Tax & Accounting Blog

Managing Complexities in International Trade in the Pharmaceutical industry

Blog, Global Trade, ONESOURCE April 22, 2016

As governments and administrative regimes worldwide work towards bringing in health benefits and improving the living conditions of people, their efforts show up through  increased spending on healthcare. For instance, over 2012–20, total healthcare spending is expected to rise at a Compound Annual Growth Rate (CAGR) of 20% to US $280 billion from US $65 billion. This directly translates into growth of the pharmaceutical industry clearly evident from the Pharmaceutical sales statistics of international trade. The expectation is that Pharmaceutical sales as a percentage of total healthcare spending will increase to 27% by 2016 from the 18.9% in 2008.

International trade in Pharmaceuticals is measured for its effectiveness through how it ensures innovations in drugs manufacture benefit the intended consumer, thereby increasing the health index.  With all the rules and regulations each country operates within, global trade in this industry would best benefit from less bureaucracy and taxes to achieve this goal of effectiveness. To succeed with less bureaucracy, the responsibility of the entire system comprising policy makers, administrators, trading partners and service providers is to work in harmony to ensure that processes are followed in compliance with regulatory norms.

Public health policies should view pharmaceutical trade as vital for the human development of their countries. In my opinion, governments should relax the trade cost overheads of these drugs through tax rate reduction; as this has a direct impact on those who use them.  Governments should also minimize non-tariff barriers to allow the trade flow to occur efficiently and quickly. This can be accomplished with governments working in partnership with all the various agencies involved in facilitating trade agreements through rate reductions, faster clearances, import duty exemptions, export incentives and the elimination of tariff and non-tariff barriers. Ultimately, special Customs regimes can be facilitators for reducing the costs of input and output of these products.

Governments through their health authorities can also ensure the effective implementation of customs procedures and border controls for the efficient flow of legitimate medicines and other health-related products to encourage global pharmaceuticals trade. Thus, international trade can be the mechanism that can bring these benefits of the pharmaceutical sector to the entire population.

Pharmaceutical World Market-Perspective

The international market perspective on the pharmaceutical industry for the coming years is optimistic about investments and the consequent expansion of new markets. According to the INTERFARMA (Brazilian Association of Research Based Pharmaceutical Industries) Guide 2015,

  • The global pharmaceutical market is expected to reach about $1.25 trillion in 2018 with the main emerging countries like Brazil, Russia, India, South Korea, Venezuela and Saudi Arabia accounting for 28% of the global pharmaceutical sales this year, against 12% in 2005

This is an important element for countries to consider when developing policies that will promote the production of medicines to minimize public health risks and boost exports to all countries. This growth perspective in the pharmaceutical field inevitably sets the direction to exports as an essential and strategic part of the growth of this segment within the pharmaceutical industry.

The following are important points which can help global pharma trade grow in the future:

  • Market diversification: It ensures independence in relation to local markets, not leaving the company linked to the seasonality of the local economy and opens new ways through which the company’s brand can become globally known.
  • Increase of production: By opening new avenues, production tends to increase while minimizing idleness and absence of production flow. The volume of the raw materials purchase is incremented, allowing an increase in bargaining power at the suppliers’ end.
  • Reduction of tax charges: In several countries, there is an incentive for exports through reduction or exemption from payment of internal taxes and duties. In addition, when combined with some special customs regime, the entire supply chain can benefit in the internal or external purchases of raw material that are consumed in the making of the finished product.
  • Improvement in organization’s processes: The international market is demanding for cost competitiveness, quality and stringent delivery deadlines to be met. Thus, for a company to meet fluctuations and escalations in international demand, it is necessary to review all its processes from the administrative, financial, fiscal, operational and logistical perspective so that it can be seen by customers, suppliers, partners and competitors as a business leader with high quality performance standards.

Efficiency in control of operations and ensuring compliance

Like any business relationship, international trade requires all buying and selling segments to comply with respect to rules and compliance with established agreements. In the pharmaceutical area, this is very critical for people directly involved with marketing.

The Pharmaceutical Company therefore needs to ensure compliance in its operations as well as to operate in minimizing risks by knowing their partners with whom they work in international markets including customers, suppliers, transporters, service providers, customs house agents, freight forwarders, shipping lines as well as insurance companies, etc. This is because the pharmaceutical industry is an important source of healthcare for billions and any risks due to malpractices in drug manufacture or illicit nexus among business players can directly mean health hazards and loss of lives. Therefore, regulatory compliance and partner screening play an important role as well as complying with all set of laws and policies governing the pharmaceutical sector. Making use of appropriate tools and stamps[1] that allow them to monitor whether their trading partners are trustworthy is globally considered as a key element to protect the image of the company and continuity of its business.

Another important point is that the rules governing these segments in all countries are subject to constant changes. That, in of itself, represents a major challenge for companies, since it is not easy to follow these changes and be agile enough to adapt their internal business processes to support the changes.

Companies in the pharmaceutical industry have additional challenges related to accurate control of their foreign trade operations.  This industry is required to factor in legal, procedural and operational changes by the regulatory bodies they must report to. These challenges have led to the need to equip themselves in technology and information gathering for monitoring the operations and staying ahead of the requirements. Add to this the increased competition in the pharmaceutical industry leading to the need for accuracy in planning operations and controlling costs to stay competitive.  Not factoring in these controls and tight planning can lead to the following tragic situations for any company.

  • Rework due to lack of legislation in countries that maintain commercial contracts
  • Insecurity, uncertainty and inefficiency in execution of foreign trade transactions
  • Excessive time spent on legal and operational research
  • Penalties, fines, administrative and financial losses
  • Risks to the company’s business reputation with regulatory agencies

Added to this list are some of the checkpoints for those who manage the area of global trade within the pharmaceutical segment:

  • Does the company have visibility of all costs, benefits and obligations that each operation generates?
  • Does the company have predictability of the time involved in the processes?
  • Can the company measure the average time spent with documentation failures or control?
  • Can the company determine the costs from failures in its operations (fines, losses from storage deadlines, etc.)?
  • Is the company efficient in finding authentic information required for internal and tax audits?
  • Can the company securely meet the required compliance demands – fiscal, tax and customs?
  • Does the company make use of some benefits as a special customs regime in order to reduce overall cost of operations?

One of the very important assets within any company is the quality of information and how it is captured, analyzed and maintained. Information management in the pharmaceutical industry is about managing the transition of “process patents regime” to the WTO-compatible “product patents regime” and the focal shift in research and development activities from developed countries to developing countries leading to export-driven growth. However, companies should validate and ensure that their export operations are not only compliant with current legislations but also consistent with their goals. For instance, the USA, which is the biggest export destination for most developing countries, has stringent rules for the imported products that are used for consumption.

Companies and countries which meet the import and export compliance requirements can achieve benefits as  most favored destinations for collaborative Research & Development (R&D) bioinformatics, contract research and manufacturing and clinical research with internationally harmonized standards such as Good Laboratory Practices (GLP), current GMP (cGMP) and Good Clinical Practices (GCP). Companies incorporating good practices and policies associated with the exchange of information with respect to drug pricing, regulatory process and patent laws will eliminate the risk of non-compliance and putting the company’s image at risk with negative exposure to regulatory bodies related to international trade of pharmaceuticals.

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Sources

IMS Pharmaceutical World Review Executive 2014 (http://www.researchandmarkets.com/reports/2622744/ims_pharmceutical_world_review_executive_2014)

WHO Challenges: Essential medicines and health products (http://www.who.int/medicines/areas/quality_safety/challenges/en/)

Export – Import Bank of India (http://www.eximbankindia.in/sites/default/files/indias-international-trade-and-investment.pdf)

India Brand Equity Foundation (http://www.ibef.org/industry/indian-pharmaceuticals-industry-analysis-presentation)