Price controls, currency devaluation fuel drug shortages in Egypt

Industry insiders attribute recent shortages of several vital pharmeceutical products to Egypt's stringent system of price controls coupled with recent devaluation of local currency

Egypt's economic predicament has not spared the country's healthcare sector, which in recent months has suffered increasingly frequent drug shortages. Within the past three months, pharmacists countrywide have reported acute shortages of an ever-widening range of locally-produced and imported pharmaceutical products.
The country's fixed drug-pricing system, which makes it more difficult for drug companies to cope with adverse financial circumstances, is seen as a main reason for the shortages.
Products that have suffered recent shortages range from government-subsidized imported baby formula and insulin, to locally produced nasal drops and laxatives and hormonal drugs used to treat female infertility and thyroid disorders.
"We used to get 30 vials a month of subsidised insulin from our supplier Egydrug, now we're lucky if we get ten," lamented the owner of one downtown Cairo pharmacy, echoing the sentiments of many of her colleagues.
Subsidised insulin costs as little as LE6.50 (roughly $1), while its non-subsidised equivalent costs between LE50 and LE60 – putting it well out of the reach of the neediest patients.
Cairo-based officials from the multinational pharmaceutical company that imports the insulin were unavailable for comment.
According to pharmacists, local drug manufacturers have reacted to Egypt's difficult economic circumstances by discontinuing production of several low-priced pharmaceutical products or exporting those products to markets abroad due to Egypt's rigid pricing constraints.
"The least expensive government-subsidised drugs have been intermittently disappearing from the local market for years," said one Cairo pharmacist who preferred anonymity. "It's no surprise that a particular psychiatric drug, which retails for as little as LE1.25, is always in short supply."
Egypt tightly regulates drug prices in the local market, with a 'cost-plus' pricing formula setting a maximum price based on production costs plus a government-set mark-up.
Due to lobbying by multinational pharmaceutical firms, newly branded drugs were subject to a less rigid pricing system since Spring 2011.
In any case, it remains extremely complicated for pharmaceutical manufacturers to adjust retail prices as their costs increase.
"Current shortages are mainly the result of the Egyptian currency's recent devaluation against the dollar, which has served to drive up the cost of imported raw materials needed for local manufacturing," said Assistant Health Minister Abdel-Hamid Abaza.
The Egyptian pound has lost more than 8 percent of its value against the dollar since the beginning of the year, when Egypt's central bank stopped freely supporting the local currency. Banks have since begun rationing US dollars, leading to the emergence of a black market.
This has taken a heavy toll on the local pharmaceutical industry, which is heavily reliant on imports.
In 2010, Egypt ran a $966-million trade deficit for pharmaceuticals, according to a report issued recently by the American Chamber of Commerce in Egypt. Sales, meanwhile, reached $3 billion for the same year.
The problem has been further aggravated by recent drops in Egypt's international credit rating.
"International suppliers used to accept letters of credit, which gave importers up to six months to settle their bill," Makram Mahanna, head of the pharmaceutical manufacturers section at the Egyptian Federation of Industries (EFI). "Now they demand immediate payment, and so we have a liquidity problem."
Since December, Egypt's sovereign bond rating has been lowered to 'junk' or 'near-junk' status by the three most internationally recognised ratings agencies (Moody's, S&P and Fitch).
While drug manufacturers have not reported any reductions in the manufacture of products seen as no longer profitable, observers see such reductions as an expected reaction.
"Companies exist to make profits," said Mohamed Bahey, vice head of the EFI's pharmaceutical manufacturers section. "So it would be understandable if they reduced production of their losing products."
Egypt's pharmaceutical market is relatively decentralised, with the top-ten companies accounting for 46 percent of the entire market in 2010. Holdipharma, the most prominent public-sector producer – which boasts 11 subsidiaries – makes up around 20 percent of the local market.
The relatively stable exchange rate between the Egyptian pound and the US dollar from 2005 until to Egypt's 2011 uprising generally shielded manufacturers from selling their products at loss. The recent devaluation of the local currency, however, appears to have exacerbated the problem.
Yet Bahey says currency problems "are just the tip of the iceberg." For years, he said, "pharmaceutical firms have seen all other costs, including wages, increase."
As it currently stands, adjusting profit margins for companies that manufacture drugs requires a decision from Egypt's health minister. Naturally, such decisions come at a political price.
"Egypt's political leadership has continued to put off the decision to float – or at least adjust – drug prices," Bahey explained. "Soon, however, the crisis will escalate and they will be forced to lift price controls, as imported drugs become increasingly unaffordable for most Egyptians."
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