When Local Production Is Not the Answer

Roger Bate | 02 Sep 2009
Africa's poor people lack access to essential medicines. Distributional failures, inadequate patient education, and healthcare facilities are key causes, but the relatively high price of drugs also plays its part. The international community has influenced prices by pressuring innovator drug companies to lower them, and encouraging generic competition by weakening international patent enforcement. As a result, the cost of public sector drugs to treat high profile diseases, such as HIV and malaria, has fallen. But except for the fortunate few million who receive donated drugs, hundreds of millions still cannot afford market prices.

In keeping with past efforts, the German government and other countries' aid agencies are promoting local production of pharmaceuticals. Their hope is that local production will increase supply, lower price, and increase access. But no serious cost benefit analysis has been done to determine the efficacy of such a policy. New research suggests that this is just another case of hope triumphing over experience.

With the exception of countries such as India, South Africa, and perhaps Nigeria, most developing countries do not have the local conditions necessary to handle drug production. For example, India has an educated workforce, a sizable local market, cheap energy, and necessary raw materials, making it a rarity in developing countries. This is not to say that other African nations cannot be home to quality drug producers, but it does make it less likely.

Having a drug industry is often a source of national pride, as well as a political opportunity, even if it is uneconomic and produces poor quality drugs. The African Union, a political grouping of African leaders, says in its document "Health Strategy for 2007-2015" that "member states need to embark on local production of pharmaceuticals and other health commodities." Many African nations have taken this policy to heart and have companies making drugs for the local market. Some firms are even owned by political figures. It is expected, at least within these countries, that politically connected companies will win contracts to supply drugs. But if such firms are favored and they produce drugs of low quality with high prices, then access to good quality drugs actually diminishes.

Uganda is a microcosm of problems on the rest of the continent. Quality Chemicals Industries Limited (QCIL) is a US$38 million joint venture between Ugandan businessmen, the Ugandan government, and the Indian pharmaceutical company Cipla. QCIL aims to produce a leading antimalarial and seven different HIV drugs. Production was due to start last year, but as of my February visit nothing was coming off the single production line.

The Ugandan government owns 22 percent of the business and has invested well over $10 million, yet a Ugandan treasury official told me that the government had conducted no economic evaluation of its investment. Perhaps analysis was not done because it would have concluded that precious government funds earmarked for health should not have been spent on a speculative production venture.

The Ugandan private market size is too small for QCIL to benefit from economies of scale, which means its prices are likely to be high. What's more, since it does not have plant or product certification from the U.S. Food and Drug Administration or the World Health Organization, it cannot take part in business deals using funds from the U.S. government, the Global Fund, or most other major donors—and the donor market makes up about 70 percent of Uganda's total market. It is also not likely to be able to sell its products in neighboring countries, many of which also have inefficient producers, similarly struggling to stay in business.

QCIL will probably overcome production-line problems, and will become more efficient as it learns from its key investor partner, Cipla, but it may never overcome cost disadvantages, especially with so many drugs donated or offered at very low prices from innovators and Indian competitors. As a result, QCIL cannot compete and probably never will. It has asked one of its own investors, the Ugandan government, to help it survive. QCIL wants a 15 percent tariff against cheaper, quality-assured foreign drugs. And QCIL is not alone; the rest of the industry in Uganda wants protection, for the same reasons as QCIL, as do producers in Ghana, Kenya, Tanzania, Nigeria, and the rest of the continent. Tanzania has put in place a 10 percent tariff on drug imports.

Of course, businesses everywhere often make protectionist calls, the United States and European Union are no exception. But rarely are such calls so diametrically opposed to good health.

As long as donors stick to the critical demand that drugs be of proven good quality, the local firms will not be able to break into donor-funded markets. However, if their lobbying is successful, the supply of good foreign products to the private markets, which serve the majority of Africans, will likely be reduced, and the remaining prices of inferior drugs will increase. Lobbying is already having an effect in Uganda. A few weeks ago, when many clinics had run out of antiretrovirals, the ministry of health diverted US$15 million, earmarked for purchasing antiretrovirals, to support QCIL and pay health workers. The Danish aid agency DANIDA is asking for an investigation of this unauthorized diversion of funds.

The donor community must take its share of the blame for focusing on drug price as the only important barrier to access and effectively ignoring other, greater problems. The Ugandan Public Expenditures Review highlights the seriousness of distribution and delivery problems; it recently reported that 93 percent of the drugs procured by the National Medical Stores (the government body in charge of procurement and distribution) did not reach their intended recipients. This is an awful state of affairs, and something donors could help address.

In the meantime, the donor community indirectly and African governments directly are undermining drug quality through their push for local production.