Egypt’s pharmaceutical industry at risk, multinational firms have large portion

The Egyptian pharmaceutical industry is suffering due to a number of governmental policies that need to be reviewed, but it has a room to grow thanks to number of options that can be tapped to overcome the industry’s obstacles, according to a new report by SHUAA securities.

The report said that although the country’s large population, favourable demographics, and high ailment rates are in the Egyptian pharmaceutical industry’s favour, drug makers are suffering from high costs of operations because a considerable portion of their pharmaceuticals ingredients are imported, exposing them to fluctuations in global prices and Forex risk.

Key challenges to the industry, according to the report, include the government’s enforcement of drug pricing, private multinationals’ dominance of the market, the delayed implementation of a comprehensive increase in pharmaceutical prices, the depreciation of the Egyptian pound, and the wide spread of counterfeit medicines.

Another core challenge the industry faces is that is still subject to price control by the government, so drug makers always find their margins at risk and are vulnerable to loss-making products they sometimes must manufacture.

Nevertheless, there is room for the industry to grow, the report said, as Egypt has one of the lowest rates of total healthcare expenditure as a percentage of GDP at 4 percent, which paves the way for more investment inflows into the pharmaceuticals industry.

The industry is dominated by multinational manufacturers that account for 69 percent of total pharmaceutical sales, while local companies are left with the remaining 31 percent.

According the report, the total production of pharmaceuticals in Egypt grew at an eight-year CAGR of 5.8 percent to 23.2 billion pounds by 2016/17. On average, private sector companies captured 84 percent of total production from 2008/09 to 2016/17, while the public sector accounts for just 16 percent.

The report said that only five state-owned pharmaceutical companies are listed on the EGX with a total market share of 6 percent in terms of sales, while the remaining private sector companies – either multinational branches or local – hold the lion’s share, commanding 94 percent of the market as of December 2018.

It also said that multinational companies make up 69 percent of Egypt’s total pharma sales, which amounted to EGP 66.6 billion in 2018, and up to EGP 57.2 billion in by the third quarter of 2019, while local companies accounted for 31 percent.

“Novartis, Glaxosmithkline, and Sanofi are the market giants in terms of their total pharma sales, which stood at 4.9 billion Egyptian pounds,  4.1 billion pounds, and 3.5 billion pounds respectively in 2018. Meanwhile, Pharco, Amoun, and EIPICO (PHAR) topped the local manufacturers with sales of  3.4 billion pounds,  3.3 billion pounds, and 2.3 billion pounds respectively,” the report said.

In addition, two price hikes relieved some of the producers’ burden, as the margins of all manufacturers have been pressured on the back of expensive raw materials and fixed prices of end products.

“The Ministry of Health provided manufacturers with two breathtaking opportunities in the form of price increases in 2016 and 2017, but producers are still looking forward to more hikes in the future,” reads the report.

Dealing with the industry’s current situation, SHUAA said that there are merger and acquisition opportunities, especially involving state-owned manufacturers, and that new IPOs should attract more investments and inject more liquidity into the industry, which can help the industry overcome its challenges.

Furthermore, the report set a number of main solutions for the industry, including medicine re-pricing, which would help improve local sales growth for all drug makers and relieve the pressure on their margins built up by increasing raw materials bills.

It also suggested that a stronger pound against the US dollar and mergers and acquisitions in the industry could lead to further consolidation which would help improve profitability margins, while new IPOs may help in re-rating EGX-listed stocks if valued at higher valuation multiples.