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Egypt’s pharmaceutical industry is making noise. Local and international drug makers blame each other for the problems plaguing the sector, while all agree the government’s pricing scheme is a mess. Some make this out to be a problem of ethics and rights, but what it really boils down to is money. Caught in the middle are Egyptians, who stand to lose the most. No matter how much sugar coating is added, this is one jagged little pill they will ultimately have to swallow. By Réhab El-Bakry The pharmaceutical industry these days is looking a lot like the reality TV show Survivor. It’s all about staying in the game for as long as possible. To do that, you constantly maneuver and shift alliances, but always keep your best interest at heart. The Egyptian press has found it all very entertaining, plastering its pages with the latest accusations and squabbling by the industry’s players, but there is a serious side to the turmoil. Unless the sector sorts out its differences, it will continue in a downward spiral. Egypt has the second largest pharmaceutical market in the region after Turkey. There are currently 74 pharmaceutical factories producing over 7,600 different types of drugs for domestic sale and export. In 2003, Egyptians consumed around $2 billion worth of pharmaceutical products, representing around 1.5 percent of the national GDP. Yet per capita drug spending was far lower than in other countries in the region. The average Egyptian spends just $30 per year on medicine, about half what Gulf Arabs spend. Many of the policies that govern the pharmaceuticals sector date back to the 1960s, when the government established public companies to manufacture cheap substitutes to imported drugs as part of the country’s policy of self-sufficiency. By the 1980s, the focus had shifted to a free market on the back of Sadat’s infitah (open-door) economic policy, by which international companies were permitted to export their products to Egypt, or establish their own factories here. Today, Egyptian drug manufacturers can be lumped into three basic categories: public sector companies, Egyptian private sector companies and multinationals. All are fighting for market share, changing their positions and alliances as easily as swallowing gel caps. And there are plenty of big issues these days. “All companies are complaining,” says cabinet spokesman Magdy Rady, a former adviser to the minister of health still assigned to answer some of the more controversial questions on behalf of the ministry. “The public sector companies, the Egyptian private sector ones and the international ones all have problems. These problems sometimes manifest themselves as arguments between the companies, and sometimes between them and the Egyptian government. Everyone is complaining to the point that it’s hard to distinguish which problem should be addressed first.” Pennies for pills Amidst every debate is the thorny issue of drug pricing. All drug companies –– even state-owned ones –– are complaining about the government’s pricing scheme, which aims to strike a balance between the right of drug companies to make profits and the right of Egyptian citizens to have access to affordable medicine. Pharmaceutical firms say in recent years, the balance has been tilted heavily in favor of one at the expense of the other, mostly them. According to Zakareya Gad, head of theEgyptian Pharmacists’ Syndicate, for some companies in Egypt the price they are permitted to charge for medicine is extremely low given the rising cost of manufacturing it. “The equation of pricing drugs in Egypt is difficult because companies have to make profit in order to continue to work. If they lose money, they will go bankrupt,” he says. “At the same time, the majority of Egyptians live on limited incomes and can’t afford high prices for drugs, which are essential and not elective products.” To determine prices, the Ministry of Health requires pharmaceutical firms to file a list of their expenses. The list includes the cost of a drug’s raw materials, overhead, production cost, sales costs and desired profit margin. The ministry’s pricing committee reviews the data, then either approves or rejects the company’s proposed price. If the committee agrees, the price is set and the product is sold at every pharmacy in the country for the same price. If the committee disagrees, which is often the case, the company representative must negotiate a price with the committee. The final retail price cannot be set unless both parties agree. The government’s firm grip on pricing policies helps keep the price of medicine in Egypt among the lowest in the region. The low prices are also the result of a robust local pharmaceutical industry, which is able to produce generic drugs at a fraction of the cost of imported brands. Of the 8,000 drugs registered with the Ministry of Health, almost 7,600 are manufactured locally, enough to cover 93 percent of domestic demand. Drug makers say one of their biggest challenges is that the government’s pricing policy has failed to keep up with the rising costs of imported raw materials. Unable to raise the price of their products, pharmaceutical firms have been forced to absorb skyrocketing input costs. Egypt lacks the resources and technology to produce medicine from scratch, notes Tharwat Bassily, president of Amoun Pharmaceuticals, one of Egypt’s oldest private drug makers. “Egypt doesn’t manufacture any of the chemical components that are needed for the production of pharmaceuticals,” he says. “This means that we have to import them and we pay for them in dollars.” Problems began when, after remaining stable for over a decade, the value of the pound fell quickly as the government loosened its peg to the dollar in 2000. As the pound fell, the cost of producing medicine in Egypt rose accordingly. Things went from bad to worse when the government announced that it was floating the pound in January 2003. Producers scoured the black market to obtain the hard currency needed to import raw materials, while still required to sell their products in local currency. “Every single local public or private sector company in the
market had a crisis on its hands,” recalls Bassily. “At
one point, the black market dollar price was around £E 7 to
the dollar, while our final product sales were based on calculations
made when the exchange rate was less than £E 4.” Rady understands their grievance, but says the price discrepancies of raw materials make drug pricing a tricky issue. “Some companies will file information that shows that they pay $3,000 per kilo for a particular chemical. Then you have another company stating that they pay $260,000 per kilo for the same chemical. How can you agree to both? You can’t. We have to base prices on something in the middle.” He says that while some companies were genuinely hurt by the rising cost of raw materials, others were exploiting the situation to boost their profits. The Ministry of Health quickly caught on and demanded that drug companies provide a list of their biggest loss-makers, as well as their biggest sellers by volume. Then, on a case-by-case basis, the ministry reviewed the lists to determine whether any price increases were in order. In certain cases, the ministry has authorized price “adjustments.”
When these occur, they are very product specific. If, for instance,
the ministry approves a 10-percent increase in the cost of the company’s
500 mg cold capsules, it might not approve any price change to the
same drug’s 250 mg capsules. Nor would the change affect identical
500 mg cold capsules in a larger or smaller package. Sweden’s AstraAB and Britain’s Zeneca Group had a presence in Egypt for decades, but the limited range of products did not justify the expense of setting up factories in Egypt. Following their merger in 1999 to form AstraZeneca, they began to survey the market. In 2002, the company announced it would invest $40 million to build a factory in Sixth of October City to produce its specialty line of ethical drugs. “We studied the market and the project was finally given the green light in 2002,” explains Ahmed Zaghloul, general manager of AstraZeneca Egypt. “The plans were then put on hold during 2003 because of the pricing problems that were causing turbulence in the market and [we resumed plans] in 2004.” Zaghloul says he found it intriguing when during AstraZeneca’s
negotiations to open the new factory the government requested that
the company consider exporting its medicine. Of course the company
would like to export, but as many countries set prices on imported
medicine based on its price in the country of origin, exporting
could be a loss-making venture. “How can I export if there
are products here losing money; if I try to export them, the local
price will make me lose even more money?” While Zaghloul agrees that drug pricing is a very sensitive issue in Egypt, he says the government should not put the cost and onus on pharmaceutical firms. “There are three main products subsidized in Egypt: bread, petrol and pharmaceuticals,” he says. “The first two are subsidized by the government, while the third is subsidized by the pharmaceutical industry. This is not really my job. My job is to make medicine and sell it for profit. It’s not my responsibility to subsidize it, nor should I be pushed into the corner of the social responsibility issue. My social responsibility is to employ people, treat them fairly, pay my taxes, support charity for the community, but I should not be expected to play the government’s role.” The government, however, argues that international drug companies already make a lot of profits and can afford to sell their products for less in poorer countries such as Egypt. It’s an argument Pfizer Egypt, the local subsidiary of US pharmaceutical giant Pfizer, says is based on faulty stereotypes. Ahmed Hakim, Pfizer Egypt’s external affairs and policy director, says his company’s recent financial record speaks for itself. Pfizer Egypt has been deep in the red since 2001 despite a 30-year history of profitable operation in Egypt. Last year alone, the company reported losing $65 million. “We’ve been losing money for the past few years,” says Hakim. “The sad part is that no one believes us when we say that.” He attributes the losses to two main reasons: “The first has to do with pricing of medicine in the market and the second is intellectual property rights (IPR) infringement.” Hakim says the long-term solution to drug pricing is to establish a universal health care system that covers the full cost of medicine, with those who can afford it paying more, while those who cannot pay less or nothing. The system would replace the current model by which pharmaceutical firms bear the expense of making drugs affordable to the poor with a system whereby drugs are purchased at full cost, with the rich paying more to subsidize the poor. The government is toying with the idea. The Ministry of Health recently launched pilot projects in Monofiya, Minya and Ismailia, but remains firm on maintaining control of drug prices. “Some companies are demanding that we allow market forces to determine the price of medicine,” says Rady. “There is only one market in the world that does that, the US. Even the EU has regulated prices. We’re a country that needs regulation or else everyone will overprice their medicine. So, I don’t think anyone should hold their breath on this issue.” The high cost of innovation Developing new treatments for influenza, cancer and AIDS requires an enormous investment of time and money. Research and development (R&D) drug companies claim they spend up to 15 years and between $800 million and $1 billion to develop one new molecule that can used to make a new drug or drug component. Yet it costs next to nothing for a company to reverse engineer a drug to identify its components, then manufacture a copycat product. In this case, R&D drug companies are unable to recover their costs, which gives them little incentive to invest in discovering more creative drugs. Pharmaceutical firms in Egypt are deeply divided over the issue of intellectual property rights (IPR), especially patent protection. Multinationals claim the Egyptian government doesn’t provide adequate protection of their drug patents and is complicit in allowing local pharmaceutical firms to produce copycats of their patented medicine, despite its protection by local and international IPR laws. Egyptian drug makers, however, argue that international pharmaceutical giants are using IPR as a pretext to smother the generic drug industry and – should they succeed – medicine prices will be unaffordable to all but the rich. “There is a worldwide consensus that IPR in pharmaceuticals is very important to humanity or else no one would invest money to develop the industry,” explains Rady. “However, the problem is putting a monetary value to IPR… This is very dangerous because it turns medicine into a commodity and once this happens, there will be those who can afford it and those who can’t. But how could medicine be treated like any other commodity?” Another danger, he says, is that IPR allows one company to monopolize a drug and decide whether “to provide or withhold essential medicine from a certain market.” Such accusations were made by South Africa and Brazil a few years ago. The countries, which have a disproportionately high number of HIV/AIDS cases, claimed that multinational drug companies were overpricing life-saving drugs to the point that patients couldn’t afford them. The two countries enforced compulsory licensing, a clause included in the TRIPS agreement, that allows signatory countries to violate IPR regulations and allow the manufacture of patented drugs in the event its patent holder refuses to lower the price of an essential drug. While the WTO approved compulsory licensing in this case, it is not expected to approve it for other medicines. Tripping over TRIPS On January 1, 2005, the Trade Related Intellectual Property Rights Issues (TRIPS) agreement came into full effect in Egypt. For local drug makers struggling to come to terms with tighter IPR regulations, things went from bad to worse. TRIPS sets a minimum standard on intellectual property protection (patents, copyrights and trademarks) to which WTO member countries, including Egypt, must adhere. The 1995 agreement provides worldwide patent protection for new drugs developed by R&D pharmaceutical firms by prohibiting unlicensed rival companies from manufacturing products with identical chemical formulas for a period of 20 years from the date the application is filed. Developing WTO countries were given a 10-year transitional period to prepare for the agreement’s full implementation and to incorporate this 20-year patent protection into their own legislation. Egyptian legislators responded with Intellectual Property Rights Law No. 82 of 2002, which was implemented in the same year except for its articles on patent registration, which only came into effect on January 1 of this year. According to Rady, articles 55 and 56 of the law – which deal specifically with IPR issues for pharmaceuticals – are in full compliance with TRIPS regulations. In fact, the two texts are almost identical. However, the problem is not with the text of the law, but rather it’s interpretation. Much of the fuss is over trade secrets – the unique chemical formula and trial results behind a drug’s efficacy. In the US, trade secrets are defined as data exclusivity, a definition that protects their trade secrets even if they are public record. This means that even if a company’s drug formula and test results are published in newspapers, broadcast on TV or e-mailed to rival drug makers, no other company can use this information for any purpose for a set number of years. When American officials tried to insert a data exclusivity clause into the TRIPS agreement, other WTO member countries vehemently refused. The EU recommended instead a clause on “undisclosed information,” which requires that information be kept secret or undisclosed in order to be granted a five-year “trade secret period.” According to Article 39.3 of TRIPS, when signatory countries require the submission of undisclosed formulas or test data as a condition for approving the marketing of new pharmaceutical products, the country’s regulatory body must protect the data against “unfair commercial use.” Only when deemed necessary to protect consumers is this data to be disclosed to the public. In essence, TRIPS sets three criteria for “undisclosed information.” First, the information is secret; second, its importance is a result of its secret nature, particularly a medicine’s bio-availability and bio-efficacy; and third, the company has disclosed this information solely at the request of a country’s regulating body. The Egyptian government clings firmly to this definition, which is part of Law 82 for 2002. Moreover, it strongly disagrees with the argument of some multinationals that trade secrets, undisclosed information and data exclusivity are all one and the same. The government argues that TRIPS signatories never agreed to data exclusivity and that this definition is strictly a US law, not an Egyptian or international one. “We don’t have this concept of data exclusivity in Egypt,” Rady emphasizes. “We have trade secret protection only if the three conditions stipulated in the law exist upon the registration of the drug in Egypt.” He says there are two ways by which medicine can be registered in Egypt. The first, the most common route, is to use benchmark approvals. “This means that if a drug is registered and approved in countries such as the US, certain members of the EU or Japan – and we can verify that this drug is registered and has been tested by their regulatory agencies – we accept the registration of the drug.” Benchmark approval operates on the principle that if a drug was able to pass the stringent requirements of regulatory agencies in developed countries, it should be able to pass the less restrictive requirements of the Egyptian government. This not only spares the government the enormous time and cost of drug testing, it avoids the need for demanding drug makers to submit their trade secrets. “I don’t request a formula or any other piece of information from the company,” says Rady. “The onus is on the company to prove to me that this exact same product is registered and approved in these countries.” Only in cases where a drug is not already approved in a benchmark country does the Ministry of Health apply the second method of registration, drug testing and data gathering. In this case, the ministry requests that the drug company submits previously undisclosed data on a drug’s formula, efficacy and trials for it to review. “It’s only in this case that data is considered exclusive,” says Rady. “But this scenario has never actually taken place in Egypt.” And that infuriates R&D pharmaceutical firms such as Pfizer. Egypt should not depend on data gathered by other countries in order to register a drug, insists Hakim. If it chooses to do so, then it must grant the company “trade secret” status because its registration process relies on trade secrets revealed to regulators in other countries. “You have to develop your own data. And if you will depend on data gathered by others that is protected by ‘data exclusivity’ in these countries, you have to also give it the same status in your country. That is the spirit of the law.” Generics under fire Stressing the spirit of the law over its literal reading, some multinationals operating in Egypt have objected to the registration of drugs they claim were granted registration in violation of TRIPS. Some have taken their complaint to international lobby groups in the hope of bringing foreign political pressure to bear against the Egyptian government. In February, the press revealed that the Washington-based Pharmaceutical Research and Manufacturers of America (PHARMA) had urged US officials not to enter free trade agreement (FTA) negotiations with Egypt. In a letter to various Egyptian government officials and the US trade representative (USTR), the pharmaceutical lobby group expressed serious concern about the Egyptian Ministry of Health’s approval of 500 generic versions of patented drugs. It claimed that the ministry registered these drugs in clear violation of TRIPS provisions that provide protection for undisclosed information. Gad dismisses this claim as the latest attempt by multinationals to wipe out local competitors. “There is no way that that many medications could have been registered in such a short period of time,” he says. “This is nothing but an attempt to make Egypt look bad internationally and to fight the generic drug industry, which is the only way that poor Egyptians can access medicine.” Amoun’s Bassily concurs. Generic drugs are gobbling up the market share of international drug giants operating in Egypt and PHARMA is the latest tool for these multinationals to regain their market share, he says. “The truth of the matter is that the majority of Egyptians can only afford generics and the international companies are losing market share. They believe if they make enough noise and use their international connections, they will push the Egyptian government to pass laws that will give them an edge in the market. But this will not happen because, as things are now, the majority of the Egyptian population cannot afford their drugs right now. If Egyptians can’t afford them now, they certainly will not be able to afford them after their prices are raised.” Hakim, however, claims the local media is blowing things out of proportion. Newspapers that accuse the Egyptian managers of multinationals of being money-grubbing traitors are “misinformed” about the details of the situation. “This is not about fighting generics,” he stresses, “this is about protecting information on patented drugs.” He explains that every pharmaceutical industry in the world relies on both patented drugs and generics. “Research-based [drugs] go hand-in-hand with generics. When a company makes new products, generics are only produced after they fall into the public domain. They’re produced at a substantial discounted price that is one-fifth of the price before falling into the public domain. But this is not the case in Egypt. Generics are produced sometimes at 80 percent of the cost of the brand and in some cases it’s even more expensive to make them. You don’t see this anywhere else in the world.” The local press has vilified Pfizer because it has been the most vocal in protesting alleged patent violations. Hakim points out that while the company has indeed appealed to its international representation for support, it has done so only out of principle. Pfizer is not claiming that any of its drugs were among the medications registered in violation of TRIPS or Egyptian law since the beginning of the year, stresses Hakim, it is fighting this battle solely on a matter of principle. Even more sadly, several other international companies have opted not to even get involved, leaving Pfizer to shoulder the accusations on its own. Many international pharmaceutical firms that Business Monthly contacted declined to speak on the issue or insisted to speak off the record. One local manager of an international drug giant agreed that some recent drug registrations were somewhat questionable, but said his company would not pursue the matter publicly. “IPR protection is a problem, but I don’t think that making a lot of noise is the best way to solve the problem,” he said. “There is a lot of room for misunderstanding in this matter, so the best approach would be to address the issue with the government directly and quietly because otherwise you will lose public support.” Bitter pill to swallow The pharmaceutical industry – like any other business –
is about making money. In essence, the role of the drug companies
is to make effective medicine, while the government’s role
is to regulate the industry to ensure these drugs are safe and affordable
to all Egyptians. In the process, however, it must take care not
to suffocate the drug makers, as an industry collapse would be disastrous. |
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