domestic manufacturing in Russia and transfer the necessary know-how and technology as a quid pro quo for continued market access. The plan also calls for the country to move toward importing only highly innovative drugs that have no domestically produced equivalents and substituting up to 60% by value of imported innovative drugs with domestically produced drugs by 2020.
The current trend is that many Western companies have already begun the process of transforming from an import-driven business model in Russia to a new model based on the local manufacture of drugs. Interesting company activities in this regard are:
- In August 2010, Teva Pharmaceutical Industries disclosed plans to triple sales in Russia by 2015 and to invest $100 million in a new manufacturing facility. Initially, the plant will only package drugs, including the multiple sclerosis blockbuster Copaxone (glatiramer acetate).
- In July 2010, Novo Nordisk announced plans to invest $80-$100 million in the construction of an insulin packaging plant in the Kaluga region that will package insulin in cartridges and insulin delivery devices. Later, the company may expand into full-scale local production.
- In June 2010, Nycomed began construction of a new $97 million manufacturing plant in Yaroslavi that is expected to be operational in 2014. Nycomed plans to produce both liquid and solid drugs at the plant for the Russia/CIS market.
These companies appear to be satisfying the local manufacturing requirement by packaging and formulation facilities. This trend implies that the requirements for local manufacture are somewhat soft at the current time. However, Novo Nordisk appears to be anticipating a future time when full-scale production may be mandated.
The nature of the exact manufacturing requirement is obviously important because it will directly impact the extent of the knowledge transfer and intellectual property drain that takes place between the MNC and the local entity. If countries require the local manufacture of biologics, for example, a significant amount of trade secrets will likely transfer to the local manufacturer/workforce about complicated fermentation technology and the quality control steps needed to ensure the efficacy and purity of the final drug. Some companies appear to be making a major investment in Russia:
- In December 2010, Novartis announced plans to invest $500 million in Russia over five years, including construction of a manufacturing plant in St. Petersburg and investments in R&D and public health collaborations. The plant will produce branded generics and innovative brands for the domestic market and for export. R&D investments will include collaborations with universities and academia and with emerging Russian private technology companies. Novartis could outlicense compounds to these companies or inlicense promising drug candidates developed in Russia. Novartis also plans to double its investment in local clinical trials,
It remains to be seen what the exact nature of Novartis's manufacture of innovative brands will be in Russia. Beginning with the local manufacture of branded generics may be a good strategy to satisfy the local manufacturing requirement and establish a good working relation with important government officials. Novartis's full-scale manufacturing of innovative brands may never come to fruition. In this regard, having a portfolio of branded generics for emerging markets seems a good strategy.
- Executing Change: Pharmas Emerging Market Strategies in Asia Pacific
- Special Report: Opportunities in Emerging Markets Central and Eastern Europe, Russia, and Ukraine