Should sub-Saharan Africa make its own drugs?

McKinsey 10 Jan 2019 12:00

A comprehensive analysis of the business, economic, and public-health impact finds the potential for local production of pharmaceuticals to be a mixed bag.

With imports comprising as much as 70 to 90 percent of drugs consumed in most countries in sub-Saharan Africa, many governments are considering whether it’s time to promote more local production. Drug imports, including both over-the-counter and prescription drugs, do considerably exceed those into China and India—where comparable populations import around 5 percent and 20 percent, respectively. And it does put strain on government and household budgets and already limited foreign exchanges.

To better understand the realities of promoting local drug production, we undertook a systematic analysis of the current state of the market. The analysis focused on simple, small molecules, such as generic drugs, since the economics and technical challenges would vary for more complex products, such as combination drugs, injectables, and vaccines. We evaluated the costs and benefits of increasing production not only in economic terms but also in their impact on the wider economy and on public health systems. We then compared that to local measures of feasibility, including government will, demand, investment attractiveness, and implementation capacity, especially with respect to quality (Exhibit 1).

The analysis depicts an opportunity that varies from country to country. In some countries, a manufacturing hub is unlikely to be economical. In a half dozen or so others, such a hub could be viable if it can overcome structural obstacles—a relatively small, if growing, market; a global excess of manufacturing capability for some kinds of drugs; unreliable infrastructure; and an underdeveloped talent base. For those countries, a local industry might make drugs modestly more affordable—an important factor in an area where out-of-pocket drug costs can be a significant impediment for all but the most wealthy consumers. It could also improve public health, enhancing access to drugs at a time when the donor programs that have long provided drugs in some countries are facing flat or declining budgets. Even there, however, the effect of local production on jobs and GDP would likely be minimal relative to the size of these economies overall.

In sub-Saharan Africa, only Kenya, Nigeria, and South Africa have a relatively sizable industry, with dozens of companies that produce for their local markets and, in some cases, for export to neighboring countries. Local producers also play in a limited range of the value chain. Almost all of them are drug-product manufacturers—that is, they purchase active pharmaceutical ingredients (APIs) from other manufacturers and formulate them into finished pills, syrups, creams, capsules, and other finished drugs. Up to a hundred manufacturers in sub-Saharan Africa are limited to packaging: purchasing pills and other finished drugs in bulk and repackaging them into consumer-facing packs. Only three—two in South Africa, and one in Ghana—are producing APIs, and none have significant R&D activity.

For most countries in sub-Saharan Africa today, this is largely a theoretical scenario. With current facilities, costs there today are typically higher because production facilities generally have less capacity and lower utilization rates than plants in India. Moreover, the affordability of drugs also depends on the structure of local supply chains, which differs between regions. Supply chains in anglophone countries of sub-Saharan Africa are more informal than in francophone countries. Markups and pricing are often unregulated in the former and also feature substantial numbers of informal stores.

Another arena in which we expect increased local drug production to have positive effects is in the regulation and quality assurance of drugs in local African markets. In Ethiopia, for example, the government’s desire to spur local drug manufacturing has come hand in hand with a commitment to strengthen its national drug regulator, the Food, Medicine, and Health Care Administration and Control Authority. The government has also committed to reducing delays in product registration, ferreting out counterfeit drugs, and pushing manufacturers to meet standards required for exports. Overall, Ethiopia is investing ahead of the curve in regulatory capacity. Although its pharma market is only valued at approximately $600 million, its regulator’s budget is $6.6 million, a higher ratio than observed in Brazil, Russia, and Turkey.

Thus, as old plants get upgraded and new plants get built, companies in sub-Saharan Africa should ensure that they will meet a certain threshold of production while ensuring that there is sufficient market demand to maintain health utilization. Companies should estimate the necessary break point for their specific mix of products and location, and plan their investments accordingly. Country governments might also reconsider incentives to companies that meet competitive levels of production.

There is already a broader movement to create freer trade across Africa. The newly established Continental Free Trade Area (CFTA) seeks to bring the 55 members of the African Union together. By spring 2018, 44 states had formally joined CFTA. Predating the CFTA, regional economic communities have also been working on removing tariff and nontariff barriers to trade.

There are some who have questioned the ability of the countries in sub-Saharan African to build a local pharmaceuticals industry, and others who question the wisdom of doing so. To those skeptics, the analyses presented here should provide comfort that the potential for building a robust local industry could be real in some countries under the right conditions. It is now for public- and private-sector leaders in the region to decide whether to try.

About the author(s)

Michael Conway is a senior partner in McKinsey’s Philadelphia office, Tania Holt is a partner in the London office, Adam Sabow is a senior partner in the Chicago office, and Irene Sun is an associate partner in the Nairobi office.

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sub-Saharan AfricaIndiaEthiopiagovernmentAfrica
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