Will Local Production Help Africa Access Drugs?

If poor people can't afford the medicines they need we should make the medicines cheaper. This is the logic pursued by the international community to fix the problem of lack of access to life-saving drugs in Africa. By weakening patent law, generic companies have been able to compete with innovators, and with billions in aid dollars buying drugs economies of scale in production have further lowered drug prices, at least for high profile diseases, such as HIV and malaria.

But the problems of restricted access are deeper, more numerous and much more intractable than price alone: poor patient education, inadequate health care facilities and distributional failings overwhelm any price improvements which have been achieved. Except for the fortunate few million who receive donated drugs, hundreds of millions still cannot afford market prices.

Nevertheless, the international community continues to focus on drug prices and today its idea is local pharmaceutical production, which it hopes further reduce costs by cutting out transport expenses, currency risk and so on. But while the German Government and other countries' aid agencies are helping fund small firms in Africa, they have failed to undertake any serious cost benefit analysis to determine the efficacy of such a policy. New research suggests that this is just another case of hope triumphing over experience.

International donors have learned, if somewhat belatedly, that if drugs, particularly those for infectious diseases, are not very close copies of the original brands, they are dangerous.

For instance, while the Government of Uganda spent US$38 million on building a new drug factory, its national procurement and distribution system recently admitted that 93% of the drugs it procured did not reach their intended recipients. The factory itself, Quality Chemicals Industries Limited (QCIL), is struggling to get production going and is already asking for tariff protection, an extended tax holiday and further cash injections.

Having a drug industry is often a source of national pride, as well as a political opportunity; as it is assumed that politically-connected companies will win contracts from international donors to supply drugs. But with the exception of countries like India, South Africa and perhaps Nigeria, most developing countries do not have the local conditions necessary to tackle drug production. For example, India has an educated work force, a sizable local market, cheap energy and other raw material inputs, making it a rarity in developing countries. This is not to say that other African nations cannot be home to good drug producers, but it does make it less likely.

QCIL will probably overcome production line problems, and will become more efficient as it learns from its key investor partner Cipla, a huge Indian generic drug producer, but it may never overcome cost disadvantages, especially with so many drugs donated or at very low prices from innovators and Indian competitors. In addition, the Ugandan private market is too small for QCIL to benefit from economies of scale, which means its prices are likely to be high. As a result, QCIL cannot compete and probably never will. But the more pertinent reason why QCIL is failing to flourish is that expected contracts from international donors have not materialised, and will not until the company can achieve the necessary quality standards

International donors have learned, if somewhat belatedly, that if drugs, particularly those for infectious diseases, are not very close copies of the original brands, they are dangerous; if they don't work properly they may lead to treatment failure, or drug resistance, potentially undermining entire drug classes. Since QCIL does not have plant or product certification from the US Food and Drug Administration or other stringent drug quality agency or the World Health Organization it cannot take part in lenders using funds from the US Government, the Global Fund or most other major donors--and the donor market makes up about 70% of Uganda's total market. It is also not likely to be able to sell its products into neighboring countries, many of which also have inefficient producers, similarly struggling to stay in business.

A few weeks ago, during a stock-out of antiretrovirals (ARVs), the Ministry of Health diverted US$15 million, earmarked by donors for purchasing ARVs, to support QCIL and pay health workers. The Danish aid agency DANIDA is asking for an investigation of this unauthorized diversion of funds.

While there are no simple solutions to improved access, other problems still need to be tackled more urgently--regardless of whether drugs are imported or made domestically. In the mean time, the donor community indirectly and African Governments directly are undermining drug quality through their push for local production.

Roger Bate is the Legatum Fellow in Global Prosperity at AEI.

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