Local investors lose out in Sh110 billion pharma business

Workers at a drugs production line in Kiambu. FILE PHOTO | NMG

What you need to know:

  • Kenyan manufacturers hold only 30 percent of the Sh109.6 billion ($1 billion) local pharmaceutical market.
  • They also sell less of their products locally, while exporting the majority.
  • Report faults them for going after low-cost generic products, leaving a Sh77 billion higher-value drugs market to foreign firms.

Kenyan investors remain locked out of the lucrative medicine manufacturing business, denying them billions of shillings, a new report has shown.

The Pharmaceutical Industry Diagnostic Report 2020 notes that Kenyan manufacturers hold only 30 percent of the Sh109.6 billion ($1 billion) local pharmaceutical market.

Domestic pharmaceutical manufacturers have over the years held a strong presence in anti-infective product categories such as cough and cold preparations, antiseptics, anti-asthmatics, and antibiotics.

The report adds that the majority have been competing on these same market segments, and hence fail to tap into lucrative immunological and cardiovascular markets which have a larger share in the region.

The report by ministries of Health, and Industrialisation, Trade and Enterprise development in partnership with International Finance Collaboration (IFC) adds that this provides a good opportunity, estimated at Sh76.7 billion.

The report comes at a time when there has been a global disruption in the supply chain of essential health products and equipment due to the Covid-19 crisis.

Supply disruptions

During the peak of Covid-19 pandemic, pharmacies reported a huge spike in demand for vitamins, supplements and minerals as consumers rushed to purchase them to boost their immune systems and in fear of full lock-down measures.

This led to stock outs of the products in the local markets due to global supply chain disruptions, as the majority of these products are imported.

The report, however, points out that Kenyan manufacturers sell less of their products locally, while exporting the majority.

A different report released by the Kenya Investment Authority (KenInvest) in October last year indicates that Kenya is the leading producer of pharmaceutical products in the Common Market for Eastern and Southern Africa (Comesa) region, supplying about 50 per cent, and the third largest exporter of pharmaceuticals in Africa.

The Diagnostic Report 2020 puts the exports to Comesa, East Africa Community and the rest of Africa at Sh6.9 billion ($63 million) with total markets valued at Sh1.49 trillion ($13.6 billion).

This translates to 4.6 per cent of the country’s exports share to Africa.

It points out that improved technologies and increased local pharmaceutical production would increase this share by five per cent while rising demand for the local products from the current 30 per cent to about 65 per cent.

“A five percent increase in Kenya’s share of this total African market would translate to exports worth Sh74.3 billion ($678 million),” it states.

The growth of this sector has been constrained by factors including dominance by foreign multinationals in terms of value, high cost of utilities – water and electricity, inadequate access to credit for the private sector to fund product research and development.

This has seen a decline in average revenue per local manufacturing company compared to other countries.

Despite Kenya having a well-developed health sector and manufacturing industry with the capacity to supply both internal and external markets, the KenInvest report points out that most local firms are disqualified from donor-funded government procurement since participation is only open to World Health Organisation (WHO)-pre-qualified facilities.

“However, investors could take advantage of the existing idle production capacity through partnerships such as joint ventures and expand product range in the market,” notes the KenInvest report.

Reliance on imports

Kenya’s pharmaceutical industry heavily relies on the global supply chain for inputs, equipment, and even specialised personnel.

Most companies manufacture simple non-patented products or rely on technology transfer agreements with foreign multinational manufacturers.

Nearly 60 percent of packaging materials are imported from India and China, attracting custom tariffs. This include glass, plastic bottles and other containers, labels and blister foil at 80 per cent, 45 per cent, 70 per cent and 100 per cent respectively.

Large and small pharmaceutical firms import about 60 per cent and 35 per cent of their packaging materials, respectively.

“The industry also imports machinery and equipment for production from Europe and Asia, including the specialised labour for equipment installation, maintenance, and repair services,’’ the report states.

“There is also a perception among pharmaceutical manufacturers that local packaging material is low quality.”

The folly of depending on imports was exposed during the lock-down period last year. Kenya was among countries that were seeking crucial supplies from medical equipment, drugs, diagnostic tools to simple kits such as personal protective equipment (PPEs) especially used by healthcare officers.

This reliance, the report notes, risks interruptions for provision of the items, undermining the country’s national emergency response to crisis.

This shortage saw a surge in prices of masks as from March last year.

In the first week March, before the pandemic hit and when the country was gearing for coronavirus outbreak in Kenya, a manufacturer of masks, Nairobi Enterprises Limited (NEL), had quoted the price of box containing 50 units of the protective gear having surged from Sh500 to Sh1,700 in the wholesale market.

The prices have since dropped to Sh5- Sh10 due ramped up production by manufacturers including Kitui county government’s factory Kikotek, and increased supply of reusable face masks made for pieces of cloth.

Coronavirus tensing cost , though still remains high at minimum of Sh7,500 from a high of Sh13,000 due low supply of the testing swabs.

Previously, the samples were collected and then sent to South Africa for testing.

The Covid-19 pandemic has however affected the trade of medical products.

During the lock-down period, India, a major exporter of pharmaceutical products to Kenya, restricted exports of 26 pharmaceutical ingredients and medicines.

As a result Kenya’s imports of the products from India fell by 42 percent in May 2020 compared to the same month 2019.

“To mitigate supply shortages and reduce its reliance on India and China, Kenyan pharmaceutical manufacturers need to identify and evaluate alternative sourcing partners or invest in capacity to produce these key ingredients locally,” the report stated.

Family businesses

Limited innovation in the sector has also led to production of low-cost generic products, spurring the dominance of foreign companies.

Production of medicines by the sector as the new report shows, is dominated by family-run businesses that focus on the simplest types of manufacturing.

The largest 10 firms account for nearly 80 per cent of local production of mainly unbranded generic.

“Local firms tend to produce simple dosage forms, such as plain tablets and capsules. While some diversify by producing syrups, suspensions, and creams, only three firms produce injectable infusions and ophthalmic formulations that require technologically complex processes and stringent quality control standards such as sterile conditions,” the report states.

Production of higher value products has been limited due to lack of technical expertise and financing for investment in advanced technologies and exquisite workforce.

The report points out that the cost of production and equipment upgrades is high due to borrowing costs, by about five percentage points higher than in India or Bangladesh.

The current lending average rate in the country, according to the Central Bank of Kenya is 12 percent as at January this year.

The Diagnostic Report 2020 states that although the workforce costs in Kenya are lower, local firms rely on expatriates due to lack of capacity, resulting in increased workforce expenses.

Unregistered retail pharmacies have also increased the risk of substandard products entering the supply chain.

According to the Health ministry, the planned roll-out of universal health coverage and increased insurance cover is expected to increase demand for medicines and spur growth in the local pharmaceutical industry.

“A coordinated approach is required through a package of interventions to support the role of the private sector in supplying good and affordable medicines to Kenyans market,” chief administrative secretary, Health ministry, Dr Rashid Aman said.

“We need to strengthen framework and investment in industrial infrastructure like the special economic zones as well as reducing barriers to entry and competition in pharmaceutical manufacturing.’’

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