Egypt: Regulating pharmaceuticals production

The domestic pharmaceuticals sector has seen expansion in recent months on the back of a large and rising population, health promotion activities to reduce endemic disease and plans to revamp the government registration and pricing processes. Growth is expected to continue at a rate of 11% through 2015.

According to the Ministry of Health, turnover from local consumption is expected to reach LE47bn ($7.8bn) by 2015, and the government also hopes for exports to reach $1bn by that same year. By comparison, turnover from local consumption stood at LE15.3bn ($2.5bn) in 2010.

Although domestic pharmaceutical prices have been strictly controlled and per capita spending on drugs is relatively modest, leading to lower-than-average sales in terms of value, Egypt’s drug industry has nonetheless been one of its strong manufacturing segments, both in terms of output and domestic demand.

Domestic production has accounted for 93% of the local market in terms of volume in recent years, although due to pricing complications, only accounts for a little more than half of the market’s value.

Currently, the sector is comprised of more than 120 licensed pharmaceuticals plants, including a handful of foreign multinationals, with 60 new plants under registration and some 100,000 employees working in the sector. The government estimates the plants and their production amount to some LE40bn ($6.6bn).

While the unrest of 2011 has increased investor uncertainty in Egypt, the strong outlook for the local drug market has led to bullish forecasts from those foreign manufacturers who are already active in the country. Indeed, a number of the largest multinationals are predicting double-digit growth rates and have increased capital expenditures in expectation of rising demand.

GSK, the largest pharmaceuticals company in the country by market share, at roughly 8.8%, has invested between $850m and $900m in expanding its local operations, including manufacturing, employment and advertising. The company has focused primarily on expanding products under the brand names Sensodyne and Panadol, two products that are already distributed in the local market.

Similarly, another large foreign producer, Novartis, grew close to 20% in 2011, well ahead of the market’s overall general growth of 10.5%. Egypt remains the company’s largest market in Africa, exceeding $250m in sales during 2011.

“2011 was a tough year for the Egyptian pharmaceutical industry, which usually grows at 16-17% a year but only achieved growth of 10.5%,” George Zarkalis, the CPO Head and Country President of Novartis Egypt, told OBG. “Novartis grew ahead of the market curve at about 20%.”

Pfizer, which celebrated its 50th anniversary in Egypt in January 2012, saw business in Egypt grow 11% in 2011. Sanofi is the fourth-largest company in terms of market share in the country, with a 5.7% share of the market. South Africa and Algeria are the company’s largest markets ahead of Egypt.

Counterfeiting does remain a challenge for the Egyptian market, due to uneven enforcement and a highly fragmented market. This is compounded by a sprawling drug distribution segment, with more than 45,000 smaller pharmacies selling over 8000 different forms of product, Amre Mamdouh, the chairman and managing director at GSK, told OBG. In total, fake, expired or illegal drugs are estimated to comprise anywhere between 10% and 15% of the local market.

The issue received renewed prominence in early February following a multi-billion dollar shipment of counterfeit Avastin cancer drugs in the US that was initially thought to have originated from Egypt. While further investigations revealed that the drugs had actually originated in Turkey, with the shipment’s paperwork having been routed through a front company in Egypt, the scandal prompted the Egyptian health ministry to reassert its commitment to policing the sector.

Inflationary pressures are also squeezing profit margins for pharmaceuticals companies, GSK’s Mamdouh told OBG. “The currency devaluation has also been eating at companies’ profits since 95% of raw materials are imported,” he said. “This eventually will require government intervention to adjust the price.”

Despite the challenges facing the sector, it is clear that Egypt’s pharmaceuticals industry is on a growth path. At the same time large international companies are investing in production, local demand is increasing, ensuring that there are plenty of buyers for the sector’s growing output.