ME TOO - Welcome new investment in the generic drug industry

Mar 25th 2004 
The Economist
Port Elizabeth


GONE are the days of a simple pestle and mortar. A new drug-making factory
in Port Elizabeth will open in May, complete with air-locks, depressurised
rooms, double-thickness windows, pipes of purified water and gleaming
machinery. Built for 150m rand ($23m), and matching European Union
standards, it will be capable of doubling the annual output of Aspen
Pharmacare to more than 5 billion tablets, mostly generics. Aspen, already
Africa's largest drug manufacturer, is growing. On March 10th it announced
the 270m rand purchase of Fine Chemicals, a firm that makes the raw
materials of many medicines in tablet form.

South Africa's drug industry can expect further growth from its current 20
billion rand in annual sales. Adcock Ingram, a rival, recently announced a
joint-venture with India's largest drugmaker, Ranbaxy Laboratories. Called
Thembalami, the new firm will make 13 types of generic medicine, if approved
by the Medicines Control Council and patent-holders.

Two factors are behind the growth of generics. The South African government
wants prices of branded drugs slashed by as much as 50% by May, and is
pushing the wider use of cheaper generics. Some multinational firms, such as
Boehringer Ingelheim, this week threatened to cancel new investment in South
Africa if sharp price cuts on branded products go ahead.

Second, and as important, is the demand for anti-AIDS drugs. South Africa is
gripped by the world's largest AIDS epidemic: an estimated 5m people, some
11% of the population, are infected with HIV. The government said in
November that anti-retroviral drugs, which do not cure the disease but can
prolong a patient's life, will be given free in state hospitals and clinics.
Perhaps 1.7m South Africans need such treatment. A typical dose of three
types of medicine—five pills—is needed each day.

South Africa's government is painfully slow at implementing its decision.
Only two of nine provinces have programmes to provide the pills. The health
minister, Manto Tshabalala-Msimang, is notoriously sceptical about their
usefulness. Her scepticism, and a genuine concern that drugs should be
distributed safely, are delaying provision. Some 40 firms, including Aspen
and Adcock Ingram, that bid to supply cheap generic anti-retrovirals to
state hospitals, must now wait until June (not March, as planned) for a
decision.

Aspen is likely to win a large tender. It holds “voluntary licences” from
drug multinationals Bristol-Myers Squibb, GlaxoSmithKline and Boehringer
Ingelheim to make generic versions of their anti-retrovirals. In October it
won a contract from the foundation of former American president Bill Clinton
to supply the drugs to charities and governments in other parts of Africa
and in the Caribbean. Last August it launched Stavudine, the first
anti-retroviral to be produced in Africa.

Sales in the rest of Africa are also likely. Exports of generic AIDS drugs
are no longer banned (for least-developed countries) by international trade
laws. Aspen estimates that 4m Africans now need the drugs, but fewer than
100,000 get them. Many African countries say that anti-retrovirals will be
given free in state hospitals.

So the new facility in Port Elizabeth will be in demand. But what of
profits? No drug firm dares to say that the AIDS epidemic could be
lucrative. A spokeswoman for Adcock Ingram talks piously of making drugs to
serve South Africa's “general economic health”. There will just be
“razor-edge” profits, she says. The price of a basic daily anti-retroviral
dose for one patient is now under $1; the Clinton Foundation will provide it
for less than 40 cents.

Aspen's boss, Stephen Saad, is more frank: “Anti-retroviral production helps
to absorb costs; the greater volumes make expansion easier and
cost-effective”. As Aspen's total output grows, thanks to AIDS drugs, there
are economies of scale. For example its antibiotics should be cheaper to
produce in the new factory.

Indeed, given the volumes of pills needed, Mr Saad sees a chance for South
Africa to develop a serious chemicals industry. Around 70% of the cost of
making a typical pill is the ingredients. Owning Fine Chemicals gives Aspen
more control of its production chain. As capacity to make generics grows,
and as foreign patents on anti-retrovirals expire (many of those licensed to
Aspen end in 2005-2012) there will be a chance to export to rich markets. An
example, as the saying goes, of doing well by doing good.