jordan pharmaceutical sector
Global Investment House-Kuwait – Jordan Pharmaceutical Sector. In the recent years, Jordan has witnessed good economic growth. Continuing the trend, the real GDP of Jordan grew by 6.4% in 2006 compared to a growth rate of 7.2% in 2005. However the nominal GDP grew by 12.2% in 2006 compared to 11.5% in 2005. The per capita GDP increased from US$2325 in 2005 to US$2546 in 2006. The Ministry of Health is the principal provider of healthcare in Jordan and provides subsidized services to all Jordanian citizens. The Ministry of Health operates hospitals, comprehensive health centers, primary health centers, maternity and child health centers, dental clinics and chest disease centers to provide healthcare to the citizens. It also administers the Civil Insurance Program (CIP), which is the largest public insurance mechanism in Jordan.
The importance of the pharmaceutical sector in the Jordanian economy can be understood from the fact that it is the second largest export industry in Jordan after garment manufacturing. Currently close to three-fourths of total pharmaceutical production is meant for exports. For the year 2006, exports of pharmaceutical products amounted to JD211mn i.e. 7.3% of total exports. The total exports grew by 6.2% in 2006, which followed 25.4% growth recorded in 2005.
The domestic pharmaceutical companies in Jordan is primarily engaged in production of branded generics ranging from many dosage forms such as solids, semi-solids, liquids, aerosols as well as producing various under licensed products for multi-national companies. Close to 90% of the total revenues is derived from branded generics, whereas under licensed products contribute majority of the revenues of the remaining revenues. As per IMS Health, the size of domestic pharmaceutical industry in Jordan was estimated to be US$120mn in 2004, and it is expected to cross US$200mn by 2010.
The total sales of listed Jordanian companies was close to JD320mn for the year 2006 and it has grown at a CAGR of 21% over the past two years. Similarly the total net profit of the listed Jordanian companies was close to JD55mn for the year 2006 and it has grown at a CAGR of 15% over the past two years.
The domestic pharmaceutical industry in Jordan is quite fragmented with no single player accounting for even 10% market share. In fact the market leader is Hikma, which had a market share of 7.3% in 2006. The fragmented nature of the industry has led to a good deal of consolidation in last few years. Though currently there are no M&A on the cards, we are of the view that less number of big companies can drive the industry strongly in comparison to current scenario.
Among the companies, Hikma has the highest RoAE (return on average equity) and RoAA (return on average asset) for the year 2006. RoAE for Hikma for the year 2006 stood at 17.1%, whereas those of DADI and APMC were 15.7% and 9.7% respectively. However companies like APMC and DADI do not have any debts on their books, which might be negatively affecting the RoAE. Considering the performance of the companies in 2006 vis-à-vis 2005, RoAE of most of the big companies declined, though in most cases the decline was marginal. Considering RoAA, all companies except Hikma and DADI have a low level of RoAA.
The pharmaceutical industry in Jordan, being primarily export-driven, has benefited from growth in Middle-Eastern economies (mainly GCC countries) in the recent years. The growth in these economies has resulted in increased expenditure on health by the respective governments. The healthcare infrastructure has improved significantly in the region in the last few years. Increase in the privatisation of healthcare in the region has benefited the industry as a whole. Several countries have implemented mandatory health insurance schemes. We believe all these factors will boost overall healthcare spending in coming years.
Demographic trends in the region such as increasing life expectancy and literacy rate are expected to lead to greater awareness of health-related issues and consequent increase in demand for pharmaceutical products. For example in Jordan, life expectancy has increased from 69 years in 1995 to 71.5 years in 2005, Literacy rates (15 year-plus) stood at 91.8%. in 2005. An increase in life-style related diseases like diabetes and cardiovascular diseases in the region is also expected to impact the industry positively.
Though there are 17 companies in Jordan, most of them are small to medium-sized. In the post-TRIPS era, size of the pharmaceutical companies has become a critical factor in view of the increased requirements for product approvals and maintaining the production sites cGMP compliant in addition to increasing marketing and R&D costs. The Jordanian companies will need increased economies of scale, and higher investment in R&D to keep ahead of their regional competitors and match the multinationals in their game. Mergers and acquisitions and forming strategic alliances with global generic players can be among the strategies to be employed by the companies to achieve the required scale. Bigger companies will also have better negotiating powers with suppliers and buying groups.
In the post-TRIPS era, companies have increased their under-licensing/contract manufacturing portfolio in order to supplement their revenue from core branded generic business. Keeping in view the higher investment in R&D, this can prove to be a good strategy. With their lower cost of production, technical expertise, and Current Good Manufacturing Practice (cGMP) certified plants, Jordanian companies have proved to be efficient partners in under-licensing/contract manufacturing.
One of the risk factors faced by the Jordanian pharmaceutical companies is the volatility in the Arab world, which is the main export destination for most of the companies. Many companies were deriving substantial part of their sales from Iraq. Iraq used to offer relatively high profit margins and relatively low marketing costs owing to the peculiarities of the oil-for-food agreement. However with instability still prevailing in Iraq, sales continue to suffer. Similar developments in Lebanon during 2006 have also affected sales of some companies. That is perhaps one of the reasons responsible for the companies looking at newer markets like Africa and East Europe (including former Soviet Union). The companies are also exposed to change in regulations in their important markets. In 2006 sales of many Jordanian companies was affected in Algeria due to introduction of reference pricing regime.
