The value of the Georgian pharmaceutical market has increased almost 40-fold since 1995 and is expected to exceed $200m in 2008. The outlook for coming years also looks optimistic.
Pharmaceutical sector in Georgia: brief overview
The development of the Georgian pharmaceutical sector started in the mid-90s, when the market was still full of illegal, low quality and low cost drugs. In 1997, a set of new regulatory changes was ratified by the government and the Georgian Drug Agency was formed, which is currently the main supervisory body of the local pharmaceutical industry. Since then, the share of counterfeited drugs has been falling and currently is an insignificant part of the total market.
In 2007, the size of the Georgian pharmaceutical market stood at $177m, growing on average by 34% per annum since 1995. Through these years, the pharmaceutical industry has enjoyed tax incentives, which stimulated growth of the sector. Rising household incomes and growing share of healthcare in household spending (to 9.5% of disposable income in 2007 from 6% in 2003), accelerated the development of the market even further. In 2008, the value of the Georgian pharmaceutical market is expected to exceed $200m.
During the mid-90s, the pharmaceutical market attracted many entrants, the majority of which were motivated by the prospect of high profits from sales of illegal, low cost and low quality medicines. Increased regulation and tough competition were the two major factors that cleaned the market from illegal activities. Those who survived have established themselves as professional, western standard pharmaceutical companies, continuing their successful operations up to the present.
After a reduction in customs tariffs for pharmaceutical products to 1%, drug imports into Georgia more than tripled in volume terms in 1997. At the same time, the exemption from VAT enjoyed by pharmaceutical companies created incentives for developing local pharmaceutical production. Currently, 2,041 pharmaceutical companies are registered in Georgia, of which 76 companies produce various pharmaceutical products in the country. The share of pharmaceutical products in Georgia’s exports reached 2%, while their share in total imports amounted to 3% in 2007. Main destination countries for exports of Georgian pharmaceutical products are Kyrgyzstan, Kazakhstan, Uzbekistan, Azerbaijan and Turkey. They will soon be joined by the Ukraine and Armenia.
Although locally produced medicines represent an attractive substitute for imported products, due to their lower prices and competitive quality, their consumptions is low as a share of total drug consumption in Georgia, oscillating between 8% and 10%. The main reason is lack of assortment breadth. Of the 50,000 drugs registered in Georgia, only 100-150 types of medicines are produced locally. Georgian pharmaceutical companies, with their own production facilities, are planning to increase this share up to 30%. The task seems challenging. Tax breaks on imported pharmaceutical products, once welcomed, now represent an important threat to local pharmaceutical production.
Leaders of Georgian pharmaceutical industry
Aversi Pharma, PSP Group and GPC are three leading domestic pharmaceutical companies, controlling approximately 75% of the local market between them. These companies are engaged in drug distribution, as well as production and imports.
Aversi Pharma was established in 1994. With a market share of 35%, the company owns the country’s largest chain of drugstores, with more than 140 outlets throughout Georgia. Aversi is the second largest producer of pharmaceutical products and holds an ISO 9001 certificate. Its Aversi Rational plant produces 65 types of medicines.
PSP Group, established in 1994, currently with 114 drugstores in Georgia, controls up to 30% of the local market. With production capacity of 500m pills and 200m capsules per annum, GMP (member of PSP Group) is the largest producer of pharmaceutical products in Southern Caucasus (Georgia, Armenia, Azerbaijan). Established in 2000, it produces more than 100 types of medicines. In 2004 the company was awarded an ISO 9001-2000 certificate, and in 2007, a Good Manufacturing Practice certificate.
GPC, established in 1995, with a market share of 10%, has 39 drugstores in Georgia.
The rest of the Georgian drug retailing market is shared by small, individual drugstores, the biggest of which is Sakhalkho Aptiaki (People’s Drugstore), owned by People’s Bank of Georgia and Peoples Insurance. Currently, the chain owns 38 drugstores and controls 4% of the market. However, Sakhalkho Aptiaki plans to increase its share up to 15-17% by the end of 2009. The company will soon launch its own pharmaceutical production, together with its Ukrainian partners.
During the last few years, pharmaceutical companies have been striving to achieve a high level of vertical integration and increase their market power further. Due to their strong bargaining power, foreign pharmaceutical concerns supply medicines to Aversi and PSP at more favourable terms compared to other local drug wholesalers. Lower prices, high service quality, superior reputation and trust all contribute to their significant competitive advantage with respect to other local companies. Their own pharmaceutical production adds up to their market power.
“Red A” and “36.6” − popular franchising programmes
In order to speed up the network expansion process, GPC established “Red A”, a cross between a quality certificate and a franchise, which is granted to drugstores complying with certain quality standards. GPC assists individual drugstores in modernising their facilities, and once a drugstore meets specified quality and service standards, it becomes a “Red A” certificate owner and GPC’s official partner, gaining access to imported medicines at lower prices. “Red A” drugstores were also attractive targets for acquisition by GPC. Up to the present, over 90 drugstores have been granted the “Red A” certificate. Due to an effective marketing campaign, the “Red A” sign has become very popular among Georgians as a symbol of quality, resulting in increased sales.
PSP followed GPC’s strategy and established its own licensing program called “36.6”, which aims at expanding its network of partner drugstores throughout Georgia. The “36.6” project is a kind of franchise scheme whereby PSP establishes and controls not only service quality standards, but also sales and the financial standing of participating drugstores as well. More than 40 drugstores are involved in the “36.6” program.
Rising drug prices
Before 2004, tough competition has been driving the prices of drugs down. However, after gaining considerable reputation and trust, leading pharmaceutical companies decided to avoid price wars and concentrate their effort on marketing, network expansion, high quality service etc. According to estimates, average prices of drugs have almost doubled during the last 2-3 years. One important factor which is thought to have contributed to increasing prices is the growing popularity of health insurance. The majority of health insurance plans include, on average, a 50% discount on drugs. Another factor which significantly facilitated this trend was a government programme to grant free health insurance to socially unsecure persons, a population of up to 700,000 people.
Prospects: a new distribution channel
The healthcare reform that is currently under way, aiming at the privatisation of state owned hospitals, has attracted the interest of leading pharmaceutical companies. Several hospitals have been purchased by Aversi, PSP and GPC, which “implicitly” view them as an additional channel for selling their products. Under the terms of the privatisation, pharmaceutical companies undertook to turn Soviet-era-style hospitals into modern medical centres, which entails the construction/reconstruction of buildings, training of personnel and equipping hospitals with modern medical devices. The channel seems to be attractive, but it is not clear whether the amount of money that needs to be invested in the hospitals will be worth the payoff.