Global Insight Perspective | |
Significance | Saudi health minister Dr Hamad Al-Manie has announced plans to reduce the prices of some 6,000 medicines and create a US$500-million wholesaler to distribute drugs in the public sector. |
Implications | The effect of the changes could be transformational in the longer term; the new distribution company is expected to spearhead an overall reduction in prices. This cost-saving drive coincides with heavy investment in healthcare and a surging private health insurance market. |
Outlook | Although the measures do not amount to direct price controls, there are signs that the kingdom is evaluating steps in this direction. |
Saudi Arabia’s minister of health, Dr Hamad Al-Manie, has been quoted by Arab News as promising that a new medicines distribution company for the public healthcare sector will drive down prices for some 6,000 medicines. Preliminary details of the plan were sketched out earlier this month (see Saudi Arabia: 3 September 2007: Government-Backed Pharma Firm to Be Established in Saudi Arabia), announcing the new entity as the National Company for Unified Purchase of Medicines and Medical Appliances, but the full plan will be made public over the course of the next month. Reports from Arab News suggest that the new distribution vehicle will be allocated capital totalling two billion riyals (US$533 million), and a 30% stake is expected to be auctioned in 2010 or 2011.
In the National Interest?
The intention seems to be to bypass what officials regard as the plethora of drug importers serving the public sector, and so generate cost savings (in effect, price reductions) through economies of scale. It is estimated that the kingdom’s approximately 40 importers of medicines— many of them foreign-owned wholesalers or manufacturers—supply about 35% of public-sector demand.
With imported drugs accounting for a very large share of market value, brand-name drugs have been blamed for generally high prices. The government has already attempted to intervene directly here, with the market price of a typical supply of the top-selling branded cholesterol reducer Lipitor (atorvastatin) recently reduced from 140 riyals to 76 riyals. However, the new distributor and off-the-cuff price cuts do not amount to a comprehensive system of price controls. Unfortunately, there are reports that the government is considering just such an option, and has evaluated the comprehensive reimbursement model used by Taiwan’s Bureau of National Health Insurance (BNHI; see Saudi Arabia: Saudi Arabia Looks to Taiwan's National Health Insurance System for Inspiration). More radical measures may be less palatable, but local pharmacists quoted by Arab News note that Plavix (clopidogrel)—a patented heart drug manufactured by France’s Sanofi-Aventis—retails at 249 riyals in the 28-pill presentation—around 30 times the market price for generic versions of the same molecule in India.
Creating what will be the most significant single distributor in Saudi Arabia virtually overnight will be quite a feat. It is estimated that medicines suppliers in the kingdom already plan to invest more than five billion riyals (US$1.33 billion) in order to modernise the distribution system, including the construction of warehouses, new offices, and cold storage vehicles. It is unclear, then, what kind of relationship the new public-sector wholesaler/importer will have with private firms, although the new distributor will undoubtedly give the government much more leverage over the market as a whole, albeit indirectly.
Some might question why a new arsenal of cost-saving measures is necessary in a wealthy country like Saudi Arabia. In fact, the economic and epidemiological imperatives for a more hard-line approach to drug pricing have existed for some time. With the health ministry alone running over 200 hospitals, public healthcare in the kingdom is in a state of rapid transformation, and so represents a very large yet underdeveloped market. Arab News estimates that the aggregate value of public and private investment in the country’s hospital system is some 500 billion riyals (US$133.3 billion), and annual health expenditure is reckoned to be in the region of 50 billion riyals (US$13 billion). The drug market is valued at five billion riyals, although it is not known what proportion of this total relates to the public sector. Nevertheless, pharmaceutical sales are reported to be growing at double-digit annual rates, driven by both the expansion of government-run healthcare institutions at the primary level (see Saudi Arabia: 29 August 2007: Government to Establish 1,010 New Health Centres in Saudi Arabia) and a burgeoning insurance market (see Saudi Arabia: 28 August 2007: Health Insurance Market in Saudi Arabia Up 64% in 2006), which has grown rapidly as demand for coverage for chronic conditions spreads.
Outlook and Implications
Aside from the massive modernisation drive that is under way in Saudi Arabia’s healthcare system, there are some signs of pure economic self-interest in the new plan. Around half the drug market is controlled by 10 Saudi companies, either as importers or manufacturers. Officials may have come to believe that strengthening native firms presents an easy route to more affordable medicines. There is the strong possibility that—taken together—new measures that have already been announced or that are in the pipeline will deal the government a winning hand in the drug market. Moreover, it is possible that the impact of the new wholesaler will ripple across the Gulf Cooperation Council (GCC) region. Earlier reports carried the suggestion that the new firm could ”re-export” drugs and devices.