1) PHARMACEUTICAL INDUSTRY ANALYSIS

1.1 Industry Background:

The total industry can broadly be classified into two categories. Theses are
a) Patent Medicines
b) Generic Medicines

Patent medicines are the products that are invented by the company, who have their own research
team working on their own laboratories. These products are patented for many years to enjoy the
monopoly market. After years of business the formulation is sold in the market so that others can
go into mass production.

Generic medicines are the products that are produced in mass scale. These are marketed by
several companies under different brand name, where the formulation of this product is almost
same. Prices of the products are under this category are competitive. Bangladesh mainly
concentrates on this category, as labor cost is one of the lowest in the world.

1.2 Growth & Trends:

The growth potential of pharmaceutical industry is enormous. As urban population is increasing

and people are getting educated, they are now more concerned about healthcare. So the demands
of medical products are rising. In Bangladesh unhygienic conditions and poor health
maintenance plans provide vast scope for the pharmaceutical firms to sell their products. On the
other hand, the constant natural disasters provide opportunities to pharmaceutical companies to
boost its sales. The industry is growing the protection of national Drug Policy 1982. But after the
GATT regulation, changes are bound to take place. Furthermore, the trend & growth of this
industry tends to be positive as the demand of medicines is rising, which have mentioned earlier.

1.3 Demand:
Bangladesh is prone to tropical diseases, and this leads to a high demand for pharmaceutical
goods. Because of this and the poor health and hygiene situations, a steady growth in the
pharmaceutical sector is possible. Demand is positively related to the changes in disposable
income. Assuming that income per capita will continue to increase, it may be predicted that the
demand for pharmaceuticals will also continue to rise.

Dhaka is the largest contributor, with nearly 35% market share. Chittagong and Sylhet follow
with 26% market share each. Khulna has a much smaller share of 14%, but it has an immense
growth potential because of the higher value sales per chemist.

Dhaka also has the highest per capita expenditure on drugs. Studies have shown that people in
urban areas tend to consume more pharmaceutical products compared to people living in rural
areas.

Urbanization is steadily increasing in Bangladesh, as more and more people move in from rural
areas to live in Dhaka and the other cities. Because of the increased frequency in natural
disasters, people prefer to live and work in cities other than in villages. This bears a direct impact
on the volume of sales of the pharmaceutical companies. As more people are living in relatively
developed areas, the demand for medicine is also rising. This provides a great opportunity for the
companies to increase their sales.

1.4 Imported Raw Materials:

The risk for the sector is, basic chemicals that are used as raw materials, need to import for most
of the cases. Large pharmaceutical companies like Beximco, Square and Gano Shastho have
taken up ventures to produce basic chemicals, though they yield lower margin in spite of high
demand. In order to remain healthy in the long run, the sector needs support from the
government in production of basic chemicals. Highly regulated drug policy & price control
mechanisms imposed by the government require that raw material components produced locally
may not be imported. 90% of the raw materials are imported from different international
suppliers through sight DC (L/C) and deferred DCs. Average stockholding period is 165 days.
Trade cycle is 120 days if (sales: 95% on cash basis & 5% on 30 days credit basis and 80% of
90% imported RM are on deferred basis). Trade cycle 240 days if (sales 100% on 60 days credit
and 90% import on sight basis); Trade cycle 156 days if (sales on 30-90 days credit and 70%
import on DPC basis/30% on sight).

1.5 Export

There is tremendous potential for the export of medicine from Bangladesh to become a growing,
booming business. The pharmaceutical sector has a large potential market abroad. Drugs
produced in the country commands high demand in the foreign markets as the sector maintains
high quality. (See Appendix for more on Drug Export)

Policy plays important role in boosting any industrial sector and that has happened to the
pharmaceutical industry of the country. 1982 is considered as a landmark in the pharmaceutical
industry’s history of Bangladesh when a new “Drug Policy” was
formulated in the year. The objective of the policy was to become self-reliant in the
pharmaceuticals sector to provide essential drugs to patients at an affordable cost, to uphold
consumers’ interest by providing them effective and quality drugs. “Drug
Policy” was found highly successful in achieving almost all its declared objectives. In
fact, Bangladesh was the first and the pioneer in formulating such a policy in the line with the
guidelines for essential drugs as recommended by the World Health Organization (WHO).

The Drug Policy is under review to meet the needs of the present time. According to the
Minister, Ministry of Health and Family Welfare, Dr. Khandaker Mosharraf Hossain, the draft
has already been proposed. To his opinion the reviewed policy will further facilitate the growth
of the pharmaceutical sector. (Source: The Business Bangladesh, March 2004)

Bangladesh is now almost a self-sufficient in its pharmaceuticals sector as 97% of the

country’s drug demand is met by local manufacturers. With the success in the domestic
market place the Bangladesh Pharmaceutical Industries are now attempting 7to enter into the
international market.
1.6 Problems in Drug Export:

In the international scenario Bangladesh has got a tremendous “image” problem.

Bangladesh is known world-wide as a country of flood, famine, natural calamities and political
unrest. Most of the people are poor. So, it is considered that Bangladesh product quality is also
poor in nature. The local drug manufacturers compete with each other with certain protection
from government regarding drug import. But, in the international arena there is great competition
with USA & EU based giant multinationals, having their own research brands. From
multinationals the threat is “Quality” and from neighboring country, India the
threat is “Price”. India is such a country, which has got almost all resources to
produce and sell pharmaceutical products at a very low price. Again, India’s country
“image” is better as compared to Bangladesh. So, it has to compete with
“Quality” and “Price” in order to export drugs to neighboring as
well as in the international market.

1.7 Prospects of Drug Export:

After the garments sector, drug and pharmaceutical products are considered to be the most
prospective items to be exported as non-traditional goods. Bangladesh Pharmaceutical products
are of the highest standard, which complies with the British Pharmacopoeia (BP) and the United
States Pharmacopoeia (USP) standard specifications. Many of the large Bangladesh drug
manufacturers’ employs state-of-the-art manufacturing and quality control technology
imported from EU and USA. Moreover, some of the manufacturers are now International
Standard Organization, ISO 9001 certified, in addition to it packaging design and get-up
presentation of Bangladesh drugs are far better than Indian counterpart. So, with the highest
quality and beautiful packaging presentation Bangladesh is now a very good candidate to face
the international competition.

Some of the Bangladesh drug manufacturers are already operating their business in many
countries of the world. With proper selection of market blended with foresighted marketing and
promotional strategies, Bangladesh would be able to place its pharmaceutical products to the
global market.

1.8 Regulatory Environment Analysis

1.8.1 Government Policies:

The domestic Pharmaceutical Industry is protected and controlled by the National Drug Policy of
1982. The Drug Administration, based on the price of the raw materials, fixes Price of 117
essential drug categories. Even then the statistics of few major companies indicate that they can
achieve margins as high as 30% gross and 15% net.

Director, Drug Administration is the only designated authority that gives license for producing
drugs. Most of the cases, production is delayed due to bureaucratic complexities. There are
complains that, production even delayed for two years. Therefore, the licensing policy should be
more flexible to stay in the competitive market.

As a signatory to GATT, Bangladesh has to deregulate the sector by 2005. Local manufacturers
will then be exposed to the competition from imported products and multinational companies
(MNCs). The real implication of deregulation needs in-depth analysis. But it is expected that
domestic units will be strong enough by that time, attaining economy of scale and passing a
significant time in the experience curve.

The Government of the People's Republic of Bangladesh is not strict enough to control the
smuggling of illegal medicines particularly from neighbouring countries. Availability of
adulterated and spurious drugs is also increasing day by day. All these hamper the healthy
growth in the pharmaceutical market.

For certain category of drugs, government regulates the formalities and fixes the maximum price
despite the increase of raw material on those drugs in the international market. Sometimes this
forces the industry to market the product at a negative profit.

It is very difficult to export pharmaceutical products from Bangladesh against the letter of credit.
Generally the firms have to export on the basis on the basis of document acceptance. In the most
favourable cases, one may receive the letter of credit with 90-120 days deferred payment.
Government regulation to submit PRC (Proceed Realization Certificate) within two months from
the date of shipment is impractical since payment is made after 90-120 days. After that, the firms
have to go through to realize the payment, which may need about another two months time.
Considering these practical aspects, PRC submission date should be expected to six months from
the date of shipment.

Pharmaceutical products are highly specialized and require extensive promotional activities. The
cost of such promotion is certainly very high. In many cases the agents carry out the promotional
activities and the firms have to reimburse the promotional cost as a commission. Bangladesh
Bank currently permits to transfer maximum of 5% of L.C. value as a commission, which is
inadequate.

On the other hand, presently as per Bangladesh Bank regulations, any company, which opens a
representative of marketing office in a foreign country, its exports are allowed to remit only
US$30,000 per year to meet the office expenses. This amount is not at all adequate in view of the
nature of pharmaceutical business and huge promotional costs.

1.8.2 Trade Related Intellectual Property Right (TRIP) Agreement:

Strategy prior to 2016

The transition period for Bangladesh to implement the patent protection to products is extended
up to January 2016. the transition was proposed in Doha Ministerial Conference and approved by
TRIPs Council in 28th June, 2002. Bangladesh should plan accordingly for effective and
efficient utilization of this additional 10 years extension. The Govt. of Bangladesh should play
the key role in supporting the industry by formulating policies that ensure growth and smooth
survival on the industry.

Strategy after 2016

After the expiration of the transition period in 2016, the situation in Bangladesh will be changed
dramatically. In order to comply with TRIP’s obligations, Bangladesh must provide
patent protection for pharmaceutical products. Domestic companies will have to obtain licenses
from patent owner to import APIs from countries that either issue compulsory license to export
or otherwise permit the export of generic drugs and to permit parallel importing. If by 2016,
Bangladesh is able to manufacture APIs that are under patent, then it is essential to obtain license
from patent holder through proper agreements.

1.8.3 TRIM Agreement:

The TRIM Agreement stands for Agreement on Trade Related Investment Measures. Bangladesh
has to essentially implement it from 1 January, 2006. As per this Agreement, Bangladesh cannot
show any types of discrimination to member countries of the WTO and also cannot protect the
domestic industry by imposing restriction on import.

At present, an executive order of the Government (in 1994, on the basis of Drug Ordinance
1982) restricts import of APIs from outside of Bangladesh, which are manufactured locally
sufficient to meet the domestic need. But from 2006, domestic manufacturers of APIs will be in
problem as India and China will be ready to supply the off-patent APIs probably at lower costs
than existing. So, investment in manufacturing of APIs in private sector may be observed as non-
profitable. For successful handling of the problem, the Government should start negotiation with
WTO to get a waiver in this field at least for up to 2016.

2) INDUSTRY RISK PROFILE

From the bank’s perspective this is the most concerned area before investing into any
industry. The Relationship Managers thus want to assess the industry in detail so that they can
have clear idea what should be policy to have a healthy return after investing here. From
EBL’s perspective, the Pharmaceutical Industry itself is classified as moderately low risk
based on an assessment of the following key areas.

With the growing development of per capita income, there has been a series of positive changes
in the pharmaceutical industry in Bangladesh. Major buyers of drugs include hospitals,
government, NGOs, as well as individual retail and wholesale buyers. Presently there are 1208
wholesale medicine shops and 48000 licensed retail shop in the country. Trend of local
consumption of drugs in mainly driven by doctor’s prescription. Companies sell their
medicine at their own marketing initiative through depots, agencies sales representatives or
wholesalers, to the retail shops in the country.

2.1 Key industry risks under this sector are:

• Deregulation after 2005: stiff competition from MNCs as they will be allowed to sell
generic drugs.
• Existence of National drug policy: controls price of 117 categories of drugs based on
raw materials.
• Heavy reliance on imported raw materials: price volatility may increase the production
costs and lead-time for local manufacturers.

In the following section the key risk areas of the industry are elaborated. In addition to that the
risk grades, which have been assigned by the bank for the particular criteria, are also mentioned.

2.2 Cost structure of the industry:

Under the government protection measures local law restricts companies to import raw materials,
which are available locally. This industry however, is heavily depended on imported raw
materials (i.e. Active Ingredients, Excipients, and packing materials), accounts 80% to 90% of
total requirements as local sources are not adequate in terms of volume and quality. Generally
raw material costs account 45% - 55% of sales. Apart from the cost of imports, conversion costs
and other regulatory taxes are the major costs items on the production of drugs, medicines and
other pharmaceutical products.

Drug manufacturing is moderately capital-intensive business; ample amount of financial

resources as well as cash is required for a successful start. Modern production facilities, licenses,
wide distribution network, strong sales force and most importantly quality products are the
crucial factors for volume sales.

2.3 Maturity:

As mentioned earlier, the local pharmaceutical industry is a growing sector, although the
industry growth rate declined in 2002. The more matured and well established companies,
especially multinational such tend to have a lower growth rate within the industry due to the
limited size of the market segment where they operate. Government is now actively encouraging
the sector and assisting to explore export market through various trade agreements. The quality
of the locally produced drugs is perceived to be better than neighboring countries and some large
players (Novertis, Beximco, Navana, Square etc.) have already begun to sell in cross border
markets. Considering the above the growth rate is expected to be more than 15% in 2003

2.4 Competition:

Competition in the local pharmaceutical industry is fierce. Stiff competition exists for certain
products (Antacids, Paraceutamols and certain antibiotics); the law prohibits these from being
made by MNCs. Despite a lack of enforcement of patent protection and opportunities created,
substantial capex and marketing overheads, technical issues and distribution pose barriers to new
entrance.

In the global context, by 2005, an estimated 20 major pharmaceutical products with current sales
(whilst under-patent) in excess of USD 40 Bn per annum, will lose patent protection in the
developed countries and will be classified as generics. Even if prices erode by 70%-80%, once
patents expire, the market for those drugs is estimated at USD 8 Bn pa.

2.5 Cyclicality:

First and foremost, life saving pharmaceutical products is necessary for everyday life. Therefore
cyclicality of the economy does not create much impact in demand for medicines. Furthermore,
prevailing weather condition, water borne diseases during flood, dengue fever and cardio
vascular diseases cause some swings in demand.

2.6 Business operating cycle:

Business operating cycle under this industry depends on terms of sells adopted by the
pharmaceuticals company. If the sales are made in cash, the trade cycle may extend to 170-180
days considering 150 days inventory days on hand. However, most of the large players’
sales are made on 30-60 days credit, for which trade cycle may go over 200 days. Most of the
raw materials, which are not available locally, are imported on deferred DC basis with usual
tenor of 120 days. The import may also be financed by post import financing of sight DC bills
for 90-120 days. Import liabilities are usually settled through regular sales proceeds.

2.7 Profitability:

Domestic pharmaceutical industry is protected and controlled by National Drug Policy of 1982,
under which the price of 117 drug categories has been fixed based on price of raw materials.

Self-pricing with prior approval from the authority is also allowed under a new pricing policy for
certain category of drugs. There is no regulation for importing raw materials. It is noted that even
then gross margins are high due to growing local demand. Presently number of registered items
(in brand names) is 8000. Ideally, well established players with mass market coverage yield a
gross profit margin of 35% - 40% and operating profit margin of 20%-25%. There remains huge
potentiality to earn more foreign currency by exporting medicines. Export of medicine (BDT
500M in FY 2002) from Bangladesh is mainly to Russia, Ukraine, Pakistan, Myanmar,
Singapore, Vietnam, Nepal, Kenya etc.

Globally until now, foreign manufacturers (MNCs), were focused on the three major markets viz.
USA, Europe and Japan, mainly due to lack of adequate patent protection in other countries.
With the implementation of uniform patent laws under WTO effective 01Jan05, new drug
patented thereafter will be protected for 20 years across all the signatory countries. MNCs will
therefore be more inclined to strengthening their presence in the first growing markets of the
developing countries, which will help them to spread their R&D costs over larger volumes.
However product pricing in the developing countries will have to take into account the low per
capita earnings and spending on healthcare.

2.8 Dependence:

As local pharmaceutical industries highly regulated, dependence appears to be less risk issue.
There are numerous buyers through out the country and over 200 manufacturers meet entire
demand. Generic drugs are manufactured by various local players’ whereas MNCs
remain key players in specialized products such as cancer, heart and multi-vitamins as the local
counterparts do not have the technology and budget to develop such products. To diversify the
market base, some of the quality producers have stated to export drugs to many countries.

2.9 Vulnerability to Substitute

Threat for substitutes by local manufacturers’, remains in different product categories in

the same generic segment, especially for the MNCs importing finished products. However
companies make differentiation through registration of products in different trade names. The
ultimate promotion, quality and effectiveness of the products usually make the individual
products acceptable to the customers. Companies with R&D facility, product positioning,
extensive sales and distribution team, will be coping well with the competition.
Under patent drugs will command high margins, and be protected from price wars, as long as
substitutes are no available. Generic drugs will attract more manufacturers, making them
progressively less profitable as prices are driven down by direct and open competition. Herbal
medicine could appear as a possible substitute to the chemical drugs and formulations. But due to
unavailability and pricing issue, this alternative has not proved to be preferred choice for
customers.

2.10 Regulatory Environment:

The Bangladeshi pharmaceutical industry has evolved around the opportunities and limitations in
a regulated environment. Price ceiling on various categories of drugs are controlled by national
drug policy of 1982 based on price of raw materials.

Furthermore, to protect the local manufacturers, existing laws prohibits certain products
(antacids, paracetamols and certain antibiotics) from being made by MNCs. Though there is no
restriction in importing raw materials, local law also says raw materials, which are locally
available are not allowed to import.
In general, drugs are locally manufactured in accordance with Good Manufacturing Practice
(GMP) criteria in line with guidelines of British and US Pharmacopoeias.

2.11 Vulnerability to Environmental / Reputational Risk:

Whilst environmental/reputational risk is not a major concern under the sector, but lack of local
regulation and regard for environment exposes this industry to environmental risk for players
having inappropriate waste disposal system. Large established supplying to export market
generally has state-of-the-art production facilities and maintained higher labor/ environmental
standards that would stand up to be acceptable to FDA or MCA.

3) SWOT ANALYSIS
Local pharmaceuticals industry is characterized with some notable strength. However, this sector
is not free from weaknesses, which are the major hindrances for it’s sustainable growth.
These issues warrant immediate adjustment if future market opportunities are to be successfully
exploited and the increasing threats of the competing large global players are to be overcome.

3.1 Strengths:

The prime strengths of this thrust sector are (1) Growing market (2) �Doha
declaration’ on Trade Related Intellectual Property Right (TRIP) has extended the time
frame for LCD’s (like Bangladesh) up to 2016 in order to comply with patents for
medicines, enables local pharmaceuticals company to overriding patent law (3) Tight quality (4)
High Gross and operating margin compare to other industry (5) Low D/E ratio due to huge
growth and significant profit retention.

The local drug market is growing at double digit rate and offer strong growth potential in future.
Having met the local demand, large local players have already started to export. Currently,
export from this sector hovers around BDT 1.5Bn in 26 countries, according to BOSS
(Bangladesh Oushad Shilpa Samity). Some MNCs having Bangladesh operations unit also
become the global sourcing point for their group.

Incumbent drug policy still favors local drug producers to promote a balanced market dimension
in presence of some global players. The quality of drug is strictly monitored by the regulatory
body, which ensures flow of acceptable products in the mass market. Established players are
setting sate-of-the art production facilities to meet international standard.

3.2 Weaknesses:

Pharmaceutical companies are exposed to significant FX risk as the cash flow are in BDT and no
hedging instruments are available right now in the country against procurement of most of the
raw materials from overseas. Any deterioration in the BDT will have a negative affect on the
profitability of the industry players given government strict price control regulation. This strict
price regulation also exposed the industry players towards the risk of raw materials price
variation in the international market. Apart from the fixation of the price of 117 drugs categories,
the regulation also caps the maximum price for other drugs.

The MNCs are restricted from importing medicines that are produced by maximum three local
companies as per the restrictions imposed through drug policy of the government. Competition in
the local pharmaceutical industry is fierce. Stiff competition exists for certain products (antacids,
paraceutamol and certain antibiotics); the law prohibits these from being made by MNCs.

3.3 Opportunities:

Notable opportunities exist for local manufacturers through national drug policy, putting MNCs
in disadvantageous position. This favorable environment will partially disappear in the post 2005
and local manufacturers will exposed to stiff competition mainly arises from increasing cost of
raw material. The MNC Pharma companies have been a disadvantage compared to local players
for following reasons:

• Global best practices prevent them from reverse engineering any other MNC’s
products
• A larger proportion of their drugs are covered under the DPCO due to a more mature
product range
• Parent companies’ reluctance to launch new products in the absence of patent
production
• Limited export opportunities as parent companies already have a global presence
• Higher cost of manufacture due to parent company’s insistence in stricter
compliance with Good Manufacturing Practices (GMP)

The new drugs launched by MNCs will be high margin, low volume products, mostly imported
from overseas bases and marketed in Bangladesh to a limited population that can afford to pay
the prices. The majority of the Bangladeshi population will continue to use the older, presumably
less efficient, but cheaper medicines.

3.4 Threats:

With the implementation of uniform patent laws under WTO effective 01Jan05, new drugs
patented thereafter will be protected for 20 years across all the signatory countries. MNCs, at that
time will be more inclined to introduce the latest drugs from the parent portfolios, a big threat for
local generic producers. Globally until now, foreign manufacturers (MNCs) were focused on the
three major markets viz. USA, Europe and Japan mainly due to lack of adequate patent
protection in other countries. Even though true competition will begin after 2016 when TRIP will
expire, Uniform patent law to be implemented from Jan05 would increase the cost of raw
materials imported by the local pharmaceutical companies. Bangladesh imports raw materials
from India, Italy and China. As patent law increase the production cost of the medicine to a
greater extent, the manufacturer of these countries will charge higher price for raw material
export which in turn increase the cost of medicine in our country. Therefore, the advantage that
are currently enjoyed by local Pharma companies in terms of low cost and high margin will
significantly reduced, even in the presence of TRIP till 2016. Considering this imminent
problem, some large local players already started to develop technology to produce raw materials
locally.

After 2016, local players will have to compete directly with the MNCs as they will no longer be
allowed to override patent law.

MNCs, which do not have a presence in Bangladesh, are likely to enter into tie-ups with local
players to license their new products for sale in this market, which will help them spread their
R&D costs over larger volumes. Local players will continue to manufacture and market generic
drugs and also those pre-WTO (pre-2005) products, which may remain under-patent in the global
markets. The above would intensify the competition and marginal players may face fierce
challenges. However, product pricing in the developing countries will have to take into account
the low per capita earnings and spending on healthcare.