PHARMACEUTICALS: Local output set to grab market share

13 June 1997


The market for pharmaceuticals in Saudi Arabia, which accounts for three quarters of all sales in the Gulf, is once again showing steady growth. Most products sold in the country are imported from outside the region, but rising demand has been alerting multinationals and local investors alike to the benefit of manufacturing locally in what is still a relatively undeveloped market.

Rapid population growth, new hospitals, and rising awareness of health care are likely to ensure that sales continue to grow. The young demographic profile will be a strong influence over which products are most in demand (see table). The fastest increase and greatest competition is in sales to the private sector, which analysts expect to grow by 8-9 per cent a year in the next five years. The private market alone will be worth SR 3,000 million ($800 million) by 2000, they say. The value of sales to the Health Ministry and other government agencies, however, has been flat for the last five years. Prices have been fixed for the last two years and rationalisation has become the watchword of a once free-spending ministry.

Debt mounting

The need for spending discipline is clear. The country’s pharmaceutical needs each year are mostly procured from international suppliers through the so-called ‘Gulf tender’, which goes out to bid in the autumn. But a backlog of debt has been allowed to build up since 1992, causing undesirable doubts about Riyadh’s creditworthiness. Higher than expected oil revenue last year enabled the state to begin repayments in August, but suppliers remain unhappy at a unilateral decision by the authorities to repay the debts over a five-year period without offering the security of a promissory note. Industry sources report payments on time this year, but with more than $200 million in arrears still outstanding, the ministry remains some way from regaining the full confidence of its suppliers (see page 48).

International manufacturers are not the only ones to have been affected. The Saudi Pharmaceutical & Medical Appliances Company (Spimaco), set up as a joint stock company in 1986, was the first large-scale local manufacturer. It began production at its Qassim factory in 1990, catering specifically to Health Ministry requirements and being supported with supply contracts in return. In recent years, however, Spimaco has suffered from its dependence on government orders, which have become more competitive and rarely been paid for promptly.

The company is now concentrating efforts on a strategy, which began in 1993, of increasing sales to the private sector. It is also looking at export markets, initially in the GCC and Yemen. The private sector now accounts for 18 per cent of sales and cumulative growth of 15-18 per cent is forecast over the next five years, mainly due to new product launches. Spimaco’s top selling product is Rofenac, an own-brand arthritis treatment, which accounts for about 40 per cent of the firm’s private sector sales. A mouthwash and an anti-allergenic eye treatment were launched last year and several more products are due to appear in the course of this year.

But adjustment is proving painful, as earnings slipped from SR 101 million ($27 million) in 1993 to SR 26 million ($7 million) in 1996. Analysts expect profits to pick up in 1997, aided by the contribution of Arac Health Care, a marketing and distribution joint venture set up last year with pharmacy owners Al-Khorayef Medical Company.

Competition will be stiff though, particularly in the private market. A number of other local manufacturers are emerging, encouraged by the growth in the market. Analysts estimate local production will account for about 30 per cent of total sales, from about 19 per cent now, when ventures announced so far come on stream.

Glaxo Wellcome Saudi Arabia was the first foreign joint venture to set up in the country and has been ready to begin sales from its Jeddah plant since mid-1995. Output will include the top-selling ulcer treatment Zantac as well as Zovirax and Serevent, and a range of new products. However, commercial production remains on hold until differences with the Health Ministry over product pricing can be resolved. Glaxo exports to Saudi Arabia have previously been worth almost $50 million a year, and the firm can expect to build up a market share of about 20 per cent, analysts say.

Tabuk Pharmaceuticals, a joint venture between local businessman Sabih al-Masry and Jordan’s United Pharma, began production of vitamins and rheumatism treatments at its plant in the north of the country in early 1997.

Pharma International Company (PIC) is a 60:40 joint venture between the owners of eight private hospitals in Riyadh and the western region with a number of local investors, and the local Mahmood Saeed Collective Company. PIC has taken over a site in the Jeddah industrial area, formerly occupied by Saudi Computer Industries, which has the advantage of utilities already installed. The premises are currently being renovated and trial production is scheduled to begin early next year. Three separate units will house anti-bacterial (beta-lactame) and non-beta lactame manufacturing facilities and laboratories. PIC will manufacture some of its products as generics, but has also recently signed a letter of intent with a French company for under-licence manufacturing. Some 30 per cent of total output is expected to be taken up by the shareholder hospitals. PIC aims for total sales of about $25 million within the country and a further $2.5 million in the GCC and other export markets.

The Medical & Cosmetic Products Company (MCPC), based in Riyadh, will produce medicines and cosmetics under licence from international manufacturers. It aims to enter the market later this year. The major shareholders are Al-Haya Medical Company and Aggad Investment Company, both local.

Saudi-Japanese Pharmaceutical Company (Sajaphco) is expected to begin production at its Jeddah plant in mid-1998. The project is a 51:49 joint venture between the local Farouk, Maamoun Tamer & Company and Japanese interest - Sankyo Company, Yamanouchi Pharmaceutical Company, Japan International Development Organisation, and Marubeni Corporation. Output will include Sankyo and Yamanouchi-branded treatments for blood pressure and diabetes.

Wockhardt Middle East, a local/Indian joint venture based near Riyadh, is due to begin production by the end of next year.

A further two joint ventures are planned, by local firms Dar al-Dawa and Al-Hikma Company, in Jeddah and Riyadh respectively. Both ventures will be with Jordanian partners.

The burgeoning local industry is regulated by the Health Ministry, which follows guidelines for good manufacturing practice for finished pharmaceuticals laid down by the US’ Food & Drug Administration. All products must also be registered with the ministry and prices approved before sales can begin.

A major attraction for a foreign company in manufacturing locally, or in maintaining under-licence agreements with Saudi partners, is the speed with which products can be registered. The process of registering an imported product can be a laborious one, often taking several years. Local producers think in terms of three months. However, the ministry expects local factories to undercut prices of comparable imports, usually by at least 25 per cent, thereby limiting the range of products that can profitably be manufactured on Saudi soil.

The character of the local market is likely to change if Saudi Arabia’s application to join the World Trade Organisation (WTO) is successful. Analysts do not expect the effect of joining the WTO to be immediate, as developing nation status would give Saudi Arabia a grace period of five-10 years in which to reform its legislation and practise. But the stricter enforcement of patents and a loosening of the ministry’s grip on pricing will be inevitable.

The agents for change will be the foreign companies, which will expect to gain freer access to the market. Under-licence manufacturing, which accounts for 70 per cent of local production by value, will come under pressure as multinationals find the arrangements unnecessary. Local factories will expand production of generics and the bill for imported patented drugs will rise, by up to 20 per cent. At the same time, cheap patent imitations, imported in small quantities from South Africa and elsewhere, will disappear from the shelves. Saudi producers say a shift towards greater production of cheaper generics should strengthen the local industry by giving it a larger share of government orders.

The Saudi pharmaceuticals market is still relatively immature and will take time to stabilise and digest these changes. With the implications of joining a global trading regime still some way off and demand in the private sector growing rapidly, opportunities to invest in the local industry will continue to be taken up enthusiastically.

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