Bittersweet pills
European Union membership will radically change the drug manufacturing industry in Poland. But the jury is still out over the benefits.
Sweeping changes are expected in the pharmaceuticals industry in Poland as the country inches closer to European Union (EU) membership. But domestic manufacturers are still debating if accession will be a boon or bugbear for the drugs sector.
Andrzej Kleszczewski, president of Polfa Tarchomin (PT), is one of those wary about the merits of membership. Since taking over the company in January he has brought PT, Poland's biggest supplier of insulin, into the black by breaking into new markets in the East. For Kleszczewski, Poland's imminent entry into the EU spells trouble for the firm's future not only in Poland, but also on the integrated market. Above all, he doubts that Polish firms will be able to stand up to competition from the West.
"The sooner Poland joins the European Union, the more difficult it will be for us to counteract the expansion of Western European drug makers in Poland," Kleszczewski said, adding that the integration of the markets will inevitably threaten Polish drug makers. Pharmaceutical products will have to be registered according to EU standards, which are more stringent than in Poland, and many locally produced drugs will be unable to meet the criteria, he said. Also, leveling the playing field between Polish and Western European manufacturers will mean domestic firms losing out to far wealthier companies from Germany or the U.K.
"In equal market conditions, richer firms have better chances to reach doctors and patients, as they can spend more money on promotion," Kleszczewski said. "We won't be able to compete in promotions, while foreign corporations have money to organize congresses and seminars for doctors in the nicest locations."
Share and share alike
Polish drug makers have seen their share of the market shrink to 27% in 2000 from 72% in 1996, according to the Drug Institute (IL), which monitors sales in Poland.
Bogusław Taźbirek, a drug industry analyst at PBK Asset Management, said the success of imported products has been largely due to intensive campaigning among doctors. "Promotion and lobbying for imported drugs are much stronger (than for domestic products)," he said. "Seminars for doctors about new drugs are organized with the intention that they will prescribe the drugs."
Wealthy foreign manufacturers also try to convince patients and pharmacists that their over-the-counter products are better than those made by local competitors.
Jacek Wygajło, who runs a pharmacy in downtown Warsaw, said sales representatives of foreign manufacturers pay regular visits to his pharmacy, while Polish firms have not got the cash to be able to send strong sales teams into the field.
But despite reservations about foreign competitors flooding the market, several domestic and regional companies are nevertheless optimistic about the benefits of the single market. This is particularly true of generic drugs manufacturers. (Generic products are based on well-known brands whose patents have expired.)
Slovenian drug maker KRKA opened a production site in Warsaw in October and is banking on the popularity of generic products to help its expansion plans. Moreover, the firm's president, Joef Kolarič, is optimistic about the plant's fortunes after Poland and Slovenia join the EU. He said equal footing with Western European makers would be an advantage - not a threat.
"Our position on the Polish market will not suffer after EU accession, we even expect it to grow," he said. "In return, we will gain more rights to sell in the EU. A drug that is registered in Slovenia or Poland will then be automatically registered in the EU."
Kolarič said KRKA's expansion in the EU will be largely on the back of the rising demand for generic drugs in Western Europe. This could also be a boost for Polish firms, which often concentrate solely on generic products.
Europe's biggest pharmaceutical manufacturers, such as GlaxoSmithKline, Aventis or Bayer, are international corporations that can afford to spend an average $250 million on the development of new products, which is then protected by a patent that usually lasts 20 years.
Smaller firms, including all Central European manufacturers, cannot afford the costly research and development (R&D), but they can copy the originals and sell them under their own brand name after the patent expires - at a much lower price.
As 90% of Polish drug manufacturers' products are generic, according to the Drug Institute, potential success on the integrated EU market hinges on the demand for those products.
"The demand for generics is rising at different paces in the EU, while the most rapid growth is in the U.K. and Germany where it's much more than 10% annually," Kolarič said.
Stefan Bogusławski, managing partner of AzyX Polska, which monitors the Polish drug market, agreed that integration with the EU could open a new market for Polish manufacturers. "The pressure in the EU for a reduction of medical treatment costs is rising and applying generic drugs emerges as one of the methods to reduce these costs," he said. "Polish firms, as they are now outside the EU, have no chance to participate in that market. Poland's integration with the EU will give them all rights to access (that market)."
But Bogusławski admits EU-accession for Poland could be a double-edged sword. "On the other hand, merging the two markets poses a challenge to Polish manufacturers because of (the EU's) stringent standards of intellectual property protection."
Get protected
The rights of drug manufacturers in the EU are better protected than in Poland. Recently, the two sides haggled over the rights issue and on Nov. 30 they reached agreement over Supplementary Protection Certificates (SPCs). The EU grants SPCs to makers of new drugs, which in turn receive an additional five-year extension of their patents.
The Polish negotiators, under pressure from domestic manufacturers, were pushing for a transition period on the introduction of SPCs so that Polish producers would not have to recognize extra protection granted by the SPC dating back to January 2000. But the Polish side, in return for EU concessions on drug registration requirements, finally gave in and agreed to apply SPCs in Poland retroactively.
The upshot is that Polish drug manufacturers have to find their own niches if they are to survive the intense competition from the West, PBK's Taźbirek said. "Central European firms can go into the niche for generic drugs," he said. "The EU market is highly competitive, but despite that Polish firms will get a real chance of expansion to the EU as big international manufacturers will not struggle that fiercely for the less lucrative generic market."
But with the imminent arrival of Western firms in Poland, many domestic manufacturers are now looking East for security.
"Our improved results in 2001 are due to a strengthening of our position on the Russian market," said Ryszarda Wolska, spokeswoman for Jelenia Góra-based drug maker Jelfa.
About 79% of Jelfa's exports between January and September went to Russia. A report by the Central Statistical Office (GUS) showed that Russians bought 38% of all Polish pharmaceutical exports in 1999, while Lithuania was the second-biggest market with 11%.
Germany was third on the list (9%), followed by Central and Eastern European neighbors Ukraine, Bulgaria, the Czech Republic and Hungary.
Still, analysts see more room for growth.
"The Polish pharmaceutical industry was too passive in the East in the late 1990s, leaving the door open for other drug makers - those Western European but also Hungarian and Balkan manufacturers," Bogusławski said. "There is no justification for not investing in promotion in the former Soviet Union."
While Kleszczewski sees big European corporations as a threat to his firm's position on the Polish market, he said the East is a natural market for generic manufacturers such as PT and KRKA.
"Polfa Tarchomin was built under communism with the intention to supply the Eastern bloc, and its production capacity and profile is traditionally tailored for the East," he said. Nevertheless, the Eastern European market also has its risks. "You may sell your products there and never see the money," he said.
PT's Kleszczewski also wants to expand into the Far East, particularly the newly open markets of China and Vietnam. "The current economic boom in these markets makes them much more attractive and less risky than Eastern Europe," he said.
PT's strategy forecasts the revenue from new products and Asian markets increasing to zł. 38.4 million ($9.6 million) in 2005 from nothing this year. Many industry analysts agree that Polish drug makers should look East for opportunities.
Happy at home
While Polish drug makers are starting to think on a global scale, the domestic market remains lucrative and grew by an average of 22% annually in the 1990s, an ING Barings report said.
However, market watchers lowered growth forecasts after the reform of the public healthcare system in 1999, when newly formed Patients' Funds began to control drug refunds more carefully. Nevertheless, the World Bank estimates the Polish market will continue to grow by 10% annually, while the Health Ministry projects growth as high as 10-15% per year.
According to the ING Barings report, there is still substantial room for growth in Poland. It said Poles on average spend four times less on drugs than patients in the EU. A Polish patient spends only $62 per annum on prescription and over-the-counter pharmaceuticals, while the EU average is $250.
"The Polish drug market is growing, but there's also a fiercely competitive struggle on it," Bogusławski said.
As a result, the industry is divided into hundreds of small units vying for market share. For example, Poznań-based GSK Pharmaceuticals, the market leader, only had a 7.2% share of all drugs sold in Polish pharmacies during the first half of 2001, according to market research firm IMS.
With so many companies on the market, many analysts predict consolidation in the coming decade. "Consolidation in Central Europe is just a question of time," said Sylwia Jaskiewicz at ING Barings. "Better Polish companies will be bought out over the next two to three years."
But like much else in the industry, analysts are divided over the consolidation issue. Some say it is inevitable after EU accession, while others are more skeptical. Taźbirek said large Western European manufacturers will not be interested in buying small Polish companies. "They prefer to import here from their own sites," he said. Large global producers invest enormous funds into the development of new drugs, so they only seek alliances with other big makers, who can co-finance the R&D, he said. "And they won't find such partners in Central Europe," he added.
Andrzej Szymański of DM BIG-BG brokerage house said manufacturers from the West would rather import their products than look at homegrown firms. "It's easy to import pharmaceuticals, as there are no custom duties and drugs are easy to transport," he said.
While the biggest firms may not be interested in Polish makers, mid-level players may find some Polish firms attractive, Bogusławski said.
"Depending on individual cases, Polish firms can offer a foreign investor such attractive assets as their share of the Polish and the Russian markets, their brands or production capacities," he said.
So while manufacturers remain divided over the future of the Polish pharmaceuticals market, they know that change is inevitable once Poland joins the EU - and everyone agrees that there is hard work ahead.
"The only chance to survive on the integrated market is to roll up your sleeves and invest now," Kleszczewski said.
Robert Wylot
