Saudi Arabia boasts the largest pharmaceutical market in the Middle East & North America (MENA) and the Gulf. It is valued at SR 32 billion ($8.6 billion) and constitutes over 30% of the Middle East market. This growth is set to continue, with projections highlighting a market value of SR56.6 billion ($15.21 Billion) by 2027, reflecting a robust compound annual growth rate of 5.2%. Despite around >50 registered pharmaceutical manufacturing units, the domestic industry is still underserved, leaving ample room for growth and expansion. This gap presents a unique opportunity for international pharmaceutical companies to contribute to the Kingdom’s healthcare sector.
This article presents the opportunities as well as the challenges faced by the global players to leverage their capabilities and establish themselves in the high-margin innovative & branded drugs market.
Opportunities in Saudi Arabia Pharma Market
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Large Size and Affluent Market
A population of over 34 million is propelling a rise in demand for healthcare solutions in Saudi Arabia. The sales of patented drug consumption are supported by the population's wealth and the preference for branded drugs among consumers and prescribers, with patented drug spending accounting for 54.4% of the country’s drug market. It is the largest regional pharmaceutical market in terms of overall value. However, by drug per capita expenditure at $ 242, it ranks seventh in the region. Domestic players in Saudia Arabia's pharma industry are focusing on branded generic manufacturing owing to the higher quality perception of branded generic drugs.
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Epidemiological Profile and Health Infrastructure
The epidemiological profile of Saudi Arabia is similar to that of a developed country, with non-communicable diseases accounting for almost 84% of deaths, as per the WHO. Cardiovascular diseases (49%), ischemic heart disease (24%), and strokes (16%) are considered the three most prevalent chronic diseases by death. Saudi Arabia’s hospitals are among the best in the Middle East, while specialized tertiary facilities are comparable to facilities in Western Europe. Large-scale plans for infrastructure developments, including new hospitals and health centers, are being considered. The Kingdom’s healthcare system faces the challenge of catering to the needs of its residents, driven by an aging population, an upsurge in chronic diseases, and increased public healthcare awareness.
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Underdeveloped Local Industry and Contract Manufacturing
Saudi Arabia's pharmaceutical market is dominated by foreign drug makers owing to its rising preference for branded drugs and because it has a small domestic manufacturing industry. The leading local players include Saudi Pharmaceutical Industry and Medical Appliances Corporation (SPIMACO), Tabuk Pharmaceutical Manufacturing, Jamjoom Pharma, and Saudi Arabian Japanese Pharmaceutical (SAJA). Most pharmaceuticals are imported from developed countries. Multinational companies, including Novartis, Pfizer, Bayer, Bristol-Myers Squibb, Roche, and Eli Lilly, are present in Saudi Arabia. However, only GlaxoSmithKline and Sanofi manufacture locally. Instead, many multinational companies are opting to engage in contract manufacturing with Saudi Arabian drug makers to save costs. Saudi Arabia depends on imports for its active pharmaceutical ingredient ( API) requirement.
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Government Support, Import Substitution, and a Lack of Local Competition
Saudi Arabia's Vision 2030, along with the National Transformation Plan, aims to produce 40% of all drugs domestically. However, the local production of generic medicines is handicapped by weak domestic sales and a poor image of generic drugs. To encourage local manufacturing, the government is providing incentives, including free property leases, interest-free loans, and government subsidies, to both multinational subsidiaries and domestic companies. Further, growth in the tender-supplied market is expected in the coming years, supported by demographic and epidemiological trends. Saudi Arabia imported $5.9 billion worth of pharmaceuticals in 2019.
Challenges of the Pharma Industry in Saudi Arabia
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Non-prescription Nature of the Pharmaceutical Market in Saudi Arabia
Saudi Arabia’s pharmaceutical industry is among the highest-growing markets in the region, with a CAGR of 14.9% from 2015 to 2020. However, most domestic suppliers still lack sufficient resources, such as R&D infrastructure, manufacturing capacity, and capital, to fully exploit the market. Consequently, Saudi Arabia has a notably low percentage of original pharmaceutical products, at less than 4% of the market share. In contrast, non-prescription products make up about 70% of the pharmaceutical market in Saudi Arabia, with branded & unbranded generic products comprising the remaining 26%. This places Saudi Arabia below its ASEAN counterparts, including Thailand (with 8% originators) and Singapore (14%), in terms of access to innovative medicines.
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Bias in Favor of Local Firms
Saudi Arabia’s pricing legislation favors local manufacturers, and local companies currently produce around one-fifth of the domestic pharmaceuticals. A large proportion of these are not generic but patented pharmaceutical products manufactured under licenses from multinational drugmakers or through contract manufacturing agreements.
The Gulf Cooperation Council (GCC) countries are also aiming to develop their domestic manufacturing capabilities as a means of reducing their dependency on imports. The GCC regulations highlight that producers in member states are not required to acquire registration or licenses to export to Saudi Arabia. The regional producers are effectively given preferential treatment for entry into the Saudi market, particularly in the tendering system. In addition, regulations permit the supply of drugs only through Saudi intermediary agents. The import distribution is controlled exclusively by Saudi Arabian firms, led by Banaja Saudi Import Company in the private sector and the government purchasing unit NUPCO.
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Regulatory and Pricing Regime
Local producers or joint ventures are reported to enjoy far shorter product registration times than multinational firms. For example, for imported products, the process often takes years, while for local items, the approval time can only take three months. The drug registration system also acts as a significant barrier to entry for most foreign firms, as it requires drugs to have been previously marketed in two 'developed' markets before they can get approval in Saudi Arabia. This virtually allows only large players to operate in the country. The complex domestic regulatory system also restricts the entry of multinational firms from developed countries. Pricing is biased in favor of the local industry, especially in tenders. The tight government control on prices has resulted in the lowest drug prices in the region.
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The Right Strategy
Global pharmaceutical companies can garner a significant share of the lucrative innovative drugs market with the combination of the right strategy, investments, and expertise. Most developing countries have leveraged the self-funded growth model. It emphasizes technology transfer and government support for local industries in the form of financial and legal incentives. China and India serve as glaring examples of this strategy. However, the self-funded model suffers from inefficiencies and a slow growth rate. An alternative is the FDI growth model exemplified by Ireland and South Africa. The self-funded model emphasizes a level playing field and investment in education and history has demonstrated that most countries, including Saudi Arabia, are moving toward a mix of the self-funded growth model and FDI growth model. Hence, we propose some strategies that can be leveraged by global players in the Arabia pharmaceutical market.
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Collaboration with Local Partners
An effective approach to entering and establishing a presence in Saudi Arabia involves partnering with a local entity that has strong connections to pharmaceutical distributors. Multinational companies, such as Novartis, Pfizer, Sanofi, Merck, and GlaxoSmithKline, are establishing a robust presence in the Kingdom through direct investments or partnerships with local entities.
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Addressing the Unmet Needs of the Population
There are multiple disease areas, such as cardiovascular, cancer, and immune system disorders, which are underserved and can be tapped into. Saudi Arabia has limited options with respect to low-cost generics and innovative & branded drugs.
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Import & Local Production
The global players need to engage in the local manufacturing of pharmaceuticals rather than relying on importation, as the high cost of importation will deter the objective of faster market share growth, which is also in line with the policies of the Saudi Arabian government. Saudi Arabia's generic drug market is supported by the government's encouragement of generic substitution to control costs. It also acts as a significant growth driver of this trend. This is particularly true considering the Saudi Vision 2030 and National Transformation Plan 2020, which has already drawn attention from Merck Sharp & Dohme, Sanofi, and Julphar Pharmaceuticals. Saudi Arabia's target to produce 40% of all drugs domestically in the long term is ambitious but can only be achieved with enough investments. The plans for closer regional integration and a greater emphasis placed on drugs produced within the GCC should boost this segment.
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Government Support and Incentives
The government has highlighted the pharmaceutical industry as a focus area for investment. Incentives for establishing new pharmaceutical companies include free property leases, interest-free loans, and government subsidies. The global players should plan accordingly to extract the maximum benefits from these incentives.
Conclusion
As Saudi Arabia continues to align more with common practices in the developed markets regarding quality and pricing, the market share for the innovative and ethical drugs segment is projected to grow. Saudi Arabia’s regulatory bodies are also planning to strengthen the drug distribution process, which will likely favor ethical drug distribution and increase healthcare expenditure.
Saudi Arabia looks like a promising country for large global players, with a focused strategy to gain the maximum as it opens itself to the world.
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