Healthcare providers in the Gulf may be straining to cope with rising demand for their services, but the boom in the consumption of medicines in the region is providing a welcome fillip to the global pharmaceutical industry at a time when growth in other markets is slowing.

The Gulf’s pharmaceutical sector was worth $2.7bn in 2008, according to Saudi investment bank NCB Capital. While this is still small on a global scale, accounting for less than 1 per cent of the total world market of $773bn, sales have been increasing twice as fast as in more mature markets in recent years. The GCC market expanded by 10-15 per cent in 2007 and 2008, compared with growth of about 5 per cent in the established US and European markets.

While some of the rise in the value of pharmaceutical sales can be attributed to currency fluctuations, the main driver of growth has been a surge in demand for medicines.

Unprecedented population growth and an explosion in conditions such as diabetes and cardiovascular disease, due to changes in lifestyle, are driving demand for healthcare throughout the GCC, and with it demand for pharmaceutical products.

Strong growth

Demand for pharmaceutical products in emerging markets, including the Middle East, is forecast to grow by 11-14 per cent a year until 2013, contributing at least 40 per cent of global market growth, according to US-headquartered healthcare consultant IMS.

In contrast, the market for pharmaceuticals in the US is expected to shrink by up to 2 per cent over that time, while those in Europe and Japan will grow by 1-6 per cent.

This difference in spending and growth levels between the Middle East and more mature markets means that pharmaceutical companies are increasingly targeting the region, investing heavily to increase their market share. UK-based pharmaceutical firm GlaxoSmithKline has made a series of acquisitions to broaden its product portfolio in the region. In January, it announced a e515m ($742m) deal with UCB of Belgium to acquire the right to market products such as epilepsy treatment Keppra and hay fever drug Zyrtec in countries including Egypt, Saudi Arabia and the UAE.

In October 2008, GlaxoSmithKline spent $210m buying the Egyptian business of the US’ Bristol-Myers Squibb, giving it 20 branded products and the right to export generic versions to other countries in the region.

Anglo-Swedish AstraZeneca has also established a foothold in the Middle East. In December 2006, it opened a $32m tablet factory at 6th October City, near Cairo in Egypt. It produces medicines for the treatment of cardiovascular disease, cancer and psychiatric disorders.

Investments are also being made in logistics to cater for the growing demand for imports. In 2007, UAE-based private equity firm Ithmar Capital entered a joint venture with Saudi pharmaceuticals distributer Banaja to establish third-party logistics provider Pharma World Holdings. Pharma World is now setting up a pharma-ceutical warehouse and distribution centre in Jebel Ali free zone in Dubai. The facility, which includes cold storage and humidity controls, is expected to open at the end of August. The company intends to set up other warehouses elsewhere in the region in the future.

“Our five-year business plan is to expand within the UAE, develop our own fleet here and then set up at King Abdullah Economic City in Saudi Arabia and in North Africa,” says Maher Kheder, business development manager at Pharma World.

Meanwhile, in May, British Airways World Cargo opened a new handling station for temperature-controlled pharmaceuticals in Kuwait. The carrier says temperature-controlled goods are the fastest-growing segment in the air cargo market.

Bureaucracy and restrictions on foreign ownership have until now hindered global pharmaceutical companies seeking to set up more complex operations in the Gulf, beyond the manufacturing, distribution and marketing they currently carry out. But governments are keen for that to change. They particularly want multinationals to undertake research in the region to facilitate the transfer of knowledge and technology.

The Saudi Arabian General Investment Authority (Sagia) is offering fiscal and regulatory incentives to international pharmaceutical firms to set up in the kingdom.

In April, France’s Sanofi-Aventis signed a memorandum of understanding with Sagia and real estate developer Emaar, The Economic City, a division of the UAE’s Emaar, to establish a base in King Abdullah Economic City, which is being built on the Red Sea coast close to Jeddah.

The biggest effort to draw in expertise in the UAE is the Dubai Biotechnology & Research Park (DuBiotech). Launched in 2005, the park aims to be a regional centre for life sciences where pharmaceutical and biotechnology firms can research, develop and manufacture their products. Among the firms to have agreed to open an office at DuBiotech is the world’s largest pharmaceutical company, Pfizer of the US, which has had its Middle East headquarters in Dubai since 1978.

The introduction of mandatory private medical insurance for many companies in the region has also improved access to healthcare services and boosted pharmaceutical sales.

This process began in Kuwait in 2000 and has since spread to other GCC states. In January 2006, Saudi Arabia passed a law requiring all companies that employ more than 500 expatriate workers to have private health cover for their staff. This was soon extended to firms with more than 100 foreign employees, and in September 2008 it was extended again, to firms with more than 50 international employees.

Abu Dhabi followed in July 2006 when it introduced regulations requiring all companies with more than 1,000 expatriate employees to provide health insurance.

The demand for medicines in the Gulf is predominantly met through imports from multi-national manufacturers, which distribute their products through a network of local agents. The UAE, for example, imports 90 per cent of its medicines and the cost of doing so is rising fast. According to the government-funded Dubai Export Development Corporation, the cost of imports of pharmaceuticals to Dubai has been increasing by 50 per cent a year over the past three years, rising from AED1.6bn ($436m) in 2006 to AED2.4bn in 2008.

Consumer preferences

Saudi Arabia is the largest consuming market in the GCC, accounting for more than half of all pharmaceutical imports into the region. Some 82 per cent of the medicines used in the kingdom are imported.

This heavy reliance on imports is due in part to the Gulf’s limited domestic production capabilities, but also the fact that patients in the GCC have traditionally favoured branded products, which tend to be produced abroad, over the generic versions that are generally produced in the region.

“This is the opposite of the trend in developed markets,” says Mohammed Ziwar, managing director in the Middle East for Bayer, a German pharmaceuticals company with brands including Alka-Seltzer and Aspirin. “The quality of generics is perceived differently here.”

NCB Capital estimates that the market share of generic medicines in Saudi Arabia amounts to just 5.8 per cent. This compares with more than 50 per cent in many European countries.

Consumers in the Gulf are also able to exercise their preference for branded medicines much more readily than their peers in Europe, as most mainstream pharmaceutical products can be bought from retail pharmacies without a doctor’s prescription. In Europe, the sale of prescription medicines is highly regulated and far more restricted.

Across the Middle East, there are about 450 pharmaceutical manufacturing plants, but fewer than 40 of these are in the GCC. Local drug manufacturers tend to be small, and researching and developing new medicines is generally beyond their capabilities because of their limited funds and expertise.

According to Pharmaceuticals Research & Manufacturers of America, a trade body that represents pharmaceutical research and biotechnology companies in the US, it takes at least a decade to develop a new drug, and costs on average $1.3bn. Furthermore, it says, just one in five marketed drugs go on to generate revenues that exceed or match the research and development costs.

The leading multinational manufacturers spend an average of 15 per cent of their sales revenues on research and development, amounting to billions of dollars of investment each year, although they often spend twice as much on sales and marketing.

Given these costs, it is not surprising that factories in the Gulf produce, for the most part, generic medicines. Any branded medicines that are produced are made under licence from global companies.

The limited size of most domestic markets, coupled with the preference for branded products, means that much of the GCC’s generic output is exported. In 2008, exports of pharmaceuticals from Dubai went to Libya, Yemen, Iran, Sudan, Afghanistan, Tunisia and Ecuador, according to the Dubai Export Development Corporation.

Even with the recent rapid growth in the Gulf pharmaceutical market, the potential for further expansion is substantial. Annual pharmaceutical sales average $50-60 per person across the Middle East. In comparison, expenditure is 10 times higher in the US, at $670 per person each year. In the UK, where private healthcare is much less widespread than in the GCC, the figure is $250 per person.

Consumption levels in Qatar and the UAE, where Western expatriates make up a large proportion of the population, are much higher than the Gulf average, however, approaching $200 per person a year.

“Compared with the EU, the Gulf is still at the low end in terms of per capita usage,” says Ziwar. “But it has the highest per capita usage within the Middle East.”

It remains to be seen whether the investment being made in the Gulf pharmaceutical sector will lead to any clinical trials being held locally.

For that to happen, researchers will first need assurances that adequate legislation is in place to protect their intellectual property rights and to punish any patent violations, especially as counterfeit drugs have been a perennial problem in the Middle East.

Until that happens, the region is likely to need ever more imported medicines, providing an attractive market for international pharmaceutical companies.