BMI Core View: Offshoring manufacturing to low-cost bases will accelerate. Multinational drugmakers are seeking to cut costs during the patent cliff. Consequently production is being shifted to emerging markets where locally generated revenue is fed back into their domestic operations, reducing repatriation of funds and exposure to currency fluctuations. The key attributes of a manufacturing hub based in an emerging market are: a favourable tax regime, political stability, a strategic location close to consumers and affordable utilities, real estate and waste management systems.
French multinational pharmaceutical company Sanofi has recently laid the foundations for an industrial facility in King Abdullah Economic City (KAEC), Saudi Arabia. Sanofi will reportedly be the first global pharmaceutical company to establish a manufacturing plant with 100% foreign direct investment.
Philippe Luscan, Sanofi's SVP for industrial affairs, stated that 'the encouraging investment environment and solid economic situation in Saudi Arabia has had a conclusive effect on our decision to go ahead with this project.'
Various multinational pharmaceutical companies including Sanofi, Pfizer, Merck & Co, GlaxoSmithKline (GSK) and Novartis have access to the Saudi Arabian pharmaceutical market through imports. GSK and Sanofi are, however, the only players to have established manufacturing sites in the country.
BMI notes that in April 2009, the Saudi Arabian General Investment Authority (SAGIA) and Emaar the Economic City (EEC) struck a deal with Sanofi-Aventis to set up a unit in the King Abdullah Economic City (KAEC). At that time, Sanofi was the first pharmaceutical company to establish a major presence in the KAEC. The factory focused primarily on producing antibiotics, diabetes drugs, gastrology and oncology medications; presumably areas where the company wanted to increase brand awareness amongst the affluent and brand-conscious Saudi population. BMI viewed this set-up as Sanofi attempting to increase its brand recognition in Saudi Arabia, where it was predominantly known by diabetes patients with few others aware of its product portfolio. BMI expects Sanofi's new, fully owned manufacturing facility to build on this previous strategy with increased focus on medicines to treat patients with illnesses in several therapeutic areas: cardiology, thrombosis, oncology, metabolic disorders and internal medicine.
Favourable Environment For Multinationals
Saudi Arabia has a wealthy, largely urbanised, growing and aging population that is adopting a more Western, unhealthy lifestyle. Consequently, non-communicable diseases will continue to be a major burden in the long-term. The disease burdens expected to increase the most are: diabetes, cardiovascular disease, gastrointestinal disorders, respiratory ailments, hypertension and obesity. Saudi Arabia is already listed in the top five most obese countries in the world. This epidemiological trend offers significant commercial opportunities for multinationals with a strong chronic disease product portfolio that are penetrating markets with a favourable drug-pricing system to maximise revenues.
As well as enjoying a favourable demographic and epidemiological profile, drugmakers with local manufacturing facilities are better positioned than the country's import partners to benefit from the general increase in drug consumption. The modernising healthcare sector and continuing expansion, will result in increased accessibility to medical care. Saudi Arabia's growing oil wealth will ensure that the affluent population continues to prefer branded medicines, resulting in greater demand for patented medicines. BMI highlights that multinationals with a local manufacturing presence, generating revenue from locally manufactured patented drugs are in a stronger position than importers to maximise sales revenue without being subject to currency fluctuations and repatriation.
|Preference For Patented Drugs|
|Saudi Arabia's Pharmaceutical Market Sub-Sectors|
Key Risks To Outlook
BMI emphasises the biggest risk to multinationals seeking to boost sales revenue through the country's preference for patented medicines is the government's drug-pricing policy. Furthermore, concerns over the exposure of product exclusivity means patented drug sales are at risk of erosion due to the availability of generic alternatives before patent expiration. Finally, a long drug registration period is a disincentive to product introductions, especially of novel drugs.