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The 2006-2011 World Outlook for Pharmaceutical Preparations for Veterinary UseProduct Type: Market Research ReportPublished by: Icon Group International, Inc. Published: April 2005 Product Code: R307-14241 Description WHAT IS LATENT DEMAND AND THE P.I.E.?The concept of latent demand is rather subtle. The term latent typically refers to something that is dormant, not observable, or not yet realized. Demand is the notion of an economic quantity that a target population or market requires under different assumptions of price, quality, and distribution, among other factors. Latent demand, therefore, is commonly defined by economists as the industry earnings of a market when that market becomes accessible and attractive to serve by competing firms. It is a measure, therefore, of potential industry earnings (P.I.E.) or total revenues (not profit) if a market is served in an efficient manner. It is typically expressed as the total revenues potentially extracted by firms. The “market” is defined at a given level in the value chain. There can be latent demand at the retail level, at the wholesale level, the manufacturing level, and the raw materials level (the P.I.E. of higher levels of the value chain being always smaller than the P.I.E. of levels at lower levels of the same value chain, assuming all levels maintain minimum profitability). The latent demand for pharmaceutical preparations for veterinary use is not actual or historic sales. Nor is latent demand future sales. In fact, latent demand can be lower either lower or higher than actual sales if a market is inefficient (i.e., not representative of relatively competitive levels). Inefficiencies arise from a number of factors, including the lack of international openness, cultural barriers to consumption, regulations, and cartel-like behavior on the part of firms. In general, however, latent demand is typically larger than actual sales in a country market. For reasons discussed later, this report does not consider the notion of “unit quantities”, only total latent revenues (i.e., a calculation of price times quantity is never made, though one is implied). The units used in this report are U.S. dollars not adjusted for inflation (i.e., the figures incorporate inflationary trends) and not adjusted for future dynamics in exchange rates (i.e., the figures reflect average exchange rates over recent history). If inflation rates or exchange rates vary in a substantial way compared to recent experience, actually sales can also exceed latent demand (when expressed in U.S. dollars, not adjusted for inflation). On the other hand, latent demand can be typically higher than actual sales as there are often distribution inefficiencies that reduce actual sales below the level of latent demand. As mentioned in the introduction, this study is strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved. If fact, all the current products or services on the market can cease to exist in their present form (i.e., at a brand-, R&D specification, or corporate-image level) and all the players can be replaced by other firms (i.e., via exits, entries, mergers, bankruptcies, etc.), and there will still be an international latent demand for pharmaceutical preparations for veterinary use at the aggregate level. Product and service offering details, and the actual identity of the players involved, while important for certain issues, are relatively unimportant for estimates of latent demand. THE METHODOLOGY In order to estimate the latent demand for pharmaceutical preparations for veterinary use on a worldwide basis, I used a multi-stage approach. Before applying the approach, one needs a basic theory from which such estimates are created. In this case, I heavily rely on the use of certain basic economic assumptions. In particular, there is an assumption governing the shape and type of aggregate latent demand functions. Latent demand functions relate the income of a country, city, state, household, or individual to realized consumption. Latent demand (often realized as consumption when an industry is efficient), at any level of the value chain, takes place if an equilibrium in realized. For firms to serve a market, they must perceive a latent demand and be able to serve that demand at a minimal return. The single most important variable determining consumption, assuming latent demand exists, is income (or other financial resources at higher levels of the value chain). Other factors that can pivot or shape demand curves include external or exogenous shocks (i.e., business cycles), and or changes in utility for the product in question. Ignoring, for the moment, exogenous shocks and variations in utility across countries, the aggregate relation between income and consumption has been a central theme in economics. The figure below concisely summarizes one aspect of problem. In the 1930s, John Meynard Keynes conjectured that as incomes rise, the average propensity to consume would fall. The average propensity to consume is the level of consumption divided by the level of income, or the slope of the line from the origin to the consumption function. He estimated this relationship empirically and found it to be true in the short-run (mostly based on cross-sectional data). The higher the income, the lower the average propensity to consume. This type of consumption function is labeled "A" in the figure below (note the rather flat slope of the curve). In the 1940s, another macroeconomist, Simon Kuznets, estimated long-run consumption functions which indicated that the marginal propensity to consume was rather constant (using time series data across countries). This type of consumption function is show as "B" in the figure below (note the higher slope and zero-zero intercept). The average propensity to consume is constant. Is it declining or is it constant? A number of other economists, notably Franco Modigliani and Milton Friedman, in the 1950s (and Irving Fisher earlier), explained why the two functions were different using various assumptions on intertemporal budget constraints, savings, and wealth. The shorter the time horizon, the more consumption can depend on wealth (earned in previous years) and business cycles. In the long-run, however, the propensity to consume is more constant. Similarly, in the long run, households, industries or countries with no income eventually have no consumption (wealth is depleted). While the debate surrounding beliefs about how income and consumption are related and interesting, in this study a very particular school of thought is adopted. In particular, we are considering the latent demand for pharmaceutical preparations for veterinary use across some 230 countries. The smallest have fewer than 10,000 inhabitants. I assume that all of these counties fall along a "long-run" aggregate consumption function. This long-run function applies despite some of these countries having wealth, current income dominates the latent demand for pharmaceutical preparations for veterinary use. So, latent demand in the long-run has a zero intercept. However, I allow firms to have different propensities to consume (including being on consumption functions with differing slopes, which can account for differences in industrial organization, and end-user preferences). Given this overriding philosophy, I will now describe the methodology used to create the latent demand estimates for pharmaceutical preparations for veterinary use. Since ICON Group has asked me to apply this methodology to a large number of categories, the rather academic discussion below is general and can be applied to a wide variety of categories, not just pharmaceutical preparations for veterinary use. Step 1. Product Definition and Data Collection Any study of latent demand across countries requires that some standard be established to define “efficiently served”. Having implemented various alternatives and matched these with market outcomes, I have found that the optimal approach is to assume that certain key countries are more likely to be at or near efficiency than others. These countries are given greater weight than others in the estimation of latent demand compared to other countries for which no known data are available. Of the many alternatives, I have found the assumption that the world’s highest aggregate income and highest income-per-capita markets reflect the best standards for “efficiency”. High aggregate income alone is not sufficient (i.e., China has high aggregate income, but low income per capita and can not assumed to be efficient). Aggregate income can be operationalized in a number of ways, including gross domestic product (for industrial categories), or total disposable income (for household categories; population times average income per capita, or number of households times average household income per capita). Brunei, Nauru, Kuwait, and Lichtenstein are examples of countries with high income per capita, but not assumed to be efficient, given low aggregate level of income (or gross domestic product); these countries have, however, high incomes per capita but may not benefit from the efficiencies derived from economies of scale associated with large economies. Only countries with high income per capita and large aggregate income are assumed efficient. This greatly restricts the pool of countries to those in the OECD (Organization for Economic Cooperation and Development), like the United States, or the United Kingdom (which were earlier than other large OECD economies to liberalize their markets). The selection of countries is further reduced by the fact that not all countries in the OECD report industry revenues at the category level. Countries that typically have ample data at the aggregate level that meet the efficiency criteria include the United States, the United Kingdom and in some cases France and Germany. Latent demand is therefore estimated using data collected for relatively efficient markets from independent data sources (e.g. Euromonitor, Mintel, Thomson Financial Services, the U.S. Industrial Outlook, the World Resources Institute, the Organization for Economic Cooperation and Development, various agencies from the United Nations, industry trade associations, the International Monetary Fund, and the World Bank). Depending on original data sources used, the definition of “pharmaceutical preparations for veterinary use” is established. In the case of this report, the data were reported at the aggregate level, with no further breakdown or definition. In other words, any potential product or service that might be incorporated within pharmaceutical preparations for veterinary use falls under this category. Public sources rarely report data at the disaggregated level in order to protect private information from individual firms that might dominate a specific product-market. These sources will therefore aggregate across components of a category and report only the aggregate to the public. While private data are certainly available, this report only relies on public data at the aggregate level without reliance on the summation of various category components. In other words, this report does not aggregate a number of components to arrive at the “whole”. Rather, it starts with the “whole”, and estimates the whole for all countries and the world at large (without needing to know the specific parts that went into the whole in the first place). Given this caveat, this study covers “pharmaceutical preparations for veterinary use” as defined by the North American Industrial Classification system or NAICS (pronounced “nakes”). The NAICS code for pharmaceutical preparations for veterinary use is 325412T. It is for this definition of pharmaceutical preparations for veterinary use that the aggregate latent demand estimates are derived. “Pharmaceutical preparations for veterinary use” is specifically defined as follows: 325412T pharmaceutical preparations for veterinary use 325412T0 Pharmaceutical preparations, for veterinary use 325412T000 Pharmaceutical preparations, for veterinary use 325412T011 Pharmaceutical preparations, for veterinary use, anesthetics 325412T016 Pharmaceutical preparations, for veterinary use, anthelmintics 325412T021 Pharmaceutical preparations, for veterinary use, antibiotics, tetracyclines 325412T026 Pharmaceutical preparations, for veterinary use, antibiotics, penicillins 325412T031 Pharmaceutical preparations, for veterinary use, antibiotics, other 325412T036 Pharmaceutical preparations, for veterinary use, antiseptics, wound dressings, and fungicides 325412T041 Pharmaceutical preparations, for veterinary use, hematinics 325412T046 Pharmaceutical preparations, for veterinary use, hemostatics 325412T051 Pharmaceutical preparations, for veterinary use, hormones, insulin 325412T056 Pharmaceutical preparations, for veterinary use, hormones, ACTH (corticotrophin) preparations 325412T061 Pharmaceutical preparations, for veterinary use, hormones, other 325412T066 Pharmaceutical preparations, for veterinary use, intravenous solutions and electrolytes 325412T071 Pharmaceutical preparations, for veterinary use, nitrofurans 325412T076 Pharmaceutical preparations, for veterinary use, nutrients and tonics 325412T081 Pharmaceutical preparations, for veterinary use, parasiticides, external 325412T086 Pharmaceutical preparations, for veterinary use, sulfonamides 325412T091 Pharmaceutical preparations, for veterinary use, tranquilizers and ataractics 325412T094 Pharmaceutical preparations, for veterinary use, vitamins and minerals 325412T097 Pharmaceutical preparations, for veterinary use, other 325412T1 veterinary pharmaceuticals, medicinal premixes, and medicated pet care products excluding diagnostic preparations and pet flea-and-tick products 325412T100 pharmaceutical preparations for veterinary use excluding diagnostics 325412T111 veterinary pharmaceutical preparations of anesthetics 325412T116 veterinary pharmaceutical preparations of anthelmintics 325412T121 veterinary pharmaceutical preparations of antibiotic tetracyclines 325412T126 veterinary pharmaceutical preparations of antibiotic penicillins 325412T131 veterinary antibiotic pharmaceuticals excluding penicillins and tetracyclines 325412T136 veterinary pharmaceutical preparations of antiseptics, wound dressings, and fungicides 325412T141 Pharmaceutical preparations, for veterinary use, hematinics 325412T146 veterinary pharmaceutical preparations of hemostatics 325412T151 Pharmaceutical preparations, for veterinary use, hormones, insulin preparations 325412T156 Pharmaceutical preparations, for veterinary use, hormones, ACTH (corticotrophin) preparations 325412T161 Pharmaceutical preparations, for veterinary use, hormones, other 325412T166 veterinary pharmaceutical preparations of intravenous solutions and electrolytes 325412T171 Pharmaceutical preparations, for veterinary use, nitrofurans 325412T176 Pharmaceutical preparations, for veterinary use, nutrients and tonics 325412T181 veterinary pharmaceutical preparations of external parasiticides 325412T186 veterinary pharmaceutical preparations of sulfonamides 325412T191 veterinary pharmaceutical preparations of tranquilizers and ataractics 325412T194 veterinary pharmaceutical preparations of vitamins and minerals 325412T197 Other pharmaceutical preparations, for veterinary use Step 2. Filtering and Smoothing Based on the aggregate view of pharmaceutical preparations for veterinary use as defined above, data were then collected for as many similar countries as possible for that same definition, at the same level of the value chain. This generates a convenience sample of countries from which comparable figures are available. If the series in question do not reflect the same accounting period, then adjustments are made. In order to eliminate short-term effects of business cycles, the series are smoothed using an 2 year moving average weighting scheme (longer weighting schemes do not substantially change the results). If data are available for a country, but these reflect short-run aberrations due to exogenous shocks (such as would be the case of beef sales in a country stricken with foot and mouth disease), these observations were dropped or "filtered" from the analysis. Step 3. Filling in Missing Values In some cases, data are available for countries on a sporadic basis. In other cases, data from a country may be available for only one year. From a Bayesian perspective, these observations should be given greatest weight in estimating missing years. Assuming that other factors are held constant, the missing years are extrapolated using changes and growth in aggregate national income. Based on the overriding philosophy of a long-run consumption function (defined earlier), countries which have missing data for any given year, are estimated based on historical dynamics of aggregate income for that country. Step 4. Varying Parameter, Non-linear Estimation Given the data available from the first three steps, the latent demand in additional countries is estimated using a “varying-parameter cross-sectionally pooled time series model”. Simply stated, the effect of income on latent demand is assumed to be constant across countries unless there is empirical evidence to suggest that this effect varies (i.e., . the slope of the income effect is not necessarily same for all countries). This assumption applies across countries along the aggregate consumption function, but also over time (i.e., not all countries are perceived to have the same income growth prospects over time and this effect can vary from country to country as well). Another way of looking at this is to say that latent demand for pharmaceutical preparations for veterinary use is more likely to be similar across countries that have similar characteristics in terms of economic development (i.e., African countries will have similar latent demand structures controlling for the income variation across the pool of African countries). This approach is useful across countries for which some notion of non-linearity exists in the aggregate cross-country consumption function. For some categories, however, the reader must realize that the numbers will reflect a country’s contribution to global latent demand and may never be realized in the form of local sales. For certain country-category combinations this will result in what at first glance will be odd results. For example, the latent demand for the category “space vehicles” will exist for “Togo” even though they have no space program. The assumption is that if the economies in these countries did not exist, the world aggregate for these categories would be lower. The share attributed to these countries is based on a proportion of their income (however small) being used to consume the category in question (i.e., perhaps via resellers). Step 5. Fixed-Parameter Linear Estimation Nonlinearities are assumed in cases where filtered data exist along the aggregate consumption function. Because the world consists of more than 200 countries, there will always be those countries, especially toward the bottom of the consumption function, where non-linear estimation is simply not possible. For these countries, equilibrium latent demand is assumed to be perfectly parametric and not a function of wealth (i.e., a country’s stock of income), but a function of current income (a country’s flow of income). In the long run, if a country has no current income, the latent demand for pharmaceutical preparations for veterinary use is assumed to approach zero. The assumption is that wealth stocks fall rapidly to zero if flow income falls to zero (i.e., countries which earn low levels of income will not use their savings, in the long run, to demand pharmaceutical preparations for veterinary use). In a graphical sense, for low income countries, latent demand approaches zero in a parametric linear fashion with a zero-zero intercept. In this stage of the estimation procedure, low-income countries are assumed to have a latent demand proportional to their income, based on the country closest to it on the aggregate consumption function. Step 6. Aggregation and Benchmarking Based on the models described above, latent demand figures are estimated for all countries of the world, including for the smallest economies. These are then aggregated to get world totals and regional totals. To make the numbers more meaningful, regional and global demand averages are presented. Figures are rounded, so minor inconsistencies may exist across tables. Step 7. Latent Demand Density: Allocating Across Cities With the advent of a “borderless world”, cities become a more important criteria in prioritizing markets, as opposed to regions, continents, or countries. This report also covers the world’s top 2000 cities. The purpose is to understand the density of demand within a country and the extent to which a city might be used as a point of distribution within its region. From an economic perspective, however, a city does not represent a population within rigid geographical boundaries. To an economist or strategic planner, a city represents an area of dominant influence over markets in adjacent areas. This influence varies from one industry to another, but also from one period of time to another. Similar to country-level data, the reader needs to realize that latent demand allocated to a city may or may not represent real sales. For many items, latent demand is clearly observable in sales, as in the case for food or housing items. Consider, again, the category “satellite launch vehicles.” Clearly, there are no launch pads in most cities of the world. However, the core benefit of the vehicles (e.g. telecommunications, etc.) is "consumed" by residents or industries within the world's cities. Without certain cities, in other words, the world market for satellite launch vehicles would be lower for the world in general. One needs to allocate, therefore, a portion of the worldwide economic demand for launch vehicles to regions, countries and cities. This report takes the broader definition and considers, therefore, a city as a part of the global market. I allocate latent demand across areas of dominant influence based on the relative economic importance of cities within its home country, within its region and across the world total. Not all cities are estimated within each country as demand may be allocated to adjacent areas of influence. Since some cities have higher economic wealth than others within the same country, a city’s population is not generally used to allocate latent demand. Rather, the level of economic activity of the city vis-à-vis others. Table of Contents 1 INTRODUCTION 101.1 Overview 10 1.2 What is Latent Demand and the P.I.E.? 10 1.3 The Methodology 11 1.3.1 Step 1. Product Definition and Data Collection 12 1.3.2 Step 2. Filtering and Smoothing 15 1.3.3 Step 3. Filling in Missing Values 15 1.3.4 Step 4. Varying Parameter, Non-linear Estimation 16 1.3.5 Step 5. Fixed-Parameter Linear Estimation 16 1.3.6 Step 6. Aggregation and Benchmarking 16 1.3.7 Step 7. Latent Demand Density: Allocating Across Cities 17 2 SUMMARY OF FINDINGS 18 2.1 The Worldwide Market Potential 18 3 AFRICA 20 3.1 Executive Summary 20 3.2 Algeria 21 3.3 Angola 22 3.4 Benin 23 3.5 Botswana 23 3.6 Burkina Faso 24 3.7 Burundi 25 3.8 Cameroon 25 3.9 Cape Verde 26 3.10 Central African Republic 27 3.11 Chad 27 3.12 Comoros 28 3.13 Congo (formerly Zaire) 29 3.14 Cote d'Ivoire 30 3.15 Djibouti 30 3.16 Egypt 31 3.17 Equatorial Guinea 32 3.18 Ethiopia 32 3.19 Gabon 33 3.20 Ghana 34 3.21 Guinea 34 3.22 Guinea-Bissau 35 3.23 Kenya 36 3.24 Lesotho 37 3.25 Liberia 37 3.26 Libya 38 3.27 Madagascar 39 3.28 Malawi 39 3.29 Mali 40 3.30 Mauritania 41 3.31 Mauritius 41 3.32 Morocco 42 3.33 Mozambique 43 3.34 Namibia 43 3.35 Niger 44 3.36 Nigeria 45 3.37 Republic of Congo 46 3.38 Reunion 46 3.39 Rwanda 47 3.40 Sao Tome E Principe 48 3.41 Senegal 48 3.42 Sierra Leone 49 3.43 Somalia 50 3.44 South Africa 50 3.45 Sudan 51 3.46 Swaziland 52 3.47 Tanzania 52 3.48 The Gambia 53 3.49 Togo 54 3.50 Tunisia 54 3.51 Uganda 55 3.52 Western Sahara 56 3.53 Zambia 56 3.54 Zimbabwe 57 4 ASIA & OCEANA 59 4.1 Executive Summary 59 4.2 American Samoa 60 4.3 Australia 61 4.4 Bangladesh 62 4.5 Bhutan 63 4.6 Brunei 63 4.7 Burma 64 4.8 Cambodia 65 4.9 China 65 4.10 Christmas Island 66 4.11 Cook Islands 67 4.12 Fiji 67 4.13 French Polynesia 68 4.14 Guam 69 4.15 Hong Kong 69 4.16 India 70 4.17 Indonesia 71 4.18 Japan 72 4.19 Kiribati 73 4.20 Laos 73 4.21 Macau 74 4.22 Malaysia 75 4.23 Maldives 76 4.24 Marshall Islands 76 4.25 Micronesia Federation 77 4.26 Mongolia 77 4.27 Nauru 78 4.28 Nepal 79 4.29 New Caledonia 79 4.30 New Zealand 80 4.31 Niue 81 4.32 Norfolk Island 82 4.33 North Korea 82 4.34 Northern Mariana Island 83 4.35 Palau 84 4.36 Papua New Guinea 84 4.37 Philippines 85 4.38 Seychelles 86 4.39 Singapore 87 4.40 Solomon Islands 87 4.41 South Korea 88 4.42 Sri Lanka 89 4.43 Taiwan 89 4.44 Thailand 90 4.45 Tokelau 91 4.46 Tonga 92 4.47 Tuvalu 92 4.48 Vanuatu 93 4.49 Vietnam 93 4.50 Wallis and Futuna 94 4.51 Western Samoa 95 5 EUROPE 96 5.1 Executive Summary 96 5.2 Albania 97 5.3 Andorra 98 5.4 Austria 98 5.5 Belarus 99 5.6 Belgium 100 5.7 Bosnia and Herzegovina 101 5.8 Bulgaria 102 5.9 Croatia 103 5.10 Cyprus 103 5.11 Czech Republic 104 5.12 Denmark 105 5.13 Estonia 106 5.14 Finland 106 5.15 France 107 5.16 Georgia 108 5.17 Germany 109 5.18 Greece 110 5.19 Hungary 110 5.20 Iceland 111 5.21 Ireland 112 5.22 Italy 112 5.23 Kazakhstan 113 5.24 Latvia 114 5.25 Liechtenstein 115 5.26 Lithuania 116 5.27 Luxembourg 116 5.28 Malta 117 5.29 Moldova 118 5.30 Monaco 118 5.31 Netherlands 119 5.32 Norway 120 5.33 Poland 120 5.34 Portugal 121 5.35 Romania 122 5.36 Russia 123 5.37 San Marino 124 5.38 Slovakia 124 5.39 Slovenia 125 5.40 Spain 126 5.41 Sweden 127 5.42 Switzerland 128 5.43 Ukraine 129 5.44 United Kingdom 130 6 LATIN AMERICA 131 6.1 Executive Summary 131 6.2 Argentina 132 6.3 Belize 133 6.4 Bolivia 134 6.5 Brazil 134 6.6 Chile 135 6.7 Colombia 136 6.8 Costa Rica 137 6.9 Ecuador 138 6.10 El Salvador 139 6.11 Falkland Islands 139 6.12 French Guiana 140 6.13 Guatemala 141 6.14 Guyana 141 6.15 Honduras 142 6.16 Mexico 143 6.17 Nicaragua 144 6.18 Panama 144 6.19 Paraguay 145 6.20 Peru 146 6.21 Suriname 147 6.22 Uruguay 147 6.23 Venezuela 148 7 NORTH AMERICA & THE CARIBBEAN 150 7.1 Executive Summary 150 7.2 Antigua and Barbuda 151 7.3 Aruba 152 7.4 Bahamas 153 7.5 Barbados 153 7.6 Bermuda 154 7.7 British Virgin Islands 155 7.8 Canada 155 7.9 Cayman Islands 156 7.10 Cuba 157 7.11 Dominica 158 7.12 Dominican Republic 158 7.13 Greenland 159 7.14 Grenada 160 7.15 Guadeloupe 161 7.16 Haiti 161 7.17 Jamaica 162 7.18 Martinique 163 7.19 Netherlands Antilles 163 7.20 Puerto Rico 164 7.21 St. Kitts and Nevis 165 7.22 St. Lucia 165 7.23 St. Vincent and the Grenadines 166 7.24 Trinidad and Tobago 167 7.25 United States 167 7.26 Virgin Islands, US 168 8 THE MIDDLE EAST 170 8.1 Executive Summary 170 8.2 Afghanistan 171 8.3 Armenia 172 8.4 Azerbaijan 173 8.5 Bahrain 173 8.6 Iran 174 8.7 Iraq 175 8.8 Israel 176 8.9 Jordan 176 8.10 Kuwait 177 8.11 Kyrgyzstan 178 8.12 Lebanon 178 8.13 Oman 179 8.14 Pakistan 180 8.15 Palestine 181 8.16 Qatar 181 8.17 Saudi Arabia 182 8.18 Syrian Arab Republic 183 8.19 Tajikistan 184 8.20 Turkey 184 8.21 Turkmenistan 185 8.22 United Arab Emirates 186 8.23 Uzbekistan 186 8.24 Yemen 187 9 DISCLAIMERS, WARRANTEES, AND USER AGREEMENT PROVISIONS 189 9.1 Disclaimers & Safe Harbor 189 9.2 ICON Group International, Inc. 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