How is Iran's pharmaceutical market structure?

 

 

 

 Credit: AFP

 

The recent establishment of Insulin production line in Iran by the Danish company Novonordisk amid the U.S. sanctions has highlighted the importance of reviewing the Iranian pharmaceutical sector. Generally, the growth of the pharmaceutical industry and market in Iran during the last decades is attributed to various factors; such as applying industrial and trade policies, currency revenues by exporting of raw materials and manufactured goods, population growth and changes in pharmaceutical expenditures that correlate with income per capita.

Liberalising reforms under a mixed public-private system since the 1990s, and article 44 of the constitution aimed to promote market competition, which is commonly identified by key characteristics such as lowering barriers to entry, increasing the number of sellers and decreasing the concentration, and product and price differentiation. Since then, in proportion to the increase in international trade, the import of high-cost patented products and Active Pharmaceutical Ingredients (API) began to increase. 

The number of pharmaceutical companies in the country has overgrown in a way that has made the affirmation that "the structure of the pharmaceutical market has been transformed into an open oligopoly" (Shabaninejad et al., 2016). This fact is, according to the theory, by promoting diversification and competition in the Iranian pharmaceutical industry, "the performance in the Iranian pharmaceutical industry would increase, and this would imply providing patients with a greater quantity and brands of medicines at a lower price" (Ebadi-Ghavam, 2009). Graph 1 shows that the number of companies has been growing over time. We can mention the example of Novo Nordisk Pars an exclusive importer of Novonordisk products and its technology from 2006 to 2020. As can also be seen, during the boom (2001-2011), the number of importing and producing companies increased.

 

Graph 1: Number and Concentration of Pharmaceutical Companies in Iran

 

Source: Own elaboration based on EMACO Adviser database and Darosaz database

 

If we assume the number of companies and their market's share as one criterion of competition, so the last figure indicates that the market concentration has decreased over the time, as the Herfindahl-Hirschman (IHH) index has followed a downward trend. The IHH is an index frequently used to determine the degree of industrial concentration in a sector, the result of which is in a range between 0 and 1 (or between 0 and 10,000, which gives us an equivalent result). The lowest result is interpreted as a more decentralised or competitive industry, and 1 equals a full monopoly. H less than 0.1 (or IHH less than 100) is highly competitive and H less than 0.15 represents a decentralised industry. I calculated the degree of industrial concentration (H) and normalised IHH (H*) following the next formulas:

 

Where n is the number of producing or importing companies, and s is the percentage share of each company's sales over the total sales in the industry in a year. Based on the results, there is a decentralised pharmaceutical industry in Iran (H equivalent to 0.02), in which the leading companies in terms of quantity or rial, do not have a strong dominance. This is also true in terms of concentration ratio (C.R.) of sales in rials and units of the major four companies (CR4) and the major eight companies (CR8) over the whole of the industry. However, the problem with this criterion is that the total number of companies and market share cannot be considered valid since the pharmaceutical industry is made up of different companies specialised in different products (mostly non-substitutable) with different characteristics and usability. As we will see later, few companies offer a similar alternative product to the domestic market.

Another factor that rules out Irans's pharmaceutical sector as a free market is the role of public institutions which strictly regulate the market in order to protect the consumers and to prevent market failure. The experience of the collapse in the late 90s led the authorities to sustain control over customer prices which are generally formed under the cost-plus model, in which a maximum possible profit margin is often defined. Annual subsidies are generally applied to high-cost imported medicines sold at a relatively "affordable" price in the domestic market. Iran's government usually grants subsidised foreign currency to supplement out of pocket expenditures for the purchase of imported medicines. The decline in public purchasing power in times of crisis leads the government to allocate a larger (but sometimes insufficient) amount of currency from the National Development Fund.

 

Graph 2: Expenses and Subsidies in the Pharmaceutical Sector of Iran

Source: Own elaboration based on data from the National Institute of Statistics and WHO. The data is in dollars (2010)—Yellow Fund: Recession, Red Fund: Sanctions.

 

Even though 43 of the most prominent companies in the entire pharmaceutical sector are listed on the Tehran Stock Exchange (Karafarin, 2019), a report published in 2015 revealed that practically three mega public organisations finance part of equivalent to 66% of the firms, such that only the remaining 34% could be called real private companies (Middle East Bank, 2015). This term may encompass the companies found in the blue, yellow, and red, or green (real private firms) in graph 3. Certainly, a new manufacturer would need to possess the required advanced technology and win strict regulatory approval from public institutions, which makes entry barriers remain.

Indeed, there is administrative autonomy in commercial activities, even if they are directly part of a pharmaceutical "mega holding". We can mention the example of the Darou Pakhsh group, which is a group made up of 3 subsidiary divisions and one distributor. However, this company is registered as a different commercial trader from other companies in the same upstream holding (TPICO). Graph 3 shows in more detail the dispersion by business volume of the 180 most outstanding companies in the sector for the year 2017. The graph considers two criteria for the volume of business: sales in rials on the horizontal axis and the unit sales on the vertical axis. Companies that only produce (circles) or also import (square) are marked on the graph.

 

Graph 3: Pharmaceutical Companies in Iran (2017)

Source: Own elaboration based on Darosaz.ir, Middle East Bank Report (2015) on pharmaceutical holdings.

 

Sales by rials and by units can represent the size and importance of the company. The graph 3 shows some companies that record substantial revenues despite their low sales volume, which is explained by the fact that they usually sell imported patented products (medicines for blood, heart, cancer treatments, Insulins). On the other hand, some companies have had massive sales in terms of units, but relatively little income, which is the usual producers of generics with a low customer price.

Given that Iran's pharmaceutical market as a whole is large and complex, we can take the example of the insulin market. Graph 4 depicts the increase in the sales and turnover of all insulins (regardless of type) by the leading companies in Iran's market. This shed light on the sale trend of Novo Nordisk Pars (red line) followed by Cobel (green line) and Exir (blue line) between 2008 and 2018. In this graph omitted Repaglinide, another important antidiabetic drug that is retailed together with insulin in Iran.

 

Graph 4: Total unit sales of insulin by company

Source: Own elaboration based on data from Darosaz.ir, Shamsi Calendar: 1 Farvardin 1386 – 29 Esfand 1396 (20 march 2008 – 20 march 2018)

 

After comparing the type of insulin sold by each company in table 1, it seems that the drugs are mostly complementary rather than substitutable. However, since in a few cases, there are precisely the same products and dosis provided by more than one company, we do not rule out the existence of a low degree of imperfect competition in the market.

 

Table 1: Top Insulin products provided by leading companies in 2015-2016

Name of the Firm	Type of Company (Insulins)	Generic name of top insulin sold in the market	Type of insulins ever sold in the market	Approximate price (Rial) of an identical drug in 2015*
Novo Nordisk Pars	Importer	• Insulin Aspart 100IU/ML 3ML for INJ • Insulin Aspart Rapid 100IU/ML 3ML for INJ	5	294990 Rs.
Cobel	Importer	Insulin Glargine 300IU/3ML Prefilled PEN	4	-
Exir	Importer and Producer	• Insulin Isophane (NPH) Human 1000U/10ML Vial • Insulin Regular Human 1000U/10ML Vial	7	340000 Rs.
Other firms: Ronak Darou, Saha, Darou Pakhsh, Shafayab Gostar, Vitane Pharmed	Varied	-	5	-
*We considered the case of Insulin "Aspart 100IU/ML 3ML for INJ" provided by both Novo Nordisk Pars and Exir, and then calculated the approximate price dividing the total sales in rial by amounts.

 

Source: Own elaboration based on data from Darosaz.ir

 

As a result, there may be weak and real signs of imperfect competition in Iran's pharmaceutical market, where companies compete in a few brands but are specialised in many certain products. However, if we look more closely at this specific market, it stands in line with the oligopolistic model with a high degree of concentration (CR4 higher than 80% in 2017), with the difference that -as said before- companies have limited ability to set prices. Finally, we can conclude that the inauguration of the Novo Nordisk production line in August 2020 complements the role of the rest of the insulin providers in satisfying customer demands in Iran.

The specialisation of each company in supplying a specific product makes the Iranian pharmaceutical market vulnerable. The effect of economic sanctions on the market and the difficulties they cause for both providers and consumers are some of the frequent debates that could be the subject of further studies.

 

 

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Shabaninejad H., The Structure of the World Pharmaceutical Market: Prioritising Iran's Target Export Markets, Iranian Journal of Pharmaceutical Research, 2016, 18, 546-555

Ebadi J., Ghavam H., [Systematisation of drug subsidies, from two points of view of justice and performance], economic research magazine, 2009, 86, 131-162

Avecina Emaco (2014), [A comprehensive assessment of Iran's pharmaceutical industry], Available in http://emaco.pro/wp-content/uploads/2016/05/daroo.pdf, 230 pages

Karafarin (2019), [Iran pharmaceutical industry], Feria Internacional Pharmapack Middle East, Isla de Kish-Irán, 2019, https://bkbrokerage.ir/files/download/2b9482ae1f9f61a, 44 pages

Middle East Bank (2015), [Pharmaceutical industry in Iran], 55 pages, https://middleeastbank.ir/uploads/pharmaceuticals-iran-139409.pdf