Kingdom of Uncertainty

September 2, 2006

Multinational, brand-name drug companies dominate 70% of the whole market, whereas local and generic drug companies dominate 30% of the market.

Thailand is not China. As obvious as that sounds, Thailand's pharmaceutical industry, like many other industries in Southeast Asia, is caught in the same shadow cast on China for intellectual property (IP) infringement and below-standard manufacturing practices.

More than 600,000 HIV/AIDS-infected Thai, together with recent SARS pandemic concerns, have Thailand's health officials more concerned about treatment and stockpiling medicine for containment than accepting stricter IP demands and higher standards set by the United States in their Thai–US Free Trade Agreement (FTA). Delayed until after the general election later this year, the Thai–US FTA has been widely criticized by Thai pharmaceutical manufacturers as imposing unreasonable patent demands and stringent standards in return for risking national supply and driving up the prices of life-saving drugs.

"There is no standard too high when it comes to making medicine and saving lives," says Thawan Cheunkarndee, founder and chairman of Siam Pharmaceuticals. "However, those who impose standards with hidden economic agendas do not have this moral obligation in mind when they prevent us from making and providing life-saving medicine at affordable prices," he adds.

Despite US claims that patented and generic drug prices will not change under the new FTA, Thai pharmaceutical manufacturers are unsure. Of the estimated 160 members of the Thai Pharmaceutical Manufacturers Association (TPMA), several of them are already struggling to meet the lenient Thai Health Ministry standards, let alone good manufacturing practice (GMP) standards or even the new Pharmaceutical Inspection Cooperation Scheme (PIC/S) required for exporting and competing openly in most foreign markets. PIC/S member countries from the Asian region so far include only Singapore and Malaysia.

Certain pharmaceutical manufacturers in Thailand already have such standards in place and have been maintaining them for years. Siam Pharmaceuticals, BioLab, SilomMedical, and ANB Laboratories, to name a few, have been heavily investing in keeping production standards on par with the world's best.

"We are one of the first facilities foreigners visit when they come to Thailand," boasts Rachod Thakolsri, managing director of BioLab's pharmaceutical manufacturing. Having invested nearly $5 million in the past three years to meet GMP standards, BioLab's newest facility for freeze-drying injectables already meets PIC/S standards.

Nevertheless, meeting standards means increased costs and raising the price of manufactured drugs, a practice many manufacturers can only afford if they export their products globally.

Besides, the government's "30 Baht Health Plan," by putting the emphasis on cheaper prices for generics, has left Thailand's pharmaceutical industry with little room to compete domestically.

Chernporn Tengamnuay, president of TPMA and managing director of his own company, Greater-Pharma, describes the sliver of market left for private pharmaceutical manufacturers to compete in: "There are two main domestic markets in Thailand for pharmaceutical products: 70% is the hospital market and 30% is the drugstore and pharmacy market. In terms of value, multinational brand-name drug companies control 70% of the market, leaving 30% for local companies and generic drugs. Now, of this 30%, a 70% share is the hospital market, which GPO (Government Pharmaceutical Organization) monopolizes by mandate of the Health Ministry. So you can see how much of a share of the market is left for us to compete in," Chernporn sighs.

Thai law has placed GPO in quite a lucrative position. Not only is the company an active player in the private market, it is also the leading distributor of drugs to the public sector. The Ministry of Health is required to spend 80% of its medical drug budget on procuring essential drugs supplied by GPO. Recent changes in local bidding for distribution rights also have limited the number of contracts awarded to companies looking to distribute their products.

Lieutenant General MD Mongkol Jivasantikarn, managing director of GPO states, "We (GPO) now have a strategy to subcontract out our distribution and allow for more competition in this area." However, besides the changes in bidding conditions, recent mandatory spending that forces hospitals to buy their drugs from GPO (passing from 70% to 80%) is hardly a sign that the status quo is going to change.

"On one hand, you have this agency lowering the price for certain drugs to supply the hospitals in order to subsidize the health plan," says Rachod Thakolsri, managing director of Biolab Co., Ltd., "and on the other hand, you have an agency raising manufacturing standards, which, in turn, increases our costs. These two agencies should work as one and give us (pharmaceutical manufacturers) an incentive to compete in the domestic market and enter government tenders for distribution."

The dilemma of manufacturing large volumes with decreasing profit margins has several manufacturers dreaming of foreign markets to penetrate, even though few have the capacity to spare for such a venture.

"Our new facility will be at full capacity before it even goes online," says Chukiet Kulpaisal, senior export manager of ANB Laboratories. A major producer of IV solutions, ANB laboratories is a classic example of a Thai family-owned and -managed business, with its meager beginnings dating back to World War II. Now providing nearly 80% of the domestic market with its product, Kulpaisal and his brother, managing director Chusak Kulpaisal, both comment: "Our margins are so small that we are left with precious little capital to invest in more capacity." Yet, despite the lack of elbow room in the operation, ANB Laboratories has developed an injectable contraceptive that they can produce without affecting their capacity for IV solutions. Already distributing some 800,000 doses per year for Thailand and Nepal, Chukiet sees this as on opportunity to look outside the domestic market. "This is what we want to export: We can produce 30 million doses a year and not affect our main capacity, and then we can look to increase our prices for better profit margins."

Looking at the picture from another perspective are the pharmaceutical equipment manufacturers. Traditionally well known for their meticulous attention to detail, Thai pharmaceutical equipment manufacturers are solidly rooted in Asian markets. With competition left to only a handful of companies, the domestic market for pharmaceutical equipment is virtually a free range. Pharmaceutical and Medical Supply Ltd. (PMS) currently exports to 30 countries while maintaining a strong presence in the Thai market. Originally a pharmacist, PMS's founder and managing director Sukavat Amarekajorn recalls providing customized solutions for many top local manufacturers during their early stages of development. "We compete in this region with brandname European companies because we are closer and up to 60% less expensive than their standard solutions."

Amarekajorn believes that the Thai pharmaceutical manufacturers' struggle to meet higher standards will be arduous. He predicts that "at least 50% of the local companies will not be able to meet the new standards and will have to find alternative products to manufacture."

GMP and PIC/S are necessary for establishing world standards and ensuring the quality of manufactured drugs. As Thawan Cheunkarndee of Siam Pharmaceuticals points out, "standards are not challenges, they are our duties as producers of medicine that we must continually observe and fullfil."

Stringent TRIPS (Trade-Related Intellectual Property Rights) and the calls for "TRIPS Plus"—demands by the US to extend patent terms and data-exclusivity provisions, which would prevent generic production of patented drugs for up to eleven years from expiration of their patents—will undoubtedly affect those who need the drugs the most.

Six hundred thousand Thai infected with HIV/AIDS have been able to afford first-generation anti-retroviral treatment by way of cheap generic drugs. Inevitably, resistance to the first-generation treatment will necessitate second- and third-generation treatments, and if US TRIPS Plus demands are accepted, the cost of the second- and third-generation treatments will be a fortune to even middle-income Thai, let alone those citizens who live below the poverty line, where diseases are most prevalent.

Fortunately, affordable generic drugs and anti-retroviral treatments recently added to the "30 Baht Health Plan" coverage have reduced the HIV/AIDS-related deaths in Thailand by nearly 80% as of this year. Estimates from the Ministry of Health predict that over 80,000 Thai now have access to treatment, and the number is expected to grow to 150,000 by year 2008.

Although this may be a testament to Thailand's unwavering resolve to uphold human rights and provide its citizens with healthcare, Thai pharmaceutical manufacturers are burdened with the cost of producing these drugs. Thus, the Thai Government should be concentrating on supporting manufacturers and allow a more competitive market to keep the medicine coming. Moreover, once HIV/AIDS patients have started first-generation treatment, the government will be expected to provide second- and third-generation treatment. This will require greater government subsidy of the 30 Baht healthcare plan and a laissez-faire policy toward distribution of the medicine. This, and acceptance of TRIPS Plus's strict prohibition of locally manufactured generic drugs and the eventual exorbitant prices for next-generation drugs will surely break the Thai Government's bank.

Thailand has backed itself into a corner. Unless the Thai government stands firm against Thai–US FTA provisions and gives serious attention to deregulating domestic distribution policy, drug prices will proably rise as they have over the past two years in Morocco and Peru following US agreements. In addition, there could be a shortage in the national supply of life-saving drugs as factories, unable to meet standards or survive low profit margins, are forced to close. This will undoubtedly lead Thailand pharmaceutical manufacturers to either shape up or ship out of the industry.

This report was prepared by Executive Country Reviews. Authors are Gilles Valentin gilles@ecreviews.com Emmanuelle Berthemet emma@ecreviews.com Marco Parigi marco@ecreviews.com Amicie de Bodinat amicie@ecreviews.com and Yaz Yazicioglu yaz@ecreviews.com)

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