Dr. Imran Ahmad Khan is the CEO and Managing Director of Bayer Pakistan, a German-based multinational life sciences company specializing in healthcare and agriculture.
Prior to his current position at Bayer, Dr. Khan has worked in general and portfolio management with a career spanning nearly two decades. He has also worked for other multinational pharmaceutical companies including Pfizer and Eli Lilly. Dr. Khan is a medical doctor by qualification. He holds an MBA from the Lahore University of Management Sciences (LUMS).
He spoke to BR Research about Bayer’s operations and future growth plans in Pakistan. Here are edited excerpts.
BR Research: Tell us about Bayer, how big is Pakistan’s existing pharmaceutical market and Bayer’s position in it.
Imran Ahmad Khan: Globally, Bayer has been operating for over 150 years. It started as a chemical company and later on, diversified. It is now a life science company—our focus is on healthcare and nutrition. In Pakistan, we started our operations in 1963 as a pharmaceutical company. In early 2000’s when we acquired Aventis’ crop science business, our agriculture footprint was established. Now with the acquisition of Monsanto, our business is sizeable in both segments. We are operating in three divisions: Pharmaceuticals, Consumer Health and Crop Science. Around 50 percent of our business is coming from healthcare while the rest is from agriculture.
Pakistan’s pharmaceutical market is around Rs450 billion—growing at around double digits over the last few years. Primarily, this growth factor is being driven by the local pharmaceutical industry. Over the last 20 years, every year multinationals are losing 0.7-0.8 percent market share. They now have 30-32 percent share in the market while locals have the lion’s share (68%) of the market. Within multinationals, Bayer has a good position. I would put our market share at 5 percent in this group—1.6 percent of the total. In agriculture space, we are operating further into two divisions: pesticides and seeds. In pesticides, we would have around 8 percent market share (with a market size of Rs40 billion as reported by CropLife. There may be many small players whose sales data is not reported), while in seeds business, we have over 40 percent share (market size: Rs10 billion).
Our consumer health segment is a little smaller. In Pakistan, 90 percent of our consumer health business comprises those products which, in other countries, are over-the-counter (OTC) non-prescription; this is somewhat unusual. Only 10 percent of our consumer health portfolio is non-prescription; the rest are prescription based which are regulated and price controlled by Drug Regulatory Authority of Pakistan (DRAP).
BRR: Why has the market share for multinational pharmaceutical companies reduced consistently over the years in Pakistan?
IAK: One reason is that local companies are expanding. New product introduction by domestic players has been huge, which has contributed to their growing market share. Local companies are bringing more generic products.
BRR: Is price fixing by DRAP a consultative exercise? Walk us through the mechanism of price fixing in Pakistan—what factors go into determining and controlling the price?
IAK: It is an industry demand that there should be a proper pricing policy in Pakistan. The last price increase was in 2002 and after that, price increases were done on an ad-hoc basis for different products. Many were no longer financially viable to be locally manufactured. In 2015, a pricing policy was drafted and approved, and again in 2018, it was deliberated.
Pharmaceutical companies have to first go for product registration in Pakistan. There is a registration board which looks into different factors. Once the product is registered, it goes to the price fixation committee. The committee first looks at whether the product is available in India, Bangladesh and Sri Lanka. If yes, the committee takes the reference price from these countries. This sets a benchmark for the prices that are fixing for products here. The first rule of thumb is that the price cannot be higher than India’s price of the same product. If this first reference from the three countries is not available, then the committee takes reference from a few other countries—including Philippines, Indonesia, and Malaysia.
These reference prices need to be attested (for proof) by one of the big four auditing firms or the relevant IMS of the country. They use the average of these references price and then look at the cost of the medicine. In the case of imported products, they look at the original invoices, and add a certain percentage to it, which determines the price. For a local product, it is cost plus a certain percentage as well. If this absolute value comes at more than the average reference price, the committee will not give us that price. The only acceptable price is below the reference.
BRR: This seems to be very arbitrary given that different countries incur different costs of production and cost of import with a number of factors working together.
IAK: We are pleased that there is a framework in place. If they are looking at reference countries, that is also acceptable. What we are more concerned about are the timelines. For a multinational to register a product with pricing, it takes 2-2.5 years. This time period results in significant delays, which could be avoided.
BRR: How often are prices increased and what is the mechanism for that? The industry so far seems unsatisfied with the price hikes.
IAK: As per the current policy, pharmaceutical companies can increase their prices as a percentage of inflation. The government has divided the products into two categories: scheduled and non-scheduled. These are typically either called controlled and decontrolled lists or essential medicine list or non-essential medicines list. Pakistan has placed roughly 200 products in the scheduled category. Pharmaceutical companies can increase the price of scheduled medicine products every year at 70 percent of the reported inflation by the Pakistan Bureau of Statistics (PBS). If the reported inflation is 7 percent, the company can raise price up to 4.9 percent and notify DRAP of the hike. For non-scheduled products, we can increase by 100 percent of the reported inflation each year.
BRR: Is that enough given other factors?
IAK: No it is not. In the last year and a half, we have seen the Pakistani rupee depreciate by 35 percent against the dollar. We have to face domestic inflation as well as the devaluation. The price increase allowed is simply not enough.
BRR: Presumably, margins for pharmaceutical companies are low. But then there are some firms that are competitive and are actually exporting their medicines abroad. How are they able to do that?
IAK: Firstly, it is definitely scale. Secondly, the breadth of the portfolio. These companies are normally into the generic business and typically operate in all the categories of therapeutic area. In every prescription and field, you will find their product. They are very broad and because of scale they can afford it.
BRR: How much of your portfolio is locally manufactured?
IAK: We have local manufacturing for healthcare and we are operating that through two plants in Karachi and Lahore. I would say about 50-60 percent of our healthcare portfolio is locally manufactured. In crop science, our entire portfolio (seeds and pesticides) is imported.
BRR: What is the share of local vs imported content in the products that you manufacture in Pakistan? What is the case for the industry in terms of costs?
IAK: All of the raw material is imported. Locally, we do not have Active Product Ingredient (API) in the country. There are several reasons for it. We can do it with investment and scale since we require a proper infrastructure in place.
Cost of goods sold is very high. In addition, the marketing costs also varies. Margins have severely declined over the years. I’m talking about multinationals in particular. Cost of imported content as a share of cost of goods sold should be around 60 percent.
BRR: Do you think price controls should be removed and prices be left to the market forces?
IAK: Ideally yes. But understandably there are reservations. A possible solution is to control the prices of the products in the essential list and decontrol the non-scheduled products. Once the market is free, competition will take care of prices. At the same time, the government has to ensure that proper checks and balances are in place. Those companies that are not producing quality or standardized products should not get licenses. The registration of products should undergo vigorous quality control checks, and there should be a bench-marking of standards which then can be used effectively for these controls.
India, which is also our first reference country has an essential products list that are price-controlled. For other products, companies don’t have to go for price approval. They only submit the products for registration and the companies themselves fix the prices.
BRR: Aside from price controls, what other regulatory hang-ups need to be fixed to create a competitive and growing pharmaceutical industry.
IAK: There are obvious issues with cost of doing business. Decision making in regulation needs to be faster. We are also asking the government to allow contract manufacturing in the country which will not only promote technology transfer and expand local industry, but will allow us to boost export business as well. Right now, you need to have a proper plant manufacturing facility to have third-party manufacturing. This is not the case in other countries. We are lagging behind in pharmaceutical exports when we could be doing so much. I would mention that, in India contract manufacturing is allowed without having a running plant in place.
The government’s argument is that contract manufacturing would discourage multinational companies to come and set up shop here. But the counter argument is that, when multinational companies contract out their manufacturing, they will never compromise on the quality and standards. Automatically, this would result in the technology transfer domestically—the same technology and controls being used globally. No multinational company compromises on its reputation.
Courtesy: Business Recorder