Ethar El-Katatney

A Bitter Pill to Swallow

Posted in Business Today by Ethar El-Katatney on June 13, 2008

A Bitter Pill to Swallow
Business Today
bt 100
June 2008

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The chairman of Egypt’s top pharmaceutical exporter discusses the myriad problems facing the sector today

30 heart medicine pills, a month’s worth, are sold for LE 3 […] I’m tied down.
But when the watermelon seller raises his prices, selling a watermelon for [LE
17.50] no one says anything.

By: Ethar El-Katatney

The chairman of egypt’s top exporter of pharmaceuticals — the Egyptian International Pharmaceutical Industries Company (EIPICO, bt100 number 44) — is pleased with his company. He is, however, distinctly displeased with the regulatory environment in which his company must operate.

EIPICO manufactures 25% of Egypt’s total drug exports and has an 8% share of the domestic market. After 17 years’ in the field, EIPICO now produces a line of more than 250 products. They run the gamut of 23 therapeutic groups, including pills, capsules, injections, eye drops, granules, powders and suspensions. Sixty-five of EIPICO’s products are under license from other companies.

In addition to having the healthiest operating margin in the Egyptian pharmaceutical industry, Chairman and Managing Director Ahmed Borhan El-Din Ismail claims the company is also the best in terms of quality and operations, with one of the most advanced research and development facilities in Egypt.

EIPICO has its own integrated distribution network with over 200 vans, one of the largest sterile areas in the Middle East and North Africa (MENA) region and has established integrated management systems for a quality environment, satisfying the requirements of both ISO 9001 and ISO 14001. Extremely strict adherence to the General Manufacturing Principles (GMP) set by the World Health Organization (WHO) helped EIPICO become one of Egypt’s top exporters (bt100X number 91).

Nevertheless, Ismail is not happy with the way the industry is developing in Egypt.

Ismail has been a chairman for over 40 years — 15 years at the helm of state-owned Kahira Pharmaceuticals and Chemical Industries Company (the initial shareholder in EIPICO before it was privatized) and now the 25-year chairman of EIPICO. In an interview with Business Today Egypt, he describes the obstacles EIPICO faces, offers some harsh words for the Ministry of Health and explains why he is setting up production outside of Egypt.

The Price is (Not) Right

The biggest problem facing the pharmaceutical sector, says Ismail, is that market prices are essentially frozen by the government. When the Egyptian pound was floated — and devalued rapidly — in 2003, the cost of imports soared. As most players in the pharmaceutical industry import between 70-80% of their production inputs and pay foreign currency-denominated royalties to companies whose patents they license, keeping retail prices fixed during the devaluation of the Egyptian pound led the industry into a crisis.

“Does our pound mean anything now?” asks Ismail. “A dollar is LE 5, and I import from Europe; the Euro is even higher than the dollar.”

With the reforms introduced by Prime Minister Ahmed Nazif’s government in 2004, expectations were high that the archaic pharmaceutical industry rules might bend or even change. It was not to be the case. As the prices of everything from bread to steel doubled and tripled, the cost of medicine remained stagnant.

Ismail says that he has products whose prices have remained the same for over 20 years (EIPICO was established in 1980 but only began operations in 1985). “Medicine is the only commodity sold at a fixed price,” he says, gesticulating wildly. “What else is sold at a fixed price? Cheese? Fuul? […] My average selling price for medicine is LE 3 […] 30 heart medicine pills, a month’s worth, are sold for LE 3.

“The government sets our prices and the ministers are afraid of the people,” he continues. “If they raise the prices, opposition papers will write the government is raising medicine prices 50%, when in reality we’re only raising it from LE 2 to LE 3 — only LE 1. What do you do with LE 1? If you’re buying sweets or gum, nothing is sold for LE 1! […] There’s something called the rule of the powerful over the weak. They say raising prices will trouble the citizens. […] I’m tied down. But when the watermelon seller raises his prices, selling a watermelon for [LE 17.50] no one says anything.”

The WHO, Ismail explains, changes the GMP for both pharmaceuticals and pharmaceutical companies at least once every six months. The GMP, according to the WHO, “cover all aspects of production, beginning from the starting materials, premises and equipment, to the training and personal hygiene of staff.” The latest addition to the GMP just this year, concerning air purity in the entire factory, is costing the company LE 13 million to comply with, even though EIPICO’s sterile areas are already environmentally controlled for an almost 100% particulate-free atmosphere.

“I had to change 36,000 square meters […] and I’ve been doing so for 18 months just because they uttered a word,” says Ismail, “but where would I get the [LE 13 million] if I can’t raise my prices?”

Ismail believes his demands are reasonable: He asks that the government allow him to raise prices in small increments every couple of years, a rate which is far behind other commodities, whose prices change in a matter of days.

“Why do you set prices?” he asks the state. “Isn’t it to give me a price good for me and good for the people? Or should I lose money and people relax? If I lose [money] I won’t produce. You are driving me out of the market and not only that, you’re bringing in someone else whose price is 20 times my own. […] In the end it is the public that will be harmed.”Obstacles, Obstacles
The second major obstacle EIPICO faces is derived from the first: Because its prices are so low, international competitors use that fact to attack EIPICO’s reputation.

“International companies […] like to destroy local companies. My average price is LE 3, his average price is LE 20. What will he say? That I’m a thief, selling cheap because I don’t use a certain chemical, or a certain catalyst. This campaign is intense and all foreign companies are attacking us from this angle. They ask if it is possible that the LE 30 medicine is like the LE 3 medicine? […] They say that since it’s cheap it must be bad.”

These accusations, says Ismail are completely unfounded. “It only takes you an hour to find out if a medicine is unsuitable. Get me a document that proves my product is bad and I’ll shut down.” Of course, he adds, “[since] my profit is this small, my abilities to defend myself [legally] are small.”

The third major obstacle that EIPICO faces, “though it won’t make the government happy when I say this,” admits Ismail, is that “the capabilities of the government are not keeping up with the development that surrounds us. […] Inspections, labs, equipment and so on have not developed sufficiently because they’re government owned, and the government doesn’t have the budget,” he claims.

Adding to the problem, the government is a critical player not only in the pricing of EIPICO’s goods, but also in their manufacture: Every year EIPICO releases new products which must be registered with the Ministry of Health before release. According to Ismail, this can take up to three years because the labs are simply not equipped for the sheer number of new products.

“What more can I do with the Ministry of Health?” he asks. “Their capabilities are weak. I am held back. We are the ones that are updating government labs [to speed up the process]. I rely on myself, but for some things, like registration, I have to rely on the ministry. But what can I do? Slap their wrists?”

Ismail says there are also other problems he faces, but that he can’t discuss.

Exporting Quality

EIPICO exports its products to 62 countries, accounting for 25% of Egypt’s total drug exports and 15% of the company’s total sales. In 2006, EIPICO’s exports totaled LE 120 million, and grew to LE 156.1 million in 2007; a 30.1% increase.

“Every country [we export to] comes to inspect us,” says Ismail. “They find that we fulfill the GMP and so allow us to export. Every year we are audited no less than 20 or 30 times.” This, he explains, proves that EIPICO is a world-class facility, contrary to what foreign importers are saying.

Export growth used to represent a crucial strategy for EIPICO, as they allowed the company to avoid government-imposed profit margin caps. But to add another hurdle to EIPICO’s obstacle course to success, this has begun to change.

“[Exporting] is another travesty we are facing. We used to price our goods [abroad] as we wanted. We used to say to governments — especially in Arab countries — the price of medicine in Egypt is set by the Ministry of Health, […] who won’t let us raise our prices. But now there is a commonly accepted resolution that you must sell medicine abroad for the same price as you sell it back home,” he says.

This is having a severe impact on the company’s revenues. Five years ago, Saudi Arabia, where EIPICO has been in business since 1985, decided to apply this rule, saying that prices should be identical to prices in the country of origin. This means that a medicine sold for LE 3 in Egypt would be sold at SR 2. According to Ismail, no pharmacy would stock the product since the minimum price of the majority of commodities in Saudi Arabia is SR 5 (LE 7.14). EIPICO is, however, investing in 30% of a SR 60 million (LE 86 million) Saudi factory that has yet to be constructed. As a local company its products will be priced relative to similar products on the local market. In Jordan, the situation is much worse; because of the country of origing rule, EIPICO had to shut down its operations in May.

EIPICO and similar companies’ solution to fixed prices in their home market was to export their business strategy and operations to other regional and emerging markets. But with importing countries beginning to implement country of origin prices, the situation does not look promising.

Strong Medicine

Set prices at home and abroad, smear campaigns and government hindrance: Ismail does not have a solution for the many threats he perceives facing the industry.

“The picture isn’t completely black,” he concedes, “but we are putting in tremendous effort to deal with all this. [Country of origin practices] in the countries to which we export was a slap in the face we are working to counter.”

The only solution Ismail sees, in order to not only remain afloat but to succeed, is to strengthen EIPICO’s position outside of Egypt, not only through exporting, but in actually building companies and factories in other countries to circumvent the country of origin price rule. In January 2008, EIPICO announced it would build a $200 million (LE 1.1 billion) factory in Algeria. Ismail is flying out this month to buy the land.

“The government is booting us out of Egypt [with set prices] and making us look elsewhere,” Ismail says. “But what about the consumer? Am I not responsible for him?”

Responsible or not, Ismail says he cannot afford to continue in Egypt the way things stand. Whether or not this eventually leads to more imports of expensive medicine remains to be seen. He is still hopeful that things will change — despite all the problems he says faces the company, in 2006 EIPICO expanded in Egypt, building new production lines on a new plot of land adjacent to its Tenth of Ramadan factory — but he’s not overly optimistic.

EIPICO’s future plans include expansion into the production of interferon treatments for use in treating nervous system disorders and immune system stimulants for use in chemotherapy. Other plans revolve around investing in a biotechnology center (which includes a DNA lab, protein chemistry lab, fermentation unit, chromatography and gel filtration lab) that is now making a small (0.25% of sales) but growing contribution to EIPICO’s bottom line.

The future of EIPICO in Egypt depends in large part on the company’s ability to find its way around the pricing hurdles set down by the government and the company’s ability to compete with foreign producers and their deep pockets.

“We have the cheapest medicine in the region and this is dangerous,” concludes Ismail. “The government is putting [us] in a dangerous situation […] Beytafashoona [They are indirectly forcing us to leave]. Only God knows what the future will look like.” bt


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