Local production: Not a silver bullet

Local production: Not a silver bullet
TAC members demonstrate outside the Supreme Court of Appeal in Bloemfontein. Photo by Patrick Mdletshe.


Will local production of active pharmaceutical ingredients offer the health and economic benefits promised by government?

The South African government recently announced plans to manufacture active pharmaceutical ingredients (APIs) in partnership with the Swiss-based chemicals and biotechnology company Lonza Ltd. APIs are the active ingredients that are used to produce medicines. Medicines also contain inactive ingredients called excipients, which usually function as carriers for APIs.

South Africa has a relatively large and competitive generic pharmaceutical industry consisting of a number of private companies. These companies sell finished products which are manufactured from raw materials or semi-finished products. However, the vast majority of APIs for these locally-produced medicines are imported.

The joint venture between government and Lonza Ltd will set up a local API manufacturer called Ketlaphela. Generic manufacturing companies will be able to purchase APIs from this firm. Initially, Ketlaphela will focus on developing APIs for drugs to treat HIV, malaria and TB and later expand its production to include APIs for treating other diseases.

Government has promoted Ketlaphela as a means to reduce the cost of medicines through local, cost-effective production of APIs. In addition to touting these savings which would help to address health needs, government has also highlighted the potential development and economic benefits of the venture – such as job creation and a reduction in South Africa’s trade deficit.

[box]On May 15 2012 the Supreme Court of Appeal heard a patent dispute between Aventis Pharma SA and Cipla Life Sciences. The case, involving the cancer drug Docetaxel,  was going to be decided on the technicalities of patent law. However, TAC approached the court and argued that the judge should also take into account public health considerations. If the judge agrees with TAC, it will set an important precedent that courts should consider public health implications when adjudicating patent disputes.[/box]

These promises have been uncritically repeated in the media. Yet they deserve closer inspection and discussion as government moves ahead with its investment in API manufacturing.

In the long run, Ketlaphela could provide the impetus for a competitive API manufacturing industry in South Africa. This could extend access to medicines by increasing competition and reducing the vulnerability of API supply. Competition has played a vital role in lowering the cost of medicines, as  shown by the significant drop in the price of antiretroviral therapy that coincided with the entry of generic competition (see below).

Also, a number of drugs that are off-patent, including some for MDR-TB, remain extremely pricey due to the inadequate supply of APIs. If South Africa is able to establish a home-grown industry for API manufacture, it could reduce this supply vulnerability for a number of medicines.

While local API production offers great potential, establishing such an industry will not be easy. Both India and China, countries with low manufacturing costs and highly skilled workforces, have emerged as the major global suppliers of APIs. Ketlaphela will need to match the efficiency of these competitors in order to sell its products. Given the South African government’s poor track record in managing parastatals, there is understandable concern that Ketlaphela may not be competitive.

Fair and open competition

It is vital that Ketlaphela competes fairly and transparently with other manufacturers. Every two years government conducts a large antiretroviral (ARV) tender to purchase ARVs for the public sector. Should Ketlaphela be unable to match the best prices available on the international market, government may be tempted to engineer its drug tenders so as to favour generic companies supplied by Ketlaphela. This could ultimately lead to higher prices and reduced access to medicines.

There are also concerns that Ketlaphela is unlikely to stimulate the kind of job growth that South Africa needs. Pharmaceutical and API manufacturing is not a labour-intensive industry. It requires significant numbers of highly skilled workers such as pharmacists and chemists. South Africa already faces a critical shortage of these workers, with more than 60% of pharmacist posts in the public sector remaining vacant. It is therefore likely that following the construction phase, the venture will for the most part encourage job creation in a field already noted for its high demand and shortage of skills.

Reducing the trade deficit

The Department of Trade and Industry has plugged Ketlaphela as a tool to reduce South Africa’s trade deficit. Business Day recently reported that pharmaceutical imports—costing R21.3bn in the first 11 months of last year—were the fifth largest contributor to the country’s deficit. Minister of Health, Aaron Motsoaledi said that South Africa’s pharmaceutical market was worth R25 billion, according to the newspaper.

An analysis of the pharmaceutical industry in 2008 (published by Deloitte in 2010) found that pharmaceutical imports at R12.97 billion far outnumbered pharmaceutical exports at R1.38 billion. The top five countries from which South Africa imports medicines are, in descending order: Germany, the US, France, India and the UK. Tellingly, this list does not include China and India is ranked only fourth. While these figures deserve further analysis by a health economist, they strongly suggest that the importation of branded medicines under patent contributes far more to the trade deficit than the importation of APIs for the production of generics.

Additionally, granting fewer patents could begin to reverse the deficit, as occurred in India. India removed product patents on pharmaceuticals in 1970 in an effort to boost local industry and improve access to drugs. This led to rapid growth in the pharmaceutical industry. As a result, by the 1990s India had progressed from net importer to net exporter of medicines.

For many drugs it is not the lack of APIs but rather the lack of licences for generic manufacture and sale that drives up medicine prices—although there are exceptions such as drugs for MDR-TB. Today the Department of Health is able to purchase low cost first- and second-line treatment through generic manufacturers that are mainly based in South Africa. A first-line ARV regimen for the treatment of HIV costs only R115 per person per month. In the early 2000s the cost of an inferior regimen was over R5,000 per month. Today’s low prices have been achieved through generic competition and increasingly open drug tenders that aim for a fairer balance between the interests of producers and the health needs of South Africa.

Patent barriers

However, many newer, more effective ARVs are not available in the public sector due to their high cost. In fact, the public sector currently provides no third-line ARV treatment. Many third-line drugs remain prohibitively expensive due to the lack of competition in the market. Without legislative reform of South Africa’s Patent Act, it is likely that Ketlaphela’s cost-saving potential will be undermined by strict patent barriers.

If the joint venture is restricted to producing off-patent APIs or finished medicines, Ketlaphela may find itself roped into a part of the market that has already seen massive price reductions due to generic competition. Only through progressive reform of South Africa’s patent laws will Ketlaphela be empowered to make significant inroads into the high prices of many life-saving drugs that remain under patent. (See www.fixthepatentlaws.org for more on potential legal reform.)

by Catherine Tomlinson and Marcus Low. Catherine Tomlinson and Marcus Low are researchers with the Treatment Action Campaign.


Sources: http://www.businessday.co.za/articles/Content.aspx?id=164729; Deloitte, ‘Insights into the high level financial contribution of the Pharmaceutical Industry in South Africa’ (February 2010); Pharma Focus Asia, ‘Generic to innovation: Transition of Indian Pharmaceutical Companies’, http://www.pharmafocusasia.com/strategy/indian_pharma_transition.htm