The market share of local pharmaceuticals manufacturers increasing in Saudi Arabia

Over the past decade, Saudi Arabia has successfully promoted the development of local pharmaceuticals manufacturing, with their share of the market rising from 14% to 18% between 2008 and 2012. Many of these companies started as sole importers and distributors of pharmaceuticals, and went on to develop their capabilities, in some cases by forming partnerships and joint ventures with global and regional firms.

Most local pharmaceuticals firms remain focused on producing generics, but some are also involved in contract manufacturing on behalf of international firms. “Locally manufactured products cover only a small amount of current market demand, which means there is potential for growth, but this will require significant investment. Therefore, the government needs to take an active role in supporting this industry,” Mohammed Al Kraida, CEO of Arac Healthcare, told OBG.

Local firms’ focus on generics would normally be expected to favour them over the coming years, as demand for generics is expected to outpace that of the overall pharmaceuticals market. However, these local firms face intensifying competition from all sides. Margins on sales of generics, for example, which account for the bulk of local firms’ revenues, are coming under pressure from producers based in lower-cost countries. In addition, international drug companies are looking to open their own plants in the Kingdom, which could in turn lead to a reduction in demand for local firms’ contract manufacturing services.

Supporting Localisation

The government is providing assistance to local drug manufacturers in the form of loans from the Industrial Development Fund, Faisal Bindail, deputy general manager for business development at AJA Pharma, told OBG. These loans cover up to 75% of the cost of building local drug factories and will be repayable over a period of 20 years. The government also leases land at preferential rates to local pharmaceutical firms wishing to build a factory.

State incentives to encourage local pharmaceuticals production have already achieved positive results. For instance, Saudi Chemical Company set up AJA Pharma in 2012 to manufacture drugs locally on behalf of foreign firms under licence, having acted as a distributor for the same firms for the past 25 years.

The growth of the local pharmaceuticals industry is also reflected in the rapid rise in exports, albeit from a very low base. Saudi Arabia’s pharmaceuticals exports expanded at a compound annual growth rate (CAGR) of 21.3% between 2008 and 2010 and by a further 24.8% year-on-year in 2011, according to Alpen Capital. Indeed, most of the Saudi pharmaceuticals produced in this period were destined for export markets. This export growth rate contrasts with the more moderate CAGR of 11.3% for pharmaceutical imports in that period.

Partnership Possibilities

As of October 2014, there were 27 pharmaceuticals companies manufacturing drugs in the Kingdom. Among the major players are Banaja Holdings, SPIMACO, Tabuk Pharmaceutical Manufacturing and Al Jazeera Pharmaceutical. Among the Saudi firms to enter recently into partnerships with foreign players is Tabuk, which signed a manufacturing and licensing agreement with Pfizer in June 2014. Under the agreement, Tabuk has gained the rights to manufacture, commercialise and distribute four drugs from Pfizer’s cardiovascular, central nervous system, anti-infective and respiratory therapeutic portfolios. In return, Pfizer has acquired the right to sell 12 of Tabuk’s most valuable generic products.

Competitive Pressures

The divergence of the Saudi pharmaceuticals market into two areas – low-cost generics and patented drugs – is a trend that Roland Berger expects to accelerate over the coming years. As a result, it notes, “Domestic players may end up squeezed in the middle, having a diluted value proposition with only the fittest surviving the race.”

Increasing local production by foreign players will also bring more competitive pressure to bear on smaller local firms, which may struggle to compete with their international rivals on costs, according to Ahmed El Shaarawy, global marketing director at SPIMACO. As foreign firms move to set up their own local manufacturing operations, one apparent downside for local companies is that, over time, the local manufacturers with higher costs can expect to see demand for their production under licence services dwindle.

El Shaarawy told OBG that he expects competition to intensify in the generics market as well, forcing prices downwards for many drugs. “Competition in the pharmaceuticals market now comes from both local and foreign players,” Bindail told OBG, adding that some local companies had seen their margins on some products fall by as much as 50-60%.

Generics

Yet despite this intensifying competition, the generics segment is still expected to outperform the market as a whole, albeit starting from a smaller base of 20% of the market. Even as health spending in the Kingdom continues to rise in both absolute terms and as a percentage of GDP, an increasing focus on efficiency of spending – both in the public and private health sectors – should boost sales of generic drugs.

Government efforts to reduce spending on pharmaceuticals are already yielding results, with pharmaceuticals expenditure as a percentage of total health care spending falling from 17.3% in 2009 to 13.5% in 2012. The National Unified Procurement Company for Medical Supplies (NUPCO), a government entity established in 2010, has played an important role in this by favouring local pharmaceuticals manufacturing companies, which tend to produce generics.

However, NUPCO’s purchasing clout may not favour domestic generic producers indefinitely if its focus on value and its moves towards a more market-driven system of procurement in the health sector lead it to start sourcing more of its generics from countries whose production costs are lower than those in Saudi Arabia. Under this scenario, the smaller local generics manufacturers would find it hard to compete with their larger international rivals, whose economies of scale are a distinct advantage in winning NUPCO’s business. “Saudi Arabia continues to have a strong preference for imported medicines. One of the reasons is the prevailing pricing mechanisms, which result in lower prices for local generics, and the perception that lower price equates to lower quality,” Noor Sheriff, the managing director of Jamjoom Pharma, told OBG.

A similar shift is already occurring in the private health care market, where providers are increasing their use of domestically produced branded generics, but are eventually expected to procure more generics from lower-cost countries as the obstacles to procurement from abroad are gradually eased.

New Strategies

Faced with such mounting competitive pressures, local firms have devised a range of strategies. For example, El Shaarawy told OBG that SPIMACO had recognised early on the enduring preference among Saudi customers for branded drugs, which places pressure on local companies such as SPIMACO that are neither large international brands in their own right nor purely focused on generics production. SPIMACO’s response to these market dynamics included forming strategic alliances with international players to produce their drugs locally under licence as part of a wider strategy to build up their brand. “We’re following a ‘branded generic’ strategy, which means that we’re aiming to develop equity in our own brand while working with partners,” El Shaarawy explained.

Local producers will also continue to dominate certain segments of the branded pharmaceuticals market. Bindail told OBG that even as international drug manufacturers invest in their production facilities within the Kingdom, they are likely to carry on looking for local partners to manufacture certain categories of drugs on their behalf. “For instance, injectables are hard to manufacture because the production facility has to be sterile. As a result, it can be more practical for foreign firms to sub-contract the production of these types of pharmaceuticals to a local company with a ready-made sterile facility rather than having to build their own,” explained Bindail.

Shaping The Future

Increased foreign competition need not put local pharmaceutical producers at a disadvantage. However, as the market continues to grow, Saudi producers will need to adapt their strategies in order to thrive. In research and development, for example, the increased presence of foreign pharmaceutical companies in the Kingdom will present local firms with the opportunity to form international research partnerships to complement those with local universities.

On the manufacturing front, some domestic producers may begin to outsource drug manufacturing to lower-cost countries while retaining their packaging operations within Saudi Arabia. At the same time, local pharmaceutical firms may find that the influx of foreign competitors offers them new opportunities to leverage their better understanding of the domestic market. For instance, Saudi firms could be in a position to provide marketing and distribution services to new foreign entrants. How local firms respond to the challenge of increased foreign competition will therefore determine not only their own future but also that of the pharmaceuticals industry in the Kingdom as a whole.