The analysis of barriers to entry into the pharmaceutical market of Ukraine
Elena Shuvanova, Olha Rohulia
The Department of Pharmaceutical Management and Marketing
National University of Pharmacy, Kharkiv, Ukraine.
*Corresponding Author E-mail: rogulyaolga@gmail.com
ABSTRACT:
The pharmaceutical market of Ukraine is characterized by a tendency to dominate imports over exports, which indicates its economic attractiveness for foreign companies that face various obstacles when entering the market. Entry barriers are understood as factors of an objective or subjective nature that prevent new firms from organizing profitable operations in the industry. The presence and impact of market barriers prove the need for their identification and comprehensive research. It has been established that when entering the pharmaceutical market of Ukraine, there are restrictive barriers related to state policy (for example, licensing, registration of medicines, examination, certification, etc.), barriers due to competition, and barriers of a non-legal nature. The results of the analysis of the competitive situation as a possible barrier characterize the pharmaceutical market of Ukraine as a market of free competition, which contributes to the relatively free entry of foreign manufacturers. Market entry barriers are also caused by anti-competitive behavior such as mergers and acquisitions, unfair competition, informal agreements, and so on. The results of the research can be used in making decisions about entering new markets or market segments for pharmaceutical companies, in forming competitive advantages and business strategies in order to develop potential in the long term.
KEYWORDS: Market Barriers, Pharmaceutical Market, Enterprise, Competition, Ukraine.
INTRODUCTION:
The study of market barriers is an important area of factors study that affect the state of market conditions and the enterprises activities. The opportunities assessment for new business entities to enter the market is based on the assumption of expected high profit with an acceptable risk level. The presence and height of barriers to entry into the market or its separate segment (or exit from it) determine the nature and timing of business decisions that affect the formation of the company's marketing strategy and tactics. Assessing the significance of barriers to entry of subjects to the pharmaceutical market is complicated by the lack of a universal formula for calculating their "height". Moreover, some barriers to entry do not lend themselves to quantitative measurement.
MATERIAL AND METHODS:
The study uses data from the Ministry of Health of Ukraine, the State statistics service, and research companies that are publicly available. The analysis of regulatory system governing the pharmaceutical market of Ukraine, as well as monitoring of publications related to the research topic in scientific and practical publications was carried out. In the research methods of analogy and comparison (the study of scientific, professional and scientific literature on the problems of formation and development of the pharmaceutical market), methods of specification and systematization, methods of descriptive modeling (formulation of conclusions) were used, tabular and graphical means of visual representation of the results obtained.
The barriers to entry may be structural in nature, due to the characteristics of the industry (production technology, start- up, current costs, demand, market development, type of competition) or determined by the behavior of economic entities. A special place is occupied by obstacles resulting from the actions of the authorities (licensing, taxation, price fixing, government assistance to individual subjects).
Fig. 1: Dynamics of the hospital and retail segments of the pharmaceutical market in Ukraine (2012-2019)
Distinguish between non-strategic and strategic barriers. Non-strategic barriers can be generated by objective characteristics of the industry market related to production technology, the nature of consumer preferences, demand dynamics, competition, etc. Another type of barriers are barriers caused by the strategic behavior of firms operating in the market (strategic pricing that restricts the entry of potential competitors into the industry, strategic policy in the field of research and innovation spending, patents, globalization, vertical integration and product differentiation, etc.) 1,2,3,4,5
According to the nature of barriers impact on the activities of enterprises that are already on the market and entering it, the following types of entry barriers are distinguished: economic, regulatory, structural, administrative, organizational, technical (technological), financial, information, geographical, environmental, demographic, cultural, as well as non -legal barriers. 6-10
When considering the subjects and factors that determine the emergence of entry barriers, we distinguish objective barriers (formed as a result of objective market trends and determined by its market conditions), as well as subjective barriers (established by the state and existing competitors).
Next, we consider the factors that determine the emergence of entry barriers for the pharmaceutical market in Ukraine.
RESULTS AND DISCUSSION:
The conjuncture of the pharmaceutical market of Ukraine and the main trends of its development:
The Ukrainian pharmaceutical market is promising and belongs to fast-growing ones: the average growth rate over the past 6 years is 17.8%. At the same time, most of the market is represented by retail sales, the hospital segment is located in the range of 12.35–15.86% (Fig. 1). 11,12,13
The structure of the pharmaceutical market is dominated by imported drugs in monetary terms (62.5%), and 71.5% in physical terms belong to the products of Ukrainian manufacturers. Experts note that a significant increase in the role of domestic producers in the Ukrainian pharmaceutical market, which began in 2010, was the result of a significant devaluation of the hryvnia due to the global financial crisis of 2008-2009, but now price advantage factor of Ukrainian pharmaceutical companies is gradually losing its importance in their competition with foreign manufacturers in the Ukrainian market.12
A specific feature of the pharmaceutical market in Ukraine is the significant predominance of imports over exports (Fig. 2), for example, in 2018, one US dollar received from the export of Ukrainian pharmaceutical products accounted for nine dollars spent on the import of such products to Ukraine.12
In Ukraine, GDP growth in recent years is in the range of 3.3-3.5%, the forecast for 2020 is 3.7%. Both the minimum and average wages continue to grow, and the inflation index is assumed to be at the level of 5±1%.13,14
According to Proxima Research forecasts, the market will continue to show double digit growth in monetary terms in the coming years. Optimistic forecasts for the development of the pharmaceutical market allow us to expect that by the end of 2020, Ukraine will be able to re-enter the group of Pharmerging Markets-promising emerging markets that are an attractive segment for international investors. 16
Barriers set by the state:
In order to enter the pharmaceutical market, it is necessary to overcome the restrictive barriers associated with the state policy in this product market: licensing, product registration, examination, certification, etc.
In accordance with the legislation of Ukraine, an enterprise must obtain a license for the production of drugs, while the enterprise or entrepreneur must have the appropriate material and technical base and qualified personnel. In addition, since 2009, mandatory licensing requirements have included certification for compliance with the requirements of good manufacturing practice (GMP).
Only after state registration, which is carried out by the Ministry of Health of Ukraine through an examination of the quality, safety and effectiveness of medicines, medicinal preparations can be launched into the drug market. After registration, a certificate is issued for a period of 5 years, and after re-registration, the certificate is issued without expiration (except for cases when the Ministry of Health decides to conduct additional re-registration after 5 years for justified reasons related to pharmacovigilance).
For registration and re-registration of drugs, a certificate of compliance for the conditions of drugs production with the requirements of the GMP or a conclusion on the recognition of a PIC/S GMP certificate is also required. The conclusion and Certificate are issued by the State Service of Ukraine for Medicines and Drug Control. The recognition of certificates issued in other countries has been possible since 2011, when Ukraine became a member country of the PIC/S, an international tool for interaction between countries and competent authorities in the field of medicines quality control, which ensure cooperation in compliance with GMP requirements, inspecting and licensing production.17 Since 2016 an updated version of the guidelines "Medicinal Products. Good Manufacturing Practice" entered into force in Ukraine, which corresponds to the document "The Rules Governing Medicinal Products in the European Union. Volume 4 EU Guidelines to Good Manufacturing Practice Medicinal Products for Human and Veterinary Use".
Since 2005, Ukrainian legislation on the registration and circulation of drugs has been harmonized with EU legislation. As part of the harmonization in 2016, a provision was added to Article 9 of the Law of Ukraine "On Medicines", providing for simplified state registration of medicines registered in the United States, Switzerland, Japan, Australia, Canada, and medicines registered by the competent EU authority under a centralized procedure for applications in the territories of these countries or EU Member States, respectively. The procedure for registering such drugs involves submitting a smaller set of documents, reducing the registration period (17 working days), and eliminating the need for examination of registration materials.18
Such model does not correspond to the European approach, but it is transitional for Ukraine, which will allow filling the state market with drugs, the effectiveness of which has been verified by the competent authorities of countries with strict regulatory policies, according to a shortened procedure.11 In the EU, the mutual recognition procedure applies to most so-called conventional medicines. This procedure is based on the principle of existing national marketing permits recognition (registration) in some EU countries. In Ukraine this procedure applies only to public procurement of medicines.18
In 2008, Ukraine joined the WTO. In order to bring the legislation in line with the obligations assumed in the framework of joining this organization, a number of laws were adopted to limit barriers to entry into the Ukrainian markets for foreign manufacturers. Among other things, Ukraine has set customs tariffs zero rates for a number of goods, including pharmaceuticals.
Another decision related to joining the WTO was that since January 2017, amendments to the TRIPS Agreement (the WTO agreement on trade — related aspects of intellectual property rights) have come into effect, according to which a permanent mechanism for compulsory licensing of patented pharmaceutical products has been introduced, which makes it possible to ensure that the necessary generic drugs produced in other States are available to WTO member countries that need it.19
The adoption of a law that fixes the provision on compulsory licensing in Ukraine has caused concern among manufacturers of original drugs, who believe that the introduction of rules on compulsory licensing can lead to abuse and violations of patent rights. According to experts, this may lead to the withdrawal of innovative companies from the market that do not want to give generic companies the products of their innovations.
In recent years, discussions have continued in Ukraine regarding the possibility of allowing parallel imports. Its supporters believe that this method of import and sale of goods helps to reduce its cost, and for manufacturers and official distributors, parallel import creates a negative competitive situation. At the same time, especially in the pharmaceutical market, there is a question of compliance with the conditions of storage and transportation of the corresponding drug or medical device, which directly affects the quality and safety of the product.20
Price regulation in Ukraine is carried out by setting border retail and wholesale allowances for medicines included in the List of Vital Medicines, but it does not affect manufacturers’ pricing. An exception is the pricing for medicines that participate in the "Affordable medicines" program and other cost-compensated programs for which reference pricing is applied. That is, the sale price of manufactured pharmaceutical products cannot exceed the state-established borders. However, the inclusion of drugs in the list of reimbursable drugs allows manufacturers to increase their sales, so participation in such programs is usually beneficial for pharmaceutical companies. First of all, we are talking about generic manufacturers.
Barriers related to the competitive situation:
A significant barrier to entering the market is the level of competition.21,22,23 To analyze the competitive situation, we analyzed the market shares of pharmaceutical manufacturers that were in the TOP 20 in terms of pharmacy sales of "pharmacy basket" products in monetary terms for 2017-2019, according to Proxima Research.11
There are 8 domestic companies in the TOP 20 manufacturers. We calculated the values of market concentration indicators for three, ten and twenty producers. The results obtained allow us to characterize the market as weakly concentrated and conclude that there is a state of free competition in the market. The Herfindahl-Hirschman index calculated for the TOP 20 confirms these conclusions (Table 1). The number of manufacturers present in the pharmaceutical market of Ukraine is significant, but since the companies holding the last positions of the TOP 20 have a market share of 1.23-1.25%, adding the remaining manufacturers to the analysis for calculating the Herfindahl-Hirschman index will not have a significant impact on the result.
Table 1: Calculated values of standard indicators of market concentration and the Herfindahl-Hirschman index for the TOP 20 manufacturers of medicines in terms of pharmacy sales of "pharmacy basket" products in monetary terms for 2017-2020.
|
Indicators |
2017 |
2018 |
2019 |
2020 |
|
CR3 |
12,35 |
12,14 |
12,03 |
12,73 |
|
CR10 |
31,22 |
30,36 |
30,17 |
33,59 |
|
CR20 |
47,56 |
46,63 |
46,44 |
50,16 |
|
HHI |
132,72 |
127,66 |
126,95 |
148,82 |
Comparison of the results of competition analysis in the pharmaceutical market with studies conducted in 2010 shows that the level of competition has not changed significantly, at that time the CR10 was about 30%.24
The fact that Ukrainian pharmaceutical companies, lacking sufficient resources to search for fundamentally new drugs, have focused their efforts on the production of generics, which makes it possible for manufacturers of original drugs to enter the market relatively freely. But, at the same time, the low purchasing power of drug users does not allow them to get the maximum profit by setting high prices.
To ensure the success of the business, manufacturers have to bear significant costs for the promotion of the product, the main place in which is occupied by advertising. As domestic practice shows, those drugs that are actively advertised occupy the first lines in the sales ratings.
For the organization of a new production enterprise in the pharmaceutical industry, significant investment and competent management decisions are expected.
Barriers of a non-legal nature. Anticompetitive behavior of pharmaceutical market entities:
Anticompetitive behavior of its subjects can create or strengthen barriers to entry into the market, such as mergers and acquisitions, informal agreements, abuse of dominant position, unfair competition, abuse of authority, etc. In order to prevent monopolization of commodity markets, the Antimonopoly Committee of Ukraine monitors the concentration of business entities. Procedures and rules for merging companies were significantly simplified in 2016 as part of the harmonization of Ukrainian legislation with the European one.
Among the negative trends in the pharmaceutical market, the spread of counterfeit medicines and corruption are of concern to business entities. Moreover, counterfeiting is a big problem for the retail segment of the pharmaceutical market, and corruption actions – for the hospital.12
CONCLUSION:
The development trends of the Ukrainian pharmaceutical market allow us to predict that by the end of 2020, Ukraine will be able to enter the Pharmerging Markets group, which indicates its attractiveness to foreign companies. When entering the pharmaceutical market of a country, companies need to overcome barriers caused by state influence, such as licensing, drugs registration, examination, certification, etc. Drug manufacturers must obtain a license and have a certificate of compliance with the GMP requirements for the production of medicines, all medicines must be registered by the Ministry of Health of Ukraine after examination of their quality, safety and effectiveness. It should be noted that Ukraine has a simplified state registration of medicines registered in the United States, Switzerland, Japan, Australia, Canada, and medicines registered by the EU competent authority under a centralized procedure for use in the territory of these countries or EU member States. Zero rates of customs tariffs for pharmaceuticals also contribute to entering the Ukrainian market. Features of state regulation of drug pricing allow manufacturers of generic drugs to increase sales volumes by participating in the "Affordable medicines" program and other cost-compensated programs. To assess the barriers associated with the competitive situation, the market shares of pharmaceutical manufacturers for 2017-2019 were analyzed, which led to the conclusion that there is a state of free competition in the market. At the same time, the orientation of national producers to the production of generics creates an opportunity for producers of original drugs to enter the market relatively freely. When making a decision to enter the Ukrainian market, foreign manufacturers need to take into account the purchasing power of drug users and the cost of promoting the product. It has been established that the source of barriers is the anticompetitive behavior of pharmaceutical market entities, the negative impact of which is minimized by state control bodies. At present, Ukraine has simplified the procedures and rules for merging companies within the framework of harmonization of national legislation with European legislation, and introduced methods to counter the spread of counterfeit medicines and corruption in the hospital segment. It should be noted the stimulating nature of barriers to the development of market competition and the creation of obstacles to the entry of unscrupulous manufacturers into the market. At the same time, a high level of entry barriers can negatively affect consumers' access to quality goods and services, whose producers do not have sufficient financial resources to overcome competition, for example, in the field of marketing. In general, the results of our research allow us to assess the prospects of foreign companies entering the Ukrainian pharmaceutical market, taking into account existing market barriers.
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Received on 17.03.2020 Modified on 30.01.2021
Accepted on 03.08.2021 © RJPT All right reserved
Research J. Pharm.and Tech 2021; 14(12):6353-6358.
DOI: 10.52711/0974-360X.2021.01098