Why Kenyan drug manufacturers are walking a tightrope

Somewhere on Rangwe Road within Nairobi’s industrial district, Cosmos Pharmaceutical, a family business founded 30 years ago, is thriving against all odds.

Beyond its traditional stronghold in cardiovascular and diabetes medicines, Cosmos has widened its scope of production to include other human and veterinary brands in its stable.

So far, government tenders, tight control on supply chain costs and a burgeoning regional market have guaranteed mass production of “affordable” drugs, putting most of its installed capacity to use and sustaining 530 jobs.

“Cosmos is currently operating at 70 percent of its installed capacity against the industry’s national average rate of 50 percent,” says Mr Rolando Satzke, the chief executive hired by Cosmos recently after serving a 30-year stint at a multinational corporation.

“We have a target to produce 150 million units in 2018 for domestic consumption and export markets like Tanzania, DRC, Uganda, Ivory Coast and Rwanda.”

But 30 kilometres away in Kikuyu, another generics drug maker, the Universal Corporation, has a different story altogether. The firm which employs 395 people and has World Health Organisation (WHO) prequalification for essential medicines, hardly receives State orders despite increasing cases of lifestyle diseases in Kenya. A prequalification means WHO has cleared a drug for standards of quality, safety and efficacy.

“Our star performing product at the moment is a drug for treating diarrhea in children but a lot of our capacity still lies idle most of the time,” says Mr Prashanth Pai, head plant operations at Universal Corporation. Two months ago, the firm also received WHO prequalification for its anti-malarial drug but to date, none of the six East African Community states has placed an order for it despite the prevalence of disease in the region.

“Our capacity is designed to run in two shifts but without a steady order book, we find it hard to plan,” Mr Pai said of the firm whose daily operations currently oscillate between 35 and 40 percent.

Kenya, Tanzania, Uganda, Rwanda, Burundi and South Sudan have intensified efforts to promote local manufacturing to boost drug supply security.

The EAC region is estimated to have a huge market for medicines but 70 per cent of this is in the hands of Asian firms which are supplying cheaper alternatives. Cosmos estimates that Kenya’s drug market is worth Sh100 billion followed by Tanzania’s Sh70 billion and Uganda’s Sh50 billion.

Investors say local manufacturing is not a walk in the park. A producer based in any of the six EAC states must import active ingredient (raw material) from China, India or Malaysia since they are not available in the region. That makes it virtually impossible to compete with Asian counterparts who have internal active ingredients production units. Interviews with manufacturers reveal that active material price account for 50 to 80 percent of ex-factory cost of drugs depending on scale of production.

In East Africa, active ingredients do not attract import duty but industry players say they still have to pay import declaration fee, railway development levy and VAT on top of demurrage costs at the ports.

Once in the market, supply chain players also adjust costs at every point with manufacturers saying hospitals load a 200 per cent mark up on sale price of medicine.

“By the time it gets to the consumer, the price of local medicines are generally four times higher than international reference prices,” notes Mr Satzke. “The cost of medicine manufactured in Kenya on average accounts for 50 per cent of hospital cost compared to developed country’s level of about 25 per cent.”

While the huge volumes have guaranteed the benefits of economies of scale to players like Cosmos, a number of firms are preoccupied with cost cutting to stay afloat.

A number of firms interviewed said they have resorted to shortening supply chain with others opting to sell their products directly to hospitals.

In Kampala, Uganda Securities Exchange-listed Cipla Quality Chemical Industries has placed its bet on machines to significantly cut the cost of labour. “Our computer-controlled machines are highly efficient but we still don’t enjoy economies of scale to the level of Indian firms which also get cash backs from the State,” said the firm’s chief executive Nevin Bradford.

The company, which at a production level of 130 million tables per month or 1.56 billion per year, is arguably East Africa’s top drug producer, employs only 300 people who work in two shifts a day.

The firm which has already penetrated the region’s market with its malarial, Hepatitis B and ARVs says it intends to increase its production by 25 per cent to be able to serve 19 countries that include Nigeria, South Africa and Comesa states.

“Only 75 percent of our capacity is in use at the moment. We are considering a third shift to handle new production lines such as cancer drugs but that depends on how fast the EAC governments move to level pay ground,” said Mr Bradford.

Still this kind of optimism is rare in landlocked states. Ms Khushboo Vadodaria, director of operations at Kampala-based Renee Industries says high cost of logistics has restricted them to landlocked states of the region.

“We are not able to compete with imports despite a 15 per cent price reference that we enjoy in Uganda,” Ms Vadodaria said, adding that the firm whose operations oscillates between 60 and 65 per cent of the installed capacity only exports to Rwanda, Burundi and DRC.

“Being a manufacturer in a landlocked country that imports nearly everything through Kenya or Tanzania is a real challenge,” says Salim Somji, chairman of Burundi-based Siphar S.A, a pharmaceutical manufacturer. “When everyone is thinking of competing in the expanded EAC market, we can only think of competing in other landlocked states in the region.”