Hard choices
Some pharmaceutical companies are at odds with the government over its drug pricing policy. Wael Gamal reports
Pushed by the management, two weeks ago the workers of some Egyptian pharmaceuticals companies published an advertisement in the national newspapers to urge the Egyptian president to interfere to save this strategic national industry. Their action revealed to the public a fierce debate over the pricing of drugs, and the pressure applied by pharmaceutical companies to change government policy.
Hit by the devaluation of the pound, the industry profit margins have contracted, undermining profits for both multinationals and local companies. Since most of the raw materials and production components are imported, production costs rose between 20 and 25 per cent. The companies see the freezing of prices as an unsustainable policy within the context of the pound's floatation. As a result, the government, which considers drugs as an essential commodity, is reluctantly calculating the political and social consequences of raising drug prices.
Egypt's pharmaceutical market is the biggest in the Middle East. After being reopened to multinationals at the end of the 1980s, it has been divided between state-owned drug producers, huge multinationals, and smaller, privately-owned local manufacturers. In total, there are 512 pharmaceutical companies registered, 475 of which are representative offices that import medicines produced elsewhere. Among the other players are 11 state-owned companies with production facilities, 17 privately-owned domestic companies and nine multinationals with local production facilities. Total investments reach LE18 billion, of which only three billion is from multinational investments.
In 2002, the combined revenue of the sector failed to meet expectations of LE5 billion, earning only LE4.79 billion. According to International Medical Statistics, an industry monitoring company, revenue for 2003 should ring in at LE4.81 billion, a modest 0.42 per cent growth rate. Some of the multinationals, which control 29 per cent of the market, are recording losses, and they are blaming the pricing system.
Specifying that this is the way investors see the issue, Joseph Iskandar, an analyst with Prime Securities, says "the pricing system is the threat to the industry. The whole sector's profitability structure is exposed, putting more pressure on multinationals. Because they are obliged by the policies coming from the headquarters to import high price generics, the exchange rate difference ate their profits. The situation is not as bad for the local companies because they can import cheap generics from India or China."
Still, Iskandar believes that the local companies are vulnerable, explaining "That's why the pharmaceutical stock prices plunged with the debate which confirmed the fact that the deficiency in the cost structure will affect the high dividend yield sector, so investors moved out pushing prices down."
"This exposure doesn't correspond to logical analysis," claimed Nahed Youssef, a pharmaceutical industry expert. She added, "There is a great deal of exaggeration especially from the multinationals. In a free open market it is not the devaluation which is responsible for this difference between small local companies making profits while Pfizer, the giant corporation, is recording losses over LE40 million. This contradicts their incomparable ability to penetrate the market, higher productivity, modern production equipment, lower R&D costs with a relative price advantage over the Egyptian companies. In the end they also have the choice of buying the same cheap raw materials and they choose not to." This situation raises questions of fraud in their financial statements, argues Youssef.
A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis of the Egyptian pharmaceutical industry published two years ago by the American Chamber of Commerce in Egypt, did not mention the prices issue as being a factor at that time. The analysis concluded that the industry strengths are: being the largest market in the MENA region, giving access to broader Arab and African markets, production of generics, low labour costs and an ample supply of scientists, doctors and pharmacists. The weaknesses were negligible research and development, low and inconsistent product quality, lack of transparency or full and consistent execution of regulations and limited backward linkages. The organisation defined the threats as the competition over multinational investments from other markets like India, Southeast Asia and Jordan, while the implementation of GATT and TRIPS is both a threat for local companies and an opportunity for multinationals looking to enter the market.
The privately-owned local Medical Union Pharmaceuticals Company's financial performance seems almost miraculous if the multinational companies demands are considered. The company recorded an increase in its profits for the first quarter of the year compared to the same period last year, from LE9.9 million to 13.5 million despite costs rising by 16 per cent, with a 13.5 per cent increase in the quantity sold.
Zakaria Gad, chairman of the company and the head of Pharmacists Syndicate, builds his evaluation on his company's success. "It is true that production costs increased and that some products need to be re-priced but financial results don't represent the real effect, which is much milder than it appears especially for the multinationals."
The government has yet to show a clear response, except for Minister of Foreign Trade Youssef Boutros Ghali, who asserted in a meeting with American pharmaceutical representatives that the drug pricing system has to change.
Raising the prices of drugs in general would have risky political consequences given widespread concern about rising prices after the devaluation of the pound. Iskandar predicts that the government will likely raise prices of a few categories of drugs, but believes that this step will fail to have a sufficient positive impact on the industry.
Al-Ahram Weekly Online : 28 August - 3 September 2003 (Issue No. 653)
Located at: http://weekly.ahram.org.eg/2003/653/ec2.htm