Healthy prospects: Regulatory reforms can stimulate growth

Annual double-digit growth rates have been a regular feature of the Egyptian pharmaceuticals industry, and the country’s compelling demographic dividend offers some of the same benefits to producers as seen in other segments of the economy. However, in 2012 and likely into 2013, the outlook is more modest, as recent challenges since the political upheavals of 2011 have exacerbated pre-existing constraints and created short-term concerns. These include currency risk, counterfeit products and a caretaker government until mid-2012 that was not in a position to make decisions that would reconfigure the sector.

GOING FORWARD: The medium- and long-term horizons present a more encouraging outlook, as both domestic and export demand show significant potential. To reach this point, a number of legislative hurdles must first be tackled, including a decision on how prices should be set in country. A reform plan expected to spur investment and add choice to the market was implemented only to be cancelled in recent years. The Ministry of Health oversees price setting for drugs and requires producers and distributors to clear approval for all drug products imported or manufactured. In the past, importers have had to contend with myriad bureaucratic delays, such as stalls at Customs and negotiations with the Ministry of Health, among others. It can take up to six months for drugs to go from factories abroad to a shelf spot on one of Egypt’s approximately 45,000 pharmacies.

Along with the need for regulatory reform, another top priority on the legislative agenda is a proposal for a new, more comprehensive national health insurance plan, which would likely trigger a long-term boost in pharmaceuticals sales if implemented.

HISTORY: Pharmaceuticals production in Egypt began in the 1930s, primarily as a state-run activity until the economic reforms of the President Hosni Mubarak era. Today the country is the leading pharmaceuticals producer in the Middle East and North Africa (MENA), supplying 30% of the region’s drugs. Holdipharma is the state holding company for pharmaceuticals firms. Upon its establishment in 1934 as a basic drug maker, then known as Hijazi Drug, it was the first venture of its kind in the Arab world. Holdipharma subsidiaries make up about 20% of production and 10% of the firm’s sales, according to UK-based Espicom, a market research company focused on health care.

OUTPUT: Alongside some of the biggest global manufacturers in Egypt is a roster of domestic producers, the largest being Egyptian International Pharmaceutical Industries. GlaxoSmithKline (GSK) maintains the most extensive foreign presence and has the biggest domestic market share, at 8.8%. The sector has more than 120 licensed plants with 100,000 full-time workers, according to the Ministry of Health. In general, the multinationals produce their own premium and patent-protected products, and local firms turn out generic drugs. The domestic firms account for 93% of the volume of output, but just 52% of its value, according to a report by the US Agency for International Development (USAID).

Recent years have been characterised by strong growth, at a pace of about 16% to 17%, according to Novartis Egypt, the local branch of the multinational Swiss drug research company. Production in 2010 was $3.7bn, up from $2.8bn in 2009. The year prior to the revolution’s outbreak was one of big plans, and the government had set a target for raising $10bn from foreign investment, while the Ministry of Investment unveiled a project for 76 new facilities and a target of $1bn in exports by 2015. However, the subsequent political strife and regime change hurt sales in 2011, and the market grew by only 10.5%, according to George Zarkalis, president and chief pharmaceutical officer at Novartis Egypt. Growth is expected at a rate of 11% until 2015, but specific plans and regulations for the sector are not clear.

Figures from the Ministry of Health show turnover from local consumption at LE15.3bn ($2.56bn) in 2010, a figure expected to balloon to LE47bn ($7.86bn) by 2015. The target for exports is $1bn by the same year. As with many other economic factors, projections are based on demographics; Egypt’s population of 85m and annual 2% growth rate make it one of the world’s most dynamic and fastest-growing markets.

EXPANDING CONCERNS: Beyond population growth are several other catalysts that add to the importance of Egypt for drug makers. The World Health Organisation identifies Egypt as one of the top-10 countries for diabetes prevalence, with significant implications for how the disease burden will drive pharmaceuticals sales. A lack of preventive care, low awareness of the health risks associated with certain eating habits, smoking and pollution are all likely to continue driving the need for medicine. Abdelaziz Shaheen, country manager of Pfizer in Egypt and Sudan, told OBG, that he expects particularly pronounced growth in oncology, immunology and anti-infection medications.

Sales of over-the-counter (OTC) medications are also likely to grow as awareness rises and is matched by rising incomes. “Supporting the development of pharmacists’ skills, and enhancing their experience to provide proper counselling to patients suffering from temporary symptoms which can be treated with OTC medication, should be a priority to increase patient access to health care,” said Niven Al Khoury, the general manager of Sanofi in Egypt. Expansion plans are in line with these forecasts: GSK has invested $ 850m900m in its local production capacity for brands such as Sensodyne toothpaste and painkiller Panadol.

REFORM TO COME: A 2009 USAID report on the Egyptian sector’s pricing regime describes the system for approving drugs sold on the Egyptian market as “bureaucratic and arbitrary”, and pushing for reform is among industry executives’ top priorities. Currently, the regulatory process is overseen by a Ministry of Health committee and is centred on a cost-plus model – factors such as the cost of raw materials, production, packaging and distribution are given weight. However, the ultimate outcome is usually negotiated. “The most crucial step in the pricing process is the negotiations phase between the pricing committee and the company,” the study found. Companies can expect significant variations between the numerical factors governing the decision and the actual outcome. “It has already happened that different prices were set for similar drugs produced by public companies and private companies,” the report states.

This system was created by a ministerial decree in 1991, which, among other stipulations, set out to ensure an affordable supply of drugs for all classes. It does not allow price increases to compensate for inflation. In some cases, registering a new product can take two to three years. Continuing with the current system presents a significant short-term currency risk for pharmaceuticals companies. Domestic producers typically import approximately 95% of raw materials, which have become increasingly expensive because of the political instability, reflected in international currency markets. “The depreciation of the currency has been eating pharmaceuticals companies’ profits,’’ said Amre Mamdouh, chairman and managing director at GSK Egypt. “This will eventually require government intervention to adjust the price, otherwise some multinationals could pull out of the Egyptian market.’’ “The weakening of the currency has been a challenge as there were shortages of active ingredients earlier in the year from India and China,” said Khaled A El Mounayri, the country president for pharmaceuticals company AstraZeneca’s Egypt division.

Indeed, local companies have made it clear that pricing will need to be addressed to enable expansion in the sector. The issue is particularly pronounced for exports, which are expected to remain at a minimum unless the pricing is adjusted.

The pound is a managed-float currency, and fell about 4% from June 2011 to June 2012. That is less than it would have dropped without intervention, as investors expressed concern about the state’s finances. Foreign-currency reserves have plummeted since the revolution. In early July 2012, 12-month forward contracts on the pound were at LE7.45:$1, according to Bloomberg, indicating that investors expected a drop of 19% by the end of the contract. The government moved to dispel these concerns in late August, stating that the currency would not be devalued.

PRICING: The price of pharmaceuticals paid by the end-user in Egypt has also been a topic of debate. Government drug subsidies have invariably affected profitability in the industry. The average price per single dose drug unit in Egypt is LE8 ($1.33), according to AstraZeneca’s El Mounayri. This price compares with LE18 ($3.01) in Sudan, LE21 ($3.51) in Libya and LE16.9 ($2.83) in Yemen. Popular pressure on the government has in the past led to price reductions for common drugs such as Viagra, for which the ministry lowered the price from LE40 ($6.69) to LE10 ($1.67).

The government had attempted to institute an alternative pricing system in the past, but the initiative was subsequently overruled by a court challenge. The proposed pricing regime change was established by decree in September 2009 to be phased in gradually until 2020. Instead of pricing based on production costs, the new system would index local prices to global ones using international reference pricing.

A list of 36 countries was drafted, and prices for drugs in those countries tracked. From there, the plan entailed taking the lowest price and reducing what wholesalers would pay to drug makers by another 10%, according to a report published by the US-Egypt Business Council in October 2011.

Naturally, reforms to the current price regime carry social concerns. The human rights advocacy group, Egyptian Initiative for Personal Rights (EIPR), alleged that the new system would cause a burdensome price hike that would leave many medications beyond the means of most Egyptians. The group cited a heart medication that currently costs LE2 ($0.33), but would see its price jump to LE7.2 ($1.20) in the proposed regime. EIPR filed a lawsuit that asked for a suspension of the decree, which was granted in April 2010.

Drug makers want a streamlined process that removes bureaucratic obstacles. Manufacturers want a sector regulator to take over responsibility from the Ministry of Health, perhaps similar to the Food and Drug Administration in the US, allowing that agency to focus on their concerns with issues such as the approvals process and drug pricing.

CARE PROVISION: While it is not clear if legislative reform is truly a key to unlocking greater potential in the pharmaceuticals sector, it is clear that other catalysts exist as well, going beyond simply extrapolating the population projections and growing demand. One such potential factor is the possibility of overhauling the existing system for national health care.

The plan that was slated for implementation in the waning months of the Mubarak era outlined an expansion of coverage to make it universal. That would increase the number of people accessing health care services, creating a range of benefits such as greater awareness of illnesses and medicines, and facilitating more access to them. It would also turn the state into a new, huge buyer of medications. As of mid-2012, three-quarters of pharmaceuticals are paid for by the end-user, outside of any coverage scheme.

COUNTERFEITS: Intensifying the fight against counterfeit drugs will also boost the sales of legitimate products. Though there is no reliable way to accurately measure the presence of counterfeit merchandise, the problem has mushroomed since the end of Mubarak’s regime. Estimates of the illicit trade’s market share are as large as 20%. A smaller police presence since the revolution has made conditions ideal for smugglers and domestic producers of fake medicines. “Counterfeit drugs remain a big challenge in Egypt, as counterfeiters do a great job of duplicating,’’ said Shaheen. The solution, he says, is harsher penalties on smugglers, but also on pharmacists who sell the fakes.

LEGITIMATE FIGHT: The US-Egypt Business Council recommends enhancing protection of trademarks and clarifying the power of the Egyptian Customs Authority to confiscate goods, which is ambiguous, according to the council’s October 2011 white paper. “Regulations, enforced in conjunction with Customs laws, are unclear and subject to various interpretations,” states the paper. “As a result, goods violating intellectual property rights (IPR) (such as counterfeit goods) find it easy to transit through Egypt. Moreover, even when IPR-violating goods are seized, Egyptian law provides that the goods may be auctioned without any determination of their authenticity. In short, counterfeit goods can re-enter the market. A more appropriate policy would be to destroy such goods.’’ Practices in the pharmaceuticals sector are developing along with the market, however, and counterfeit goods are not the only place where issues have been raised. Some drug makers have been accused of manufacturing unauthorised generics, for example, or giving doctors biased information, using gifts and promotions to influence health care professionals’ recommendations to patients, and committing other ethical breaches, according to research done by the German University in Cairo and published in 2011. One method involves a “points system”, whereby doctors are offered gifts in advance to be delivered after a certain number of prescriptions have been filled. Doctors have also initiated this type of collusion by asking drug makers for specific benefits.

Should the government and industry address these problems, a greater variety of products could become available on the market. The Egyptian Pharmacovigilance Centre, which was established in 2009, could play an important role in helping the sector overcome such issues. The agency is tasked with monitoring drug usage to ensure appropriate medicines application and dosage, monitoring abuse of the system and promoting patient education.

EXPORT MARKETS: Another potential growth catalyst is exporting. The sector sold $250m in goods in foreign markets in 2010, according to a study by the Organisation of Islamic Cooperation on the pharmaceuticals industry in its member countries. It is believed that a strong export market can expand through geographical diversification. Egypt has historically considered the Arab world its overseas market, a logical approach for a number of reasons: consumer typologies are similar, and labels affixed to products in Egypt can be read and understood in all Arab countries.

The four biggest customers for Egyptian pharmaceutical exports are the Arab nations of Iraq, Sudan, Saudi Arabia and Yemen. These countries account for slightly more than half of Egypt’s total market. The most common non-Arab destinations for Egyptian drugs are Romania, Turkey, Pakistan and India, and sub-Saharan Africa is a viable potential market. Though much of the attention given to consumers in developing-markets goes to in India or China, Africa has many similar conditions – a population of 1bn, an emerging middle class and growing discretionary income among the lower classes. Though Africa cannot be defined as a single market like the other two, it is receiving more consideration among drug makers as a market with merit.

Boosting exports will require support, however, implying the need for government cooperation to remove bureaucratic obstacles, and perhaps export financing or incentives. A project announced in July 2012 with the International Bank for Reconstruction and Development will aid this process by offering companies €10,000 to acquire the certificates needed for products that meet international standards.

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The Report: Egypt 2012

Industry chapter from The Report: Egypt 2012

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