Healthy growth: New production facilities for pharmaceuticals are in the pipeline

The largest drugs manufacturer in the GCC by far, Saudi Arabia is also the second-largest pharmaceuticals exporter in the Arab world. Exports from the Kingdom have almost doubled over the past five years, though it continues to register a large negative pharmaceuticals trade balance, as it is also the largest consumer and importer of drugs in the region. However, local production and exports are set to grow further, with a number of Saudi and foreign companies currently building major new production facilities in the Kingdom. The authorities are also working to encourage pharmaceuticals exporters to establish production facilities in the country or license production by local players.

DOMESTIC MARKET: Alpen Capital put the size of the domestic drugs market at $5.1bn in 2012 and per capita sales at $175. In terms of private retail sales of pharmaceuticals, Saudi Arabia was the second-largest market in the Arab world in 2012, according to Jordan’s Hikma Pharmaceuticals. Private sales for the year stood at $2.35bn, just behind Egypt (which has a much larger population) in first place on $2.51bn, representing an increase of 11.4% on the previous year. The country is also the largest importer of pharmaceuticals in the MENA region and the 22nd-largest importer in the world, according to World Trade Organisation (WTO) data for 2012.

Rising consumption is being driven by a range of factors, including general economic expansion and population growth, as well as increased government expenditure on health care. “In 2012 there was a budget surplus, leading to increased investment in health and the expansion of state insurance coverage,” Hossam Awad, head of business development for GlaxoSmithKline Saudi Arabia, told OBG.

GROWTH NICHES: Rising consumption of certain therapeutic drugs is helping to boost demand. “There is significant growth in most therapy areas; however, some specialised markets such as oncology, hepatitis treatments and cardiovascular products are growing especially fast,” said Awad. So-called lifestyle diseases also represent a major market within the Kingdom – the prevalence of diabetes is around 19.4%, the highest in the GCC region and also one of the highest rates in the world. “Diabetes is very common,” said Faisal Bindail, deputy general manager of AJA Pharmaceutical Industries. “There is no sign of improvement; indeed, the figures are still getting worse.” Complications as a result of diabetes are also on the rise, adding to treatment requirements. “Saudis often fail to control their diabetes by, for example, failing to take their drugs or to change their lifestyle. It’s a chronic condition and sufferers often don’t feel day-to-day pain, which can lead them to forget to take their medicine,” he said, adding that local dietary habits aggravate the problem.

Another therapeutic area that is becoming increasingly important, albeit from a lower base, is the antidepressant market. “Anti-depressant use has grown a lot,” said Bindail. “Historically in Saudi culture people have been reluctant go to psychiatrists, but this is changing.” A recent study by the University of Melbourne found that MENA had the highest diagnosed rates of depression of any major region in the world (though it is important to note that diagnosed rates of depression may differ from actual rates in the population). However, the Kingdom did not fare as badly as some countries in the region, with a clinical depression prevalence of around 5% compared to 7% or higher in some countries.

DOMESTIC PRODUCTION & EXPANSION: Most local production is of generics, with some production of drugs licensed by multinational firms also taking place. The country’s 2010 Comprehensive Economic Census recorded total operational revenues in the sector of around SR2.33bn ($621.2m). Alpen Capital puts the number of domestic pharmaceuticals producers at between 15 and 20. While local production is relatively small by international standards, it has been growing fast; the Kingdom had no local producers prior to 1997. The government is working to further encourage domestic production by exempting domestically produced medicines from pre-registration tests required of imports, for example, as well as facilitating their entry to the market. The Saudi Industrial Development Fund has also provided a total of SR1.1bn ($293.3m) to 18 pharmaceuticals projects in the Kingdom.

Among the more prominent local drug manufacturers are Saudi Pharmaceutical Industries and Medical Appliances Corporation, which had revenues of around $15m in 2012, and Tabuk Pharmaceuticals, which is part of the country’s Astra Industries group and has around 1500 employees. Other local groups are also entering the sector. These include industrial conglomerate Saudi Chemical, which has established a new subsidiary called AJA Pharmaceuticals. AJA is in the process of building a new 120,000-sq-metre pharmaceuticals factory in Hail that will mostly produce branded generics and that is due to start operations in March 2015. The company is investing SR230m ($61.3m) in the facility, which will be one of the largest pharmaceuticals factories in the Kingdom and which will focus on a number of therapeutic classes including anti-diabetics and injected and lyophilised (freeze-dried) products. Initial production capacity will stand at 300m units, rising eventually to 1bn, including solids, semi-solids, liquids and injectable products.

“Saudi Chemical felt there was a gap in the market, given that only around 20% of Saudi pharmaceuticals consumption is locally produced,” said Bindail, explaining the decision. “Locally made products enjoy better access to the market, and some of the international pharmaceuticals companies with whom we have distribution agreements were also interested in having some products manufactured within the Kingdom.”

Such expansion plans are helping to drive innovation in the sector, albeit gradually and from a low base. “Saudi firms producing new chemical entities as their own licensed drugs is a long way in the future,” said Bindail. “However, there are opportunities in terms of making changes and improvements to existing medicines, such as stability improvements,” he told OBG, adding that AJA itself is working on similar improvements.

More can certainly be done in the areas of research and innovation, particularly when partnering with international researchers. “Pharmaceutical research and development offers social benefits, because local institutions can work with international principals who have the knowledge to create solutions for the Kingdom’s own needs,” said Mohammed Al Badr, the CEO of Saudi Chemical.

EXPORTS: Most domestic production is exported; this is partly due to the fact that the country largely produces generics while the domestic market is dominated by drugs on patent, which account for 80% of sales. Exports largely go to other GCC countries. “GCC countries are very attractive markets, as are Egypt and Algeria,” said Bindail. The latter two nations are the largest and third-largest pharmaceuticals markets by private consumption in the region.

Exports remain small compared to imports, at SR1.15bn ($306.6m) and SR16.48bn ($4.4bn), respectively, in 2012. However, they have grown strongly in recent years, nearly doubling from SR600m ($160m) in 2008, according to the Central Department of Statistics and Information, and the Kingdom ranks as the second-largest pharmaceuticals exporter in the Arab world, according to WTO data for 2012, and is only outranked by Jordan.

FOREIGN INVESTMENT: At least four foreign and multinational pharmaceuticals firms currently have manufacturing facilities in the Kingdom, via local subsidiaries and joint ventures with local firms. These include Saudi Arabian Japanese Pharmaceutical Manufacturing Company, a joint venture between local firm Tamer Group and Japanese drugs manufacturer Astellas and Daiichi Sankyo; GlaxoSmithKline Saudi Arabia, a joint venture between GlaxoSmithKline and Banaja Holdings established in 1997; and Jezeera Pharmaceutical Industries, an affiliate of Jordan’s Hikma Pharmaceuticals.

Additionally, pharmaceuticals major Sanofi is building a 100%-owned factory on 35,000 sq metres of land in King Abdullah Economic City (KAEC) that it says will be the largest pharmaceuticals production facility in the Kingdom. The facility will initially focus on producing diabetes and cardiovascular drugs. Others also appear likely to follow. “Two or three multinationals are now taking serious steps to open factories here,” said Bindail. “Investment also receives a lot of support from the authorities, for example in terms of access to land, utilities and funding.”

Awad told OBG that other advantages for foreign companies establishing local production include continuous supply, as it can sometimes take a long time to import products. The creation of free zones in the Kingdom that allow foreign firms to take 100% ownership of local activities, as Sanofi is doing in KAEC, is encouraging foreign companies to set up shop in the country. “The main challenge for investors is volume – the volumes involved in manufacturing locally can be low, which pushes up costs,” said Awad.

REGULATION: The sector is overseen by the Saudi Food and Drug Administration (SFDA). Notable features of the regulatory environment include the fact that the government fixes prices for all pharmaceuticals products. For imported medicines, the SFDA determines pricing by examining the cost of the same drugs in 30 other countries, with reviews every five years. As regards locally produced products, the agency issues its own price determination.

Some industry players say this can be a challenge. “There is a strong regulatory focus on pricing, as the authorities want patients to receive medication at reasonable costs, which is putting significant pressure on margins,” said Awad. However, others play down the problem. “Prices are on the low side compared to other countries in the region, but it is rare for companies to stop exports to Saudi because of this,” said Bindail. “Pharma companies would like higher prices, but it is not a major problem.”

Producers also say that registering drugs can be a slow process in the Kingdom. “Registration can take around 12-18 months, compared to 6-12 months in some other countries in the region,” said Awad. However, Awad added that the issue is in part a sign of the industry’s health. “Saudi Arabia has a strong pharmaceuticals regulator that reviews everything.”

The SFDA’s organisational strategy also mandates it to work to reduce registration times, and industry players say that the situation is improving. “Registration of products takes time, but the authority has recently expanded its team,” said Bindail. “It has also become easier to track products through the regulatory process than it used to be; the SFDA is in the process of making the registration process electronic and from next year common technical documents will have to be submitted electronically, which will facilitate the submission and tracking of applications,” Bindail of AJA Pharmaceutical Industries said.