Pharmaceuticals Industry: Egypt’s Window of Excellent Opportunity
by Tarek Shafey
Egypt has the largest Arab and African pharmaceuticals industry and market, with yearly products worth USD 2.6 billion and exports of $1.7 billion. Though long underperforming, this profitable industry; intensive in skilled, well-paid labor, retains the solid foundation, fine strategic advantages and potential for lasting production and exporting success, as well as greatly serving Egypt’s citizens.
First, though, a word on the global COVID-19 pandemic, which has caused great suffering. It is hoped that it will be contained and eradicated worldwide by the end of 2022. Egypt needs to look and plan beyond this, as it is not a world pharmaceuticals heavyweight, and lacks the longer time frame needed to become a world player in producing quality, reliable COVID-19 vaccines. Looking ahead, Egypt has long focused on medicine import substitution, with its home-grown and domestically-based foreign firms supplying 90% of its home market of 102 million people. Egypt has the largest numbers of doctors (300,000), pharmacists (250,000) and chemical, mechanical and industrial engineers in the Arab region and Africa. They are all educated in English. Technicians, production supervisors and industry workers are also numerous, fairly skilled, and all pharmaceutical industry staff (40,000) are well-paid by Egyptian standards but cost-competitive by world standards, helped by the Egyptian Pound’s weakness. Many qualified medical professionals and staff work outside Egypt, and many of them would be happy to return to work in good, well-paying pharmaceuticals jobs.
Egypt is ideally located, on the world’s busiest shipping routes via the Suez Canal, on Europe’s doorstep, near fellow Arab and African markets, accessible to Central and South Asian markets, and with strong trade links to all those regions. Egypt’s medicines are very good in quality, yet face five structural hurdles that are nonetheless readily surmountable via good vision and reforms. Egypt’s firms import 90% of their raw materials and equipment, which is a missed chance that also costs $1.3 billion yearly. It also sharply pushes up production costs, and would make medicines unaffordable for lower-income buyers. (Egypt’s) state is thus forced to impose high tariffs on imported medicines, which sharply raises their prices, in turn forcing the state to subsidize imported and especially domestic medicines, at great cost. It also acts as a disincentive for domestic (home-grown and multinational) firms to become more competitive, both domestically and externally. Globally, medicines are either patented by the developing firm and copyright-protected (usually for 20 years), or generic, when the patent has expired and other firms are free to develop the know-how to produce it. This opportunity has for decades been brilliantly exploited by Indian firms, most of which invest in advanced research and development, acquire and appropriate the know-how to produce high-quality generic medicines at excellent value for money. India is now the leading such producer with high exports, and especially dominant in developing country markets.
Most Egyptian firms produce patented medicines, tariff-protected and subsidized domestically, but less competitive globally due to high costs, suboptimal quality and limited value for money. Advanced-country consumers typically have health insurance and can afford top-quality, fellow advanced-country medicines, while for developing countries such as Africa, India’s high-quality, low-cost generic medicines hold greater appeal. Another structural hurdle is that most Egyptians lack health insurance. Health care at state-run hospitals and clinics is very poor, and in private ones it is very costly, and prohibitively so for most lower and many middle income citizens. Medicines and other health care costs are mostly out-of-pocket in Egypt, and can often be a great burden, especially for both the poor and elderly.
More hurdles exist, among which is the bureaucracy and inefficient management of the pharmaceuticals sector. The medicine approval and registration process is very slow, bureaucratic, and prone to favoritism, with the Egyptian Medicines Authority (EMA) lacking the needed resources or legal and financial independence from the Ministry of Health and ability to move fast and efficiently. Moreover, medicine copyright protection is dodgy and not well-enforced. In fact, Egypt has in fairly recent years acquired a negative reputation for being a back door to import copyright-violating medicines from eastern Asia and re-export to Africa. Needless to say, this is unethical and needs to be stamped out in the interests of the credibility and long-term reputation of Egypt in general and its pharmaceuticals industry in particular. The fifth and final major hurdle is that in an industry mostly focused on import substitution, export incentives and facilitation are lacking. So is an environment that facilitates doing business, and a clear, transparent and reliable business, legal and regulatory framework that provides much-needed certainty and stability to attract foreign investors, which in return would typically even accept higher taxation. All those hurdles need reform, along with other, integrated and supporting reforms, but Egypt’s potential is undiminished and success is achievable in the lucrative world market.
Managing Production and Demand
We begin with a look at the world pharmaceuticals markets, which totals $1.3 trillion in worth. Though India dominates the developing-country market, with a long head start and cost advantage over China, Egypt has made steady progress despite serious structural hurdles, and can enact effective reforms and leverage its strategic advantages to compete far better abroad, especially in its nearer markets, and secure a sizable share of the vast and fast-growing world market. Egypt does well in fellow African and especially Arab markets, and somewhat well in Asia and Eastern Europe. There is no luxury or prestige element to medicines, which are a high-volume, medium-tech industry. An effective medicine with reliable quality and good value for money will be competitive no matter where it is produced. We start with managing Egypt’s home market. An equitable but efficient, universal national health insurance scheme, modelled on Canada’s successful one, is needed. To prudently cover costs, it would need to be steadily extended, and funded by middle to higher-income employees, employers, the state, and taxes on high-profit private hospitals, building material and other well-chosen, high-profit firms. In parallel would be gradual medicine subsidy removal for consumers and producers, with the former easily affording health care and the latter boosting profits and induced into greater efficiency and competitiveness.
With consumers affording market prices, and more efficient firms, pricier imported medicines can be produced in Egypt. Import tariff removal would lower consumer prices and boost competition, but in such a large and fast-growing home market it needs to be done very gradually, and only when Egypt’s firms can successfully compete with international firms (especially Indian) and maintain their domestic market dominance, which is a crucial factor. Production also needs full restructuring. Strong incentives (financial and regulatory) are needed so as to produce raw materials, equipment and medical supplies in Egypt, which has the industrial base and qualified, attractive workforce for this. This would sharply slash medicine costs and raise profits and competitiveness, as well as generate for Egypt further efficient economic activity and employment. Medical supplies are another, related and promising field for Egypt. Labor costs are already high in China and rising in India, while Bangladesh in particular is positioning itself as a low-cost producer, but it is still a less formidable competitor than India, and can be out-competed by a fast-moving Egypt.
Equally important is inducing Egypt’s firms to invest in research and development, and (as in India) appropriate know-how and successfully produce and export generic medicines. To recover investments with profits, focus needs to be on both medicines that treat illnesses common in Egypt, and lower-cost, high-sales, successful medicines with continued excellent prospects. That step alone would transform Egypt’s pharmaceuticals industry over the long term into a powerhouse and formidable competitor, as previously done by India, help out-compete rising, low-cost medicine producers such as Bangladesh and Vietnam, and benefit from India’s rising costs and lower competitiveness. To that end, Egypt needs to leverage its strategic advantages of a large, skilled and cost-competitive labor force, favorable location, lower transport costs, proximity to and close trade links with its main, nearby markets, including the recent, landmark African Continental Free Trade Area Agreement, and work closely with the Arab Medicines Manufacturers Union and African Medicines Authority for preferential export treatment and strong market penetration in those regions. Good trade links also exist with other markets, especially Central and South Asia, Eastern Europe and Latin America. Attention is needed there as well, as upside export potential to them exists and also needs to be exploited.
Further reforms are needed, with both the home and world markets in mind. We begin with where best to concentrate the industry. It is medium-tech, intensive in research and development, capital and labor, moderately so in water, but not in energy. Transport costs are low, waste pollution is manageable but needs strict control, and no smoke is emitted. As a consumer-oriented industry it would best be well-distributed to serve the population mass along the elongated Nile Valley, and near consumers. With both the home and export markets in mind, four locations would be ideal. Sadat City, in the north, between and near the largest cities Cairo (the capital) and Alexandria (the main seaport), plus the industrial zone in Alexandria, are best. For Middle Egypt, Asyut is the largest city, with a high concentration of qualified pharmacists. Qena is the largest southern city, close to the Red Sea and to tourist areas on both its coast and the far south (Luxor and Aswan). Asyut and Qena also have their best regional universities and well-run and active industrial zones nearby.
Moving on to the business framework, ease of business and a favorable environment need to be favored over excessive tax and profit repatriation privileges. Export facilitation is also important to re-orient the industry focus, as well as easing the securing of bank credit and reliable imports of supplies, raw materials, plant and equipment as needed, until Egypt is able to produce and provide those vital inputs domestically. Import duties on those inputs should not be onerous, and be lower for exporters and emerging generic medicine developers and producers, so as to help them compete abroad. The EMA needs good resources, qualified staff, and legal and financial clout and independence from the state, so as to quickly, efficiently and transparently approve and register new medicines, strictly enforce copyright protection, and stamp out the dodgy medicine import/re-export activities outlined above. Licensing and registering of new medicines producers needs to be eased and speeded up, especially for exporters and developers of generic medicines. Finally, a flexible but balanced and equitable labor market, and much better formal education for professional staff and managers, technical and vocational education training for technicians and workers, and much-improved English language education for all, are all needed.
Lastly, an element indirectly related to medicines but of great benefit to public health and Egypt’s national interest. It is an open secret that Egypt’s universal and flawed state food subsidies, policies, priorities and eating habits are major causes of prevalent poor health and disease among Egyptians. They are generally notably unhealthy relative to their (internationally) lower-middle income levels, as compared to nearby, low-income countries such as Sudan and Ethiopia, let alone similar-income southeastern Asian countries such as Vietnam, which are known for their healthier diet and more disciplined and active lifestyle. Egypt’s flawed policies and subsidies are inequitable, economically inefficient, foster great waste, overconsumption, poor public health, and onerous taxation on middle and higher-income citizens. Modern, thorough and enlightened reform of subsidies (instead: direct, targeted cash support to responsible and worthy poor families), agricultural choices, and dietary priorities and eating habits, mainly via pricing and awareness campaigns, would together be transformative, and greatly alleviate the problems above. Reform would even sharply cut demand for medicines, further boosting exports. With smart reforms, the pharmaceuticals industry holds great and lasting promise, and is potentially worth further billions of Dollars for Egypt, which needs to utilize this window of opportunity.