Egypt: Drug Price Hikes Highlight Market Volatility

Profitability in the Egyptian pharmaceutical industry remains constrained by tight price controls

Egypt has attracted a strong presence from multinational pharmaceutical companies. However, current turmoil over drug shortages and drug price hikes underscores the volatility of a market characterized by high out-of-pocket spending. Amid the economic instability that followed the 2011 Arab Spring, President Abdel-Fattah El-Sisi’s government has been struggling to counter drug shortages. Low foreign currency supplies have raised manufacturing costs and squeezed profits in a sector regulated by strict price controls. This led to the withdrawal of certain products from the market. In response, the government reformed its drug pricing system to allow for re-evaluations in light of changing costs. The result – higher drug prices – has sparked political controversy in a country blighted by poverty. The heat was turned up this month by the most far-reaching drug price hikes to be mandated under the new pricing system.

Poor provision

Some 56% of health expenditure in Egypt was paid out-of-pocket in 2014, according to the World Health Organization (WHO). With pharmaceutical purchases at pharmacies accounting for nearly half of out-of-pocket payments, access to medicine carries a significant financial burden for individuals; nearly 28% of Egyptians live below the poverty line, according to government statistics.

Although 50% of the population is covered by basic state health insurance, fiscal constraints limit services. Public healthcare facilities have long been underfunded and poorly maintained. Egypt's 2014/2015 economic and social development plan targets a comprehensive health insurance package for all Egyptians by 2030, but with social unrest still posing a threat, tight control of medicine prices remains a key policy imperative.

Pricing reform

Drug prices are regulated by the health ministry’s Central Administration of Pharmaceutical Affairs (CAPA), which sets compulsory product retail prices. Wholesaler and ex-factory prices are controlled by subtracting fixed percentages off retail prices. Until 2012, the pricing system used a cost-plus method based on manufacturers’ cost sheet reports upon product entry to the market. Prices were rarely re-evaluated.

To counter the drug shortages caused by the profit squeeze on companies importing foreign medicines and raw materials for production, the CAPA introduced a new external reference pricing (ERP) system. This sets the domestic retail price of an innovator product at 10% below the lowest retail price in 36 reference countries. Prices for generics are set at a fixed percentage markdown from the originator company’s price. Ex-factory and wholesaler prices remain fixed relative to the retail price. Crucially, the 2012 drug price decree permitted price reviews in cases of new indications and exchange rate fluctuations. Companies can submit an updated product cost sheet for up to 5% of their registered portfolio annually.

Political quagmire

Price changes took place in 2012 and 2013 and the new pricing policy was expanded to more products in 2014 and 2016. The government claimed publicly that the new system would reduce prices, but pharmacists report that most changes have been upward, severely hampering affordability and access.  The issue has fallen into a deep political quagmire, with the government forced to defend itself from accusations that it has bowed to pressure from the pharmaceutical industry. Simultaneously, it has been clamoring to remedy drug shortages caused by a foreign currency crunch.

Problems deepened in November 2016, when, under pressure from the International Monetary Fund, the government abandoned a currency peg of 8.8 Egyptian pounds to the US dollar. This caused the pound to halve in value, rendering scores of medicines unprofitable to produce or import. Far from a panacea, another round of drug price increases this month looks set to stoke political and public unrest.

Currency float

Unpegging the pound helped the cash-strapped government to secure a US$12bn IMF loan. Economists expect the currency devaluation to boost Egypt’s external competitiveness and encourage foreign investment and foreign currency supplies. However, soaring inflation – however short-term – leaves the government walking a tight-rope. On one hand, it must protect industries such as pharmaceuticals and fertilizers from the effects of currency depreciation by easing price controls; on the other hand, it must shield the Egyptian public from crippling price hikes on essential goods. Although increased subsidies to industry is an option, this would scupper efforts to reduce Egypt’s fiscal deficit.

Following the currency float, pharmaceutical companies face paying twice as much for imported finished drugs and active ingredients for production. Yet, despite the 2012 move to the ERP system, they remain unable to raise prices in line with cost increases. In the closing weeks of 2016, pharmacies reported unprecedented levels of drug shortages. Stocks of some oncology drugs, as well as standard medications such as insulin, ran dry. Pharmaceutical companies argued they had to halt production of some products to stay in business.

Resisting calls from the pharmaceutical industry to allow a blanket increase for all drugs, the health ministry in January announced a decision to raise prices on 3,000 of the 12,000 medicines currently available on the market. Previous rounds of increases under the new pricing mechanism had affected far fewer products. Of these 3,000 products, prices of locally produced medicines will rise by 15%, while prices of imported products will increase by 20%. Drugs to treat chronic diseases will rise by a maximum of 10%.

Since these increases do not keep pace with soaring costs, the chances of securing the availability of essential medicines remain slim, but more products have been rendered unaffordable. Civil society groups such as the Egyptian Center to Protect the Right to Medicine have warned of an impending catastrophe. Egypt's Pharmacists Syndicate has threatened legal and strike action against what it referred to as a damaging and “random pricing policy”.

Conclusion

Despite its longer-term potential, profitability in the Egyptian pharmaceutical industry remains constrained by tight price controls. Efforts to ease the pressure on drug makers with the gradual introduction of an ERP system, have increased the burden of medicine costs on the general public and failed to shield pharmaceutical companies from economic turbulence. Government reassurances that the populous will be protected from the worst effects of structural reforms sound increasingly vacuous in the face of double-digit inflation and ongoing drug shortages.  Government expenditure on health as a percentage of total government expenditure was a paltry 6% in 2014 – unchanged since pre-2011 (WHO). In the absence of adequate health insurance to protect individuals from spiking medicine costs, the government will come under intense pressure to commit much higher levels of public finance to help improve access to medicines while the economy stabilizes.

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