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Why isn't South Africa the new India for pharma?

20 November 2013 Mark Hollis

South Africa's got a lot going for it, great beaches, sunshine (important to us Brits), plentiful wine. But what it doesn't have is a significant generics manufacturing industry. On paper, South African drug manufacturers have it all; the virtually untapped Sub-Saharan African markets in close proximity, a robust IP environment, low cost labor and bountiful cheap natural resources. So why, beyond a handful of companies, have South African manufactures failed to grow to rival large Indian companies? And why isn't South Africa the next big place for drug development?

Well, an obvious difference between the two countries is population size. Unlike the multinational monoliths we see now, Indian companies were first engaged in the manufacturing of products for the Indian market - the large Indian population acting something like an incubator for drug manufacturers, before expanding internationally. The sheer size of the market has lended Indian manufactures an economy of scale realized in lower manufacturing costs. Given that the South African market only has a population of 48 million, even the most protectionist policies would not be enough to cultivate serious growth comparable to that produced by India's 1.2 billion.

And a general lack of protectionist policies serves another challenge acting to stymie the country's manufacturing potential. The South African public healthcare system is heavily skewed towards cost containment - mainly through the use of tendering. These tenders predominantly prioritize price, stability of supply and combination products above that of the origin of producers. Although capturing a large percentage of these tenders, many South African companies still lose out to international companies.

The South African market also presents another challenge in the form of regulatory delays. At present it takes north of three years to get product approval in South Africa, this likely acting to dampen the market. In addition, for generics companies, some commentators argue that the current South African IP environment allows ever greening. This will however likely change in the future with a new IP policy promising changes which will make it more challenging to obtain a patent.

Turning away from domestic markets and looking at the regional view, South African producers should, in theory, be able to tap into the fast growing markets of its northern neighbors across Sub-Saharan Africa. In reality, these markets have already seen significant penetration by Indian producers. With their higher manufacturing costs South African companies cannot hope to compete. There may, however, be one ray of hope and that may be in investing and moving into the cardiovascular and oncology space. Many countries in sub-Saharan Africa have a sizable risk factor profile for the spread of non-communicable diseases in the future. With Indian companies primarily focused on supplying Sub-Saharan Africa with anti-infectives and essential medicines the time may be right for South African companies to look at expanding into the African oncology and cardiovascular space.

The truth may be that South African companies have already missed out on the chance of an Indian style industry and may want to look for models elsewhere. Israel for example, punches above its weight, not through bulk manufacturing but through innovation and research - perhaps South Africa could examine strategies in this direction.

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