Pharma funding is plentiful but MENA countries seek greater innovation

HONG KONG – Rules imposed by Sharia Law are often a concern for individuals or small companies in underfunded sectors in the Middle East and North Africa (MENA) region, but they are less of an issue for cash-rich industries. The good news is that most biomedical companies in MENA fall under the latter category.

Traditional sources of funding include loans and lines of credit that allow companies to tap funds in exchange for interest payments.

Sharia Law, which governs the behavior of Muslim individuals and companies, includes restrictions on what interest can be charged – at the core of Islamic finance is the idea that none should earn income from money itself. Much of Islamic finance is based on the idea of sharing risk.

With plenty of money in hand, however, pharmaceutical companies in MENA are rarely affected by the complicated demands of Islamic financing rules.

“In the Saudi Arabia market, 90 percent of the company funding comes from internal [sources]. Most of the companies they have are entirely profitable businesses,” explained Rajesh Singh, manager of investment research at Saudi Arabia’s Ithraa Capital. “There’s not much impact from Islamic finance in this region for any company.”

Companies can, for example, tap into the markets via IPOs that are generally oversubscribed five or six times, said Singh. The result is plenty of capital.

“There’s not much leverage you’ll find on the balance sheet,” he said.

And, when they want to expand, companies might find options other than borrowing – an option that is not practicable under Islamic finance rules that forbid interest charges.

“If they want to expand their footprint, they will go out and do some joint ventures,” said Singh.

Another source of funds is government spending, which is often higher in the oil-wealthy MENA countries. Government spending almost guarantees sales for companies and facilitates expansion.

Saudi Arabia’s health care expenditures, for example, account for about two-thirds of the country’s entire health care market and 3.7 percent of GDP at $937 per person per year, which puts it in sixth place in the region. Out-of-pocket expenditures account for just 20 percent of health care spending, which shows the government’s commitment to provide universal health care access.

The combined value of Saudi Arabia’s pharmaceutical and health care markets is the largest in the MENA region. According to BMI Research, Saudi Arabia’s pharmaceutical market is worth $7.56 billion.

Interestingly, finding savings in generic products is of little interest for most consumers or doctors, who generally prefer branded drugs. Patented drug spending accounts for 65 percent of the country’s prescription drug market, and prescription drugs make up almost 90 percent of pharmaceutical product sales.

MENA countries also have some of the highest prices for pharmaceutical products in the world. According to the World Health Organization, countries that are part of the Gulf Cooperation Council (GCC) pay as much as 13 times more than international standard prices for drugs.

Such high levels of spending are attractive, not only for domestic companies that may have to deal with Islamic finance rules, but also for international companies in search of market share. The market is particularly attractive for R&D-heavy biotech start-ups, which are welcomed throughout the region with open arms and open wallets.

ATTRACTING MORE INNOVATION

Israel, in particular, has emerged as a hub of biotech innovation.

“Israel is very successful in promoting start-ups in biopharmaceutical and especially medical devices,” said Mark Hollis, senior life science analyst at information provider firm IHS. “They have a model of larger companies running incubators to help provide business support for start-ups.”

“The MENA area is diverse but the Gulf region is the major area that’s attracting interest,” said Hollis. “The attention is around lifestyle diseases, especially type 2 diabetes, which is going to be a major health care issue in that region in the very near future.

“We are seeing most of the Western pharmaceutical companies investing in the region,” Hollis added. “There’s quite strong brand loyalty for Western pharmaceutical products in the Gulf region that could make it hard for domestic companies to capture market share.”

Foreign drugmakers dominate the market while domestic production supplies around one-fifth of the market by value.

Leading local players include Saudi Pharmaceutical Industries and Medical Appliances Corporation (SPIMACO), Tabuk Pharmaceutical Manufacturing, Jamjoom Pharma and Saudi Arabian Japanese Pharmaceutical (SAJA).

The majority of pharmaceuticals are imported from developed countries, including Switzerland, Germany, the U.S. and the UK. Novartis AG, Pfizer Inc., Bayer AG, Bristol-Myers Squibb Co., Roche AG and Eli Lilly and Co. all have an extensive presence, but only Glaxosmithkline plc and Sanofi SA have local manufacturing facilities.

Most countries in the region want to change some of that. They are keen to attract more research and innovation.

“Governments in the region are also keen to attract the pharmaceutical companies to manufacture in country to diversify their economies from oil,” said Hollis.

Drug prices may also be coming under pressure, particularly as countries add tariffs and put in place value-added taxes.

“We see price harmonization at the moment across the Gulf region of GCC states,” said Hollis. “So companies importing certain biopharmaceutical products would have to conform to this harmonization.”

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