Industry Trend Analysis - Failure To Ratify TPP To Be A Loss For Innovative Pharmaceutical Firms - MAR 2017

BMI View: A failure to ratify the Trans-Pacific Partnership (TPP) will be a negative for multinational drugmakers operating in the Asia Pacific. With seven of the 12 participating members in the APAC region , collectively accounting for 42% of the region ' s medicine sales in 2016, the trade deal would have altered the landscape by introducing stronger intellectual property protection among other measures. We now expect improvements to member regulatory regimes to be more gradual , with alternatives to the TPP unlikely to result in a similarly significant improvement. This creates an environment that will be beneficial for generic drugmakers , allow ing firms to tap on the rising demand for low-cost drugs among participating countries in Asia.

Country-specific factors that shape the growth trajectory of pharmaceutical markets in Asia Pacific (APAC) will become more salient with the failure to ratify the Trans-Pacific Partnership (TPP). Seven of the 12 participating members are in the APAC region (Singapore, Vietnam, Brunei, Japan, Malaysia, New Zealand and Australia), and its implementation would have affected the business environment in the region - especially as other Asian countries such as Thailand and South Korea had signalled their interest in joining. However, this has come to nought with US President Donald Trump signing an executive order to formally withdraw the US from the trade deal in January 2017.

TPP's Demise To Perpetuate Region's Existing Trajectory
TPP Participating Countries
Source: D-maps, BMI

Based on the agreement, the trade deal requires all 12 signatories to ratify the trade pact within a two-year time frame, failing which at least six members - representing 85% of the group's total GDP - must ratify the deal for the TPP to come into force. However, the US accounts for the majority of the group's total GDP and its withdrawal will mean that it is not possible for either condition to be met. As of January 26 2017, major trade groups such as Pharmaceutical Research and Manufacturers of America (PhRMA) have not made any comments on the US withdrawal from the TPP. We will thus maintain our forecasts for the seven APAC markets, expecting combined sales to rise from USD129bn in 2016 to USD146bn by 2026.

TPP Would Have Shaped APAC Market
Asia Pacific: Breakdown Of Pharmaceutical Sales (%,2016)
Source: BMI

Innovative Firms To Face Continued Intellectual Property Challenges

Improvements to the intellectual property regime among participating APAC markets will be gradual and limited without the TPP. While this is not a central issue in countries such as Singapore and Japan, it will significantly affect commercial opportunities for multinational drugmakers in Vietnam, where firms are not allowed to receive a patent for second medical use. Similarly, while trade groups such as PhRMA have expressed disappointment that negotiators were not able to secure 12 years of data exclusivity for biologic medicines, the failure to ratify the TPP will see the perpetuation of a much lower level of protection than the five years plus three years of effective market protection that had been agreed upon. Brunei, for example, does not offer any regulatory data protection for biologic medicines, while Malaysia's data protection timeframe begins from the date that a product is first approved globally.

Lower Level Of Intellectual Property Protection Perpetuated
TPP Member Countries: Existing Regulatory Data Protection Periods
*No provision of regulatory data protection is specifically accorded for biologics . ** Malaysia begins counting its data protection timeframe from the date a product is approved and given data protection in its originator country and allows for up to five years from that date . ***Maximum timeframe of data protection accorded under the TPP . Source: News Sources, Regulatory Focus, BMI

Foreign-Based Generic Drug Industry To Benefit

Consequently, generic drugmakers will be the primary beneficiaries of the TPP's demise. Without the introduction of patent term extensions, patent linkage and stronger regulatory data protection as outlined in the TPP, firms will be able to more readily market generic pharmaceuticals in member markets. This bodes well for company revenue growth as the region's generic drug sub-sector has highly favourable fundamentals, ranging from the need for cost containment in Japan to the rollout of universal healthcare in Vietnam. Beyond domestic firms such as Malaysia's CCM Pharmaceuticals, India's generic drug industry will stand to gain as medicine exports to the TPP member countries based in Asia are substantial. In 2015, Indian pharmaceutical exports to Australia were the largest out of the seven states, valued at USD187mn by UN Comtrade. This was followed by Vietnam (USD141mn), Singapore (USD55mn) and Malaysia (48mn).

Indian Drugmakers To Continue Expansion In APAC
India: Exports To Asia Pacific TPP Members (USD)
Source: United Nations Comtrade Database DESA/UNSD, BMI

Alternative Trade Deals To Come To The Fore

While other trade deals will gain in prominence, any positive impact on multinational pharmaceutical company operations will not be of the same magnitude as the TPP. The Regional Comprehensive Economic Partnership (RCEP), which consists of 16 APAC countries - the 10 Association of South East Asian Nation (ASEAN) members, along with China, Japan, Australia, India, South Korea and New Zealand - is beset with difficulties regarding market access for various goods and services. Being put together from existing trade deals with ASEAN, BMI's Country Risk team expects countries to be far less willing to make significant concessions - which were instrumental in securing stronger intellectual property rights for innovative firms, given the potential implications for healthcare costs. Moreover, among the countries involved, only Japan has a sizeable innovative pharmaceutical industry, greatly limiting the potential for stronger intellectual property measures to form part of the deal.