Attracting attention: Developing the domestic pharmaceuticals industry

As growth in pharmaceuticals demand is flagging across much of the developed world, international players are casting about for new lands of opportunity. Saudi Arabia is likely to attract considerable attention. While the Kingdom’s market is not growing at the rates seen in countries such as China, India and Brazil, it has been outstripping most of Western Europe and the US. It was expected to have grown by 5.9% in 2011 and 2012, according to a 2011 report by the National Commercial Bank (NCB). Around 80% of this market is supplied by imported products, and imports were estimated to be growing by 4.6% in 2011 and 2012 by the NCB. However, the government is keen to promote local manufacturing in order to reduce its reliance on imports and support industrial diversification.

Demographics

In demographic terms, Saudi Arabia is perhaps the most attractive Gulf country for pharmaceuticals manufacturers: its population is not only the largest, but also the fastest growing in the GCC region. Central government statistics suggest that the Saudi Arabian population can be expected to grow at a compound annual rate of 3.1% between 2011 and 2016, reaching 31.6m by that year. Furthermore, unlike several other Gulf nations, some 80% of the Saudi population are nationals, who are the beneficiaries of government spending on public health care.

While the population is, on average, exceedingly young, it enjoys a greater-than-average life expectancy: 69 for men and 75 for women, compared to a regional average of 64 and 67 respectively, according to the World Health Organisation (WHO). On top of this, non-communicable diseases, such as diabetes, obesity and hypertension, are more common amongst Saudi Arabians than in the region in general, boosting demand for generic drugs, according to a June 2012 report by Al Rajhi Capital.

The Kingdom’s increasing GDP per capita – $20,540 in 2011, up 25% on 2010, according to the World Bank – is another significant contributor to growing demand. The country is made more attractive by the fact that manufacturing operations can export to an expanding regional market. Frost and Sullivan reported in mid-2012 that the average annual growth rate for pharmaceuticals sales in the GCC region between 2010 and 2020 will be around 7%. Saudi Arabia represents around 65% of all drug sales in the region, but firms will be looking to tap the significant potential available elsewhere. Large-scale production in the Kingdom enables better-value production, which in turn means that Saudi goods can compete well against more expensive products in other Gulf markets.

Policy & Regulation

Within the country, demand is receiving a boost from increased social spending. According to a September 2012 report by Business Monitor International, spending on pharmaceuticals increased by 13.6% from around $4.5bn in 2011 to nearly $5.1bn in 2012, while spending on health care also experienced a 16% increase during the same period. This is an important development, given that the public sector accounts for 54% of pharmaceuticals sales by value, according to a 2011 report by the NCB. However, as government spending rises, Saudi Arabia is also offering room for private-sector pharmaceuticals players to grow in the market.

The 2012 Al Rajhi Capital report expects increased over-the-counter (OTC) consumption, “as the government shifts its focus from being a service provider to a regulator”. This prediction was seconded by another report the same year, which projected growth in the OTC market of 6% per year between 2010 and 2015, albeit down from the 9.4% annual average recorded in the period from 2006 to 2010.

Foreign investors have raised concerns over the regulatory environment, however. In the generics market, the pricing system currently secures the best prices for the first producer, which is normally a local company, while those who subsequently acquire licences have to sell the same drug at a discount. More generally, producers have argued that the pricing criteria currently used by the Ministry of Health are overly strict, reducing companies’ profitability. Foreign firms have also claimed that the approval process for new drugs used by the Ministry of Health – primary approval by a committee, followed by tests carried out in local laboratories – is unnecessarily long, according to the 2011 NCB report. Further challenges were raised by a 2012 report by the International Society for Pharmoeconomics and Outcomes Research. It states that supplying the public sector is made more difficult by limitations in the Kingdom’s reimbursement policies: the pricing and reimbursement decision-making processes are not linked, and the reimbursement policy lacks a unified national system. The government, however, said it is taking steps to address the situation: the Saudi Food and Drug Authority (SFDA), which has managed drug registrations since 2009, has been working on a framework for drug approvals.

Foreign Investment

In spite of these factors, there are also many reasons why a foreign manufacturer would want to gain a foothold in the Saudi market. A crucial factor is the continuing prevalence of patented pharmaceuticals: they have a 95% market share in the GCC region, according to a 2012 study by Frost and Sullivan, as affluent consumers are willing to pay for what they perceive to be the highest-quality product. This can clearly be used to the seller’s advantage: Patented drugs are sold at around 13 times the international standard price, according to the WHO. This makes it difficult for the generics-oriented local producers to compete with international players.

In addition to the market domination of branded goods, another major incentive for foreign investment in pharmaceuticals has been the introduction of free zones. Normally a manufacturer looking to enter the Saudi market would have to form a joint venture with a local firm, but in a free zone foreign investors can set up wholly owned operations.

The policy has begun to attract large manufacturering companies. The first to arrive was the French-owned Sanofi Aventis, which agreed in 2010 to build a manufacturing facility at the King Abdullah Economic City (KAEC). The brand is known best for its diabetes medication, for which there is enormous demand in the GCC and Middle East.

More recently, the US’s Pfizer announced in late 2011 that it will construct a manufacturing and packaging facility for medicines in the KAEC, and will begin production in 2015. Investments such as these are in line with the government strategy to reduce the Kingdom’s dependence on imported drugs, which currently account for around 80% of the market.

Other multinationals already have a presence in the market through a joint venture. Glaxo Saudi Arabia, for example, is 51% owned by Banaja Saudi Import Company, while the Jordanian Arab Company for Drug Industries and Medical Appliances owns 20% of the Saudi Pharmaceutical Industries and Medical Supplies Company. A 2012 report by Espicom, a pharmaceuticals industry business intelligence firm, stated that while joint ventures are gradually increasing in number – as of 2011, there were nine – the complex regulatory situation means that they are rare, and that regional investors have shown a greater tendency to find Saudi partners than international ones. All the same, it seems that free zones will continue to attract firms.

Generics

While the current preference for branded drugs amongst domestic consumers can make business difficult for local manufacturers focusing on generics, there are indications that this may change. A May 2012 report by Al Rajhi Capital believes that imminent changes to the regulatory environment – including the increased usage of generic drugs by the public sector – could mean that generics gain greater market share. NCB also reported in 2011 that it expects generic-friendly policies and the mandatory price cuts imposed on patented products to erode their current market dominance from 81.7% in 2008 to 77.6% in 2012. Such government support has led to new investments in generics production, most of them by local and regional rather than international investors. In February 2011, for example, a Saudi-Egyptian-Syrian venture called Shamla Pharmaceutical Industries announced plans to develop a pharmaceuticals factory at KAEC. KAEC is also to host a new SR300m ($80m) factory which will be built by a joint venture between the UAE’s Gulf Pharmaceuticals Industries and the Jeddah-based Cigalah Group, as well as a separate complex to be built by the Saudi Tamer Group. More recently, too, a proposal was made by the Saudi Chemical Company in April 2012 to build a pharmaceuticals plant in the industrial area of Hail at a cost of $230m.

Yet, although the government is hoping to boost domestic production, the last thing it wants to do is scare off investors. The clearest expression of this came in February 2012 when MODON launched the Kingdom’s first complex dedicated to the pharmaceuticals. MODON’s director-general, Saleh bin Ibrahim Al Rasheed, said it will be a centre for “local and international companies”, and that it has attracted more than six factories. More firms are expected to follow, with phase two of the complex still to be developed.