Saudi Arabia's domestic pharmaceuticals industry gains strategic importance

With Saudi Arabia’s population now above 30m, and an increasing number of high-end private and public hospitals in the Kingdom, there are strong opportunities in the field of pharmaceuticals, not only for companies looking to import drugs but also for the local production of pharmaceuticals and medical devices, an area the government is eager to develop.

Domestic Targets

Fostering a strong and localised drug manufacturing sector is increasingly being identified as an area of strategic importance, and the new National Transformation Programme, released in 2016, aims to see an increase in the role of local pharmaceutical manufacturing in the domestic market, up from 18% to 40%. As part of cost-saving measures in the face of lower oil revenues, health care institutions are also being encouraged to review their pharmaceutical purchases to try to find cheaper alternatives, offering opportunities for local manufacturing.

There are 27 pharmaceutical manufacturers currently operating in the Kingdom, and while there is certainly scope to establish a vibrant local pharmaceutical industry, the main challenge is that most pharmaceutical products are imported; imported branded pharmaceutical products in 2014 accounted for 80% of the domestic market.

Opportunities

The pharmaceuticals market is projected to expand by a compound annual growth rate of 10% between 2015 and 2020 to reach SR51.2bn ($13.6bn), according to an April 2016 pharmaceuticals and health care report by BMI Research. In addition a July 2016 report by research and consulting firm GlobalData highlights how the Saudi Ministry of Health plans to spend $18.5bn on health care annually over the next 10 years, with a focus on improving the domestic manufacturing of medical devices and pharmaceuticals. “Due to the increase of chronic diseases and Saudi Arabia’s rising wealth, there is a huge demand for patented products, representing a significant opportunity for market players,” GlobalData analyst Adam Dion wrote, before adding that local pharmaceutical manufacturers “...face challenges from the increasing prevalence of low-cost generics and the entrance of global pharma giants, such as GlaxoSmithKline, Pfizer, Astellas, and Sanofi”.

Bricks & Mortar

Efforts by the authorities to support the growth of the domestic pharmaceutical industry are already visible. In April 2015 the Saudi Industrial Development Fund (SIDF) approved a SR54.1m ($14.4m) loan for Dammam Pharma, a subsidiary of Saudi Pharmaceutical Industries and Medical Appliances, aimed at partially financing the construction of a pharmaceutical plant in the eastern province of Dammam. In February 2016 AJA Pharmaceutical Industries, a subsidiary of Saudi Chemical Company founded in 2012 to manufacture drugs locally on behalf of foreign firms under licence, signed a SR157.5m ($42m) loan deal with SIDF for partial-financing of the company’s new 120,000-sq-metre manufacturing facility in Hail Industrial City.

In total, the government fund has given financing to 32 factories involved in the manufacturing of basic pharmaceutical products and pharmaceutical preparations since it was established in 1974, according to the latest data available on its website, with a combined value of roughly SR3bn ($799.8m). “The pharmaceuticals sector has great potential here. Interest is growing, but we would like to see much more investment in this area,” Abdul Karim Al Nafie, director-general of SIDF, told OBG.

Healthy Developments

King Abdullah Economic City (KAEC) is also fostering growth of the industry. In December 2015 Pharmaline Saudi Arabia, a joint venture between Al Rashed and the Malia Group, signed a land-lease agreement with KAEC to construct the company’s first on-site pharmaceutical facility, which will cater to both domestic and regional markets. Other international drug producers have also committed to establishing facilities in the city.

Incentives

In the past, international companies favoured engaging with Saudi Arabia through trade or licensing-out agreements due to tight regulatory issues, but international pharmaceutical companies are now being incentivised to open local manufacturing facilities with interest-free loans of up to 75% of capital costs available through SIDF. Companies are also able to establish 100% foreign-owned operations within the Kingdom’s economic free zones.

These policies are beneficial for foreign firms, but could result in a more challenging environment for local companies trying to grow their market presence, as foreign manufacturers potentially expand their domestic footprints. Rising energy prices in Saudi Arabia are also likely to make it difficult for local manufacturers to compete with imports in the future.

Local Players

According to a report on the Saudi pharmaceuticals industry by consultancy Roland Berger, over the past couple of decades domestic players have come a long way on the road to becoming a core element of the local market. Many international pharmaceutical giants work in partnership with local distributors, with UK-Swedish pharmaceutical firm AstraZeneca, for example, working with local partners SITCO and Naghi, which take care of distribution, while AstraZeneca focuses on marketing. If the industry is really going to take off, the Kingdom will need these domestic players to migrate up the value chain and begin producing their own medicines. There are already good examples of this on the market; after starting as importers and distributors of other companies’ pharmaceutical products, Saudi firms like Tabuk Pharmaceutical Manufacturing, Banaja Saudi Import Company and Al-Jazeera Pharmaceutical Industries have developed their own domestic manufacturing facilities.

R&D

When it comes to creating their own line of products, however, Saudi firms may have their work cut out for them. According to Roland Berger, despite investment in research and development showing an 80% increase over the last decade, the number of new medical entities in the Kingdom has fallen by 43%, largely due to more complex study requirements, which have extended the development period of new drugs by around 30%.

There is also a challenge when it comes to human resources. “The availability of qualified workers for the industry will be crucial to ensure its growth over the next decade,” Ayman Al Mazloum, country manager of Janssen Pharma, told OBG. “Current human capital output from universities in this area remains limited, and industries have to look abroad to meet demand.” However, he also sees cause for optimism. “We have seen new programmes in universities and a renewed focus on research abilities in student programmes across the country,” he said. “This will pay dividends and will ensure Saudiisation runs smoothly.” Those in the industry also suggest that more needs to be done in terms of guidance regarding what lines of production are open to local investment, with the Saudi Food and Drug Authority urged to encourage local firms to target pharmaceuticals by offering competitive pricing and improving the registration process.

Export Market

While the main target now is supplying the domestic market, those involved in the sector see further opportunities in the export of pharmaceuticals and medical devices across the region. “Local manufacturing accounts for only 15-20% of the Kingdom’s pharmaceutical market, so there is obvious room to grow just in domestic consumption,” Mohammed Al Badr, general manager of the Saudi Chemical Company, told OBG. “Exporting these products, especially to the rest of the Gulf, is also attractive, as Saudi products are more competitive than those in the rest of the GCC.”

Despite efforts to establish a thriving domestic pharmaceutical industry, there are significant challenges to overcome before key government targets are reached. That being said, the arrival of international players, who are setting up local manufacturing facilities, and the growth of domestic firms suggests that overall development is on the right track.