An interesting economic by-product of the recent trend of Medical Tourism has been its impact on other healthcare-related and ancillary industries. One area that will be explored briefly in this article is its impact on the pharmaceutical industry. It is well known that countries, regions and healthcare providers that look to attract foreign medical tourists often advertise that their facilities and care are equivalent to the most modern US, European Union (EU) or Japanese facilities in order to recruit patients.

These foreign providers tend to want to have the types of products that their customers are used to seeing in their home country. Therefore, having name brand prescription and Over-the-Counter (OTC) medications could be a key success factor for these foreign providers. In addition, very similar to the medical equipment industry, the pharmaceutical companies want to understand how medical tourism will impact the logistics of healthcare (e.g., the movement of patients, delivery of care, quality of information, amount of procedures performed, and the purchasing of physical products). This research will look at the impact that medical tourism is having on the pharmaceutical industry.

Pharmaceutical Facts The Pharmaceutical and Medicine Manufacturing industry falls under the NAICS code of 3254 which includes sub-codes of:

• 32541 Pharmaceutical and Medicine Manufacturing
• 325412 Pharmaceutical Preparation Manufacturing
• 325413 In-Vitro Diagnostic Substance Manufacturing
• 325414 Biological Product (except Diagnostic) Manufacturing

Overall, this industry primarily comprises companies that are engaged in one or more of the following:

• manufacturing biological and medicinal products
• processing (i.e., grading, grinding, and milling) botanical drugs and herbs
• isolating active medicinal principals from botanical drugs and herbs
• manufacturing pharmaceutical products intended for internal and external consumption in such forms as ampoules, tablets, capsules, vials, ointments, powders, solutions, and suspensions

The total US domestic drug sales were approximately $235.4 billion USD in 2007 and worldwide sales are estimated at around $568 billion USD (possibly rising to $800 billion by 2020). The biggest pharmaceutical companies have traditionally had good growth and profits (10.8% in revenues and 10.4% in profits as reported in Fortune 2008). In addition, they are cash-rich (the top 20 companies have access to $ 7.5 billion in cash, equivalents and short-term investments) and relatively debt-free.

They have  had a good run for the past few decades and have good cash reserves (for the top 20 pharmaceutical companies the average net debt, as a percentage of capital employed is just 6%) which should help them ride out the current recessionary trends. However, a concern raised by PWC (2007) was that more than 90% of big pharmaceutical companies’ total revenues came from medicines that have been on the market for more than five years. And these patents are due to expire in the near future, exposing an estimated $157 billion USD worth of sales to generic erosion.

According to Fortune’s Global 500 (July, 2008) issue, the largest global pharmaceutical companies are:

Medical Tourism’s Impact on the Pharmaceutical Industry in Industrialized Countries In the current recessionary environment, it might be expected that the medical tourism industry would be impacted because people have either been laid-off or are dealing with lowered salaries. Although, according to an analyst at DataMonitor (2009), this impact to the medical tourism industry will be small (possibly 1 or 2 percentage points) because the “sheer advantage of low-cost healthcare still remains attractive to many”. They still expect robust growth in medical tourism based on the advantages of lower costs of medical care and medications, experienced healthcare providers, the latest, state-of-the-art equipment, combined with similar quality care to that found in developed nations.

The facilities in medical tourism hotspots will probably offer an array of medication options to medical tourists. This will include non-Western suppliers of drugs (including possibly that of the provider country- see more below) which could cause a disruption of service in their pharmaceutical therapy upon their return trip home. It is a very real possibility that the medication offered abroad may not approved in their home country (such as by the FDA in the US) or the formulations may be different. This could lead to difficulties in their ongoing rehabilitation and interesting dilemmas for any possible insurance companies that cover these medical trips.

The following very real case was given by Williams and Seus, the Principals at MedPharma Partners (2007):

“Consider the case of a patient who travels to India for major surgery. Upon discharge he receives a few days’ supply of pharmaceuticals from the hospital pharmacy and is told he can refill his medications over the Internet through the hospital’s mail order service once back home. It seems likely that this patient –who traveled halfway around the world for care— will become a loyal, long-term customer. In effect, a pharma manufacturer’s marketing practices in Asia or Latin America might have a demonstrable effect on U.S. drug consumption patterns.”

In more developed countries, medical tourism is starting to become available to the insured population (it was recently estimated that about 11% of US HMOs have some medical tourism plan or pilot in place). Insurers are attempting to respond to requests for medical tourism from their customers and businesses who are seeking lower prices while still providing services to employees.

This is especially the case in the developed world during the worldwide recession. US, EU or Japanese insurance companies and even employers will increasingly be looking for more high value, low cost options like seeking healthcare options in countries where medical costs are 50-90% cheaper (including the airfare). Therefore, it is likely that the insurance companies will have an impact on the interactions between foreign providers and the pharmaceutical industry.

For the pharmaceutical industry, the availability of information on the Internet and other sources has increased the awareness of pricing disparities on international drugs. This has placed additional pressure on the drug companies to reduce drug prices in developed countries, which has been a problem for almost ten (10) years now. In fact, many countries are now trying to put laws in place that will limit the prices charged by pharmaceutical companies particularly for new prescription drugs.

Also, some developing nations claim that the prices charged by large pharmaceutical companies limit their access to the poor who are in desperate need of them. It was just reported in February of 2009, that GlaxoSmithKline PLC would cut drug prices to the 50 poorest countries in the world and use 20 percent of its profits from those countries to build health clinics and other infrastructure. In addition, large buyers like brokers, distributors, retail chains, large employers, governments, and healthcare providers are pushing for savings through bulk purchases and large volume-based discounts.

The current world-wide recession will only increase the already intense pressure on pharmaceutical companies to lower prices. These companies will most likely have to limit their aggressive promotional spending rates and possibly their research and development (R&D) costs in order to keep profits high. Because of the international nature of these pressures, pharmaceutical companies are becoming adept at international trade management and trying to limit cross-border shipments by distributors (to reduce perceived disparities in prices). However, medical tourism may prove to be a disruptive trend to this industry and has the possibility of impacting margins by decreasing the costs paid by patients but keeping sales high through volume.

One interesting thought offered by Williams and Seus (2007), is that medical tourism may provide pharmaceutical companies from developed countries with leverage in intellectual property (IP) disputes with foreign countries. Every month, in the US Patent and Trademark Office (USPTO), some 1,000 names are filed in Class 5 (the international trademark classification for pharmaceuticals).

This author was fascinated to find out that, according to the Economist (2005), as much as three-quarters of the value of publicly traded companies in America comes from intangible assets (such as patents on drug formulas). Countries that are counting on medical tourism to help drive economic growth will have more incentives to respect IP regulations in order to be able to offer well-known, name brand drugs to prospective medical tourists.

Medical Tourism’s Impact on the Pharmaceutical Industry in Medical Tourism Countries

The growth of the pharmaceutical market in emerging markets is impressive (a 14.7% increase over the 2005-06 period) and substantially greater than found in the developed markets of the EU and US. Emerging markets offer access to sizeable patient populations and the added bonus of medical tourism patients from developed countries as well. There are still some significant barriers that continue to exist in these markets (such as IP protections as mentioned above) but the overall potential is definitely there.

In India, the impact of the pharmaceutical industry is everywhere to be found. India has over 20,000 scientists engaged in the biotech sector, the highest number of FDA approvals worldwide outside of the US, and world-class facilities for manufacturing generics that comply with international harmonized standards such as Good Laboratory
Practices (GLP), current Good Manufacturing Practice (cGMP), and Good Clinical Practices (GCP). Ernst & Young, has projected a robust growth for biotech, pharmaceutical and healthcare service sectors in the country for the coming years. They report that the country was on the threshold of strong growth partially driven by the surge in medical tourism.

Other Asian countries like Thailand and Singapore and Malaysia are offering competition however, as these countries were reportedly, altogether attracting 10 times more medical tourists from abroad than India. In Malaysia, Frost & Sullivan, reported that one of the key drivers that will boost their pharmaceutical industry is the country’s medical tourism. Because Malaysia is a fast emerging destination for medical tourism, thanks to its world-class healthcare and a good cost-to-value; it is expected that more foreign patients will seek treatment here, and this will ultimately drive demand up for pharmaceutical products.

In the Middle East, it was reported that the Kingdom of Jordon was also looking to boost medical tourism by developing innovative products through a burgeoning pharmaceutical industry. Jordan’s pharmaceutical industry is relatively small with a value of $160 million USD, but they have an advantage of being a supporter IP rights and the FTA. This has helped stimulate a vigorous environment for clinical trials in the country. This overall market could be increased if a Kuwaiti-Jordan consortium, in a $3 to 5 billion USD medical city near Amman that is focused on medical tourism, is completed by 2012. It will include a number of hotels and entertainment centers supporting state-of-the-art hospitals hoping to attract foreign medical tourists.

As reported in the Medical Tourism Association’s newsletter from February 2009, Abu Dhabi is trying to develop other areas of its economy to sustain its long-term growth (as found in the Abu Dhabi Economic Vision 2030). Oil and gas exports accounted for 74% of all Abu Dhabi’s revenues between 2000 and 2005and they want to decrease the proportion of revenues derived from petrochemicals to about 50%. To achieve the diversification they want, the Government plans to focus on developing the pharmaceutical and medical tourism industries. For pharmaceuticals, Abu Dhabi has a goal of becoming a thriving research and development center by attracting investment, strengthening IP rights and formulating a drug-testing system.

In Latin America, US patients have been quietly going to Mexico for years to take advantage of cheaper prices. In fact, in 2005 Mexico’s pharmaceutical market was valued at $7 billion, much bigger than India’s market, and was growing at 10% pace. An older report (1999) by the AEI found that prices in the US are on average about 72 percent higher than in Canada and almost 102 percent higher than in Mexico. Historically, pharmaceutical prices in Mexico have been low relative to other OECD member countries. However, prices for pharmaceutical products in the private sector have been increasing about 5% per year since 2002 (possibly driven by its proximity to the United States) and sales are expected to rise as medical tourism continues to grow in this county.

Summary

Sustainable success in the pharmaceutical industry can be derived from watching the change in demographics/markets and timely exploitation of opportunities such as the rise of medical tourism. During the economic slowdown, most of the big companies are not expected to generate significant revenue growth, and earnings growth will be primarily being drive by cost-cutting and share buybacks.

In the long run, the future is bright for the pharmaceutical companies. The world-wide population is growing and aging. According to PWC (2007), the global population is projected to rise from 6.5 billion in 2005 to 7.6 billion in 2020. It will also age rapidly, with about 719.4 million people or about 9.4% of the world’s inhabitants expected to be 65 or more in 2020 (compared with 477.4 million or about 7.3% from 2005). Older people typically have more prescription medicines than younger people with 80% of those over the age of 75 taking at least one and 36% taking four or more.

Medical tourism may impact the pharmaceutical industry in several ways. One is the amount of money spent on promotion (approximately 24.4% in 2004) versus R&D (13.4% for the same period). These findings, from the York’s School of Health Policy & Management (2005), should continue as the pharmaceutical companies continue to have to market drugs to possible medical tourism patients and international providers (in addition to having to design blockbuster drugs) at the same time. In addition, if the worldwide medical tourism market gets to $60 billion by 2010, as has been forecasted, then the total impact on pharmaceutical sales in terms of percentage of revenue and logistics will be significant.

Drug companies will have to work through issues of pricing, distribution, and IP rights which will become even  more important as the market grows. Finally, the pressure on the drug companies and countries to have safe, secure, logical, free-market options to manufacture and distribute pharmaceuticals as close as possible to these medical tourists will continue to drive the investment in pharmaceutical manufacturing to these developing countries (much to the delight of their economic development folks!).

David G. Vequist IV, Ph.D. is the founder and Director of the Center for Medical Tourism Research and a Professor at the University of Incarnate Word in San Antonio, Texas, USA. He is also a consultant, author and speaker on topics such as healthcare trends and technologies. He can be reached at vequist@uiwtx.edu.