Egypt's pharmaceuticals industry under strain due to currency devaluation, price caps

One of the oldest sectors in the local economy, Egypt’s well-established pharmaceuticals industry dates back to 1939. Today 154 factories manufacture products to meet 93% of the demand of the nation’s large and growing population, according to Osama Rostom, commercial director and member of the board of the Egyptian International Pharmaceuticals Industries Company (EIPICO), the country’s largest private-sector pharmaceuticals firm, with a 10% market share. However, the industry currently struggles with economic pressures.

Industry Growth

According to the 2015 Multiples Health Care Sector report, Egypt’s pharmaceuticals market grew by about 500% between 1995 and 2010, by 11.5% from 2011 to 2012, and by 11.7% from 2013 to 2014, and currently employs around 39,500 professional staff. The report cites estimates from the Arab Union of Pharmaceuticals Manufacturers that put the total value of Egypt’s pharmaceuticals consumption at $1.4bn, the largest value in the Arab world.

However, Rostom told OBG that the industry faces severe challenges in the form of stringent regulation of product pricing, which rarely allows for price increases despite rising production costs. Egypt’s General Authority of Foreign Investment states that pharmaceuticals prices are based on a cost-plus formula managed by the Ministry of Health and Population (MoHP) that guarantees positive returns for all companies operating in Egypt. According to Rostom, however, the price caps coupled with the depreciation of the Egyptian pound since 2011, and the 2014 energy subsidy cuts have hit manufacturers hard. Almost 90% of components of Egyptian manufactured products are imported.

Rising Costs

Since these costs are priced in foreign currency, not only is the cost of production high due to the depreciation of the pound, but companies increasingly do not have access to currency to pay suppliers, resulting in halted production and product shortages. “The pharmaceuticals market has been heavily affected by the devaluations affecting not only profit margins but also supply,” Khaled Atef El Mounayri, country president of Astrazeneca Egypt, told OBG.

Ahmed Al Ezaby, head of the medicine industry division at the Federation of Egyptian Industries, told local press in May 2016 that there were 200 medicines in short supply, 39 of which do have available alternatives.

Rostom explained that part of the government’s rationale for maintaining this stronghold on prices is the fear of increasing – or being viewed as increasing – the costs of life-saving medication. However, from the perspective of Egyptian manufacturers, this not only impedes profitability from domestic sales, but limits potential revenue from exports, since prices listed on the international market are tied to domestic prices. Rostom estimates that $220m worth of Egyptian pharmaceuticals were exported in 2015, but this figure could have been closer to $2bn with prices that more accurately reflected production costs.

As a solution, Rostom told OBG that he has suggested that domestic prices be considered subsidised prices for Egyptians and that the MoHP should provide certificates to more closely reflect actual costs for exported products. EIPICO and others in the industry have also requested that Egypt’s central bank set aside a greater portion in foreign currency to cover the importation of materials for the industry. In January 2017 the government raised prices of a number of medicines after months of negotiations with pharmaceuticals firms.

Opportunities

Despite these challenges, Rostom has confidence in the industry, noting that major multinationals such as GlaxoSmithKline, Novartis and Pfizer maintain factories in Egypt and that the World Health Organisation approves locally manufactured products. He anticipates that research could be an area for growth with the right investment, particularly for biological products that will require heavy financing. Local research initiatives under way include projects to produce some of the most popular active ingredients, as well as medicines to combat Hepatitis C (see overview).