The Middle East and North Africa is a region once again on the radar, following recent rumours that Valeant is considering a bid for Egypt’s Amoun Pharmaceutical.
While there has been no shortage of global M&A activity in the sector this year, this is one of the first potential deals drawing our attention back to the particular commercial opportunities characterising this region.
Amoun, operating since 1998, is one of the largest branded generic manufactures in Egypt, with a portfolio of human and veterinary medicines in addition to supplements. Valeant, headquartered in Quebec, has had a busy start to 2015, so far acquiring Dendreon, known for its cell-based immunotherapy Provenge in prostate cancer, and Salix Pharmaceuticals, heavy in the specialty gastrointestinal space.
So, how does a potential acquisition of Amoun fit into the picture? To dig a little deeper and put this into context, we thought we’d look at some of the forces that have been shaping the healthcare landscape in Egypt. Despite the uncertainty and conflict that have rocked the country in recent years, it remains a dynamic market, much like several of its neighbours.
Pre- and post-revolution
Despite lingering doubts about the extent of the country’s 2005 implementation of the TRIPS IP regime, Egypt was at that time well positioned to benefit from global pharma’s burgeoning interest in emerging markets. In the same year as TRIPS implementation, Amoun registered a 34.25% increase in revenues, coming in at USD75.2 million. This dynamism drew a consortium of private-equity investors to acquire the company in 2006.
In 2010, Egypt’s pharmaceutical market grew by as much as 15%, achieving USD3.9 billion. At the time, 120 firms were reported to be operating in the country, of which GlaxoSmithKline and local players EIPICO, Medical Union and Pharco, alongside Amoun, were thought to comprise 30% of the market.
This ambitious trajectory was shaken by the revolution in 2011. While the country has since stabilized under President Abdel Fatah el-Sisi, the aftereffects continue to impact the country’s pharmaceutical sector. By mid-2011, it was reported that the number of local manufacturers had fallen to 40, leading to a 50% drop in production.
Compounding the immediate effects of political instability, ensuing credit downgrades and currency devaluation effectively priced out importers of raw materials, while foreign currency shortages meant local firms were unable to meet increasing demands for downpayments.
Since that time, the country has faced repeated drug shortages. In recent years, inadequate supplies of subsidised milk for infants and insulin for diabetics have been reported, and the Egyptian Centre for the Right to Medicine threatened to file suit against the government following the deaths of haemophiliac patients unable to access essential treatment. The government has since established a Drug Shortages Directorate which has begun publishing periodical bulletins on drugs facing shortages in the hope that early warning of healthcare professionals can help stem the problem.
Ambitions for reform
Against this backdrop, Valeant’s rumored play for Amoun could be seen as high risk. That the company might be a tempting acquisition target arguably hinges on two key factors.
First will be the success of the Egyptian government’s long-standing ambition to expand health insurance coverage, a project still pressing ahead with World Bank support despite an economy in flux. USD75 million has been earmarked for phase one, which will focus on expansion of coverage in the most rural and poorest parts of the country. Aumon’s established footprint, now set against reduced competition in the domestic market and the prospect of increasing healthcare spend as a result of these reforms, helps explain its appeal within Egypt.
That said, at present, out-of-pocket spending is thought to account for over 70% of health expenditure in Egypt – and that’s with roughly two-thirds of the population covered by the country’s Health Insurance Organisation. Ambitions of full universal coverage, before they can significantly expand access to medicines, will have to contend with this reality, as well as significant infrastructure challenges – the latter having recently prompted the Egyptian government to approach the World Bank for an additional loan on the scale of USD300 million to go toward replacement of equipment and, notably, addressing drug shortages.
Past and ongoing inflows of aid from Gulf countries, however, mean Egypt may well weather the storm. This aid has helped the country to shore up government finances and address fuel shortages. Some of the support coming from the UAE in 2013 was known to be earmarked for construction of primary healthcare units and a number of vaccine production lines. While there were some questions surrounding the extent to which this support would continue up against declines in oil revenue across the Gulf, in March of this year, Kuwait, Saudi and the UAE pledged a combined total of another USD12 billion in aid and investments.
These resources provide Egypt with an immediate lifeline, while the direction of travel that the country is taking with regards to healthcare reform is promising. In the long run, the government aspires to implement a system of universal healthcare revolving around patient choice.
The broader MENA region
A large market in its own right, Egypt also offers a low-cost base and strategic point of entry into the broader Middle East and North Africa (MENA). This is the second factor explaining the value Amoun might bring to a potential acquirer. Indeed, the company is an established exporter across MENA, a fact playing no small part in its sales forecast of USD230 million for 2015, translating into a 4-year CAGR of 21%.
Alongside Egypt, MENA is home to a number of other large and rapidly growing markets, including Saudi Arabia and Turkey. Pharmaceutical market growth rates across key countries in the region continue to display robust CAGRs of around 10%. Healthcare in general continues to exhibit high growth potential, growth aided by the fact that a number of markets are, like Egypt, on the brink or in the midst of implementing ambitious healthcare reforms with scope to significantly enhance market-access opportunities.
The branded generics strategy is one path to MENA. Research that we recently completed for our latest multi-client study has revealed the region’s opportunities – current and emerging – for manufacturers of innovative medicines. Learn more about our new study, “Market Access in the Middle East: How Pricing Reform Impacts Pharmaceutical Uptake Strategies,” and get a sample chapter.
Cameron Lockwood is a life sciences analyst for IHS
Posted 2 June 2015