Saudi Arabia is expanding its healthcare industry on the back of a soaring population, and global pharmaceuticals giants are jostling to take a bite of the action. However, a complex regulatory landscape and fierce competition mean they must be smart to reap the rewards.
Saudi Arabia, with its fast-growing population and far-reaching plans to improve public health, is ripe for investment from the world’s pharmaceutical giants.
The kingdom is one of the largest pharmaceutical markets in the Middle East and the largest in the GCC. It has grown by 7.4 percent annually since 2008 and is forecast to grow from $4.5bn in 2015 to $6bn by 2020, according to a report by GlobalData in July.
Demand for pharmaceuticals has been driven largely by demographic trends. Saudi Arabia’s population has grown by 2 percent each year since 2010, according to an industry briefing by Euromonitor in February. And, while the kingdom is generally considered to have a young population with more than half of its 30 million residents aged under 25, the elderly population is on the rise.
Between 2010 and 2014, the number of residents aged over 65 rose by 16 percent against overall population growth of 12 percent, Euromonitor said, and there has been a surge in chronic diseases such as obesity, increasing the need for long-term medical care.
In response, the Saudi government is planning a major expansion of the healthcare sector in line with its Vision 2030 economic strategy unveiled in April. The Ministry of Health (MoH) has an annual budget of $18.5bn over the next ten years, according to GlobalData, and aims in particular to boost domestic manufacturing of medicines and medical devices.
GlobalData analyst Adam Dion told industry media in July following publication of the company’s report: “Due to the increase in chronic diseases and Saudi Arabia’s rising wealth, there is huge demand for patented products representing a significant opportunity for market players.”
Examples of firms active in the market include GlaxoSmithKline, Pfizer, Eli Lilly, Bristol-Myers Squibb, Novartis and Sanofi. GlaxoSmithKline’s Panadol is the leading consumer health brand in the country, according to Euromonitor research analyst Diana Jarmalaite, accounting for around 10 percent of the total consumer health market in 2015. Meanwhile, Siemens Healthcare, Philips Healthcare and Abbott Laboratories are among the big players in the medical device market.
Yet, experts tell Arabian Business there remain significant barriers for global firms to break into the market. While plenty of multinationals supply medicines as exports to Saudi Arabia, only Sanofi and GlaxoSmithKline have operational manufacturing plants there. Analysts cite lengthy drug approval times, flimsy intellectual property (IP) protection and opaque government tender processes among the challenges facing firms.
A paper by BMI Research at the end of August highlights such issues and argues that market access barriers remain a significant concern for pharmaceutical firms. “Issues pertaining to market access, [for example] the restrictive nature of the domestic regulatory system, continue to pose challenges to foreign drugmakers and their ability to penetrate the kingdom’s medicine market,” the report said.
One issue is lack of transparency in the selection process of pharmaceutical products. The Saudi government plays a prominent role in the purchase of products, negotiating with drug companies and deciding upon the supply schedule, the report said, noting that the principal buyers of products are the MoH and Secretariat General of Health (SGH) for the GCC.
The report said: “Many government tenders in Saudi Arabia are only open to local medicine suppliers and biased towards drug companies with the strongest local representation [among them, market leader Saudi Pharmaceutical Industries and Medical Appliances Corporation (SPIMACO), Tabuk Pharmaceutical Manufacturing and Jamjoom Pharma].
“Moreover, tenders are often only announced for a short period of time, making a strong local connection even more vital — something that multinational drugmakers lacking a direct presence struggle to obtain.
“We note that a 10 percent preference is granted to local or GCC-based companies over multinationals; as such, the government tends to prefer buying medicines from local companies, if their prices are not more than 10 percent higher than those offered by foreign firms.”
Saudi Arabia’s pricing legislation favours local producers, effectively giving regional producers preferential treatment in the tendering system. This bias is unlikely to change despite World Trade Organisation (WTO) provisions against it, the report said.
Speaking to Arabian Business, report co-author Craig Smith says another issue is the country’s underdeveloped patent system. “It is not up to Western standards,” he says. The IP environment in Saudi Arabia fails to provide adequate protection for “innovative” products yet it has created a favourable framework for “generic” domestic drugmakers.
However, improvements are expected in this area following pressure from international research-based pharmaceutical companies and Saudi Arabia’s pledge to comply with the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement of 2012, he adds.
There are other barriers, says Smith. For example, foreign pharmaceutical firms can only supply medicines through Saudi Arabian intermediary agents — negotiation with which are often complicated. As the market becomes increasingly attractive to multinationals, BMI says it expects to see an increase in joint ventures between foreign and Saudi firms.
There are a few such arrangements in place. For example, Saudi-based Tabuk Pharmaceuticals announced in 2014 it had signed a commercial agreement with US pharmaceutical giant Pfizer. Under the deal, Pfizer agreed to grant Tabuk exclusive rights to manufacture, market and distribute second brand versions of four Pfizer products in the kingdom. In return, Tabuk agreed to grant Pfizer rights to 12 of its own products in Saudi Arabia.
Like Smith, Euromonitor analyst Jarmalaite warns of inconsistencies when it comes to subsidies and pricing. Local firms win preferential treatment, such as interest-free capital and subsidised utility costs.
“Saudi Arabian domestic pharmaceutical companies receive subsidies from the Saudi Ministry of Health and Saudi Food & Drug Authority (SFDA), while international companies do not,” she says.
She also highlights the unified pricing system for pharmaceuticals adopted by all GCC states in 2014, which is in the process of being implemented.
“The agreement prohibits both global and domestic companies from increasing prices for pharmaceutical products. Local companies have benefitted from the latter regulation as they receive subsidies that helped them to absorb any increase in costs.”
As drug prices are to be decided according to the lowest price of that particular product throughout the region, the new system is likely to restrict profit margins for multinationals wishing to operate in the kingdom.
Jarmalaite says: “Companies eyeing investment opportunities in the kingdom should also consider the business operational environment in the country. There is no unified position regarding the business licence fee, therefore each municipality has autonomy over the level at which to set their fee.
“We have observed some discussions to charge the fee based on the size of the operational premises or per employee, however none of those recommendations are yet implemented.”
She says the traditional solution to such issues is for investors to create joint ventures with local firms “to overcome business set-up obstacles and help deal with bureaucrats”.
Another potentially prohibitive factor for foreign firms is the government’s policy to grow the domestic workforce. ‘Saudisation’ is considered a “double-edged sword” for businesses, Jarmalaite says. “On one hand, the companies will get a wider pool of labour to choose from. On the other, the skillset Saudi nationals could provide to the companies might not meet [international] expectations.
“Saudisation is also expected to increase the costs of companies as Saudi nationals are expected to be paid more.”
Despite the hurdles, there is no doubt that the market offers huge potential to foreign drugmakers, and analysts report rising levels of interest as the kingdom starts to implement its healthcare reform plans. Government expenditure on health services and social development rose more than 10 percent to $20.8bn between 2014 and 2015, according to Euromonitor — directed mainly towards the construction of new hospitals, laboratories, medical centres and polyclinics, as well as sport clubs and rehabilitation centres. Meanwhile, household spending on pharmaceuticals rose 8 percent in 2014, providing a fillip to foreign firms.
Many multinationals are preparing to ramp up operations, including Pfizer, which is due to complete the construction of its first manufacturing facility in the GCC — a 32,000 sq m plant at Saudi Arabia’s King Abdullah Economic City — in January 2017.
Indeed, GlobalData’s Adam Dion says: “Domestic pharmaceutical manufacturers, which account for only 18 percent of the market at present, face challenges from the increasing prevalence of low-cost generics and the entrance of global pharma giants such as GlaxoSmithKline, Pfizer, Astellas and Sanofi.”
The Saudi government appears to have sought to counter this rush of interest in its Vision 2030 plan. Law firm Shearman & Sterling’s analysis of the National Transformation Programme 2020 (NTP) — the strategy underpinning Vision 2030 — notes that one of the key objectives for boosting the domestic healthcare industry is to increase local pharmaceutical manufacturing’s market share from 20 percent to 40 percent — potentially sidelining foreign firms.
It is not clear whether this has alarmed them. Of the 10 global pharma firms contacted by Arabian Business (including Merck & Co, Bristol Myers Squibb, GSK, Pfizer, Sanofi and Eli Lilly, as well as GCC-based Julphar Pharmaceutical Industries and Tabuk Pharmaceuticals), only four responded and even fewer were able to provide comment in the time available.
A spokesperson for Pfizer said in an emailed statement that the firm was upbeat about the opportunities the NTP presents.
“Saudi Arabia is an attractive and promising market for global pharmaceutical firms and the largest market in the region. Some firms are already looking into doing more business in Saudi because there is high untapped potential, while others are observing the market closely.
“The Saudi government has spent billions over the years in healthcare to build and maintain a good healthcare system and has made substantial progress over the last two decades. Life expectancy has increased from 68 to 74 and there is a focus on public health programmes including vaccination and health awareness campaigns, as well as other major investment opportunities.”
Smith at BMI Research agrees that the educational campaigns of which Pfizer speaks present significant opportunities for foreign firms. He says Merck & Co is one example of a multinational that has partnered with the Ministry of Health to raise awareness of health issues while also broadening the company’s access to market.
The Pfizer spokesperson also played down analysts’ assessments of barriers to entry. “Overall, there has been significant improvement in [the process] of registering medicine in the past few years. The Saudi Food and Drug Authority (SFDA) recently reduced the timeline for review of registration for new products. Moreover, the government started issuing 100 percent ownership trading licences to global firms to exercise their operations directly without any obstacles that may result from third party involvement.”
Pfizer this year became the first pharmaceutical company to win a 100 percent operating licence under new, relaxed, foreign ownership laws.
The spokesperson continued: “One of the main objectives of Vision 2030 is to increase and attract foreign investment in the kingdom, and government entities have been reviewing and improving the regulations to enable global firms to operate there.
“As a result, we have seen an increasing number of projects by global companies and some of them have started manufacturing locally.”
In general, the government has been “more cooperative and open for discussions and meetings with the private sector”, said the spokesperson, suggesting it is committed to easing the barriers to foreign investment.
Saudi Arabia this year moved to allow 100 percent foreign ownership of retail and wholesale operations in the kingdom, and, although the exact definition of eligible companies is unclear, Euromonitor’s Jarmalaite says the permissions appear to apply broadly to any “trading” entity. “Lately we’ve seen that the definition of trade sector is wider [than previously thought] — for instance, Pfizer received a 100 percent ownership licence this year.
“According to Euromonitor, the latter will become the benchmark case for other global pharmaceutical companies to come and start developing their business in the country.”
Closer to home, Gulf-based pharmaceuticals players are ramping up activity too, spurred by such encouraging moves from the government. UAE-based Julphar, for example, expects to open its first manufacturing plant in the kingdom later this year.
Overall, the NTP is expected to open up a new page for the country’s economic development. “Despite some uncertainties, the government is doing its best to implement the strategy in a manner that favours both consumers and businesses,” says Jarmalaite.
Global pharmaceutical firms stand to benefit from a more open environment in future. For now, they must navigate complex regulations and form productive partnerships with local agents to reap the returns of this lucrative market.