6. Case Examples

Pharmaceutical Companies: Market-access Barriers Intended to Lure Investment End Up Increasing Costs and Delaying the Delivery of New Drugs

International pharmaceutical manufacturers face different obstacles in advanced and emerging markets. In advanced markets like the US and European Union, companies must contend with customs barriers to enable their supply chains to function smoothly. Meanwhile, many emerging markets, eager to improve their citizens’ access to affordable, high-quality healthcare, try to encourage pharmaceutical companies to invest locally. This undermines efficiency and drives up operating costs with price caps and other regulations that end up limiting the availability of new treatments. 

As participants in one of the global economy’s leading high-value growth industries, pharmaceutical companies face conflicting challenges in advanced and emerging economies. In the US and EU where most leading drug research is based, pharmaceutical companies strive to work around inconsistent standards, customs and infrastructure barriers that handicap the efficient operation of their downstream supply chains. Meanwhile, governments in developing countries impose market access barriers as a way to encourage pharmaceutical companies to maximize their local investments in different aspects of their operations from manufacturing and distribution centres to R&D and clinical trials. These measures present obstacles to greater efficiency that would foster the industry’s continued global growth and would ensure greater access for people to newer medications. 

Country-specific measures that restrict imports and increase local investment are a significant source of friction in the cross-border trade of pharmaceutical goods (see figure). In Indonesia, for example, only pharmaceutical companies that set up their own factories or sign a transfer license with a local manufacturer will be eligible to sell their own drugs in the fast-growing market following a two-year transition period.⁶⁴ Vietnam sets import quotas for active pharmaceutical ingredients and inner packaging materials, restricting imports to pharmaceutical companies that invest in local manufacturing or storage facilities.⁶⁵ Thailand established a burdensome permitting process that obliges pharmaceutical companies to periodically disclose proprietary information, resulting in delays of as long as a year to satisfy all the requirements.⁶⁶ Pharmaceutical companies acknowledge that market access barriers like these force them either to delay the introduction of new drugs into the market or not to enter it at all. Companies that do set up local production generally bear higher financial costs and are unable to capture economies of scale that boost production efficiency.

Figure 23: Pharmaceutical companies face major market access barriers in Asia’s emerging economies (not exhaustive)

The cumulative effect of local manufacturing requirements is to increase pharmaceutical companies’ investments needs, which in turn reduces the number of new drugs they release and increases the time-to-market for those that end up getting produced. Developing the new products may necessitate installing new technology at a plant. Those investment costs multiply when a company operates several plants spread across the globe and must upgrade them all. Pharma companies have a strong incentive, of course, to focus their investments first on the bigger, mature markets. It can take years before they get around to reequipping plants in less developed regions, depriving them of access to new medication in the meantime. 

An increasingly large burden the pharmaceutical industry faces is the requirement more countries are imposing on them to conduct local clinical trials to determine the safety and efficacy of new drugs. With upfront new-product development costs averaging some US$ 1 billion,⁶⁷ clinical trials are one of the most expensive and time-consuming investments pharmaceutical companies make, taking anywhere from four to seven years (see figure).

Currently, most clinical trials are carried out in the US, EU and other countries with advanced economies, where markets are big and regulatory standards are strict and well-established. As testing requirements have become more standardized internationally in recent years, developing countries can present an attractive opportunity to offshore clinical trials because the costs per patient participating in trials can run half or less than in an advanced market. In 2011, developing markets attracted some 16% of total pharmaceutical company spending on drug trials.⁶⁸

Figure 24: New drug development requires about US$ 1 billion and between 4 and 7 years of clinical trials

Some developing nations are using clinical trial requirements as a lure to boost direct investment by pharmaceutical companies by restricting imports only to companies that conduct local trials – even for drugs that may already have won clearance from US or EU regulators. Overall, redundant local clinical trials add significant costs to drug development and delay their market entry. For example, Vietnam requires local trials for multinational drug companies when their product has been available in their country of origin for less than five years but not for local manufacturers.⁶⁹ Certified drugs imported into Thailand are subject to a mandatory two- to four-year safety monitoring period, but government-owned pharmaceuticalfirms are exempt.⁷⁰ Chinese authorities mandate local clinical trials for products seeking registration, which can require companies to repeat tests for some earlier clinical stages and result in delays of up to five years. Both Russia and India also insist that companies conduct local clinical trials in order to gain market access.⁷¹

Restrictive market access measures intended to increase and accelerate local drug development usually backfire because of the resulting inefficiencies and higher costs they cause. They harm emerging markets because they delay entry of new life-saving medications as they undermine the competitiveness of the industry.